Confronting Convenient Historical Distortions

30 July 2011 at 12:00 pm 3 comments

| Peter Lewin |

From management professor Richard Rumelt. This is very interesting.

Today, households carry a much greater relative debt burden than they did in 1929, largely due to a 25-year mortgage binge. Between 1980 and 2007, disposable income grew at 5.9% per year while household indebtedness grew at 8.7% per year — a clearly unsustainable situation. As in 1939, this hangover of debt blocks new rounds of consumption and dulls the impact of fiscal and monetary stimuli.

From today’s WSJ: here.

Entry filed under: Business/Economic History, Financial Markets, Former Guest Bloggers, History of Economic and Management Thought.

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3 Comments Add your own

  • 1. Peter Klein  |  30 July 2011 at 12:10 pm

    If you’re a Keynesian, the remedy is obvious: increase consumer spending!

  • 2. Rafe  |  30 July 2011 at 5:08 pm

    No doubt it blocks new rounds of investment as well.

  • 3. Michael Marotta  |  30 July 2011 at 5:21 pm

    Rafe above is on-point. It is a fact of economics that you get more of whatever you subsidize (pay for). Even though the moral high might be to invest in inventions and innovations, mortgages and T-bills attract the money of rational actors.

    Among the factors in the 1929 crash and the eventual (perhaps not inevitable) Depression from 1933-1953, was the blossoming of tax-free municipal bonds in the early 20th century: they paid good rates and the earnings were yours to keep. So, money did not flow into television or dirigibles or any number of other “unbroken windows” that were frontline then.

    I replied to a similar point on “Pretense of Knowledge” and then expanded it for “Necessary Facts.” The federal government’s granting tax deductions for home mortgage interest payments not only drained money from more productive channels, it tied millions of Americans to their land: workers were (and are) less free to physically move to where work (better pay; any pay) actually is.

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