Dr. Abraham Maslow, Ph.D., the famous American psychologist, once said, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”
This concept is known as the Golden Hammer Rule, and it’s simply an over-reliance on a familiar tool. For example, physicians, chiropractors, physical therapists, acupuncturist and many other healthcare professionals, epitomize the Golden Hammer Rule with all their various healthcare treatments. If you go to a physician, they'll want to prescribe medication; if you go to a surgeon, they'll want to operate; if you go to a chiropractor, they'll want to adjust your back; if you go to a physical therapist, they'll want to stretch your muscles and have you do exercises; if you go to an acupuncturist, they'll want to stick needles in your body. The list of examples could go on and on.
But most of us realize that it takes a holistic approach to solve many health problems. There's no one healthcare solution or Golden Hammer that'll fix everything. It's a combination of various treatments.
In the case of Economists, their Golden Hammer is the economic theories that have been in vogue for the past forty years, namely The Chicago School of Economics and their devotion to laissez faire capitalism. The definition of insanity is doing the same thing the same way and expecting different results! We’ve gotten where we are today by following these same economic theories and not looking at other causes to our economic problems. And the only ways to reverse our current economic morass is by reexamining our beliefs and chart a new course for a better economic future.
Rana Foroohar, who is an assistant managing editor at TIME and the magazine’s economics columnist, in her recently published best-selling book Makers and Takers: The Rise of Finance and the Fall of American Business, makes a compelling argument that Finance and not just poor economic theory is mostly to blame for our current economic problems. She makes the point that most economist (who were asleep at the switch during the 2008 financial meltdown) have very little academic training in finance, and haven't spent much time researching the economic impact the finance sector has on our economy. Starting with Presidents Carter through Obama, most Presidents have slowly deregulated the finance sector of our economy. She also argues that the Dodd-Frank law enacted after the 2008 financial meltdown made everyone feel a bit better, but didn't really change the way Wall Street or the Big Banks operate due to so many loop-holes written into the law (mostly by Wall Street lobbyist). This is a prime example of crony capitalism at work! Only by enacting new, stricter laws and regulations can America break the stranglehold Wall Street and the Big Banks have over our economy. Ms. Foroohar in the final chapter of her book gives a laundry list of suggestions to change things for the better. A similar argument was made during the Democratic primaries by Senator Bernie Sanders, and during the recent convention managed to get many of his ideas put into the Democratic platform, namely Wall Street reform. (We'll see if any of his ideas come to fruition?)
Over a year before Rana Foroohar published her new book, she wrote this in a February 13, 2015 TIME article entitled, “What’s Really to Blame for our Weak Economic Growth.”
After years of hardship, America’s middle class has gotten some positive news in the last few months. The country’s economic recovery is gaining steam, consumer spending is starting to tick up (it grew at more than 4% last quarter), and even wages have started to improve slightly. This has understandably led some economists and analysts to conclude that the shrinking middle phenomenon is over.
At the risk of being a Cassandra, I’d argue that the factors that are pushing the recovery and working in the favor of the middle class right now—lower oil prices, a stronger dollar, and the end of quantitative easing—are cyclical rather than structural. (QE, Ruchir Sharma rightly points out in The Wall Street Journal, actually increased inequality by boosting the share-owning class more than anyone else.) That means the slight positive trends can change—and eventually, they will.
A new report from Wallace Turbeville, a former Goldman Sachs banker and a senior fellow at think tank Demos, which looks at the effect of financialization on economic growth and the fate of the working and middle class. Financialization, is the way in which the markets have come to dominate the economy, rather than serving them.
This includes everything from the size of the financial sector (still at record highs, even after the financial crisis and bailouts), to the way in which the financial markets dictate the moves of non-financial businesses (think “activist” investors and the pressure around quarterly results). The rise of finance since the 1980s has coincided with both the shrinking paycheck of most workers and a lower number of business start-ups and growth-creating innovation.
This topic has been buzzing in academic circles for years, but Turberville, who is aces at distilling complex economic data in a way that the general public can understand, goes some way toward illustrating how the economic and political strength of the financial sector, and financially driven capitalism, has created a weaker than normal recovery. (Indeed, it’s the weakest of the post war era.) His work explains how financialization is the chief underlying force that is keeping growth and wages disproportionately low–offsetting much of the effects of monetary policy as well as any of the temporary boosts to the economy like lower oil or a stronger dollar.
I think this research and what it implies—that finance is a cause, not a symptom of weaker economic growth—is going to have a big impact on the 2016 election discussion. For starters, if you believe that the financial sector and non-productive financial activities on the part of regular businesses—like the $2 trillion overseas cash hoarding we’ve heard so much about—is a cause of economic stagnation, rather than a symptom, that has profound implications for policy.
For example, as Turberville points out, banks and policy makers dealt with the financial crisis by tightening standards on average borrowers (people like you and me, who may still find it tough to get mortgages or refinance). While there were certainly some folks who shouldn’t have been getting loans for houses, keeping the spigots tight on average borrowers, which most economists agree was and is a key reason that the middle class suffered disproportionately in the crisis and Great Recession, doesn’t address the larger issue of the financial sector using capital mainly to enrich itself, via trading and other financial maneuvers, rather than lending to the real economy.
Former British policy maker and banking regular Adair Turner famously said once that he believed only about 15 % of the money that followed through the financial sector went back into the real economy to enrich average people. The rest of it merely stayed at the top, making the rich richer, and slowing economic growth. This Demos paper provides some strong evidence that despite the cyclical improvements in the economy, we’ve still got some serious underlying dysfunction in our economy that is creating an hourglass shaped world in which the fruits of the recovery aren’t being shared equally, and that inequality itself stymies growth.