I've been meaning to blog this Paul Krugman post from last week, but I got caught up in the First Draft of History, and didn't get around to it. Now I have some time, I find it still puzzles me:
Andrew Leonard is unhappy with my colleague David Brooks for suggesting that rising debt in America reflects moral decay. Surprisingly, however, Leonard doesn't make what I thought was the most compelling critique.
David points out, correctly, that something changed around 1980 -- that consumers started spending a larger share of national income and that debt began increasing. Although he doesn't point this out, this was also when the federal government first began running substantial deficits even in good years.
David would have you believe that what happened then was a decline in Calvinist virtue. But, um, didn't something else happen around 1980? Can't quite remember .. someone whose name begins with the letter "R"?
Yes, Reagan did it.
The turn to budget deficits was a direct result of the new, Irving-Kristol inspired political strategy of pushing tax cuts without worrying about the "accounting deficiencies of government."
Meanwhile, the surge in household debt can largely be attributed to financial deregulation.
So what happened? Did we lose our economic morality? No, we were the victims of politics.
For starters, of course, deregulation kicked off under Jimmy Carter, with the Depository Institutions and Monetary Control Act of 1980. More importantly, deregulation wasn't simply the brain child of some Chicago-crazed lunatics at Treasury. It was the brainchild of Fernand St. Germain, the Democratic representative from Rhode Island, which is not surprising, because of course, Democrats had control of the House of Representatives. And he wasn't being driven just by ideology, or even bank lobbying; he was being driven by the fact that the previous regulation regime had driven the Savings and Loans into a ditch. They were stuck with a bunch of fixed rate mortgages paying low interest rates at a time when Paul Volcker was driving short term interest rates up to 20%. Mortgage deregulation was supposed to be a solution to the problem of banks that borrowed short and lent long bleeding to death.
And why were they borrowing short and lending long so disastrously? Because Congress had prohibited banks from making anything other than long-term fixed rate loans, and until the deregulation of 1982, sellers could pass their low-interest loans on with the house when they sold it.
There are also other demographic changes that explain the change in American indebtedness, particularly the retirement, and subsequent death, of the generation that lived through the Great Depression. Their children were the first to have grown up with long term mortgages and credit cards--which were invented in the 1950s, not under Reagan. There's a lot of evidence that American attitudes toward debt have changed, but very little that this change was caused by changes in the government--rather, the explosion of deficits seems to have followed the mood of the citizenry.
More broadly, it doesn't make a whole lot of sense to deride those who have linked the crisis to the Community Reinvestment Act because 1977 was such a very long time ago . . . and then claim that it can all be linked back to one law passed a few years later.