'Lost Decades' explains what damaged the U.S. economy
— -- More than three years after a global financial near-meltdown ground a decades-long era of prosperity to a halt, the United States economy is still reeling.
Though the panic of collapsing markets is now behind us, Americans are experiencing a weak, painful recovery compounded by mounting public and private debt.
Bombarded with the opinions of confrontational political pundits, many Americans fail to grasp the origins of our predicament and are rarely presented with clear and cogent analysis regarding our policy choices moving forward.
Just how did we get into this mess and what's our best path out of it? In prose that is intelligent yet accessible to non-experts, authors Menzie Chinn, professor of public affairs and economics at the University of Wisconsin, and Jeffry Frieden, professor of government at Harvard University, tackle these questions in their new book, Lost Decades: The Making of America's Debt Crisis and the Long Recovery.
In Lost Decades, we learn how the financial crisis was spawned by years of artificially low interest rates, buttressed by massive lending from abroad, which encouraged an unprecedented spree of debt-financed consumption. We learn how lawmakers disarmed the financial regulators, allowing the proliferation of highly complex, unsupervised and interconnected financial instruments, which enabled firms to increase profits by taking on riskier assets. We learn how some of those firms failed when one highly dubious assumption — that housing prices would continue their unabated rise — proved false.
We also learn — despite the multitude of systemic forces that nearly led us to financial Armageddon — that the crisis was not inevitable. Though it is impossible to exonerate the big financial players whose actions brought the economy to the brink, ultimately those firms and the bankers they employed, say the authors, were playing with the cards the government had dealt them through measures that enabled a foreign borrowing binge and encouraged the taking of inordinate financial risks.
"Certainly citizens could have been more vigilant, bankers more conscientious, and regulators more watchful," Chinn and Frieden write. "But the root of all the evil that befell the country was irresponsible government policies."
Government is also to blame, they argue, for the makings of the looming debt crisis. While defending the oft-criticized TARP (Troubled Asset Relief Program) bailout and the subsequent debt-financed stimulus as critical emergency measures, they cite years of irresponsible monetary and fiscal policy as key sources of the current budget woes. Though their tone remains non-partisan, they place particular blame on the George W. Bush administration, which transformed a budget surplus of $236 billion in 2000 into a budget deficit of $650 billion by 2004 through politically motivated tax cuts and massive spending on wars in Iraq and Afghanistan.
Despite this lack of thrift, Chinn and Frieden argue, the fundamental problem is much deeper and has more to do with the rising cost of health care and graying demographics. Under current policies, they note, Medicare, Medicaid and Social Security will account for more than half of all government spending by 2020, a fact that comes with consequences unlikely to be popular on either side of the political divide.
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