January 02, 2010

The past decade was the worst for the U.S. economy in modern times. There was zero net job creation this decade. Going back to the 1940s, no previous decade had a job growth rate less than 20%. This decade's economic output rose at its slowest rate since the 1930s. Middle-income households made less in 2008 than they did in 1999 (adjusted for inflation). This was the first decade of falling median incomes since figures were first collected in the 1960s. The net worth of American households (the value of their houses, retirement funds, and other assets minus debts) has also declined when adjusted for inflation. In comparison, in every previous decade since the 1950s (when data was first collected), there were sharp gains in the net worth of American households. The president of the Economic Policy Institute said, "This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this in spite of substantial growth in productivity, which should have been able to improve everyone's well-being."

This decade was indicative of what happens when an economy relies heavily on borrowed money. The housing bubble that occurred this decade both caused, and was enabled by, a boom in indebtness. Americans borrowed to buy expensive homes and to support consumption more generally; commercial real estate and financial firms borrowed as well. The co-director of economic studies at the Brookings Institute explains, "A big part of what happened this decade was that people engaged in excessively risky behavior without realizing the risks associated. It's true not just among consumers but among regulators, financial institutions, lenders, everyone."

Many are trying to learn the lessons of the Bubble Decade. "At the Federal Reserve, the major lesson that top officials have taken is that bank regulation shouldn't occur in a vacuum; rather than monitor how individual institutions are doing, bank supervisors should try to understand the risks and frailties that the banking system creates for the economy as a whole -- and manage those risks... And the question of how Washington can prevent a recurrence is an overarching theme in the Obama administration's efforts to overhaul the financial system and support growth through investments in clean energy and other areas." (Full Story)