Galbraith divides his book into three parts. In the first part, The Optimists’ Garden, he shows that mainstream economists after World War II thought they that had learned the secrets—high population growth, technological change, and savings—to maintain the American economy in a pattern of high growth with only a tweak necessary here and there to nudge the economy out of recessions. Their confidence was such that the American government undertook the responsibility of managing the economy, assum

Galbraith divides his book into three parts. In the first part, The Optimists’ Garden, he shows that mainstream economists after World War II thought they that had learned the secrets—high population growth, technological change, and savings—to maintain the American economy in a pattern of high growth with only a tweak necessary here and there to nudge the economy out of recessions. Their confidence was such that the American government undertook the responsibility of managing the economy, assuming that the correct dose of fiscal and monetary policies would continue trends that became regarded as “normal”. Governments were judged as successful or unsuccessful based on the performance of the economy, and the best thing for government to do was to get out of the way and leave the economy alone.

This worked so long as costs of natural resources, especially those necessary to produce energy such as oil, remained low and stable. The idea that economic growth could be largely managed by government getting out of the way was severely compromised by subsequent events. One was the Vietnam War, whose costs contributed to increasing inflation and the trade deficit. This crisis was met by President Richard Nixon by cutting the link between the dollar and the price of gold, and imposing wage and price controls which were temporary and insufficient to solve the underlying issues. More damaging was the huge price jump of a crucial natural resource necessary for the efficient operation of the economy: oil. The obvious solution to rising energy costs was conservation and the more efficient use of energy as promoted by President Jimmy Carter. But the preferred solution by President Ronald Reagan was to put “oil on a credit card that would never by paid”, leading to ever-rising trade deficits.

So how did the US continue to get oil relatively cheaply? It began when Reagan appointed Paul Volcker chair of the Federal Reserve System. He is ordinarily thought of as the man who halted the rampant inflation of the 1970s by raising the Fed’s interest rates. Ending easy credit that resulted in a serious recession in the early 1980s explains part of the lowering of inflation. But it only begins there. The value of the dollar also rose 60% relative to other currencies, especially those of poorer and indebted nations. Paying back their debt became more expensive, and that took them off the market for many commodities, including oil. Minerals and oil became less expensive for the US as their prices collapsed, further depressing the economies of poor resource-rich nations. What the Fed’s high interest rates accomplished was the lowering price of the natural resources needed to make inexpensive products people in the US wanted to buy. This was really how the Fed’s high interest rates managed to help inflation collapse.

Thus began what has become known as the Great Moderation. Inflation was kept in check, unemployment kept low, long-term interest rates fell, and lifestyles maintained, although unions were busted and women had to enter the workforce to maintain middle class incomes. By the 1990s the neoclassical economists took credit for engineering this age of growth. Their policies, including deregulating the economy, had restored equilibrium to the economy. Only policy errors by the Fed could derail continuing growth, and now those mistakes could be avoided so long as the right people were running the Fed. So when the crisis of 2008 hit it was totally unexpected by orthodox economists, though not by many investors who bet on the coming disaster.

Galbraith discusses three groups of heterodox economists who got it right. The pragmatic and statistical economists who base their analysis on bubbles (such as Dean Baker, who predicted the 2008 crisis based on the real estate bubble; problem: discovering bubbles is hard, and since it is ad hoc, there exists the possibility that the method will fail.).

The Wynne Godley and National Income Identities approach which analyzes accounting relationships that state facts about the world. This is similar to Baker’s approach without the ad hoc element since its choice of variables is based on the total expenditures in the economy—income equals the sum of consumption, investment, government spending, exports minus imports. This is the National Income Identity. The flow of these expenditures is the economy. Economic growth occurs when the flow of expenditures increases. A fact revealed by this formula is that every dollar of the public deficit is matched by a dollar of private saving. This is a bookkeeping fact. Increasing the deficit increases private savings, as does increasing the trade surplus. Increasing savings, conversely, increases the deficit because there is less consumption, less income, and less economic activity to tax. This explains the prosperity of the late ‘90s, and the dot com slump and the 2008 crisis. It becomes a macroeconomic question about whether a particular state of the accounts is sustainable and what would happen if it stopped. Budget deficits are inevitable when the economy goes south because people focus more on saving instead of spending. As private spending declines, budget deficits must increase. It’s simple accounting.

