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Reagonomics and Debt

By Matthew Yglesias  

"Reagonomics and Debt"

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As Krugman says there’s something mighty suspicious about the apparently tight chronological link between the rise of Reagonomics and the trend toward declining household savings in the United States. But is there a causal link? I think it’s suggestive, but I don’t know what it would be.

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That said, if you agree with David Brooks that household indebtedness reflects a kind of moral decay, then the causal arrows get relatively easy to draw. The 1980-2008 era was a period during which the United States was dominated by a political movement—Brooks movement—that in turn was dominated by the belief that public expenditures need have no particular relationship to public revenue. One can imagine the hegemonic position of said movement “infecting” household spending decisions.

Personally I’m not thrilled with that explanation, but it seems like the obvious one from within the Brooksian framework. From a non-Brooksian point of view, maybe low inflation leads to low nominal interest rates which trick people into underestimating the value of savings and the price of debt relative to a situation with equal real interest rates but higher nominal ones.

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