NEW YORK – For many, if not most, Americans, the crisis that befell them in 2008 – leading to slow growth, rising unemployment, and high anxiety among voters – appeared to spring from nowhere. Certainly, the vast majority of economists, investment analysts, financial firms, and regulators failed to see the growing risk. In fact, it had deep roots.
While the precise timing of any crisis is impossible to predict, ample signs of rising risk, distortions, structural problems, and imbalances could be seen by anyone who took the time to interpret a decade’s worth of mounting debt, low savings, surging asset prices, and excess consumption. The United States was on an unsustainable growth path for at least a decade – probably longer – before the crisis.
Restoring balance and eliminating the distortions will require time, investment, and structural change, and should be the central focus of America’s economic policy. The household sector is especially important. If the main problem had been confined to excess leverage and risk-taking within the financial sector, the economic shock would have been large, but the recovery quicker. It was the huge loss of households’ net worth that brought down the real economy (with an assist from the credit squeeze on smaller businesses).
Let’s be clear: elevated savings and reduced consumption relative to pre-crisis levels are likely to be permanent even after households reduce leverage and restore retirement savings – a process that in the US has removed roughly $1 trillion from the demand side of the economy. To make up the difference, Americans need to compete effectively for a portion of global demand.