Sunday, November 6, 2011

IMF Book Forum on “Lost Decades: The Making of America’s Debt Crisis and the Long Recovery”

The talents of Menzie Chinn and Jeffry Frieden—a leading international economist and political scientist, respectively—have come together in a nice way in a new book on the U.S. financial crisis and the prospects for the country. The title of the book (“Lost Decades”) gives away what the authors think will happen.

A standing-room only audience at the IMF last month heard a presentation by Chinn and Frieden, along with comments from Diane Lim Rogers (Concord Coalition), Gail Cohen (Joint Economic Committee) and Simon Johnson (MIT and Peterson Institute). The forum was moderated by Nobel Prize-winner George Akerlof.

Two features of the book make it different from the many books on the crisis. The first is the authors’ position that this financial crisis was a typical foreign capital flow cycle in which money flowed in from abroad and was not used productively. In this respect, they say, the U.S. proved to be no different from Argentina in the 1990s or the U.S. in the 1880s.

The second distinctive feature is the book’s focus on the political tussle over who bears the costs of resolving the crisis. When “we turn to political economy,” Frieden quipped, “we’ll see that political economy is the truly dismal science.”

Frieden recalled that in 1985 the military dictator of Brazil made a famous speech in which he said Brazilians have to realize that the party is over. The next day on the streets of Sao Paolo and Rio, there were mass demonstrations and the banners read, “The party is over and we weren’t even invited.”

Frieden said that the demonstrations in the U.S. reflect the growing realization that “the benefits of the party [during the 2000s] were not equally shared while the burden is being unequally distributed.” Over the 2000-07 period, Frieden said, the top one percent of the U.S. population saw its income grow by 60 percent. But the bottom 99 percent of the population had income gains of only 6 percent and “of course that six percent [was] eaten away by the crisis.”

This was a theme picked up by Cohen in her remarks. “What I’m really concerned about,” she said, is that the lost decades that Chinn and Frieden fear “will only be for some segments of the population and that some people will do fine.” Simon Johnson concurred, noting that for some people decades have already been lost: “This is a continuation of losses.”

Cohen noted that long-term unemployment is at historically high levels: half of those unemployed have been out of work for over six months. African-American workers have been disproportionately hit, as have younger workers. The unemployment rate for younger workers is 20 percent. Her examples of the unequal distribution of pain supported Frieden’s assertion that some segments of the populations are “really almost at Depression levels of unemployment and underemployment.”

During the Q&A, the IMF’s Steve Phillips questioned the book’s focus on the international nature of the capital flows. Chinn and Frieden emphasize the “international aspects,” he said, “but you couldn’t have had the bubble without lax regulation. But you could have had a bubble and you could have had the crisis without international capital flows.” In his view, therefore, “the prerequisite was lax regulation.”

In response, Chinn acknowledged that it was difficult to distinguish between a capital flow boom-bust cycle and a credit boom-bust cycle and also agreed that the U.S. had “essentially disarmed ourselves in terms of regulation.” Nevertheless, he defended the book’s focus, saying that “it’s hard for me to think about a boom that doesn’t have some component of savings coming in from the rest of the world.”

The wisdom of the Bush tax cuts of 2001 and 2003 also generated some back-and-forth. In commenting on the book, Diane Lim Rogers noted that she and Menzie Chinn had “worked together at the end of the Clinton Administration on the Council of Economic Advisors and ever since then I became obsessed with the Bush tax cuts and the fiscal irresponsibility of them.”

Taking some issue with this, noted commentator Bruce Bartlett said that with hindsight it is easy to blame the tax cuts or other policy actions, but the main driving force behind the overborrowing was that “we had this huge increase in world saving that had to go somewhere … Even if [the U.S.] had kept the budget balanced, the money would have flowed into something else … Absent capital controls, what could we have done to keep the money out?”

Liaquat Ahamed, author of the 2010 Pulitzer Prize-winning book Lords of Finance, asked whether the debate over the short-run impacts of fiscal policy is really “a disagreement about how the economy actually works?” Frieden responded that “I think the conflicts here are not ideological and they’re not really theoretical … They’re really about who is going to pay the price.”

Event's transcript and webcast.

The IMF Book Forum was launched in September 2003. Over the years, it has featured nearly 30 books on international economics, political economy, and business cycle analysis.

Photos: Michael Spilotro/IMF