Economy

What happens if Americans come out of the current downturn with a serious commitment to save more? There are many sound and obvious reasons for people to save -- to build up a cushion should they lose their jobs, for example, accumulate the down payment for a house, cover their children's college tuition, and be able to retire on more than their Social Security. Yet, over the last generation, the U.S. personal saving rate fell steadily and sharply, even reaching negative territory, as most Americans decided that the rising value of their homes or stocks could substitute for saving. And anyway, most of us simply preferred to consume more. The drawbacks became painfully clear as soon as the current crisis struck, and those home and stock values nosedived.

For now, personal saving is back, quickly turning positive and reaching 4.3 percent of people's post-tax incomes in the first quarter and nearly 7 percent in May. Businesses also are saving (i.e., they're retaining earnings) -- but not much, since hard times leave them less to save: The private saving rate, which includes businesses and households, was a little under 6 percent of national income in the first quarter. But the national saving rate is down in negative territory for the first time in generations, mainly because federal and state governments are running such big deficits -- i.e., "public dissaving." So households are rebuilding their resources, businesses are holding on, and government is using stimulus to support overall demand.

As there are risks to both families and the economy from under-saving -- our low national saving rate is what's forced us to borrow so much from China, Japan and Saudi Arabia -- high saving brings its own problems. As people save more, they have to consume relatively less, and ours is an economy run for a long-time largely on consumption. A saving rate substantially higher than we've been used to could mean slower growth and fewer new jobs, unless we maintain strong demand with large, permanent government deficits -- a bad idea for other reasons -- or much stronger business investment. Other nations also have some skin in this game of ours: More than $2 trillion of what we consumed last year came from abroad -- imports -- so weaker U.S. consumption means fewer exports and jobs in China, Germany, Japan and a lot of other places.

How we all fare with a higher saving rate will depend in part on how quickly it rises and how high it goes. Nouriel Roubini, the NYU economist who actually predicted the housing and financial market meltdowns, sees personal saving going to 10 or 11 percent, and worries especially about how a quick ascent to those levels could mean a deeper and longer recession. Most Wall Street economists, however, predict a relatively gradual increase which shouldn't impair an initial recovery -- especially since we still have most of the federal stimulus in the pipeline -- but would likely mean a slower expansion. But if the saving rate does continue to go up, it's likely to stay high for some time: Nobel economist Edmund Phelps calculates that it may take 15 years for American households to rebuild what they've lost in this meltdown. And that doesn't count the enormous debts which so many Americans carry today: In the seven years from 2000 to 2007, the debts of American households grew as much, relative to income, as they did during the previous 25 years. All of this helps explain why a majority of Americans now say they plan to keep their expenditures down after the recession ends.

The actual effect of higher saving on jobs, growth and most Americans' quality of life, however, will really depend on what happens to the incomes those savings come out of. If we return to the trends of the 2000-2007 expansion, when real wages declined and real incomes stalled, each percentage point increase in the saving rate will reduce spending by at least $100 billion. That's more than $1 trillion if we reach 10 percent and stay there (and assuming business investment doesn't soar). But if incomes rise 2 percent a year in the next expansion -- as they did through much of the 1990s -- we can save more without having to endure a long period of very slow growth.

It always comes back to incomes. It was, after all, the income slowdown since 2001 which drove up that household debt and pushed tens millions of families to spend down their home equity -- ultimately contributing to the current meltdown. And let's talk politics: Once the recession eases, what happens to wages and incomes will be the critical test of the economic success of Barack Obama's presidency and his large, Democratic majorities.

Unhappily, nothing will be harder to achieve, because restoring the broad income gains we saw in the 1950s, 1970s and again in the 1990s will require, just to begin, slowing increases in the health care and energy costs that businesses bear, and, which in a period of intense global competition come out of jobs and wages. Fortunately, the Obama Administration is focused on both of these problems. The catch is that their programs, at best, will take a decade to produce a significant slowdown in those costs. That's a long time for people to wait while their wages stagnate. But if we don't start now, those benefits will be still further off, and prospects for broad upward mobility could fade for another generation.

