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Is Plutocracy Really the Problem?

After the 2008 financial crisis, economic policymakers in the United States did enough to avert another Great Depression, but fell far short of what was needed to ensure a strong recovery. Attributing that failure to the malign influence of the plutocracy is tempting, but it misses the root of the problem.

BERKELEY – Why did the policy response to the Great Recession only partly reflect the lessons learned from the Great Depression? Until recently, the smart money was on the answers given by the Financial Times commentator Martin Wolf and my Berkeley colleague Barry Eichengreen. Each has argued that while enough was remembered to prevent the 1929-size shock of 2008 from producing another Great Depression, many lessons were plowed under by a rightward ideological shift in the years following the crisis. Since then, the fact that the worst was avoided has served as an alibi for a suboptimal status quo.

Now, Nobel laureate economist Paul Krugman has offered an alternative explanation: plutocracy. At the start of the 2010s, the top 0.01% – 30,000 people around the world, half of them in the United States – cared little about high unemployment, which didn’t seem to affect them, but were greatly alarmed by government debt. They began demanding austerity, and, as Krugman contends, “the political and media establishment internalized the preferences of the extremely wealthy.”

Would the US economy of the 2010s have been materially different if the share of total income accruing to the top 0.01% had not quadrupled in recent decades, from 1.3% to 5%? Krugman certainly thinks so. “While vigilance can mitigate the extent to which the wealthy get to define the policy agenda,” he writes, “in the end big money will find a way – unless there’s less big money to begin with.” Hence, curbing plutocracy should be America’s top priority.