I agree with Dean Baker’s very interesting explanation of the housing bubble, the consequences of its inevitable collapse, and the remedies that were put into place with one small exception. Here’s a snippet of it:
The basic story is very simple. (Remember, the purpose of economics is to make simple things complicated so as to exclude most of the public from debates on the most important policy issues that affect their lives.) The economy in the bubble years was driven by the bubble. The huge run-up in house prices led to an extraordinary building boom. Residential construction, which is ordinarily 3-4 percent of GDP rose to more than 6 percent of GDP at the peak of the boom in 2005.
Bubble-inflated house prices created close to $8 trillion dollars of housing equity. The housing wealth effect implies that people would spend between 5 to 7 cents on the dollar of this additional wealth, creating between $400 billion and $560 billion in additional annual consumption. The property taxes on inflated house prices also helped support perhaps $80 billion or so in state and local government spending. For good measure there was a bubble in non-residential real estate that followed in the wake of the housing bubble, which created a boom in this sector as well.
When the bubble burst, there was nothing to replace the lost demand. Residential construction fell by more than 4 percentage points of GDP ($600 billion annually in today’s economy). It fell below normal levels because the boom of the bubble years had led to record vacancy rates. Consumption plunged because the housing bubble equity disappeared. When the wealth was gone, the consumption that it generated also vanished. And, we saw cutbacks in government spending at the state and local level in response to the lost tax revenue.
All of this seems clear and simple. We lost $1.2 trillion to $1.4 trillion in annual private sector demand. Some of this has been replaced by the federal government’s budget deficits, but not enough to fill the gap.
The small exception relates to this:
The simple story is that we need a new source of demand to fill the gap left by the collapse of the housing bubble. In the short term that can only be the government. In the longer term it will have to be trade, which means a reduction in the trade deficit. That means first and foremost getting the value of the dollar down, but macho politicians in Washington don’t talk about a lower valued dollar.
To explain my disagreement with Dr. Baker we need to go back to 2008. At the time, alarmed by the extensive layoffs in mostly large companies in all sorts of sectors, I began a systematic report on layoffs comparing them with sales, net revenues, and so on. There was simply no correlation. The layoffs were completely out of proportion to the decline in sales or revenues.
What I think happened is that companies used the recession as a pretext for restructuring in ways they might have wanted to do long ago. Something like letting an old, obsolete office building burn down so you can replace it with a better one, less expensive to maintain and operate. The difference is that buildings don’t have lives to ruin or stunt while workers do.
My concern is unemployment, the very large number of people who can’t find jobs, are underemployed, or who have left the workforce entirely. I don’t think that over the last four years we’ve seen a clear relationship among employment, consumption, GDP, or government spending presumably intended to boost employment. At the level of GDP growth, government spending, and consumption we should seen more employment than we have. Basically, Okun’s law has broken down.
“Okun’s law” is the rule-of-thumb that says that with decreased GDP you should get decreased employment and, implicitly, vice versa.
I don’t think we can completely explain the sharp decrease in employment solely on the basis of the collapse in the housing bubble and, consequently, I think that solutions that stop at compensating for the gap in consumption will fall short of their objectives. I don’t doubt that those measures will cause employment to increase. I just think that it will increase in China and Vietnam.
I don’t think we can completely explain the sharp decrease in employment solely on the basis of the collapse in the housing bubble….
No, the sharp decrease in unemployment happened because all of us unemployed people suddenly because shiftless, unskilled layabouts – with bad attitudes.
The phrase I’ve heard the most in the last 4+ years is, “Why is this happening to me? I did everything I was supposed to do!” Helping people get jobs in China and Vietnam isn’t likely to help answer that question.
Yes, yes and yes. Trade balances matter and it doesn’t help to stimulate if the money gets spent in another country, increasing their productivity and demand instead of ours.
Unfortunately, you can’t put every relevant factor into every post. Everything is interrelated and you’ve just to leave some things out.