On my way back to DC after three days in New York (including some time at this year's excellent Personal Democracy Forum which NDN helped sponsor) and I can't stop thinking about the conversations about the American economy I had while there.   David Leonhardt has a piece in today's Times which captured a lot of the sentiment I heard.  It begins:

In the weeks just before President Obama took office, his economic advisers made a mistake. They got a little carried away with hope.

To make the case for a big stimulus package, they released their economic forecast for the next few years. Without the stimulus, they saw the unemployment rate — then 7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent next year. With the stimulus, the advisers said, unemployment would probably peak at 8 percent late this year.

We now know that this forecast was terribly optimistic. The jobless rate has already reached 9.4 percent. On Thursday, the Labor Department will announce the latest number, for June, and forecasters are expecting it to rise further. In concrete terms, the difference between the situation that the Obama advisers predicted and the one that has come to pass is about 2.5 million jobs. It’s as if every worker in the city of Los Angeles received an unexpected layoff notice.

There are two possible explanations that the administration was so wrong. And sorting through them matters a great deal, because they point in opposite policy directions.

The first explanation is that the economy has deteriorated because the stimulus package failed. Some critics say that stimulus just doesn’t work, while others argue that this particular package was too small or too badly constructed to make a difference.

The second answer is that the economy has deteriorated in spite of the stimulus. In other words, the patient is not as sick as he would have been without the medicine he received. But he is a lot sicker than doctors realized when they prescribed it.

To me, the evidence is fairly compelling that the second answer is the right one. The stimulus package does seem to have helped. But its impact has been minor — so far — compared with the harshness of the Great Recession.

Unfortunately, the administration’s rose-colored forecast has muddied this picture. So if at some point this year or next the White House decides that the economy needs more stimulus, skeptics will surely brandish that old forecast.

Worst of all, the economy really may need more help.

Three quick thoughts:

1) It is time for the Obama Administration to abandon the "recovery" rhetorical frame.  Going back to the economy under Bush is neither possible given what has happened in recent months, nor is it desirable - that economy produced growth but declining incomes for a typical family.  The more recent formulation of "new foundation" is clearly a better frame.   What America needs is a more modern and better economy - the very opposite of recovering what we had.

2) It is remarkable how suprised mainstream economists - including the Obama team - have been by the virulence of the Great Recession.  We will be debating this point for years but certainly one major factor is that the American middle class was already in a terribly weakened state prior to the financial crisis.  Incomes had been declining, and wages flat for most of the current decade, long before the Recession began.  So when it kicked in, and a weakened middle class then lost wealth, jobs, homes, income while retaining high levels of debt, things have gotten much much worse with the end hard to see today. 

My own view is that we really don't understand how robust growth is going to happen again in the Untied States, and certainly we don't know how we can get incomes up again given that they fell during the last period of sustained growth.  What are we doing differently now that will ensure that we don't "recover" the Bush economy - one that saw growth and income decline?

Given the state of the American consumer it is easy to see how over the next 3-5-7 years the savings rate stays very high as people replenish their lost savings and pay down high-interest debt.  This leaves little left over for consumption.  If the American people spend the next half a decade getting their own personal balance sheets in order, and buying very little to do so, we could see very slow growth here and aboard, and may be headed, incredibly, to an entire decade or more of no income growth for the typical American family. 

3) In meeting after meeting I heard that the coming commercial real estate crisis could dwarf the home mortgage crisis.  Are we really ready for this? Do our policy makers understand what is coming here? Will another round of defaults then once again cause bank failures and usher in a new round of financial crisis?  Predictions are we will begin to feell the effects of this impending new crisis this fall, while the nation may also start having to manage the prospect of several states, including California, going bankrupt or shutting down this summer.

