Summers and Krugman Justify Stimulus Using Mian and Sufi’s Hard-to-Believe Theory Subprime Savings Caused Great Recession

Larry Summer and Paul Krugman cite Atif Mian and Amir Sufi’s hard-to-believe theory of the Great Recession to justify fiscal stimulus. In their book, House of Debt, Mian and Sufi claim falling home prices caused highly levered subprime households to reduce consumption and temporarily save a larger portion of their earnings. A more likely scenario is that subprime consumption fell back to sustainable levels when low-income households could no longer borrow against the rising value of their homes and consume more than they earned. In that case, because a Keynesian lull in demand didn’t cause the recession, stimulus could not mitigate a temporary dislocation of resources. Instead, what occurred was a permanent shift in demand, and the cost of dislocation was inevitable. I elaborate on the differences in my review of Mian and Sufi’s book.