One of the problems with a WPA-type jobs program is our crappy immigration policy. Who gets to participate? If you only allow people who can prove they’re citizens to participate, not only will there be an uproar but you won’t get the number of participants you need. If you accept all comers, a program that was originally estimated at costing $200 billion (you get to $200 billion pretty quickly with something like this) will cost you $1 trillion in the flash of an eye.
The basic point is this. Tax policy, spending policy, monetary policy, economic policy, trade policy, immigration policy, social policy, education policy, transportation policy, and Lord knows what else are all interrelated. You can’t pull one string without all of the other marionettes moving, almost always in unpredictable ways.
Um, er, uh, ahem…..so if GDP and employment have disconnected what would be a rational conclusion? Perhaps that the cost of employment, including future prospects and the cost to fire, have risen relative to GDP?
I’ve only made this point 10,000 times.
It’s rejected every time, here and at OTB. In my business, people simply nod their heads and agree………and act. And they are the employers, not politically motivated Internet commenters. They are the only ones who really matter.
Wake up, folks. Vote Obama, and you have four more years of floundering.
On the other hand, you can provide exculpatory arguments for this guy. Why don’t you just put a gun to your head, and pull the trigger.
Wake up, folks. Vote Obama, and you have four more years of floundering.
Right, because there haven’t been problems in the past under Republican Administrations. Exactly how well did manufacturing employment fare under Bush II? Why? Because there is NO WAY to reduce labor costs in this country to match levels seen in China, Vietnam, and other Third World capitalist paradises.
But please, tell me how Mittens, Mitch and Boehner will do better this time than that Republicans did earlier this century.
Drew,
My brother, who runs the family construction business, agrees with you regarding the cost of employment. And he generally views Romney as more business-friendly and is likely to vote for him as a result. But he’s also knows that Romney can’t do much about the problems he faces, especially with respect to the cost of employment. In my brother’s business a lot of those employment costs are due to state and local rules, regulations and taxes. Then there’s the fact that the business is increasingly moving to Mexican labor of questionable legality. On top of all that is the change wrought by technology which destroyed the relationship-based business it was 30 years ago and replaced it with low-margin competitive bidding.
Hard to get a chart that I like on short notice, but here’s what we’ve got. These numbers are for 2012, and probably a little out of date.
Federal Government Spending for 2012: ~$3,795,600,000,000.
Of that ~21.6% is pension spending. Romney isn’t going to be cutting SS to anyone, so that’s out.
Another 22.3% is Healthcare spending. Romney isn’t cutting Medicare, not anytime soon (meaning during his term in office), so that’s a big chunk of that out. Medicaid? They’ll probably try to cut that, but that isn’t the bulk of the spending. So that’s not much.
Another 5.9% is interest on the debt. That will not be cut.
A big 23.8% goes to Defense. Romney is promising to increase that in absolute terms.
That’s about 73.6% of the budget right there. And any cuts that might be made in Medicaid will be likely made up in increases to Defense.
So that leaves about 26.4% of the budget for Mittens to work his magic on. Unfortunately, the deficit is about 35% of the budget, so he can’t balance the budget on the backs of the rest of it.
But let’s see what we got.
Education accounts for about 4%. Let’s just pretend he can cut all of that.
Welfare is 11.9% of the total. Now, is Mittens going to take away food stamps for kids? Get real. But let’s say he can cut that by 3% of the total budget. That gets us to a 7% cut in spending, and all we had to do was eliminate education spending and cut back on feeding poor people (Too many fat poor people in the country anyway. Let them eat – each other.)
The other 10.5% amounts to OTHER: Protection, Transportation, General Government and ‘Other’. I’m guessing that a lot of that are operations like the Secret Service and FBI, the Mint, etc. But let’s say Mittens can work some real turn-around magic and cut 3% out of the budget for that.
So Mittens has shrunk the federal government by 10%, and all it took was cutting back on law enforcement, education, food stamps for kids (because regardless of anything else, that’s how it will be pitched – and really that’s what it will be), and he will STILL have a deficit of $947,000,000,000. And that’s before he decides to cut taxes on rich folk.* That’s a hiccup away from running a trillion dollar deficit.
