Kathmandu— Economist James K. Galbraith contends that decades of adherence to neoclassical economic orthodoxy has severely distorted US policymaking across a range of critical areas, including inflation, trade, and even the ongoing fertility crisis. In his forthcoming book, *The Power to Destroy*, Galbraith argues that this dominant framework is empirically discredited and actively harmful, despite its continued influence on institutions like the Federal Reserve and Congressional Budget Office. Recent administrations, including those of Joe Biden and Donald Trump, have begun to deviate from these established principles with policies such as tariffs and domestic manufacturing initiatives, but Galbraith suggests these efforts are hampered by a lack of capacity and an outdated understanding of the modern American economy.

Challenging Economic Orthodoxy

Galbraith identifies what he calls “equilibrium economics” – prioritizing market-driven outcomes and limiting government intervention to correcting market failures – as fundamentally flawed. He argues that markets don’t exist in a vacuum but are created and regulated by governments, and the assumption of a self-correcting economy is unrealistic. This mindset, ingrained in generations of economists, informs policies like maintaining balanced federal budgets and attempting to control inflation through interest rate manipulation—strategies Galbraith deems ineffective and often detrimental.

Inflation and Federal Reserve Policy

According to Galbraith, the Federal Reserve’s attempts to curb 2021-2022 inflation by raising interest rates were misguided. He asserts that short-term interest rate adjustments have no direct impact on price levels and that significant contraction—job losses and business bankruptcies—would be required for such a strategy to work. However, he notes the current American economic structure, with its weakened unions and service-based economy, prevents this traditional contractionary effect. Instead, Galbraith attributes the initial inflation spike to pandemic-related supply chain disruptions and increased demand for fixed assets like housing among higher-income individuals.

Industrial Policy and US Capacity

While acknowledging recent efforts to rebuild American industry through initiatives like the CHIPS Act and Inflation Reduction Act, Galbraith expresses skepticism about their long-term success. He argues that decades of deindustrialization have eroded state capacity and that the shift towards a service economy makes replicating past industrial successes difficult. The recruitment of companies like Taiwan Semiconductor Manufacturing Corporation highlights this challenge, as establishing complex manufacturing ecosystems is not easily replicated domestically. Furthermore, he suggests renewable energy policies may simply fuel demand for data centers rather than significantly reducing carbon emissions.

Financial Dominance and Global Trade

Galbraith contends that the United States’ financial dominance—particularly the role of US Treasury debt in the global economy—is at odds with its industrial competitiveness. While benefiting from access to low-cost goods, the US has lost domestic production capacity. He also criticizes the use of economic sanctions as a tool of foreign policy, arguing they incentivize countries like China and Russia to reduce their reliance on the dollar and develop alternative financial systems. “They’re sending real goods and services in exchange for that debt,” Galbraith explained, referring to nations accumulating US Treasury bonds. “It is, in fact, to their advantage to do that.”

A Shift Away From Old Models

Galbraith believes a more successful policy system requires an alternative conception of how economies function—one that acknowledges the complexities of real-world systems and moves beyond simplistic models. He points to examples like China’s rapid response to mask shortages during the pandemic, demonstrating a flexible and responsive industrial structure lacking in the US. He advocates for policies tailored to specific conditions rather than adhering to outdated economic principles.

Galbraith's analysis suggests that fundamental shifts in economic thinking are necessary to address the challenges facing the United States, but acknowledges that overcoming decades of ingrained orthodoxy will be a significant undertaking.

(With inputs from Jacobin)

Originally published on abcnews.com.np.