Thursday, July 14, 2011

Lost Decade of Debt

Two political economists write about the economics of American debt in the first decade of the twenty-first century. They call that time a 'lost decade' because debt financed both federal budget deficits and consumer spending. The deluge of borrowing made up for the fiscal deficits caused by massive tax cuts at the beginning of the decade and fueled the real estate buying spree and resulting housing price boom, then bubble. 'Political' is a key concept here. Menzie and Frieden weave a lucid and compelling tale of the history and politics, regulation and deregulation that structured events. For them, the story is not one of greedy bankers and out-of-control markets but of deliberate public action and inaction. And the events of the last (lost) decade were not unprecedented. The authors begin with a short recap of the horror of accumulated deficits and the near-frantic political effort to cut spending and raise additional revenue to close the fiscal
deficit - a fiscal success that quickly undoes the tepid economic recovery of the previous few years when the country stared down economic catastrophe. A prediction? No. An account of the years from 1936 to 1939 when unemployment and recession beat down the American economy after a young Franklin Roosevelt engineered in short-lived recovery during his first term.

Manse and Frieden are not writing a cautionary tale. Theirs is a political history of the American economy of the last decade. Mining history, they predict that the coming decade of long recovery will be lost as well. The authors accept the debt story precisely described by Reinhart and Rogoff in 'This Time is Different' - the jumping point for their political narrative of the American economic story of the last decade.

-Jim Wood

Lost Decades: The Making of America's Debt Crisis and the Long Recovery by Menzie D. Chinn and Jeffry A. Frieden, 9780393086509, Cloth, September, 2011, W.W. Norton & Company, Inc.

This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff is coming out in paper with a revised preface in September, 2011. $19.95. 978-0-691-15264-6

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