At Crooked Timber, Daniel says "there is a lot of rewriting of the recent past" in the secular stagnation view of "why we’re in the mess we’re in".
Basically, the thesis is that since about the mid-1990s, it has been the case that it has only been possible to achieve anything like full employment in America during periods when the private sector has been chronically over-consuming and increasing its debt levels.
Daniel doesn't buy it:
They got a structural increase in personal sector debt because they wanted one and set policy in order to create one. There’s no good calling it a “bubble” or a “puzzle” now that the shit’s hit the fan.
Amen, brother.
I liked the article. I don't like that the "thesis" only goes back to the mid-1990s. But that's not Daniel's version, of course. Daniel takes us back to when "China starts to industrialise and NAFTA is passed." I don't know about China, but NAFTA came into force in 1994, according to Wikipedia. So, mid-1990s.
Daniel does refer to "the entire period in question" as “The Greenspan Years”, which gets us back to 1987. Nothing before that, that I noticed.
For more or less the entire period in question (call them “The Greenspan Years”), the growth of consumer spending, financed by increased consumer debt, was the main instrument of policy.
Sure. In comments, Robert Waldmann replies:
A wish is not a plan. Greenspan, Clinton and Bush might have wished for consumers to borrow and spend, but they had no way of forcing people to.
Okay. But policy doesn't "force" people to do things. Policy induces people to do things. And anyway, consumer debt was increasing anyway:
See how the dramatic increase begins right there in the mid-1990s? No...
No, I mean right there in 1987? No...
No. Debt was going up from the start.
To be clear, I do like Daniel's summary of events since the late 1980s. Those were all contributing factors, surely. And I very much like where he's coming from:
... in describing the growth in debt as if it was a purely exogenous phenomenon, due to nothing other than animal spirits and irrationality, there’s a really dangerous kind of mistake being made.
It was policy!
Absolutely, it was policy. Either we encouraged debt, or we failed to discourage it, or both. (Actually, both.) But here's the thing, Daniel. You don't go back to the time when a problem became obvious, and point to that time and say, "There's the problem."
Things don't happen instantly in the economy. Things develop.
The debt that became a problem in 2008 was already a problem for people in the 1990s. The debt that was a problem in the 1990s was already creating problems in the 1970s. And the debt that was a problem in the 1970s was already a developing problem in the 1950s.
It's obvious. Just look at that up-trend on the graph.
11 comments:
I just read daniel's post, but not the 261 comments. His narrative seems [mostly] pretty compelling, but I'm not sure how tongue in cheek he is being.
I have to think harder abut the bullet points after his policy in a box digression.
I think there is much more to be made of distribution effects:
- So there is a structural shortage of domestic demand
- Which is probably exacerbated by the distributional effects of Chinese imports and NAFTA
Also, the bulk of consumption growth being for health care is an enormous factor that gets talked about almost never.
And aren't medical expenses the leading cause of personal bankruptcies?
All this just reinforces my view that secular stagnation is real, and that wealth/income disparity is the main root cause.
People used debt because they were broke. I don't know how much policy encouraged the use of credit, vis-a-vis simple necessity.
To your point, the growth in CMDEBT has a double peak around the '83 min due to the double dip recession. Maxima in Q1 79 and Q4 79. The 90's have the lowest debt growth rate of any period in this record.
http://research.stlouisfed.org/fred2/graph/?g=qfg
But it really takes off again starting in 97. Speculation in margin?
I don't think I agree with daniel's blithe dismissal of bubbles.
Cheers!
JzB
"People used debt because they were broke. I don't know how much policy encouraged the use of credit, vis-a-vis simple necessity."
Jesus Jazz, you seem to think I want to reduce debt growth in order to punish people. Is that what you take from all our exchanges??
Clearly to simply crunch down on credit use would reduce spending and reduce economic activity and do great damage to growth. This is not my plan.
I want to reduce the use of credit, which is money that costs money to use, and replace the expensive money with inexpensive money, providing sufficient money to sustain the level and the growth of GDP.
In an economy where every dollar of money is turned into more and more credit, my plan -- to move away from the reliance on credit, toward a reliance on non-credit money -- will only provide more grist for the mill that generates debt. Therefore, it is necessary to prune back the policies that encourage the use of credit, and to replace them with policies that encourage the accelerated repayment of debt, and the preference for cash.
Art wrote:
"I want to reduce the use of credit, which is money that costs money to use, and replace the expensive money with inexpensive money, providing sufficient money to sustain the level and the growth of GDP."
Seems to me that is what is happening. I Can't say if it is by design or accident but the money supply has been growing without credit expansion and the burden of past credit is constantly dropping.
This graph shows that both debt service payments by households and the ratio of loans to deposits in the banking system are at a more than 30 year low and still heading downward.
http://research.stlouisfed.org/fred2/graph/?g=qfv
What exactly are the policy changes that would "encourage the accelerated repayment of debt, and the preference for cash"?
Jesus Jazz, you seem to think I want to reduce debt growth in order to punish people. Is that what you take from all our exchanges??
I wasn't being in the slightest argumentive, and seriously have no idea where that came from. I'm just looking at the data and the atmospheric conditions in which they were generated. I'm riffing on what i got from Daniel's post, and my own long standing ideas. Nothing about your goals and methods was either expressed or implied.
Therefore, it is necessary to prune back the policies that encourage the use of credit, and to replace them with policies that encourage the accelerated repayment of debt, and the preference for cash.
