*House of Debt*

That is the new book by Atif Mian and Amir Sufi and the subtitle is How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again.  As the title suggests, the argument focuses on household debt and also its subsequent effects on aggregate demand.  Here is one bit:

From 2006 to 2009, large net-worth-decline counties cut back on consumption by almost 20 percent.  This was massive.  To put it into perspective, the total decline in spending for the U.S. economy was about 5 percent during these same years.  The decline in spending in these counties was four times the aggregate decline.   In contrast, small net-worth-decline counties spent almost the exact same amount in 2006 as in 2009.

There is much in this book of interest, but the problem is on the theoretical side.  High debt means higher payments to banks and other intermediaries, and so that money need not disappear from the stream of aggregate demand.  Investment is AD too, and more generally AD theories based on short-term changes in the distribution of wealth have not generally succeeded in the past (with apologies to Michael Kalecki).  It is true that wealth redistribution will induce sectoral reallocations, perhaps significant ones, but then a debt-collapse theory requires a lot of the predictions of sectoral shift theories.  At least for the recent crisis that is not obviously going to do the trick, even if sectoral shifts have been underrated by a lot of Keynesian commentators.

I would sooner start the foundations with multiple equilibria and then add on the Swedish and also Hayekian notion of intertemporal equilibrium, period analysis, and satisfied plans, or lack thereof.  Excess household debt then can slot into that argument neatly, and without putting so much burden on wealth redistribution and sectoral shifts per se.

In any case this is a book worth reading and pondering.  You can follow Sufi on Twitter here.


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