Fault Lines: How Hidden Fractures Still Threaten the World Economy (42 page)

1
For examples, see Paul Krugman, “How Did Economists Get It So Wrong?”
New York Times,
September 6, 2009,
www.nytimes.com/2009/09/06/magazine/06Economict.html
; John H. Cochrane, “How Did Paul Krugman Get It So Wrong?” University of Chicago Booth School of Business,
faculty.chicagobooth.edu/john.cochrane/ research/Papers/krugman_response.htm
, accessed March 5, 2010.

2
J. Lahart, “Mr. Rajan Was Unpopular (but Prescient) at Greenspan Party,”
Wall Street Journal,
January 2, 2009.

3
See C. Reinhart and K. Rogoff,
This Time Is Different: Eight Centuries of Financial Folly
(Princeton, NJ: Princeton University Press, 2009) for an excellent study delineating the commonalities between crises through history.

4
For surveys, see M. Brunnermeier, “Deciphering the Liquidity and Credit Crunch, 2007–2008,”
Journal of Economic Perspectives
23, no. 1 (Winter 2009): 77–100; G. Gorton, “Information, Liquidity, and the (Ongoing) Panic of 2007,” NBER Working Paper 14649, National Bureau of Economic Research, Cambridge, MA, 2009; D. Diamond and R. Rajan, “The Credit Crisis: Conjectures about Causes and Remedies,”
American Economic Review
99 (2009): 606–10. A number of very good books have been written on the crisis, including Gillian Tett,
Fool’s Gold
(New York: Free Press, 2009); Richard Posner,
A Failure of Capitalism
(Cambridge, MA: Harvard University Press, 2009); Andrew Ross Sorkin,
Too Big to Fail
(New York: Viking, 2009); and David Wessel,
In Fed We Trust
(New York: Crown Business, 2009).

5
A. Atkinson, T. Piketty, and E. Saez, “Top Incomes in the Long Run of History,” NBER Working Paper 15408, National Bureau of Economic Research, Cambridge, MA, 2009.

6
J. Anderson, “Wall Street Winners Get Billion-Dollar Paydays,”
New York Times,
April 16, 2010,
www.nytimes.com/2008/04/16/business/16wall.html
.

7
See Stacey Schreft, Aarti Singh, and Ashley Hodgson, “Jobless Recoveries and the Wait-and-See Hypothesis,”
Economic Review,
Federal Reserve Bank of Kansas City (4th quarter, 2005): 81–99.

8
Ibid.

1
See, for example, Richard Florida,
The Rise of the Creative Class: And How It’s Transforming Work, Leisure, Community and Everyday Life
(New York: Basic Books, 2004).

2
See Claudia Goldin and Lawrence Katz,
The Race between Education and Technology
(Cambridge, MA: Belknap Press, 2009), 231.

3
Ibid., 330–31.

4
On educational attainment, see U.S. Census Bureau, “Educational Attainment in the United States: 2008,”
www.census.gov/population/www/socdemo/education/cps2008.html
, accessed March 5, 2010.

5
Brink Lindsey, “Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequality,” Cato Institute working paper, Washington, DC, 2009.

6
Author’s calculations based on Goldin and Katz,
The Race between Education and Technology,
52.

7
U.S. Census Bureau, “Educational Attainment: People 25 Years Old and Over, by Total Money Earnings in 2008,”
www.census.gov/hhes/www/cpstables/032009/perinc/ new03_001.htm
, accessed March 5, 2010.

8
See Goldin and Katz,
The Race between Education and Technology,
327.

9
Ibid., 249–50.

10
Ibid., 326–28.

11
T. Piketty and E. Saez, “Income Inequality in the United States, 1913–1998,” NBER Working Paper 8467, National Bureau of Economic Research, Cambridge, MA, 2001.

12
Ross Douthat and Reihan Salam,
Grand New Party
(New York: Doubleday, 2008), 55.

13
See Lindsey, “Paul Krugman’s Nostalgianomics.”

14
See P. Gottschalk and R. Moffitt, “The Growth of Earnings Instability in the U.S. Labor Market,”
Brookings Papers on Economic Activity
25, no. 2 (1994): 217–72.