As recent polls have shown the American people believe there is one dominant issue in American politics today - the economy.  While I am proud of the President for bravely taking on health care and climate change this summer, he also cannot lose sight of our weakened economy, weakened financial sector and weakened middle class, and to be very very sure he is keeping his eye on this very important ball.  It seems like the nation is ready for, and requires, a big conversation about our economic future, and how this new economy of the 21st century will be very different from the one just past.  I am not convinced we are adequately preparing our people for what is to come, and certainly the nostalgia tied into the concept of "recovery" is not helping us let go of an old economic and financial paradigm, and forthrightly begin the process of welcoming in the next.

Simon's series of essays on Iran have continued to be picked up in the blogshphere, starting with his June 16 column, "Obama: No Realist He," in the Huffington Post, where it has been retained a high profile since it was posted on the site. 

Another essay by Simon on Iran, "The Impact of the Iranian Uprising on Other Repressive Governments," was picked up by The Moderate Voice and Politics for the Common Good blogs.

Sam, Dan and Jake also have been writing about Iran, and NDN Fellows Morley Winograd and Mike Hais weighed in on the Huffinton Post with "Will Young people Unite to Save the World?"

Check the NDN on Iran often to see new essays and newsroundups from Simon and the rest of the team as this uprising continues into its third week.

NDN Fellows Morley Winograd and Mike Hais published a major op-ed ed on Millennials prospects for jobs during these tough economic times. The op-ed, "Are the Millennials the New GI Generation?" has been picked up by several newspapers across the country and beyond, including the Albany Times Union, the Glen Falls Post Star, the Concord Monitor, the Miami Herald, the Sarasota Herald-Tribune, the Austin American-Statesman and the Guelph (Ontario, Canada) Mercury.

Morley and Mike also were quoted in a new FORBES column, "The Economics of Quarterlife."

Lastly, Simon, Morley and Dan are at the Personal Democracy Forum in New York City today. Simon and Morley have just wrapped up their compelling presentation -- moderated by the Washington Post's Pulitzer Prize-winning Jose Antonio Vargas -- on "America 2.0 - How Our Changing Demography Is Helping Create a New Politics." Dan Twittered throughout the panel. Check out what his Tweets here.

Washington policymaking is caught in its own version of sensory overload. All at once, there are too many problems that seem - and actually are -- urgent, mind-bogglingly complex, and politically ultra-sensitive, to handle well. The result now emerging could be waves of ill-considered decisions.

Exhibit A is climate change.Taking serious measures to protect the planet's climate and ecosystems by driving down greenhouse gas emissions comes as close to an imperative as exists in science-based policy. But a small group has used this imperative to try to force a decision quickly, without preparing the public or most representatives for how their cap-and-trade scheme would affect everybody - for example, by increasing the volatility of energy prices, and setting off frenetic Wall Street speculation in the emission permits created by cap-and-trade.That's just the start of the sloppiness: The process of corralling the support to pass the measure in the House of Representatives - the vote is expected this week - has become a frenzy of giveaways that have cost the program most of its teeth and all of its bite. The result is the worst of both worlds: A measure that most environmentalists agree (at least privately) would do little about climate change, while unnecessarily harming the economy. Thankfully, the Senate is unlikely to go along.Once it fails there, perhaps we can get on to more serious and public deliberations about what will be required from all of us to shift to a less carbon-based economy.

Financial regulation is Exhibit B. The minimum for sound policymaking here has to be a genuine recognition of how our capital markets came to melt down and what irreducible steps can prevent it from happening again. We now know, to start, that the most prominent institutions in our financial system have operated for years in ways that create unsupportable levels of risk. We also know that their risky behavior wasn't an accident, but the result of thousands of calculated responses to real incentives. The toxic combination here is what insiders refer to as limited liability plus leverage: The executives, managers, traders and deal makers at Bear Stearns, Lehman Brothers, Merrill Lynch, Citigroup, Bank of America, AIG, Merrill Lynch, Goldman Sachs and others could borrow unlimited amounts of money (the leverage) to enter into almost unlimited numbers of risky deals. For the deals that worked out, they pocketed enormous profits and additional compensation; and for those that went south, only the shareholders suffered. If the bottom fell out on thousands of deals at once, they also all believed that they would be both too big to fail and not too big to save - and but for the incompetence of the Bush Treasury in the Bear Stearns and Lehman Brothers cases, they were right.

