Following up on yesterday’s post that was, in part, about how Americans were encouraged over the past 30 years to take on more and more debt in order to make up for the fact that nearly all income growth in the country during that time was being funneled to the few people at the very tippy-top of America’s economic pyramid, here are two additional factoids, below the fold:
(1) Via Matthew Yglesias we have this nifty little chart showing inflation-adjusted incomes in the United States from 1980 through 2005. Note how income for the bottom 80% of all Americans stayed almost perfectly flat for the entire 25-year period being measured, compared to the huge increases in annual income enjoyed by those in the top 1%:
(2) A lot of people are paying attention to Ezra Klein’s piece today titled, “Could This Time Have Been Different?” It’s a very good examination of how and why the Obama team did what they did in confronting the country’s economic crisis, how their initial actions tended afterward to hamstring them politically, and what they might have done differently to address the crisis more effectively. I very much urge anyone interested to click over and read it in its entirety; it seems remarkably even-handed in both its praise and criticism.
But this passage in particular, in which Ezra discusses Carmen Reinhart’s economic analysis, really caught my attention:
[F]inancial crises are not like normal recessions. Typically, a recession results from high interest rates or fluctuations in the business cycle, and it corrects itself relatively quickly: Either the Federal Reserve lowers rates, or consumers get back to spending, or both.
But financial crises tend to include a substantial amount of private debt. When the market turns, this “overhang” of debt acts as a boot on the throat of the recovery. People don’t take advantage of low interest rates to buy a new house because their first order of business is paying down credit cards and keeping up on the mortgage.
In subsequent research with her husband, Vincent Reinhart, Carmen Reinhart looked at the recoveries following 15 post-World War II financial crises. The results were ugly. Forget the catch-up growth of 4 or 5 percent that so many anticipated. Average growth rates were a full percentage point lower in the decade after the crisis than in the one before.
Perhaps as a result, in 10 of the 15 crises studied, unemployment simply never – and the Reinhardts don’t mean “never in the years we studied,” they mean never ever – returned to its pre-crisis lows. In 90 percent of the cases in which housing-price data were available, prices were lower 10 years after the crash than they were before it.
Now that is some very scary stuff.
As I mentioned yesterday, we seem to have come to the end of the line of credit that was extended over the past 30-odd years to persuade regular Americans that they were growing more prosperous, when in fact they were simply plunging deeper and deeper into debt. The lack of a new asset bubble to support yet another extension of credit is akin to an inability to refinance all that existing debt. Which means it cannot be kicked down the road any longer, but must be dealt with now; this is the “debt overhang” described in Ezra’s article.
But what is really scary is that Carmen Reinhart (along with her colleague, Ken Rogoff) was the economist who most correctly predicted exactly how bad the current recession was likely to end up being. Which means – if she is also correct about what we can anticipate coming out of the recession – we are looking at three fairly terrible things:
(i) No hope of recovery in the housing market. Which means many people currently underwater on their homes will remain underwater. It also means that – any happy talk to the contrary notwithstanding (and I’ve seen some surfacing every once in a while) – we can’t expect a revitalized housing market to pull us out of this mess;
(ii) We will never, ever, get back to what we used to consider “full employment.” A fairly large and permanent number of unemployed Americans may be the new normal; and
(iii) We cannot expect to see any post-recession economic boom. The best we can hope for is a steady growth rate that will still be lower than what we used to consider “normal” in the past. Our future “best” will be worse than our past “normal.”