Third Kaminska

Izabella Kaminska's "time of hoarding" post (reviewed yesterday) links to her "missing variable" post of 31 August (reviewed today). Once again, the article starts out great.

She wonders if we remember

Alan Greenspan becoming confused about America’s exceptional growth in the 1990s.

At the time, the data didn’t seem to fit the prevailing reality. The incredible and seemingly unstoppable growth Greenspan was seeing on the ground was at odds with his economic models, which instead were signalling an imminent rebalancing on the back of wage pressures and implied inflation.

Greenspan, confounded by the disconnect, concluded that some sort of missing variable must have been responsible for the mismatch.

I got that far into it, and in my notes I wrote: The missing variable is debt.

The story Kaminska tells links the missing variable to "the growth of information technology and computers". Sure. Robert J. Gordon told the same story. I didn't buy it then, either.

If there's one thing economists ignore, it's debt. That's the reason the variable seems to be missing: They ignore it.

Anyway, Kaminska extends the story. She notes that Ben Bernanke was puzzled by the "information technology" explanation of our high productivity. Kaminska quotes Bernanke from 2006. Bernanke makes two points:

1. Other countries made comparable investments without comparable returns; and
2. The good returns we were getting continued long after the investments declined.

Good reasons to doubt Greenspan's IT explanation.

"In the end," Kaminska writes, "Bernanke rationalised that the United States had become the greatest beneficiary of technological shifts due to the country’s open and pro-business culture".

So, Greenspan said IT explained the good productivity. Bernanke said our supply-side culture explained it.

"Of course," she writes, "what happened next — the subprime crisis — changed everything."

Ooh! Ooh! Debt! She's gonna say debt is the missing variable!

"The above rationale was forgotten about as a new, more resolute, and less ‘mystic’ theory focused on the role of credit expansion came to the forefront."

Ooh! We're almost there!

"The logic now went that it was the uber-low rates, introduced in the aftermath of the dot-com crash to cushion the economy, that had caused all the trouble."

No!!! (Disappointed.) In one step, Kaminska drags us kicking and screaming from excessive credit use to excessively low interest rates.

Notice what is being ignored, here? Debt is being ignored here: Accumulated debt. (Also known as credit in use.)

"By the time the market started to crash in 2007, the causes seemed far clearer. What we were suffering from was a debt overhang in the Western world, driven by a complacent attitude to debt, imprudent lenders and greedy consumers living beyond their means."

Debt?? You would think so! But the only times I regularly see debt brought up, excessive private debt, brought up as the central problem is when I'm reading my own blog, or Steve Keen's, or sometimes Krugman's. Otherwise, the story is always that debt is commonly said to be the problem but really the problem lies elsewhere. That is how debt comes into the picture -- in the attempt to show that debt is *not* the problem. This is how it seems to me.

If we now know that this "debt overhang" is the problem, then why don't we do something about it? Bernanke doesn't think the debt overhang is a problem. He's busy trying to get people to borrow more. And economists in general don't think the private debt overhang is a problem, or they wouldn't be still ignoring it.

"Even Alan Greenspan acknowledged that the ‘missing variable’ had more than likely been globalisation, not information technology."

What the... Globalization?? That's not the same as excessive debt.

So where are we now? Information technology... Our supply-side culture... The uber-low rates... and then globalization. Notice how debt is right in there, so close, yet somehow never makes the list?