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| Economy |
| Easy Credit = America's Under the Table Welfare State |
| 2010-08-03 |
| Economist Raghuram Rajan of U. Chicago Rajan offers a bold and convincing diagnosis of how a screw-up in the regulation of poor peoples mortgages in one country has brought the world to the brink of economic disaster, where it teeters still. He goes beyond the proximate causes of the problem — the subprimes and derivatives and trade imbalances and the like. The ultimate cause, Rajan convincingly argues, is a widening of economic inequality that American politicians of both parties found politically intolerable, and chose to fix by turning the credit market into an under-the-table welfare state. Rajan is describing not the moral problems of capitalism but the political problems. The median American is losing ground. And while people at the 90th percentile have never had it so good, Americans in the 10th percentile have endured a punishing economy for about a third of a century now. Their problems become particularly acute during recessions. For reasons that are not fully clear, recessions have changed in nature in the last 20 years. Historically, Western economies returned to full employment within a few months of hitting a recessions trough. Losing a job was a calamity, but a calamity of short duration. Since 1992, however, all recoveries have been "jobless recoveries" — in the 2001 recession, it took more than 38 months for the economy to return to full employment. And, as Rajan puts it with some understatement, "the United States is singularly unprepared for jobless recoveries." This is only partly because the United States has a weaker welfare state than other industrialized countries. It is also because the American safety net - in which government provides fewer health and retirement benefits but incentivizes employers to fill the gap — winds up placing all of a persons eggs in the basket of his job. Lose your job and you lose not only your income but also your (and your childrens) health insurance and possibly (as in several scandalous recent cases) your pension. Under such circumstances, any recession with the slightest perceptible effect on the public will end political careers by the score. And recessions are, alas, inevitable. The result, under both Democratic and Republican leadership, has been reckless government extension of credit. As a remedy for downturns, this has two political advantages. First, it does not bother conservatives as much as handouts do. Second, "easy credit has large, positive, immediate, and widely distributed benefits, whereas the costs all lie in the future. It has a payoff structure that is precisely the one desired by politicians, which is why so many countries have succumbed to its lure." You might say that the financial crisis reflects the emergence of the off-balance-sheet liabilities — the human costs — of deindustrialization. |
| Posted by:lex |