From: sug6@amber.uchicago.edu (Patrick Sugent)
Subject: Re: You get what you deserve
Organization: University of Chicago
Distribution: usa
Date: Sat, 12 Sep 1992 12:48:24 GMT

mulac@daystrom.lerc.nasa.gov (Richard Mulac) writes:
>  Just a comment to all those who want to blame Reagan, Bush, and the
>Republicans for every problem in the country.  One big cause of our
>economic problems which I don't hear being mentioned is credit cards.

  Oh my gosh, a reasonable analysis on our economic woes (even if
I somewhat disagree).  What will I do?  :-)


  At any rate, while I greatly appreciate your analysis and agree
somewhat, I think it is oversimplified and relies too much on
"credit cards".  Certainly, no one knows for sure what causes
business cycles and I would not dispute at all that higher personal
debt loads have led to problems with the recovery.  However,
consider at least some of these other problems that may have led to
the recession:

1)  Overdeveloping real estate and inflated real estate prices,
particularly in the northeast and west.  This is particularly noticeable
when one looks at percent of occupancy in office space.  This has
been largely remedied in the recession and subsequent slow growth.

2)  Banks too willing to loan money for said real estate.  One of the
problems with the banks is that they had a lot of their loans in
this overdeveloped and overinflated real estate.    Once again,
this has largely been remedied in recent years (but still lingers
on.)


3)  There was clear overhiring and underutilization of workers in
the service sector.   While our manufacturing sector increased its
per hour productivity throughout the 80s and is reaping some of the
benefits, our service sector remained largely stagnant.  Over the past
few years, our service sector has been increasing its productivity.
Both _The Economist_ and _US News & World Report_  point out that we
are currently on track for a productivity led recovery because of
this productivity increase (our first in decades).  A productivity led 
recovery is slower than other types, but is inherently healthier
for the economy.

4)  While I'm sure that people overused credit cards during the 80s 
expansion, they also overused other forms of credit as well.  
Actually, this is not terribly surprising and was largely a worldwide
phenomenon.  When people are in an expansion as successful as the 80s,
they tend to borrow against future earnings as if those earnings will
continue to increase at their current rate.  In other words, if
a person goes from earning $20k to $30k over 5 years, the tend to
borrow as if they are going to go to $45k over the next 5 years. 
Since household incomes increased rapidly during the 80s expansion,
people borrowed more expecting the trend to continue.

  Now, once the upward trend in income stopped in mid-1990, people
suddenly realized their debt loads were too high and started paying
them down.  This is _exactly_ the same thing that happened in the
last recession ('79-'82).  So, it really should come as no surprise
nor (IMHO) be looked upon as a phenomenon of only the 80s and 90s.
(This is not to say that debt levels weren't higher in the 80s than
in the late 70s, just that the trend is not surprising historically.)
  
  Currently, percent household debt as a percent of after tax-income has 
decreased dramatically and is roughly down to 1979 levels.  It's tough to say
how long it will take for people to feel comfortable with their
debt levels again.  I've heard estimates in the WSJ that range from
6 months to a year.  However, the economists' I've heard estimating
such agree with you that personal debt loads and consumers 
uncomfort with such is holding up the recovery.  

  All the same, this may be good long term, since a more productive,
less debt burdened society seems (at least on the surface) more
healthy.  The drawback is that we may have to live with relatively
high unemployment for a few years as the productivity led recovery
takes off.  (Although, future unemployment is certainly debatable as well.)
Despite that, a productivity led recovery should be very good in all
respects over the long term.


  In summary, I sort of agree with you.  I think you place too
much blame on credit cards without looking at other nations and
history of debt levels during expansions and recessions, but I certainly
agree with you that the high debt levels of the 80s overall are one
reason why the recovery is slow to happen.  

  I also agree that Reagan tends to get too much credit and Bush
too much blame for the economy.  In many ways, many of the painful
events of the Bush administration will lead to long-term benefits (IMHO).
Additionally, while I think the 80s expansion was a very good thing (tm),
it (like all expansions before it) led to some excesses which are
currently being corrected (such as I mentioned above).  It is certainly
debatable to what extent the President could have corrected the problems
I mentioned without sending us into a period of slow growth.  I'll
just dodge that question entirely. :-)

  As if that wasn't wordy enough, I'll comment on one or two 
of your other points:

>tried to stimulate the economy by lowering interest rates, but most people
>are so deep in debt from the eighties that they can't take advantage of it.
>What scares me now is the sudden wave of big companies (GM, GE, ATT, etc.)
>putting out their own 'brand' of credit cards, trying to squeeze the last
>drops of blood from a credit hungry society.  I suppose that it might help
>increase consumer spending and get us out of the recession, but I fear it
>may put your average consumer into an even deeper debt hole.

  I think this fear is unfounded.  As you point out, people are 
refusing to borrow.  As I pointed out, debt levels as a percent of
after tax income have been decreasing as they do during recessions
and (apparently) slow growth periods.  People are unlikely to borrow
more just because more credit cards enter the market.  What people
_are_ likely to do is switch their debt to more competitive cards
with lower interest rates.  More credit cards is probably a good
thing (tm) for consumers and a bad thing for bank credit cards.
(All IMHO of course, but I have studied this topic.)

>  So Reagan can't take credit for the boom years and Bush can't be blamed
>for the stagnant years.  People had good times spending like crazy and now
>they are going through some pain having to pay for it.  No government could
>have stopped what happened, be it Democratic or Republican.  One thing you
>can blame Bush for is waiting until now to try and implement policies to
>try and move us out of the recession.  But you can't say his ideas are
>wrong any more than Clinton's, they haven't been tested.  I see this
>election as starting with a clean slate - no incumbent.  Each person will
>have to decide whose economic plan they will gamble on.  The right plan had
>better be one that helps both the individual and the country eliminate
>their respective deficits or this recession will get even deeper.

  I agree with much of this.  Certainly, the President can and does
have an effect on the economy, but it is debatable how much and
certainly how much over the short term.    I tend to think that Reagan
gets a little too much credit and Bush (and even Carter) get a little
too much blame. 

  This does not dispute that this country has several problems which
are hurting our economy and a President can address.  These include
(IMHO)  government spending, health care, infrastructure, education,
our civil justice system, and our tax system.  Many of these problems
would destroy a weaker economy.  In fact, I agree with economists that say
that America's greatest problem is that it has such a strong economy
that its major problems can go ignored for far longer than is healthy.

  As far as I'm concerned, a political year is a particularly poor time to 
get any of these resolved.  I think it is amazing that this years campaign 
has stuck to issues even as much as it has.


Pat

-- 
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