Today, after $3 trillion to $4 trillion in federal bailouts and federal guarantees, these incentives to undertake risky deals are even greater than they were before. And if the latest OECD forecast is right, and we should expect at best a weak and fragile recovery next year, the incentives to go for a killing will be even greater still.

Yet, most current proposals for new regulation would do little to head this off. Part of the problem with the financial system comes from simple size - firms that are too big to fail - yet none of the proposals even approach this issue. For example, we could debate scaling up a firm's capital requirements with its size:The bigger it is, the less pure risk it can take on - an approach the Administration likes. And with the collapse of so many large institutions, the survivors are now even bigger. So here's another thought we haven't heard much about: Shouldn't the rules of antitrust apply to finance?

We also know that part of the problem is the nature of the risks taken by these huge institutions:Complex derivatives being traded outside regulated markets, and thus not subject to the normal capital and governance rules applied to those issuing them or to the normal disclosure and transparency requirements applied to all transactions in regulated markets. So, requiring that all derivative-like instruments henceforth be traded on regulated public markets seems like a no-brainer. Perhaps sensory overload can help explain why the leading reform proposal preserves the right of those undertaking "large private transactions" in these derivatives to operate outside the regulated markets.If this sloppy decision stands, another element for the next market meltdown will be in place.

We also know that part of the problem lies in compensation arrangements that reward executives, managers, deal makers and traders for the highly-leveraged risks that pan out, but exact no costs for those that don't.The issue here is not how big the bonuses are - that's their business - but rather a structure that actually drives decisions to take unreasonable risks because they carry no personal price.Yet, for all of this issue's urgency, addressing it among the hundreds of others demanding attention has apparently been too complex and politically-sensitive. Why can't we have a serious discussion of creating a new SEC rule that would require a shareholders' vote approving any compensation over, say, $1 million? Better still, how about a genuine debate about compensation arrangements that would claw back previous bonuses to reflect large losses by the same people?

Maybe everybody needs a break to clear their heads - and remember their principles. Let's hope it happens before the new regulatory reforms for climate change and finance become law.

In this morning's Washington Post, Michael A. Fletcher writes about the probability of a jobless recovery, a meme that has been growing in the zeitgeist around Washington lately.

Despite signs that the recession gripping the nation's economy may be easing, the unemployment rate is projected to continue rising for another year before topping out in double digits, a prospect that threatens to slow growth, increase poverty and further complicate the Obama administration's message of optimism about the economic outlook.

The likelihood of severe unemployment extending into the 2010 midterm elections and beyond poses a significant political hurdle to President Obama and congressional Democrats, who are already under fire for what critics label profligate spending. Continuing high unemployment rates would undercut the fundamental argument behind much of that spending: the promise that it will create new jobs and improve the prospects of working Americans, which Obama has called the ultimate measure of a healthy economy.
...

Since the recession took hold in December 2007, the U.S. economy has lost 5.7 million jobs, a rapid decline that caught administration and other economists off guard. In recent months, the velocity of job losses has slowed substantially, which, combined with a rising stock market and increases in consumer spending, has offered hope that a recovery is beginning to take hold.

But employers still cut 345,000 jobs last month, while the nation's growing working-age population requires the job market to expand by 125,000 to 150,000 a month just to keep the unemployment rate stable.

The dynamics of the modern economy further dim the employment picture. Job growth was weak for years after the past two recessions, in 1991 and 2001. Employers have grown increasingly slow to rehire workers, and steady advances in technology have allowed businesses to do more with fewer workers.

It's really only a matter of time until that double-digit unemployment number comes out, and there are strong arguments to be made that we are, for most intents and purposes, already there. This means it's very much worth thinking about the jobs meme that has basically taken over the economic dialogue. If a jobless recovery is a strong possibility, crafting an agenda around that meme has become far more politically dangerous. It also means that it's now worth devoting almost every waking minute to figuring out how to avoid such a scenario - or an even share of time fixing it and blaming it on the last guy, which is what FDR was able to do, and what the American people overwhelmingly believe right now.

