There’s an interesting article at the Washington Post about the role of mortgage debt in our ongoing economic doldrums:
“No one was in doubt that debt overhangs were an important problem,” Summers said recently at a conference. But despite exploring many proposals, the administration did not see a plan that did not have the potential to cause “effects worse than the cure,” he said, such as cratering the financial system by forcing banks to absorb huge losses.
At a more basic level, officials simply did not believe that a big program of debt forgiveness was a smart investment, costing hundreds of billions of dollars — money that it preferred to spend on a massive economic stimulus package that could much more quickly lift the economy. The administration also announced a more modest program designed to avert foreclosures by reducing mortgage payments but not the total debt balance.
The issue here can be stated pretty simply. If the Great Recession was a “balance sheet recession”, caused by too much debt, then much of the pump-priming spending in the ARRA, the stimulus package, was futile. If it was not a balance sheet recession, the spending should have done significantly more good than it has. There’d be no debate over whether it had any effect or not.
The Obama Administration has a lot riding, against all evidence, on our problems not having been caused by a balance sheet recession and, in characteristic fashion, they’re sticking to their guns.
For what it’s worth here are my views. For counter-cyclical government spending does the most good when it’s timed properly and it must be of the right size. In practical terms the only way that could have been accomplished in 2009 was by suspending the payroll tax. There were just too many constituencies slavering over the prospect of all of that free money. The ARRA wasn’t economic policy; it was constituent service.
I believe our problems go back much farther than 2007. I think they go all the way back to the early 90s. That’s when we got on the roller coaster that created two successive bubbles—the dot com bubble and the housing bubble. We are relying far too much on consumer spending and not nearly enough on domestic business investment. Additional consumer spending on healthcare is possibly the worst of all possible worlds as economic stimulus but that appears to be where we’re heading. That will produce less employment per dollar spent than practically any other approach.
We also have too many immigrants with low or no skills relative to the number of jobs for people with low or no skills that are being created. Ordinary supply and demand ensures that will push down wages for the lowest income earners and nearly every empirical study of employment in the U. S. has found that to be the case.
As it is we are now conducting the world’s largest experiment in doing the same thing over and over again and expecting different results.