15
See Goldin and Katz,
The Race between Education and Technology;
Lindsey, “Paul Krugman’s Nostalgianomics.”

16
See, for example, Nolan McCarthy, Keith Poole, and Howard Rosenthal,
Polarized America: The Dance of Ideology and Unequal Riches
(Cambridge, MA: MIT Press, 2008).

17
See Lindsey, “Paul Krugman’s Nostalgianomics,” 10.

18
See, for example, A. Alesina and E. LaFerrara, “Preferences for Redistribution in the Land of Opportunities,” NBER Working Paper 8267, National Bureau of Economic Research, Cambridge, MA, 2001.

19
See Alberto Alesina and Edward Glaeser,
Fighting Poverty in the US and Europe: A World of Difference
(Oxford: Oxford University Press, 2004), 61.

20
Ibid.

21
Alexis de Tocqueville,
Democracy in America
(New York: Doubleday, 1959), 53.

22
Robert J. Samuelson, “Indifferent to Inequality,”
Newsweek,
May 7, 2001, 45.

23
The quote is from a description by Jennifer Hochschild on what her survey respondents believe, from
What’s Fair? American Beliefs about Distributive Justice
(Cambridge, MA: Harvard University Press, 1981).

24
See Robert Frank,
Falling Behind: How Rising Inequality Harms the Middle Class
(Berkeley: University of California Press, 2007).

25
McCarthy, Poole, and Rosenthal,
Polarized America
.

26
Aristotle,
Politics,
book V, parts 1–5 (New York: Cambridge University Press, 1988). Indeed, Abhijit Banerjee and Esther Duflo argue in “Inequality and Growth: What Can the Data Say?” (NBER Working Paper 7793, National Bureau of Economic Research, Cambridge, MA, 2000) that changes in inequality in either direction tend to be associated with reduced growth.

27
See R. Green and S. Wachter, “The American Mortgage Market in Historical and International Context,”
Journal of Economic Perspectives
19, no. 4 (2005): 93–114.

28
See, for example, James R. Barth, S. Trimbath, and Glenn Yago,
The Savings and Loan Crisis: Lessons from a Regulatory Failure
(Los Angeles: Milken Institute, 2004).

29
Bethany McLean, “Fannie Mae’s Last Stand,”
Vanity Fair,
February 2009.

30
Steven Holmes, “Fannie Mae Eases Credit to Aid Mortgage Lending,”
New York Times,
September 30, 1999.

31
Wayne Barrett, “Andrew Cuomo and Fannie and Freddie: How the Youngest Housing and Urban Development Secretary in History Gave Birth to the Mortgage Crisis,”
Village Voice,
August 5, 2008.

32
National Home Ownership Strategy
(Washington, DC: Department of Housing and Urban Development, 1995),
chapter 4
. I thank Professor Joseph Mason of Louisiana State University for bringing my attention to this document and for first highlighting these issues.

33
See Lawrence McDonald and Patrick Robinson,
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers
(New York: Crown Business, 2009).

34
Neil Bhutta, “Giving Credit Where Credit Is Due? The Community Reinvestment Act and Mortgage Lending in Lower-Income Neighborhoods,” Federal Reserve Board Working Paper 2008–61, Washington, DC, 2008. Also see Peter Wallison, “Deregulation and the Financial Crisis: Another Urban Myth,” American Enterprise Institute,
www.aei.org/outlook/100089
, October 2009.

35
George W. Bush, “America’s Ownership Society: Expanding Opportunities,” June 17, 2004,
georgewbush-whitehouse.archives.gov/news/releases/2004/08/20040809–9.html
.

36
George W. Bush, “Remarks by the President on Homeownership,” speech at the Department of Housing and Urban Development, Washington DC, June 18, 2002.

37
Ibid.

38
See Peter J. Wallison and Charles W. Calomiris,
The Last Trillion Dollar Commitment: The Destruction of Fannie Mae and Freddie Mac
(Washington, DC: American Enterprise Institute, September 2008).