NDN, a leading Washington, DC-based think tank, is adding major capacity to its key policy areas with the appointment of three new Fellows and a much-expanded role for one of its current Fellows. With the addition of James Crabtree of London, Nelson Cunningham of Washington, DC, and Joe Garcia of Miami as Fellows and a bigger role for current Fellow Mike Hais of Los Angeles, NDN will significantly increase the range and depth of its commentary.

James Crabtree, NDN Fellow: Based in London, Crabtree, an editor at Prospect, the UK’s leading monthly political magazine, has spent the last decade working in politics and journalism on both sides of the Atlantic. In Britain, he was a policy advisor in the Prime Minister’s Strategy Unit, wrote for the Economist and served in senior roles at the Insitute for Public Policy Research and various other UK think tanks. In the United States, Crabtree attended Harvard’s Kennedy School as a Fulbright Scholar and also worked as senior policy advisor to NDN's Globalization Initiative.

Crabtree will write about progressive politics from the UK and Europe, focusing broadly on what people "across the pond" think about U.S. issues. He also will provide perspectives on globalization, contributing commentary on current events and from his own travels such as his recent trip to Pakistan to look into the revolution in Pakistani media. Crabtree also will write about new technologies and media tools, analyzing the broad area of government transparency, openess and new techniques for political campaigning.

Nelson W. Cunningham, Chair, NDN’s Latin America Policy Initiative: Widely recognized as one of the nation’s foremost experts on U.S.-Latin America relations, Cunningham was special advisor to President Bill Clinton for Western Hemisphere affairs and advised the Obama campaign and transition team on Latin American policy issues. He is managing partner of McLarty Associates, an international consulting firm based in Washington, DC.
Cunningham will promote NDN’s long-standing commitment to comprehensive immigration reform, as well as to a progressive vision of globalization that looks to link the interests of Latin American and other developing nations more deeply with the United States. The Latin America Policy Initiative will focus on raising awareness of these issues in Washington, using NDN’s excellent relationships on Capitol Hill, the Administration and the NGO community. The initiative will also build concrete ties between the United States and our neighbors by sponsoring leadership training programs for promising young Americans in key Latin American countries.

Joe Garcia, NDN Fellow: Garcia, who previously served for more than three years as head of NDN’s Hispanic Strategy Center, has a long history of involvement in Cuban and Latin American issues and the fields of energy, foreign policy and human rights. In 1994, the late Governor Lawton Chiles appointed him to the Florida Public Service Commission (PSC), where he advocated for lower monthly utility bills on behalf of Florida's families. In 1998, during Gov. Jeb Bush’s Administration, Garcia was elected Chairman of the PSC.

In 2000, the Cuban Amercian National Foundation named Garcia Executive Director. At CANF, he helped reshape U.S. Cuba policy and was a force for moderation in the Cuban American community. In 2004, NDN named Garcia head of its Hispanic Strategy Center for NDN. Garcia, based in Miami, serves on the Board of Directors of CANF and is one of the leading voices on U.S.-Cuba policy.

Garcia will write about U.S.-Cuban relations and other hemispheric issues.

Michael D. Hais, NDN Fellow: Hais, currently a Fellow at NDN and the New Policy Institute since November 2008 and affiliated with NDN since 2006, served for a decade as Vice President, Entertainment Research and for more than 22 years overall at Frank N. Magid Associates where he conducted audience research for hundreds of television stations, cable channels, and program producers in nearly all 50 states and more than a dozen foreign countries. Prior to joining Magid in 1983, Hais was a political pollster for Michigan Democrats and an Assistant Professor of Political Science at the University of Detroit. He received a B.A. from the University of Iowa, an M.A. from the University of Wisconsin at Madison and a Ph.D. from the University of Maryland, all in political science. He is the co-author of Millennial Makeover: MySpace, YouTube, and the Future of American Politics (Rutgers University Press, 2008), which New York Times book critic Michiko Kakutani named as one of her 10 favorite books of 2008.

