Are we in a lost decade?

Marketplace Staff Aug 15, 2011

Are we in a lost decade?

Marketplace Staff Aug 15, 2011

Kai Ryssdal: If you’re going to do a week of coverage about where this economy is as we are, looking at what’s really going on out there, we figured it’d be good to ask around a bit first, see what people think is going on out there.

Michael Prachar: We’re going through a cyclical phase, which we’ve gone through historically.

Todd Hayes: We’ve got too many people who want handouts instead of going to work.

Dorothy Winston: We’re having the rich getting richer.

Pam Victor: We’re paying the price for the investments in big corporation loopholes and the wars.

Nick Casali: It’s kind of on a downhill spiral.

Joy Hamilton Jones: People want to believe that it’s really, really bad, so it is.

Trellan Smith: A lot of people are being hurt because there are people in Washington who aren’t paying attention to things that really matter.

Ben Skiers: For a while, America was living on a credit card and that got us the best seat at the restaurant, and now the bill is due.

It does kind of point out how tough it is to pinpoint exactly what is happening in this economy right now. A double dip? A slo-covery, if you will? Or something else entirely?

To get a little perspective, we’ve turned to two people whose job it is to have a big picture of how things work, economically speaking. Justin Wolfers is an economist at The University of Pennsylvania’s Wharton School of Business. Liaquat Ahamed is an investment banker and the author of the Lords of Finance, his Pulitzer Prize-winning book on the lead up to the Great Depression.

Good to have you both with us.

Justin Wolfers: Pleasure to be here.

Liaquat Ahamed: Thank you.

Ryssdal: Justin, the first question goes to you, because there’s an economics thing that I’m curious about. We had the S&P downgrade, everybody went bananas, and then you look around today and the markets are fine. There’s a big merger announcement. Help me understand that.

Wolfers: Well, I’m not sure the chaos was about the S&P, to start with. Over the past we’ve seen a run of numbers that start to suggest the recession was deeper than we thought, it’s been going on longer than we thought, and the chances of we escape easily are lower than we thought. You know, it’s just a pause where the coyote is in mid-air, looks around, realizes there’s not the support we had… I think it was just people waking up and feeling the run of numbers.

Ryssdal: And then how do you explain today?

Wolfers: We generally tend to see, when volatility goes up, it then slowly marches right back down. Hopefully, what you just said will still be true by tomorrow morning. But as much as things are calm, in terms of economist watching the economy rather than folks thinking about the stock market, there’s still a lot of fear that things in two, three or four years may still looks pretty grim.

Ryssdal: Well seeing as how, Liaquat Ahamed, we’re going to be dealing with this for awhile, what are we in?

Ahamed: Well, we’re in the aftermath of a giant bubble which then burst and caused a banking crisis, and they dealt pretty well with the banking crisis, but they haven’t been able to do very much about the aftermath, which is an overhang of debt. Ordinary Americans went into this recession having borrowed way too much money. And either the banks are going to have to write off some of it, or they’re going to have to spend the next decade paying it down.

Ryssdal: So I call it the “Great Debt-pression?” What’s the name? Is there one?

Ahamed: There was an economist, and I forgot who it was, who called it “debt deflation.” And that’s what we have.

Ryssdal: Justin Wolfers, you’ve written and said, I think, on this program in a commentary or two that you think we’re about halfway through a lost decade. What does that mean?

Wolfers: We’re going to look back in, say, 2016 and wonder what we’ve achieved economically. And the answer’s going to be, not very much. Right now, average incomes are still lower than they were in 2006. And unless things really start to get moving, they’re going to be lower for another three or four years. So maybe it’s a lost eight and a half years, maybe nine. But let’s just call it a lost decade.

Ryssdal: Not that I want to put you on the spot, because I know economists hate that, but can I now go around telling people that Justin Wolfer’s telling me it’s going to be better around 2016?

Wolfers: I sure hope so. The optimistic side is that, I think, realistically, things are going to be better in 2016 than they were in 2006. Economies normally grow, so they won’t be better in 2016 than they should have been, than we were hoping for, or than we otherwise expected.

Ryssdal: Liaquat Ahamed, I’m going to read you a quote from your own book talking about John Maynard Keynes. And you quote Keynes as saying this: “We have involved ourselves in a colossal muddle having blundered in the control of a delicate machine, the working of which we do not understand.” Obviously talking about the economy. Could’ve been written about today and what we’re doing.

Ahamed: Well I suppose the difference is that we probably do understand a little more, but we lack the courage. Maybe we could’ve avoided a double dip if the stimulus package had been larger. But the numbers were so large that the guys in charge just balked and just had sticker shock.

I think economic literacy can be really helpful. So if we think about the stimulus — hundreds of billions, top $800 billion — these numbers naturally scare people. But they’re all different. So first of all, the stimulus. To the extent that we’re building bridges today instead of tomorrow and we’re building them at a time when it’s cheap because people are otherwise idle and wages are low, in fact, that’s saving us money.

Ryssdal: So, Justin Wolfers, if we get people like John Taylor from Stanford in here, they’ll say you guys are out of your mind. We don’t need to spend more. We don’t need new debt. We need to reduce that debt so that the government can grow organically. Tell me about that position and why it doesn’t make any sense, ’cause it sounds reasonable.

Wolfers: If you read John Taylor’s economic textbook, it actually says government spending can be a powerful impetus to help you get out. If government debt were a problem, it would be a problem because of governments borrowing so much that the private sector can’t borrow. The symptom that you’d expect to see would be very high interest rates. The problem for businessmen right now isn’t that their government is borrowing too much and they can’t get a loan. The problem is, folks aren’t coming into their stores and buying stuff.

Ryssdal: Because they don’t have jobs and are thus uneasy about pretty much everything.

Wolfers: Yeah.

Ryssdal: Justin Wolfers at Wharton School at the University of Pennsylvania. Liaquat Ahamed, his book is called Lords of Finance: the Bankers Who Broke the World. Gentlemen, thanks very much.

Wolfers: Thank you.

Ahamed: Thanks, Kai.

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