debt loads

The Nonexistent Rise in Household Consumption by JW Mason

In our "Fisher dynamics" paper, Arjun Jayadev and I showed that the rise in debt-income ratios for the household sector is not due to any increase in household borrowing, but can be entirely explained by higher interest rates relative to income growth and inflation.

Pace Dean Baker and House of Debt. Or maybe not.

Diagnoses and Prescriptions: The Great Recession by Jared Bernstein

Seems like a confused article.

As Low Rates Depress Savers, Governments Reap Benefits by Catherine Rampell

Dean Baker Reduces Uncertainty

Clinton's Surpluses Were Due to the Stock Bubble by Dean Baker

The huge surpluses of the last Clinton years were the result of a boom that was driven by a stock bubble. The boom was great. Millions of people got jobs who would not have otherwise. We also saw real wage gains up and down the income distribution for the first time since the early 70s.

The greatest minds in the economics profession had assured us that the unemployment rate could not get below 6.0 percent without touching off accelerating inflation. However the boom pushed the unemployment rate down to 4.0 percent as a year-round average in 2000. Guess what? There was no story of accelerating inflation. (Fortunately for economists, continued employment, and even standing in the profession, does not depend on performance.) 

But the key point is that the surplus came from a boom that was not sustainable. Here's the key chart that shows you how we went from the deficit of 2.7 percent of GDP that the Congressional Budget Office had projected in 1996 for 2000 to the surplus of 2.4 percent of GDP that we actually saw in 2000.

This was not a story of tax increases and budget cuts, those had already been on the books by 1996. This was pure and simply a story of the bubble-based boom pushing the economy much further than CBO had expected. (Greenspan deserves a huge amount of credit for allowing the unemployment rate to fall. His Clinton appointed collegues, Lawrence Meyer and Janet Yellen wanted to raise interest rates in 1996 to keep unemployment from falling much below 6.0 percent.)

[(EDITED: Baker mentions 1996 which I somehow missed. The Russian default was in 1998 so I must be confused about this.) Supposedly Greenspan lowered rates because he wanted the Fed to act as the lender of last resort during the Russian default. The hedge fund Long-Term Capital Management failed because of the default. The international scene was a mess even if the U.S. had 6 percent unemployment. N.O.]

Anyhow, when the bubble burst, the surplus was destined to vanish. The Bush tax cuts and even the wars helped to stimulate the economy and maintain employment. There were much better ways to boost the economy, but it is absurd to imagine that the economy somehow would have been better off without this spending.

To repeat a post from last week, the real tragedy of both conventions is that policy is so obsessed with the deficit....

You’re on Your Own vs. We’re In This Together by Jared Bernstein

Clinton Tries To Bring Medicaid Into Focus by Yglesias

Is the Economy on the Mend? by Krugman

Between debt repayment, defaults, and — since recovery began in mid-2009 — rising income, the US has made a lot of progress in deleveraging. Add in the fact that we’ve worked off the excess construction from the Bush years, and there’s a pretty good case that the stage has been set for a much stronger recovery over the next few years. 

Even if that’s true, by the way, inadequate stimulus and debt relief have inflicted huge, gratuitous suffering. But the case that we have been healing all the same is pretty good.

Might be a better jobs report tomorrow. The ADP Employment Report had a good number today.

Student debt up, all other kinds down by Doug Henwood

Diagram from Mike Konczal. Via Yglesias, who says "I’m with Woodford in the overlapping fiscal/monetary slice of the Venn diagram." I agree, but I'd add the perspective of Eggertsson/Krugman on debt and deleveraging.

Mass Mortgage Refinancing Is A Good Idea by Yglesias

Housing and Arithmetic: Why Do They Never Appear Together by Dean Baker

Arsenal of Democracy

Dean Baker points us to an editorial at the Washington Post.

Nor is Mr. Obama or his economic policy to blame for the economy's inability so far to resume robust, job-generating growth. The economy faces a painful, protracted process of deleveraging. Households and companies must work off a huge overhang of debt built up during the boom, and they can't resume spending and investing in the meantime. That deleveraging will hamper growth for -- well, for as long as it takes. Government efforts may ease deleveraging, but to the extent they succeed, it is generally by postponing the day of reckoning and making it more expensive when it inevitably arrives. 

Baker also notes that those calling for sacrifice failed to foresee the $8 trillion housing bubble which caused the overleveraging of debt. As Krugman argues, we can work off the debt cleanly or ugly. In the meantime the government could boost aggregate demand to utilize excess capacity until the private sector recovers. 

Here Krugman blogs about a new paper which shows that fiscal stimulus worked during the prewar buildup to World War II.

What Gordon and Krenn point out is that we actually have more information than a simple comparison between the depressed peacetime economy and the war economy after Pearl Harbor: there was a period of more than two years when the United States was gearing up for war but not yet engaged in combat -- the Arsenal of Democracy era. Rationing was not yet in effect, and for at least part of this period the economy still had excess capacity despite a very large rise in government spending.

...in the prewar buildup you had a clear-cut expansion of federal spending on the order of 14 percent of GDP. That’s a real experiment with the economy. And the results were clearly Keynesian.

The editors at the Post seems to the think the stimulus bill worked to help prevent another Great Depression - actually it was negated by the "50 little Hoovers" at the state level - but they don't advocate more to get us to full employment and full capacity usage.

It seems to the editors at the Post were a little too complacent about the housing bubble and are currently too complacent about high unemployment, slow growth and disinflation.

Interesting bit from a commenter at Baker's blog:

From Keynes's The General Theory of Employment, Interest, and Money: Chapter 21 - Trade Cycle - Section III:

"Furthermore, even if we were to suppose that contemporary booms are apt to be associated with a momentary condition of full investment or over-investment in the strict sense, it would still be absurd to regard a higher rate of interest as the appropriate remedy. For in this event the case of those who attribute the disease to under-consumption would be wholly established. The remedy would lie in various measures designed to increase the propensity to consume by the redistribution of incomes or otherwise; so that a given level of employment would require a smaller volume of current investment to support it."