Hais, with Millennial Makeover co-author Morley Winograd, is one of the nation’s leading voices on the Millennial Generation, which has been the focus of much of his work for NDN. In his newly expanded role, Hais will examine important and interesting data from available public surveys and surveys commissioned by NDN and its affiliates. Themes and analysis will include attitudes toward race and ethnicity, the economy, foreign affairs, the Millennial Generation, but will not be limited to those topics. Hais is based in Los Angeles.

Today in the Washington Post, Treasury Secretary Tim Geithner and Director of the National Economic Council Larry Summers outline the administration's plans to regulate the financial system. While these reforms will not get the same attention as the other major initiatives President Obama is trying to pass this year, they are incredibly important to our continued prosperity, and the post crisis shape of the financial system is a fascinating story to follow. One also notices that the "New Foundation" theme is repeated for the op-ed. Here's what the President's top economic advisers had to say:

Over the past two years, we have faced the most severe financial crisis since the Great Depression. The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.

We have taken extraordinary measures to help put America on a path to recovery. But it is not enough to simply repair the damage. The economic pain felt by ordinary Americans is a daily reminder that, even as we labor toward recovery, we must begin today to build the foundation for a stronger and safer system.

This current financial crisis had many causes. It had its roots in the global imbalance in saving and consumption, in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation.

Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated.

That is why, this week -- at the president's direction, and after months of consultation with Congress, regulators, business and consumer groups, academics and experts -- the administration will put forward a plan to modernize financial regulation and supervision. The goal is to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.

Read the whole piece here.

The results of last week’s European election, when combined with the ongoing slide of Gordon Brown’s Labour government, add up to odd to a puzzle. In America this feels like a progressive moment, as Simon outlined in his new presentation. Just as the injuries of industrialisation boosted social reform in the early part of the 20th century, so two decades of over-confidence in the power of markets in the era of globalisation seemed decisively rejected by the 2008 election, and the economic crisis which followed. With the Republicans in a mess, and Obama boldly making the case for universal health care yesterday, the progressive post-crisis bounce seems almost natural. But in Europe—where the recession is, if anything, worse than in America—the right are doing just fine.

Judging by results it would really be fairer to say the right was booming. Silvio Berlusconi won handily in Italy, despite his marital problems. Incumbent conservative government’s in France and Germany more than held their own. While the mainstream centre-left parties tanked in third place or worse, the extreme right made gains too, from the neo-fascist British National Party to the Dutch Party of Freedom. And no one seems to better encompass all this than Britain’s battered Brown, leading a once impregnable Labour party into poll ratings in the teens. Just as capitalism is questioned more deeply than at any time in a generation, Britain will almost certainly elect a conservative Government next year.

So what’s going on? If, as Simon wrote this morning we’re in a hole dug “by years of reckless, ideological and impractical conservative government”, why vote them back in? This week Paul Krugman dubbed Brown Gordon the Unlucky: it was just his bad fortune to be caught standing when the financial music stopped. Just as Bush is blamed in America, so progressives are in Britain. But that doesn’t explain why Brown has suffered while incumbent European conservatives prosper. One might, instead, make the case that 90s-style centre-leftism of the Clinton / Blair mould was too enamoured of the failed market system to deserve credit now. Certainly this was anti-Clintonite case underlay much of the crowing this week over the defeat of Terry Mcaullife in Virginia.

But better, I think, to focus on three points. First, European voters are angry, confused about the cause of their current predicament, and unwilling to believe that the traditional remedies of the left will fix it. Second, they haven’t made much connection between the crisis, the ideology that caused it, and the parties which most closely reflect that ideology in government. For this one should blame the parties of the centre-left themselves, for failing to make the case clearly. Third, in tough time, outsiders are feared: Europe just voted for a range of parties whose central policy is protecting insiders against immigrants.

