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In the United
But when easy money pushed by a deep-pocketed government comes into contact with the profit motive of a sophisticated, competitive, and amoral financial sector, a deep fault line develops.
the ability of these countries to supply the goods reflects a serious weakness in the growth path they have followed—excessive dependence on the foreign consumer. This dependence is the source of the second fault line.
essentially, their own financial systems were based on fundamentally different principles from those of their financiers, and the incompatibility between the two, the source of the fault line, made it extremely risky for them to borrow from abroad to support investment and growth.
Jobless recoveries are particularly detrimental because the prolonged stimulus aimed at forcing an unwilling private sector to create jobs tends to warp incentives, especially in the financial sector.
In politics, economic recovery is all about jobs, not output, and politicians are willing to add stimulus, both fiscal (government spending and lower taxes) and monetary (lower short-term interest rates), to the economy until the jobs start reappearing.
As with the push for low-income housing, the fault line that emerges when politically motivated stimulus comes into contact with a financial sector looking for any edge is an
immense source of danger.
The gap between the growing technological demand for skilled workers and the lagging supply because of deficiencies in the quantity and quality of education is just one, albeit perhaps the most important, reason for growing inequality.
All of this growth was concentrated at the top: the wages of those in the middle relative to those at the 10th percentile have not gone up anywhere near as much as the wages of the 90th percentile have grown relative to those in the middle.
of university education. Instead, there are three obvious problems
advantage breeds more advantage. The rich can afford to live in better neighborhoods,
We do not need to get into the moral issues surrounding extreme inequality to understand that it is a thoroughly undesirable state of affairs. To the extent that it is caused by a significant part of the population’s not being able to improve themselves because of lack of access to quality education, it signifies tremendous inefficiency. A mind is a terrible thing to waste, and the United States is wasting too many of them.
Because the well-connected and the highly educated tend to mate more often with each other, “assortative” mating has also helped increase household income inequality.
“on the whole, Americans care less about inequality—the precise gap between the rich and the poor—than about opportunity and achievement: are people getting ahead
As self-confidence withers, can envy, and its close cousin, hatred, be far behind
Politicians are coming to terms with something Aristotle pointed out: that although quarrels are more likely in an unequal society, striving to rectify
the inequality may precipitate the very conflict that the citizenry wants to avoid.
Easy credit has large, positive, immediate, and widely distributed benefits, whereas the costs all lie in the future.
The problem in the United States this time was that the politicians found a way around these regulatory structures, and eventually public support for housing credit was so widespread that few regulators, if any, dared oppose it.
The FHA protected itself by charging an insurance premium, setting strict limits on the maximum loan it would finance (initially 80 percent of the property value), and the amount of the loan it would insure. This restriction also ensured that a private market emerged for the mortgages, or portions thereof, that the government would not insure.
But much of the profit stemmed from their low cost of financing, deriving from the implicit government guarantee, and this was a critical political vulnerability.
The problem with using the might of the government is rarely one of intent; rather, it is that the gap between intent and outcome is often large, typically because the organizations and people the government uses to achieve its aims do not share them.
it may well be that many of the parts played by the key actors were guided by the preferences and applause of the audience, rather than by well-thought-out intent.
The consequences of the lending are greater loan defaults and no measurable increase in agricultural output, which suggest that it really serves as a costly form of income redistribution.
However, even accounting for differences in human capital between rich and poor countries, Lucas surmised that capital should still be far more productive in the latter. Moreover, evidence suggests that the enormous investments in education around the world in recent years have not made a great difference to growth.3 Something else seems to be missing in poor countries that keeps machines and educated people from maximizing productivity and the countries from growing rich—something that dollops of foreign aid cannot readily supply.
As a result, India’s private sector simply did not have the encouragement or the requisite cover behind which to develop organizational capital.
So competition within the domestic market was typically unfettered, with governments rarely intervening. The extent of government intervention is the critical difference between the early developers and many of the late developers.
that incentives in the government are not aimed at using resources efficiently.
The primary role of the government is to ensure that the superstructure that facilitates private activity—including public security, the functioning of markets, and the enforcement of contracts—functions efficiently.
lead the state to favor the producer and the financier at
In the perfect world envisioned by economists, a country’s investments should not depend on its savings. After all, countries should be able to borrow as much as they need from international financial markets if their investment opportunities are good, and their own domestic savings should be irrelevant. So there should be a low correlation between a country’s investment and its savings. In a seminal paper in 1980, Martin Feldstein from Harvard University and Charles Horioka from Osaka University showed that this assumption was incorrect: there was a much higher positive correlation between a
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The current account is just the difference between a country’s savings and its investment. A surplus indicates that the country contributes savings to the global pool, while a deficit indicates that it borrows from the rest of the world to finance its investment. A current-account surplus typically also means a trade surplus: the country exports more than it imports.
We found a positive correlation for developing countries: the more a country finances its investment through its own domestic savings, the faster it grows. Conversely, the more foreign financing it uses, the more slowly it grows.
A government-directed, producer-biased strategy of growth tends to stunt the development of that country’s financial sector. Because banks are told whom to lend to, and because domestic competition among producers is limited anyway, banks tend not to seek out information or develop their credit-evaluation skills.
Knowing this, foreign lenders demand protection, which the government can typically give only by eroding the rights of existing domestic creditors—for instance, the more the overindebted government borrows in foreign currency, the higher the inflation it will eventually have to generate to erode domestic-debt claims on it.
and electronics—or India’s family-owned conglomerates, like the Tatas or the Birlas, essentially try to replicate the role of the financial system by creating an internal capital market within the conglomerate. Although the loss of corporate
The United States, with growing inequality making the political environment favorable to more debt-financed consumption (as I argue in Chapter 1), was a prime candidate to be the new demander of last resort. However, the policies in the early years of this century that pushed it firmly into the role of the world’s new designated spender were driven by a new phenomenon: recoveries in the United States were increasingly “jobless,” and the U.S. safety net was wholly inadequate to cope with them.
The emphasis is on rapid restructuring in the face of distress, terminating dying enterprises, and financing new businesses.
Recessions are a time of both destruction and new creation.
The broader point is that discretionary fiscal stimulus tends to be based on ideology and on past obligations or interests rather than attuned to the needs of the moment. Clearly, if there is a strong case to be made that it will “work” in creating long-term jobs or averting a self-destructive downward spiral in the economy, few would dispute the need to spend.
