For one shining moment, Thomas Piketty’s “Capital in the 21st Century” was the most talked about economics book of the year. Adulation came from all corners, including Larry Summers, a man some blamed for having helped loosen financial restrictions that led to ever-greater gains for the 1%.
“Even in terms of income ratios, the gaps that have opened up between, say, the top .1 per cent and the remainder of the top 10 per cent are far larger than those that have opened up between the top 10 per cent and average income earners,” Summers wrote in his “Capital” review. “Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution.”
Today, Summers has announced he is already over Piketty.
“Atif Mian and Amir Sufi’s House of Debt, despite some tough competition, looks likely to be the most important economics book of 2014,” Summers writes in a post for the FT. “It could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession.”
Mian and Sufi, professors at Princeton and the University of Chicago respectively, argue that what caused the Great Recession to be so great wasn’t the banking sector blow-out, but rather overindebted households. The full title of the book turns out to be “House of Debt: How They (and You) [emphasis ours] Caused the Great Recession, and How We Can Prevent It from Happening Again.”
Here’s how Summers’ summarizes their case:
Households do not spend while they are still overly indebted, which precipitates slow growth even after banking is restored to health. Spending slowdowns are caused by household over-indebtedness, so of course they precede problems in the banking system. And, when consumers do not spend, businesses have less need to borrow to finance investment, inventories or receivables.
This argument, Summers says, “is a major contribution that furthers our understanding of the crisis. It certainly affects what I will examine in trying to predict and forestall future crises.”
It was a good run, T.P.