It’s a combustible mix, with warnings for America. Economic recovery has pushed other priorities down the list, but these European elections certainly warn of the dangers of letting immigration worries fester. The dismal Bush inheritance, meanwhile, has allowed Obama to make a clear link between the recession and his predecessor. But it’s not a memory that will hold forever. European voters, normally more left wing than in the US, didn’t seem inclined to give any post-crisis electoral gift to tired progressives. Nor might American voters in 2010, or 2012. In this, Krugman was right. Obama was partly lucky to pick up the batton at the right time. The lesson of last week is he’ll have to fight doggedly to keep it.

David Brooks has a very good column in the NYTimes today about how we got to where we are today, and the daunting economic challenges ahead.   His sober analysis of our economic situation is part of a growing tide of recent analysis looking beyond the momentary crisises, and which are beginning to move the economic debate beyond the stale, brain-dead bromides of the terribly disapointing age of Bush.  

Here’s one way to look at the politics of our era: We’ve moved from The Age of Leverage to The Great Unwinding.

For about a generation, the U.S. surfed on a growing wave of debt. The ratio of debt-to-personal-disposable income was 55 percent in 1960. Since then, it has more than doubled, reaching 133 percent in 2007. Total credit market debt — throwing in corporate, financial and other borrowing — has risen apace, surging from 143 percent of G.D.P. in 1951 to 350 percent of G.D.P. last year.

Charts that mark these trends are truly horrifying. There is a steady level of debt through most of the 20th century, until the mid-1980s. Then there is a steep accelerating rise to today’s epic levels.

This rise in debt fueled a consumption binge. Consumption as a share of G.D.P. stood at around 62 percent in the mid-1960s, and rose to about 73 percent by 2008. The baby boomers enjoyed an incredible spending binge. Meanwhile the Chinese, Japanese and European economies became reliant on the overextended U.S. consumer. It couldn’t last.

The leverage wave crashed last fall. Facing the possibility of systemic collapse, the government stepped in and replaced private borrowing with public borrowing. The Federal Reserve printed money at incredible rates, and federal spending ballooned. In 2007, the federal deficit was 1.2 percent of G.D.P. Two years later, it’s at 13 percent.

The crisis response more or less worked. Historians will argue about the Paulson-Geithner-Bernanke reaction, but the economy seems to be stabilizing. And now attention turns to the task of the next decade: slowly unwinding the debt that has built up over the past generation.

Americans aren’t borrowing the way they used to, but the accumulated debt is still there. Over the next many years, Americans will have to save more and borrow less. The American economy will have to transition from an economy based on consumption and imports to an economy with a greater balance of business investment and production. A country that has become accustomed to reasonably fast growth and frothy affluence will probably have to adjust to slower growth and less retail fizz.

The economic challenges will be hard. Reuven Glick and Kevin J. Lansing of the San Francisco Fed estimate that Americans will have to increase their household savings rate from 4 percent to 10 percent by 2018 to restore balance. That, they write, will produce “a near-term drag on overall economic activity.” Meanwhile, capital and labor will have to flow from sectors that depend on discretionary consumption to sectors based on research and investment.

But it’s the political challenges that will be most hellacious. Basically, everything that a politician might do to make voters happier in the near term will have horrible long-term consequences. Stimulate the economy too much now and you wind up with ruinous inflation down the road. Preserve failing companies and you wind up with Japanese stagnation. Cushion the decline in living standards with easy money now and you just move from a housing bubble to a commodities bubble.

The members of the political class face a set of monumental tasks...

Read on to see his recommendations, all of which are a little less compelling than his narrative on how we got here.  What is most interesting to me, however, is how Brooks' analysis is itself a complete condemnation of the cultural and economic impact of the recent conservative ascendency.  His story rightly points out that this "Age of Leverage," or as Paul Krugman has called it, "The Great Unraveling," was a manifestation of the Reagan Revolution.  Rather than being conservative in the classic sense, Brooks has correctly and helpfully begun the labeling of this era of our history as it will be known to future generations - a terribly reckless, irresponsible time where our leaders, in the grip of impractical ideologies, failed to do what was required to ensure American greatness and success in the 21st century.  

