Wednesday, January 26, 2011

So, what caused America's economic woes?

Like the blind men and the allegorical elephant, every person who cares to think about this question has a different theory, there being half a dozen to dozen dominant aggregate theories. This week's issue of Economist speculates on a couple of relatively less-paraded ones (here and here). Not that these are new ideas, but I promptly took note because they seem to resonate with my own notions of the elephant:
1. Price of oil
My friend D and I often commiserate with each other and jointly wonder/seethe at the energy profligacy of our fellow men. When oil touched $120 a barrel back in 2008, I remember spending a summer afternoon exchanging our ignorance on what damage such prices would do in an economy so dependent on cheap energy.
In this paper, James Hamilton of the University of California proposes through a study of historical energy prices and economic downturns that indeed, high oil prices may have been one of the culprits:
"The correlation between oil shocks and economic recessions appears to be too strong to be just a coincidence. If consumers try to maintain their real purchases of energy in the face of rising prices, their saving or spending on other goods must fall commensurately."
Crude has been inching up steady for a past few months and flirting with the 90s now. One wonders...
2. The US' promotion of easy homeownership
In his book Fault Lines: How Hidden Fractures Still Threaten the World Economy, Raghuram Rajan at the University of Chicago suggests that in America, the political response to rising inequality was to make credit easily available to prop up the living standards of those at the bottom.
"Easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class. Politicians, however, want to couch the objective in more uplifting and persuasive terms.....in the United States, the expansion of homeownership was the defensible linchpin for expanding credit and consumption."
Interestingly, Peter Wallison, one of the members of the Financial Crisis Inquiry Commission, has released a dissent opinion which places the blame for the financial crisis squarely at the feet of the US government's housing policies.
* * * * *
On the subjection of self-deceiving public policy, saw the documentary I.O.U.S.A the other day. It is a well-made, roundly depressing piece of work. The film has a clip of Gerald Ford's 1975 State of the Union speech when he announced "...I must say to you that the state of the Union is not good...". I was fantasizing that Obama would give an equally blunt message in his speech yesterday. Of course he didn't. Hope obstructed realism.

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