Again, without denying policy effects, i think a more fundamental answer is to have sufficient funds in the hands of the people who need basic necessities, such that the excessive use of credit is not necessary. Certainly tax, regulation, and employment policies affect this profoundly, and that is where I think the policy solutions can be found.
Note that during the 50's and 60's YoY credit growth was in rapid decline. We had strong unions, a much smaller finance sector, reasonable executive pay, high investment, and moderate dividend payout rates.
This changed during the 70's. High inflation encourages credit use, since you pay off with cheap dollars.
[BTW, the 2nd peak I mentioned in the earlier comment s/b q4 '85, not 79.] After that, credit growth again falls to a multi-year low as inflation goes away.
It takes off again after '97, for a variety of reasons. Then in mid '06 falls like a rock.
For me, this is all in the context of secular stagnation, as a direct result of income and wealth disparity.
Cheers!
JzB
[Reposted to correct a typo]
Jim -
I think money supply growth has been quite ineffective at promoting demand because none of that money is getting to the lower half of the population.
It's mainly gone into speculation and fueling another stock market surge. This is NOT going to end well.
The top 1% has gotten far, far richer since the great recession allegedly ended, and people near the bottom have lost wealth. See graph 2 and accompanying text here.
http://jazzbumpa.blogspot.com/2013/09/the-misguided-right-wing.html
I think the fact that people are still in deleveraging mode is empirical evidence that 1) either the great recession is in fact not over, or 2) we are in an extended era of real stagnation.
I think your final question is cogent.
Cheers!
JzB
Hi Jim. In response to my desire to reduce our reliance on credit, you wrote: "Seems to me that is what is happening."
Yes. And much of what is happening is a completely natural response. People saving more and borrowing less is a natural response. The point is, the solution that we need, the solution that I say we need, happens eventually anyway. But it doesn't happen soon enough to prevent a Great Depression or a very severe crisis.
Bernanke's provision of additional base money... I doubt he understands why he has to do that. He seems to be trying to do what he thinks Milton Friedman would tell him to do.
I certainly don't know what Bernanke is thinking. But if policymakers understood that there is a limit to how many dollars of credit can be supported by a dollar of money, then they would see they don't always need to test the limit. They could settle on a low, safe number and be done with it. I think policymakers have yet to learn that you cannot stretch a dollar forever.
One dollar of money can cover a few dollars of credit use, yes. It can cover several dollars of credit use, yes. And for a time, it can even cover many dollars of credit use. But time runs out.
Look, when money was gold we could not increase the money at will so that each dollar could stretch over fewer dollars of credit use. Today, because money is fiat, we can increase the money at will. But that's only half the problem. We must also contain credit use, or the increased quantity of money will all of it be stretched to the failure point over additional new uses of credit. And the whole point of reducing the credit-to-money ratio will have been defeated.
If we double the quantity of money in order to cut the credit-use-per-dollar number in half, we're on the right track. But then if credit use doubles, we're back where we started (and prices are probably higher besides).
We need incentives to keep credit-use-per-dollar at a level where finance is sustainable and economic performance is vigorous.
//
The tax deduction for mortgage interest encourages [home ownership by encouraging] people to have mortgages. If you pay off your mortgage, you lose the tax deduction. So it encourages people to be in debt.
I would prefer to give people tax deductions for making extra payments that reduce their debt. The tax advantage of this plan could be designed to be equal to the tax advantage of the existing plan -- equal in dollars, I mean. But the tax deduction for accelerated repayment will help to reduce debt, rather than increase it.
That is one example of a policy change that would encourage accelerated repayment of debt.
Jazz: "i think a more fundamental answer is to have sufficient funds in the hands of the people who need basic necessities, such that the excessive use of credit is not necessary."
Agreed. That's what I've been saying.
Another tax policy that would help accelerate repayment of debt and reduce the reliance on credit would be to leave interest rates permanently low, and to redesign the income tax so that the tax rate you pay rises and falls with your debt-to-income ratio, or some such.
In other words, redesign the tax code so it creates a variable cost that until now has been the function of interest rates.
The advantages of this approach:
1. Policymakers determine the level of rates and the steepness of the curve. Much greater control than they have over interest rates.
2. The tax-based approach affects the individual borrower slash taxpayer. The interest-rate approach affects the economy as a whole. When they raise interest rates, they undermine growth as a whole. Under the tax-based approach, the heavily-indebted taxpayer experiences a growth slowdown, a recession of sorts at the personal level. But the economy as a whole is still buoyed by other taxpayers, those whose debts are relatively small. We can eliminate recessions, or anyway those that are caused by monetary imbalances.
3. The revenue from the tax-based approach accrues to government rather than to the banks.
Because of current conditions, this may not be the best time to start such a policy. But it is a policy that could prevent conditions like these from arising again.
Debt to income based tax policy powerfully disfavors low income earners and will be horribly regressive.
JzB
you're not listening to me jazz. i am not offering a way to fix the current problem. i am offering a way to prevent it from happening again.
and i am offering a description of what the problem is.
What am I not hearing?
redesign the income tax so that the tax rate you pay rises and falls with your debt-to-income ratio, or some such.
Taxing debt is onerous on debtors, irrespective of place or time, and would be ruinous to low income earners.
The devil is in the denominator.
This plan over-burdens the poor, favors the creditor, and lets the rich skate.
What am I missing?
JzB
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