Raghuram Rajan on the Recession

In Foreign Affairs, Raghuram Rajan (who’s appeared on this blog before) writes about the causes and lessons of the Great Recession:

In fact, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side. For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their aging populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.

His prescription? A focus on “long-term sustainable growth.” Rajan writes: “The United States must improve the capabilities of its work force, preserve an environment for innovation, and regulate finance better so as to prevent excess.” 

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  1. Mike B says:

    That is one of the best summaries of the recession I have seen. I can remember back to 2007 and to at least me it was clear that that was something majorly wrong because our country simply wasn’t doing useful things any more.

    Personally I am worried that finding such a sustainable growth pattern may not be possible as automation and technology continue to improve. Humans can only consume so much without just setting resources on fire. As people become satiated by cheap food and super lost cost digital content and devices demand for those goods and services that previously employed people are only going to drop further, creating a permanent idle class whose labour is simply not necessary. What are these people to do? Get welfare? Go to prison? Fight in wars? Perhaps the eventually decline in birthrates will eventually restore the balance.

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  2. Seminymous Coward says:

    Are software, processor designs, medicines, and other technological developments not useful?

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    • Erik Dallas says:

      They would be useful if we could export them.
      1) Software – copied. =0
      2) Processor Design – perhaps some export, but manufacturing is overseas so we really import the manufacturing back into the US, and this may be offset by exporting the design via chip sales to the rest of the world. =+-
      3) Medicines – are sold at closer to generic cost elsewhere in the developed and developing world so really only the US is paying for development and everyone else is getting medicine at closer to manufacturing costs. = 0 or small +
      4) Technological developments – probably a mix the prior three answers. =+-

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      • Seminymous Coward says:

        I would contend that defining “useful” as “increasing the balance of trade” is fairly unusual. Rajan didn’t do so within the paper, either.

        In any case, the USA produces plenty of useful physical objects, as well, not least among them those computerized lathes Rajan mentions and similar production machinery.

        America’s manufacturing output was the highest in the world for the last year I could find easily, and it’s certainly still at least second, since only China was even in the same league. I’d contend that even second is respectable, given that China does have more than quadruple the population of America, after all.

        [WORDPRESS HASHCASH] The poster sent us ‘0 which is not a hashcash value.

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  3. James says:

    I call it the squirrel cage economy: you convince people they need to buy stuff that they don’t actually get any use or enjoyment from, which creates jobs making the stuff so more people can buy it. In the end, the people who really profit are the owners of self-storage units: what fraction of the public is shelling out $50-100 or so a month to store stuff that they never use? Which in many cases won’t see the light of day again until the inevitable estate sale?

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  4. Clancy says:

    Some of the reforms he suggests might be nice, but woefully inadequate to get us out of depression.
    His description of the crisis offers nothing new, it’s just a rehashing of the same tired “Conventional Wisdom” much of which is just wrong. He rattles off the old and disproved “Barney Frank caused the housing bubble” with out even mentioning financial deregulation that opened the door to subprime mortgages, mortgage backed securities, CDOs, etc. He also repeats the German line that Europe’s problems are all about budget deficits and if everyone could be like the thrifty Germans they could pull out of the depression too.
    He points out that Greece can’t borrow its way out of crisis, (true, because Greece borrows in Euros) and leaps to the conclusion that no-one, including the US can afford more debt without mentioning that the US is not Greece; we borrow in our own currency and borrowing costs continue to be at record lows.

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  5. Paul says:

    Clancey, I think you should read more of Rajan’s work/analysis before making lazy comments. Pick up & read “Fault Lines” for a more detailed synopsis about the events that lead to the 07/08 collapse and his constructive (if difficult) solutions on how to get us out of this mess. He’s about as apolitical as I’ve read on these topics which is (sadly) rare in today’s world.

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  6. David G says:

    Why not ” Don’t spend more than you take in?”

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    • Travis says:

      Because that becomes impossible for many people who either lose their job through no fault of their own, and have greater obligations (mortgage, insurance, other debt) than their income, or for individuals who are underemployed working part time for near minimum wage in an attempt to support themselves.

      It’s great advice for people who have good, full time jobs, but it’s pointless bell ringing for anyone less fortunate.

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      • James says:

        How about doing the spend less thing BEFORE you lose the good, full-time job? But it seems that for most Americans, spending increases to match, or even exceed, income, no matter what that income may be.

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      • Travis says:

        That supposes that a lot of people have good full time jobs. And how do you decide how much less? If you have a job making $100,000 a yea and you buy a house for $250,000, there’s nothing unreasonable about that purchase. But lose that job and suddenly you’re stuck regardless of how prudent you were.

        Yes, if everyone lived like paupers there would be much less strife about economic downturn. But modern life is expensive. Medical care is expensive. Rents and mortgages are expensive. Cars and gasoline are expensive. Children are expensive. Food is expensive. Student loans are expensive.

        Yes, people in the US have some serious issues with credit card debt. But even that is out-stripped by non-dischargeable student loan debt. There’s been a seemingly huge movement to shift the blame of the economic downturn onto the individuals who don’t have enough, because in the US if you don’t have enough money it’s always your own fault. But this seems to ignore both culture and reality.

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      • James says:

        Not quite true. Medical care may be expensive, but choosing a lifestyle that reduces the chance that such care will be needed is cheap. (And a lot of preventative care – vaccinations, a daily aspirin – is dirt cheap.) A new SUV and the gasoline to run it are expensive; a 10 year old Honda or Toyota is cheap. Mortgages or rents are a lot cheaper if you don’t choose to live in a McMansion. And food – the raw ingredients, not processed & prepared food – is probably cheaper than at any time in history.

        The problem is not that people are living like paupers, but that they are trying ot live like the rich (or like their idea of rich) when they’re not. It’s not about people who don’t have enough, but about those who use a definition of “enough” that is continually being inflated at a rate faster than income.

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      • Mike says:

        This is the attitude that disregards “long-term sustainable growth”. You’re thinking of the already-struggling, instead of the soon-to-be-struggling or soon-to-be-thriving. The argument also seems to revolve around those who for all intents and purposes are too far gone to save. Let’s focus on the next generation. Don’t have kids. Get a skill. Work your ass off. Save. Pretty simple paradigm if only we’d encourage people.

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