Perhaps the three central questions of macroeconomics are: What drives fluctuations in employment and output? What is the relationship between the short run of business cycles and the long run of growth? And what policy tools are needed to overcome the instabilities to which capitalist economies are subject? The behaviour of the U.S. economy in the decade since 2008 is informative for all three questions. The U.S. experience suggests that, first, consistent with Keynesian theory, short-run variation in employment and output is dominated by aggregate demand and not by technological or other ‘structural’ factors. Second, less comfortably for heterodox as well as mainstream macroeconomists, the distinction between a demand-determined ‘short run’ and fundamentals-determined ‘long run’ appears less viable. Third, the pre-2008 consensus that setting the central bank-controlled overnight interest rate to the appropriate level is sufficient to keep output and employment near their desired levels has become harder to defend. Going forward, macroeconomic policy is likely to rely on a broader toolkit and a more eclectic theoretical framework.
J.W. Mason and Arjun Jayadev
The conventional division of household payment flows between consumption and saving is not suitable for investigating either the causes of changing household debt–income ratios, or the interaction of household debt with aggregate demand. To explain changes in household debt, it is necessary to use an accounting framework that isolates net credit-market flows to the household sector, and that takes account of changes in the debt–income ratio resulting from nominal income growth as well as from new borrowing. To understand the implications of changing household income and expenditure flows for aggregate demand, it is necessary to distinguish expenditures that contribute to demand from expenditures that do not. Applying a conceptually appropriate accounting framework to the historical data reveals that the rise in household leverage over the past 3 decades cannot be understood in terms of increased household borrowing. For both the decade of the 1980s and the full post-1980 period, rising household debt–income ratios are entirely explained by the rise in nominal interest rates relative to nominal income growth. The rise in household debt after 1980 is best thought of as a debt disinflation, analogous to the debt deflation of the 1930s.