Some Interesting Reading

A couple of interesting op-eds from the NY Times/International Herald Tribune.  One is on life in Athens today and the other on debt and the Walker recall election in Wisconsin.

Lessons of the Recession

Raghuram Rajan's book, FAULT LINES, is one of the best books I have read concerning the causes of the Great Recession. He now has an article in FOREIGN AFFAIRS that brings it forward. He goes over some ground covered in his book, arguing that the United States and other developed nations distorted markets for a couple of decades by making credit very accessible.  People's spending increased even as incomes didn't increase as much.  The bursting of the housing bubble induced households to deleverage, which was necessary.  For some of the European countries, it was government spending more than household spending that took place in the 15 years prior to the crash.  In neither case, Rajan argues, is the answer to increase government deficit spending.  We need to address the longer term problems.
Rajan's arguments run counter to the view that this is not the time to take the long view. We need to stimulate in order to get growth going. Once growth is back, then we can address the longer-term problems. Rajan argues against this on the grounds that the prosperity we had was not sustainable.  Further, the history of public policy has been to ignore the problems when we have prosperity.
He writes, "Fiscal austerity is not painless and will probably subtract from growth in the short run. It would be far better to phase reforms in over time, yet is is preceisely because governments did not act in good times that they are forced to do so, and quickly, in bad times. Indeed, there is a case to be made for doing what is ncessary quickly and across the board so that everyone feels that the pain is shared, rather than spreading it over time and risking dissipating the political will."
The whole piece is worth reading.

Debt Ceiling Comment by a Colleague

Here is a column about the debt ceiling by my colleague, Todd Steen.

BOOMS AND DEPRESSIONS

In previous posts I have described books on the recent "Great Recession" that I found helpful. I just finished the single best book, although it was written in 1932 and about the Great Depression--Irving Fisher's BOOMS AND DEPRESSIONS. Like several recent books, Fisher focused on debt as a key part of the problem. Some of the book read like it could have been written today--debt in securities, debt in housing, for example. I have been critical of the Fed and QEII, but Fisher makes me reconsider somewhat. He focuses a lot on the effects of falling prices during the early 1930s. Bernanke, as a student of the Great Depression, is aware of these dangers and has focused attention on preventing falling prices.
I wish that some publisher would make this fine book available again to the public.

Root Causes of the Economic Crisis Continued

In an earlier post (Oct. 1) I mentioned an article in the Journal of Accountancy that I thought was very good about the root causes of the economic and financial crises and the recession. I also noted that Marty LaBarge and I had written a comment on the article and sent it to the journal. The comment, divided up by questions supplied by editors, is part of an "Economic Discussion" on the original article. It is available, along with other comments on the original article, on-line here. My only complaint is that they left in our reference to a figure we supplied on US net exports but didn't publish the figure.

Is the American Consumer Becoming More Prudent?

Consumer credit fell in February, as reported in an article here. Accompanying the article is a graph showing consumer credit for almost 20 years. While reduced borrowing may be linked to reduced spending, and the government would like to see spending increase to help the economy pull out of recession, I think consumer credit needs to fall further. Households need saving to help during unexpected events such as serious car trouble, furnace going out, illness, layoff, and numerous other possible events. Further, longer-term saving for anticipated events such as buying a house, college education, and retirement is prudent. In fact, prudence needs to be emphasized in our economic life. Prudence is a term with a long history in economics. Adam Smith wrote of the virtue of prudence, and, more recently, Deirdre McCloskey describes prudence as, "...first in political and economic and bourgeois value." (Deirdre N. McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce. (Chicago: The University of Chicago Press, 2006), p. 253.) Perhaps the American consumer is becoming more prudent. Then again, it could be a short-term effect due to declining wealth and increased job losses.