Digging America out from the hole that been dug by years of reckless, ideological and impractical conservative government remains the greatest governing challenge of this early part of the 21st century, a job that increasingly looks like - given its depth - will last long past the Obama Presidency. 

Finally, for all these reasons, I think it is time for us to move beyond the concept of "recovery" as a goal of our economic strategy.  Who wants to go back to what we had? A time of bubbles and declining wages, of a policy designed for the few at the expense of the many? Obama has begun to move beyond this frame with his recent attempts to use the term "new foundation."  But there is an urgency to this mission - for I think very few Americans are interested in recovering - or going back to - that old economy of the late 20th century and this terribly destructive conservative ascendency.

Stockholm -- The best way to clear your head of the political chatter that passes for policy debate in Washington is to get out of town. I’m writing today from Stockholm, a grand old city on a picturesque harbor and archipelago, where it’s harder to care much about Larry Summers’ squabbles with White House colleagues, the cynical fulminations from Newt Gingrich or Rush Limbaugh, or even the heated discussions inside Obamaland over its legislative strategy for health care reform. With a little distance, it’s easier to focus on developments which may actually matter for the rest of us, such as the prospects of Iran electing a democratic reformer as president this week or how the unfolding, deep slump in global trade may imperil economic recovery by China, Japan and Germany.

 It’s also easier to concentrate on our own economic conundrums. Let’s start with the crying need for new financial regulation that can prevent a system whose dysfunctions have just wiped out 20 percent of America’s wealth from doing it all over again sometime soon. The current TARP program, now officially a tangled mess, isn’t much of a model. This week the Treasury announced that 10 large institutions will be permitted to repay their TARP loans, including Goldman Sachs and Morgan, while nine others, including Wells Fargo, Bank of America and Citicorp, have to stay in the system. It sounds reasonable, since the lucky 10 can afford to repay while most of the rest cannot. But the TARP system ties regulation to outstanding loans, so now we’re left with a two-caste financial market where the weaker ones operate at a market disadvantage and others who used the taxpayers to fund their comebacks are no longer constrained to operate in the interests of a public which rescued them less than nine months ago.

We also learned this week that the Treasury’s clever plan to use taxpayer guarantees to create a private market for the toxic assets of all these institutions is a flop: Even with all that largesse, nobody wants to buy much of the toxic paper. So if the economy dips again, the 10 institutions now exiting the TARP regulations will be back for more, and there won’t be enough money in the Treasury or the Fed to save Citicorp and Bank of America again.

Then there’s the matter of how to regulate the derivatives that knocked the pins out from under the vaunted U.S. financial markets last year. The Administration’s current economic mandarins, along with the most elevated mandarin of all, Alan Greenspan, all have confessed publicly to their errors in dismissing the need for such regulation in the late-1990s. With the catastrophic collapse of the multi-trillion dollar markets for mortgage-backed securities and their credit default swap derivatives, strict regulation of these transactions to protect the rest of us -- which basically means transparency and reasonable limits on the leverage used to create or buy these instruments -- should be a no-brainer.

So what’s the logic behind the Administration's decision to keep trading in large, “private” deals in derivatives outside regulated markets? Those are precisely the deals that pose a danger for the rest of us, since they’re the large ones and inevitably the deals carried out by the institutions now acknowledged to be too large to fail. That’s Washington-speak for companies important enough to demand help from the taxpayers whenever they need it. The justification is the same as in the 1990s -- it will reduce their profits. That’s correct, in order to protect the rest of us from the now well-known consequences of a mindless drive for higher and higher profits regardless of the risks.

The next time you feel yourself drawn to the insider accounts of the greasy pole inside the White House or the breakup of the Republican coalition, take a deep breath and remind yourself that these are the players actually responsible for serious matters that ultimately may determine whether you ever have the income and assets required to send your kids to college or retire before you’re 80 years old.