Tell me again, Drew, how night & day the difference is between Mittens Romneyhood and Barry Half-White.
*Shared sacrifice, bitchez!
Also, is Mittens going to be any more PRO hydrocarbon than Bush was, when a bunch of Texans were running the House? They couldn’t even get a no-brainer like drilling in ANWAR through Congress. You really think they will be able to go with Full Frontal Anthracite in the face of determined, nasty and stupid Democratic opposition? No chance in Hell.
And Drew, even steve doesn’t really make exculpatory arguments in favor of Obama. Now that Reynolds took his ball and went OTB there aren’t any hyper-partisan Obamanauts here. steve and Schuler are going to vote for him, but Schuler in particular isn’t going to be happy about it, and steve is voting his pocketbook same as you are. The only question is whether or not the alternative is worth voting for.
On that, you and jan agree that the Romster is the BOMB. No one else does. The responses seem to run from ‘hold my nose and vote for him’ to my rather extreme position that it doesn’t make a damned bit of difference. (Steve V agrees with me on that, TastyBits seems to lean that way, though I don’t really know how he might vote, and that’s about it.) But without Reynolds B+ rating, there is NO enthusiasm expressed for Obama here.
If you want change, you have to vote for Romney. (Can there be any disagreement with that proposition? Good change or bad change is debatable) This is primarily due to the fact that the Republicans will control at least one House and will not feel that their mandate is any less than Obama’s.
PD, I laid out some numbers above. What is Romney doing that suggests that he do any more than nibble around the edges? We need radical reform across several major categories of governmental policy and Romney is basically promising to be Obama-lite and Bush II-strong. Not only is that not worth supporting (because it just rewards the Rs for sucking a little less than the Ds) that is reprehensible. To quote Schuler’s Lament above:
Most, if not all, of those policies need to be reformed. What is Romney going to do to address any of those issues, much less all of them? At best he is saddled with a party that largely approves the status quo. He’s doing nothing to build the capital needed to tackle the problems singularly or in toto. We need a force along the lines of FDR in 1932. What we’re getting is Bush 2000. Not exactly cool beans.
Unexpectedly…
I’ve been watching this rodeo for a while – took Econ 101 about 50 years ago. Seems to me that economists have about the same track record as astrologers and entrailologists.
How many angels can dance on the head of a pin? This seems to be a far less dangerous diversion for the chattering class. At least nobody cared what they thought.
Seems to me that economists have about the same track record as astrologers and entrailologists.
Who’s your entrails guy? I can set you up with somebody better if you’re comparing your current guy to economists. You want Jamaican or Haitian? Haitians have a better track record, but Jamaicans make better food out of what’s left. Mmmmm, jerk chicken….
OK, Icepick – I was just going to let that hang out there as the blathering of an old curmudgeon but I sense some degree of scepticism on your part.
The course of the economy is unknowable. In mathematical parlance the problem is of the order np-complete. In the words of Roger Penrose it is non-computable. This means that no conceivable computer can solve the problem within the accepted age of the universe. Throwing lots of numbers and graphs and formulas at the economy is self delusional hubris.
The only (not very) reliable guidance we can look to is experience – common sense in the vernacular. Tulip bulbs come to mind. I’d liken the economic professionals to used car salesmen except you can’t drive the product home.
Astrologers and entrail readers did very well in their day.
I believe it was Keynes who said that the purpose of economic forecasting was to make astrology look respectable.
Icepick, that’s too funny. Check out Gaelic Storm on the blog.
Sigh.
You can lead a horse to water…….
E’en a horse knows better than to drink the water from a Superfund site …
Roy, seriously, I’m just discussing entrails. And I’m no fan of economists, so you’ve got the wrong idea!
Janis, I’m on it.
…
I should back down a bit. I don’t mind economists so much, except when they start pontificating about policy and what it should be. It would be one thing if they had a better track record, but they don’t. Keep it in the academy, boys and girls, keep it in the academy.
