Morning Must-Read: Heather Boushey: It Wasn’t Household Debt That Caused the Great Recession

Heather Boushey: It Wasn’t Household Debt That Caused the Great Recession: “Given the troubling rise in economic inequality over the past four decades, this research could not be more timely….

Mian and Sufi are part of a new generation of economists who examine detailed microeconomic data and analysis to understand the macroeconomy, giving us a deeper understanding of how inequality affects economic growth and stability…. Mian and Sufi’s research shows that the marginal propensity to consume… depends not just on the value of the asset but also the debt burden…. Mian and Sufi provide a definite ‘yes’ to the question of whether we could have prevented the Great Recession…. Policymakers could have seriously mitigated the damage, pointing out that debt forgiveness would have been much more effective that the policies implemented because it would have targeted households with the largest marginal propensity to consume. This is a failure on a massive scale, and more economists need to follow the lead of Mian and Sufi and look deep into the data to understand what we got wrong. Mian and Sufi’s argument hinges on the conclusion that it was the supply of credit that drove the bubble and the heightened debt burdens… people were just acting irrationally—given that the massive increase in borrows during the credit boom was among borrowers with declining incomes…. As families sought to cope with the slow-job growth economy in the 2000s and a labor market that still does not provide the kinds of supports and protections working parents need, many turned to increasingly-readily-available credit as a way to cope…. The story that emerged in the early days of the Great Recession was that too many people borrowed too much to afford fancy houses. That’s not what Mian and Sufi’s data show…. Subsequent reforms to our financial system give policymakers more tools to police housing finance, yet the continuing over-reliance on debt and a lack of good jobs leaves families at risk and exposes our economy to the whipsaw of another debt-fueled credit bubble…