JONATHAN CHAIT OCTOBER 22, 2010
[Guest post by Noam Scheiber:]
I'm a little late coming to this, but the indispensable Mike Konczal has a great post pivoting off of the piece I wrote earlier this week on consumer spending, and what it tells us about the kind of recession we experienced and the prospects for recovery.
In the piece, I discuss the work of Japanese economist Richard Koo, who argues that in so-called "balance-sheet recessions," which follow the bursting of asset-price bubbles, consumers and businesses become preoccupied with paying down debt. So much so that borrowing falls through the floor, which takes money out of the economy and can lead to a downward spiral. Worse, borrowing falls no matter how low interest rates drop (which is a sharp departure from normal times, when lower rates tend to stimulate borrowing). Anyway, Konczal posts a very helpful graph illustrating why it's plausible to think the United States is experiencing a balance-sheet recession:
As Konczal points out, businesses are kind of treading water, but households still appear to be firmly in debt pay-down mode, a hallmark of a Koo-style balance-sheet recession. (Though, as I note in my piece, more conventional models of consumer behavior made similar predictions about what would happen up to the present. The real test is what happens from here on out, when the predictions of the different models start to diverge.)
For those who are interested, Konczal also posts footage of a lecture Koo gave at a recent conference. It's a very nice introduction to his argument.