The third approach is Hyman Minsky and Nonlinear Financial Dynamics. It shares with Godley’s approach the idea of not prejudging the intrinsic instability of the economic system.

Minsky’s core insight is that stability breeds instability. While this is an abstract way of thinking about the economy, this model implies that the role of government is to regulate, to prevent a potentially unstable system from slipping into instability as much as possible. Managing this is difficult and imprecise. Getting too close to the boundaries should be avoided. Once the boundary has been crossed, the rule of thumb is play it safe, stay away from the boundaries, “even when pressured to move to the edge.” Orthodox economists are only concerned with the “safe zone”. They don’t know what to do during a crash, and often inadvertently push the system into a crash, as we’ve experienced in the last several decades.

Part two of the book, The Four Horsemen of the End of Growth, explains why the return to “normal growth” is impossible. The first of the horsemen deals with natural resources within the context of a concept from thermodynamics: entropy. As noted earlier, natural resources did not figure into the equations of orthodox economists. Part of the reason for this seemed to be that the costs of oil, coal, copper, bananas, coffee was too low to make much of a difference. Yet much of United States postwar foreign policy was devoted to maintaining access to cheap minerals and food from developing countries. Oil was cheap because the US supplied enough for most of its own needs. Many of the clandestine activities undertaken by the US government was to ensure that governments favorable to supplying American consumers with cheap goods remained in power. One of the effects was that the US consumed a great deal of the world's resources at the expense of those countries producing them. When resources are added to the equation, a different analysis emerges that not even “he Keynesian alternative to mainstream economics—in the traditions of Godley and Minsky—had little to say.

This is where the analysis provided by Nicholas Georgescu-Roegen’s book, The Entropy Law and the Economic Process, enters the argument. The second law of thermodynamics, entropy, applies as much to economic processes as to physical processes. To oversimplify, the idea in the economic context is that as resources become depleted they cannot be replaced; once a barrel of oil is pumped out of the ground, it can never be pumped out again; when a ton of copper is mined, it cannot be mined again. Eventually there will be no more oil to pump, no more copper to mine. The consequent scarcity either raises the price of the resource and the products it helps produce or another resource replaces it. Galbraith discusses various consequences of this, but the bottom line is that without including the cost of natural resources, especially oil, our account of what brought about the 2008 crisis is incomplete because not only did the cost of oil retard economic growth, it also contributed to the growth and influence of the financial sector.

The second horseman is the limits of American power. The low cost of resources for the US has been guaranteed by its immense military power as well as the nation containing many valuable resources within its borders. As a result, the United States managed to impose an order on much of world. Sometimes it has done this by force, sometimes by bringing compliant nations under its protective umbrella.

For several reasons the imposition of the US’s will by force has become much harder recently. One reason is the increase in urbanization in most countries in the world. Iraq, for example, is not a nation of small farmers and nomadic herders. If it were, it would have been easier to subdue. Weapons have also evolved so that a relatively small number of dedicated insurgents can do an immense amount of damage with explosives cheaply acquired. Modern communications also play a role in publicizing the brutal acts of war raising question of morality and introducing doubt into the enterprise. Modern occupation is limited in time, and occupying armies are also much more expensive to pay, house, train, and each soldier more precious as a result.

The cost of modern warfare is so high it is unlikely that major nations will fight with one another. It also means they will be less likely to forcefully impose their wills on smaller nations. The US is learning that lesson with it wars in the Middle East. The upshot is that the US military might, powerful as it is, can no longer help keep resource costs low.

The fourth horseman is the role fraud played in the 2008 crisis, the millions of mortgages that could only be repaid on the assumption on the perennial rise of home prices. Economists rarely bring up the topic of fraud.

Institutions function under certain conditions, some of which result in prosperous survival, and different conditions result in the institutions’ failure. Failure need not come as the result of being unable to compete in the marketplace; internal factors within a firm alone can also be involved: mismanagement, corruption, greed, corporate infighting, and looting of corporate assets for personal gain. As resource scarcity increased and it became more difficult for corporations to meet the financial and economic expectations established during the immediate postwar period, regulations on corporations loosened to the extent that fraudulent activities, within corporations and in the way they dealt with their customers, became accepted business practices. It’s no wonder the system collapsed.

