I recently heard Business Week economist Michael Mandal make a provocative point. Fortunately, it turns out that he’s put a related PowerPoint online so I can pull out some of his slides. But his basic thesis is that the current recession does not, in fact, represent a financial crisis that’s spilled over into the “real” economy; rather, he says the cause of the financial crisis is that growth in the recent past has actually been much less robust than people realized. That “looking back, the Internet Decade (1997-2007) was much weaker than we realized.” This starts with the observation that real wage growth during this period was terrible, even for college graduates:
This basic information is familiar to liberals, who spent much of this period being suspicious that capital was somehow sucking up all the gains. But then came the stock market crash:
But if the gains from Internet Decade productivity growth didn’t go to labor and didn’t go to capital, then where did they go? His thesis is that it largely didn’t exist at all. The extra money went into increased costs of health care (while wages have been flat, “total compensation” has gone up because employer-side health insurance premiums are higher) but health care isn’t actually dramatically better than it was ten years ago. Mandel doesn’t put it this way, but you can understand the situation as real, but modest, productivity gains being essentially offset by the decreasing productivity of the health care sector. Instead of really growing, we’ve just been borrowing from foreigners who were willing to invest on the theory that America was going to produce awesome innovations in the IT and biotech sectors that never really panned out:
Instead of the national balance sheet, you can look at the household balance sheet:
The good news, such as it is, about this interpretation of the crisis is that it implies that some fairly large proportion of the ongoing contraction is actually the vanishing of prosperity that to some extent was an illusion all along.
To be honest, I don’t know how plausible this really is. I’ve been alive for the past two years. It certainly looked at the time as if we were, first, facing a relatively minor recession. New housing starts were way down, due to housing having been overbuilt. This was leading to unemployment. At the same time, the dollar was falling and making US exports more competitive which was leading to a (gross) decrease in unemployment. The recession basically reflected the friction involved in this need for a shift in the real economy. But then it turned out that the same oversupply of housing that was leading to the collapse of the building trades as a source of employment was also going to cause a financial crisis. And then only after management of the financial crisis went wrong did the real economy start to get really bad.