39
Edward Pinto, “Sizing Total Exposure to Sub-Prime and Alt-A Loans in U.S. First Mortgage Market as of 6.30.08,” American Enterprise Institute,
www.aei.org/docLib/ Pinto-Sizing-Total-Exposure.pdf
, accessed March 10, 2010.

40
Edward Pinto, “High LTV, Sub-Prime and Alt-A Originations over the Period 1992–1997 and Fannie, Freddie, FHA, and VA’s Role,” American Enterprise Institute,
www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf
, accessed March 10, 2010.

41
Ibid.

42
Atif Mian and Amir Sufi, “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis,”
Quarterly Journal of Economics
124, no. 4 (November 2009): 1449–96.

43
Peter Wallison, “Barney Frank, Predatory Lender,”
Wall Street Journal,
October 16, 2009.

44
Ibid.

45
Of course, some of the change is also accounted for by the greater willingness of lenders to accept higher loan-to-value ratios as the credit market boomed. See James MacGee, “Why Didn’t Canada’s Housing Market Go Bust?” Federal Reserve Bank of Cleveland website,
www.clevelandfed.org/research/commentary/2009/0909.cfm
, December 2, 2009.

46
Nicolas P. Retsinas and Eric S. Belsky, eds.,
Borrowing to Live: Consumer and Mortgage Credit Revisited
(Washington, DC: Brookings Institution Press, 2008), 14.

47
Tim Landvoigt, Monika Piazzesi, and Martin Schneider, “The Housing Market(s) of San Diego,” presentation at Stanford University, 2009.

48
See, for example,
IMF World Economic Outlook
(Washington, DC: International Monetary Fund, September 2004), 76.

49
See, for example, Joseph Stiglitz,
Free Fall
(New York: Norton, 2010).

50
See Seymour Lipset,
Agrarian Socialism: The Cooperative Commonwealth Federation in Saskatchewan; A Study in Political Sociology
(Berkeley: University of California Press, 1951). I thank Rodney Ramcharan for this reference.

51
Shawn Cole, “Fixing Market Failures or Fixing Elections: Agricultural Credit in India,” Harvard Business School working paper,
www.hbs.edu/research/pdf/09-001.pdf
, 2008.

52
U.S. Census Bureau, “Homeownership Rates for the U.S. and Regions: 1965 to Present,”
www.census.gov/hhes/www/housing/hvs/historic/index.html
, accessed March 10, 2010.

53
See, for instance, Raghuram G. Rajan and Arvind Subramanian, “Aid and Growth: What Does the Cross-Country Evidence Really Show?”
Review of Economics and Statistics
90, no. 4 (2008): 643–65.

1
See Angus Maddison, “Monitoring the World Economy, 1820–1992,” University of Groningen, Faculty of Economics,
www.ggdc.net/maddison
, accessed February 2010.

2
R. E. Lucas Jr., “Why Doesn’t Capital Flow from Rich to Poor Countries?”
American Economic Review
80, no. 2 (May 1990): 92–96.

3
Lant Pritchett, “Where Has All the Education Gone?”
World Bank Economic Review
15, no. 3 (2001): 367–91.

4
There are many antecedents to this view, though not necessarily in the precise way I have formulated it. One of the early formulations is by Albert Hirschman in
The Strategy of Economic Development
(New Haven, CT: Yale University Press, 1958).

5
See Angus Maddison, “The Economic and Social Impact of Colonial Rule in India,”
chapter 3
of
Class Structure and Economic Growth: India and Pakistan Since the Moghuls
(New York: Norton, 1971).

6
E. Glaeser, R. La Porta, F. Lopez-de-Silanes, and A. Shleifer, “Do Institutions Cause Growth?” NBER Working Paper 10568, National Bureau of Economic Research, Cambridge, MA, 2004.

7
See, for example, David S. Landes,
Dynasties: Fortunes and Misfortunes of the World’s Great Businesses
(New York: Viking, 2006).