Galbraith is pessimistic that the collapse can be “cured by the application of Keynesian stimulus. … The institutional, infrastructure, resource basis, and psychological foundation for a Keynesian revival no longer exist”.(168)

Part three is entitle No Return to Normal. In chapter twelve, Galbraith debunks myths about Federal budget deficits, trade deficits, and interest rates. Specifically, that the US is in no danger of bankruptcy, which is impossible given that the Fed can always print money to pay the country’s debts. Given the realities of the world’s financial system, trade imbalances and federal deficits are bound to occur. The reason that these imbalances—which appear so large in the US—are necessary for the global economic system can be explained by simple double entry accounting.

The view that ongoing and rising budget and trade deficits are unsustainable and will bring our grandchildren to ruin due to the inability to pay off those debts is simply mistaken. Galbraith’s argument is something like this: The US is a wealthy nation and can not only afford deficits, but these deficits are helpful and, in fact, necessary for US economic growth. The reason is simple: When US exports exceed imports, the money from those imports end up in the banks of the oil countries, China, and other net exporters. Now what happens to all that money? If there aren’t enough projects available to invest that money, what can these countries do to keep their money safe and earn a little bit of interest? Why, buy US Treasury bonds. Of course, bonds are debt instruments; buyers of the bonds collect interest that the US government has pay. Why should the US government do these other sometimes morally dubious governments such a favor? The US needs to sell these bonds to finance the annual deficits necessary to pay for all the government goods and services. In a sense, it’s a virtuous feedback loop: the US government needs money for expenses and is willing to issue bonds to raise the extra money; other countries have excess dollars earned from selling goods or resources, and they don’t know what to do with the money so they buy the Treasury bonds; foreign countries could invest in other countries’ bonds or more lucrative investments, but they choose to invest in Treasury bonds because they are the safest investment in the world, and because there is so little financial risk, the interest rates paid by the US are incredibly low. So low that the real interest rate is below the rate of inflation. What this means is that this is a good deal for the US: money is cheap. Making it even a better deal is the dollar is the currency used to grease international trade, so foreigners have to hold dollars either in their hands or in the form of Treasury bonds.

So how does this help US economic growth? If Congress were to try to balance the budget by cutting spending and/or increasing taxes paid by the poor and the middle class, this will result in less money spent by Americans on cars, homes, furniture, clothes, electronic equipment, attending football games, pesticide service, gym memberships, eating out, hanging out in bars and coffee shops, college education, etc., etc., etc. Less money circulating in the economy will contract the economy; in other words, a recession.

What about the debt in the future? Because real interest rates on the debt is below inflation, it should also be less than the overall growth of the economy over time. Because of that, the ratio of the debt to the economy (GDP) will remain at manageable levels. Meanwhile, the US can pay its bills, and the rest of the world has a safe place to park its money. Where else can they do that? For at least a few more decades, there ain’t no other place.

So what do we do in the face of what appear to be permanent structural changes in the economy? Galbraith has tried to show that recreating the conditions that produced the “normal” status of the 1950s and 1960s is impossible. It is also difficult to predict what the New Normal might look like—or even whether anything like normal is possible—but it will be undoubtedly a period of low growth. Given that will be the case, what policies to help mitigate the low growth should the government follow?

First of all, we will need a drastic adjustment on our material expectations. People can still live well in a low-growth environment as long as they adopt economic and financial goals that fit within its constraints.

As far as government policies, one would be a drastic cut back in military spending. Galbraith isn’t suggesting that the United States should weaken its military as much as re-allocating money in such a way that redundancies and unnecessary or ineffective military systems are eliminated. He also argues that instead of reducing entitlements, they should be expanded. Rather than raising the age when people become eligible for social security, the eligibility age should be lowered to open up more jobs available to young people. The estate tax should be raised not so much for the purpose of increasing government revenues as to decrease the degree of wealth inequality. To ensure that everyone who works is earning a livable wage, the minimum wage should be higher. Taxes on labor should be lower, and taxes on capital, especially on income earned by capitalizing on scarce resources, higher.

Galbraith’s arguments favoring these changes are more detailed than space allows me to repeat. His book is persuasive in pointing out some sort of adjustment in our economic thinking is necessary, and also persuasive in showing how mainstream, orthodox economic thinking that got us into this mess will end up getting us mired deeper in the economic muck.

