Debt: The Stickiest Price of All
Economists tell a lot of stories about how a fall in dollar spending
can hurt the real economy. And we should
be forced to tell these stories–we
shouldn’t take it for granted that a fall in spending causes a fall in output,
we shouldn’t assume
the can opener of general gluts.
Why bother explaining the root causes of gluts when so many
think they can see a glut by just looking out the window? Because gluts conflict with one of the best
ideas economists have ever had: That surpluses–of workers, of unsold homes, of
cars rusting on the lot–push down prices and move the product out the door.
Surpluses set in motion a process that ends the glut: Just
watch the last half hour of a garage sale.
Any force strong enough to fight against the power of prices
should be a strong force indeed, strong enough for all to see. But when economists talk about the “frictions”
that keep gluts alive, we usually talk about “sticky prices” and “sticky wages”
and cultural norms and public sector unions and a few other forces. Strong forces, yes, and forces I believe in, but
stronger than creative destruction and supply and demand? For years on end?
Here’s my favorite friction, one that exists by force of
contract, not because of worker sociology: Debt. Debt in the household, debt in the firm,
and–for state and local governments at least–government debt. Irving Fisher beheld debt destroying a
deflating economy, and he wrote an excellent paper
about it in Econometrica v.1 back in
1933–a theory of depressions better than anything I’ve seen in Keynes’s General Theory.
In a world of debt, a modest fall in sales threatens
bankruptcy while a big fall in revenues sets off a fire sale of assets. Massive leverage means fewer dollars are
adjustable; more dollars are tied up already.
Miss a few credit card payments and you’ve entered a new social class;
miss a dozen mortgage payments and the police will be there to escort you out
of your home. Those are some sticky
Perhaps that’s part of the reason that real
retail and food service sales have fallen about 15% below their pre-crisis
trend: It’s a part of cash flow that a family can adjust without the police
showing up at the door.
One question I wish I had a solid answer to: Does private
sector debt have big negative externalities?
Fisher reminds us that when national income is unstable, the answer is
at least “Maybe.”
And finally, I’d like to thank David for his kind welcome yesterday. Glad to be aboard.