Reading Carmen Reinhart and Kenneth Rogoff’s This Time Is Different: Eight Centuries of Financial Folly was eye-opening and entertaining (entertaining only if you skim over the majority of the book that is dense technical matter and detailed charts, tables, and graphs). But I couldn’t shake the sense that they were creating a straw man: sure, nations get into trouble with debt crises, but not because policymakers really delude themselves that “this time is different.”
Now, back in 2003 I got very alarmed about the US deficit — wrongly, it turned out — not so much because of its size as because of its origin. We had an administration that was behaving in a deeply irresponsible way. Not only was it cutting taxes in the face of a war, which had never happened before, plus starting up a huge unfunded drug benefit, but it was also clearly following a starve-the-beast budget strategy: tax cuts to reduce the revenue base and force later spending cuts to be determined. In effect, it was a strategy designed to produce a fiscal crisis, so as to provide a reason to dismantle the welfare state. And so I thought the crisis would come.
In fact, it never did. Bond markets figured that America was still America, and that responsibility would eventually return; it’s still not clear whether they were right, but the housing boom also led to a revenue boom, whittling down those Bush deficits.
Compare and contrast the current situation.
He then presents an argument that sounds plausible, but amounts to “this time is different.”
Maybe it is. But it’s tough to say so out loud if you’ve looked at the evidence Reinhart and Rogoff presented in their book.
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