ZING!
@Icepick, to carry over your comment from a recent post:
“[Romney]’s not going to accomplish much unless he lays the groundwork for it NOW. Campaigns are when political capital is created. He’s not creating anything specific for anything that will require any kind of pain from the voters. In fact, he’s doing the opposite, telling people that he can fix things without any suffering by anyone.”
That’s a textbook description of a politician’s mandate that hits hard against history. Obama believes that marriage is an insitution between a man and women, and . . . . [zing] DNADNT is history. Obama is opposed to an individual mandate, and . . . . [zing] he’s defending an individual mandate. Bush II runs on partial privatization of SS, . . . and there is not even an attempt at compromise. I think one needs to think of politics more as chemistry than math. What are the impulses that the Presidential candidate is surging on that react with his/her future Congress?
From another thread, Drew wrote: I’ve made a fantastic living by following the principles I cite here.
You’ve made a fantastic living by always choosing the second worst option available? It’s like the mirror image of Jack Welsh’s strategy of only doing something you will be best, or at worst second best, at.
PD, DNADNT was ultimately a small potatoes issue. For that matter a lot of people on the notional right supported ending it. That change has been coming for some time now. My point is that the acceptance of gay marriage has been building culturally for some time.*
You are somewhat correct about the individual mandate, except that was really not the issue except for the wonks. The issue was nationalizing healthcare, and PPACA is a step in that direction. The point is that a certain segment of the policy elite wants blanket coverage, backed by the government. Obama ran on the idea that everyone would be covered by insurance of some kind. He fell short of that, but he made a big (if horribly misguided) step in that direction.
On SS Privatization, yes, Bush failed. Do you think he would have done better if he just announced it out of the blue, without having campaigned on the issue? I think that one works more in my favor, frankly. SS will NOT be changed without a lot of buy-in from the public. How are you going to lay the foundation for that BETTER than by hashing it out in a campaign?
Big changes can occur without campaigns, but those usually happen because of some other traumatic event, such as the vast ramp-up in security apparatus (sp?) and war fighting after 9/11/2001.
Medicare is the one example I can think of off hand that runs counter to my belief, but (a) I honestly don’t know the history of that so much, and (b) 1965 was kind of unique.
* Actually I would say that the actual policy shift by this President had to do with an electoral crisis – he needed a boost with his base.
Icepick – mea culpa.
PD, Icepick – Romney is going for a mandate. Both he and Ryan are stressing that this election is about a fundamental choice, to be made by the people, about what kind of country we want. We haven’t been presented with this kind of stark talk since Goldwater in 1964 (my first vote).
Times were different then. A young, charismatic President had been assassinated and we were torn apart by by the second sequel to WWII.
It’s been 50 years of ever encroaching government since then. The pot was on simmer and the frog was vaguely aware that things were getting a might warmish. Obama and friends were the wake up call. We’re in for a major change. Won’t mean much to me but it will mean the world to my children and theirs.
Icepick – mea culpa.
No problem, I just wanted to clear it up.
…
Regarding the rest of your comment – I agree we need a major change. I just don’t think they’re going to do it. Ryan’s budget plan forecasts increased government spending every year going forward. That isn’t cutting! The two budget issues the elected officials can most clearly impact are revenues and Defense. And Romney has vowed to decrease revenue and increase defense spending. In return for that we get vague promises that Congresses and Presidents in the future will go along with whatever ideas they cook up for Medicare and SS reform for future participants.
My complaint is that these guys do not represent the radical break that is needed, and neither does their party. Assume Romney wins (I believe it is his to lose) in November. Assume the Republicans hold the House and win the Senate. That puts Boehner, McConnell and their cronies back in charge. Largely the same group of profligate spenders from the Bush years. Where’s the change?
PD
Well, I’m cynical, so I tend to think Presidential platforms are mostly aspiration. Or to use an economics term, it’s signalling – they are a laundry list of “issues” designed to appeal to specific constituencies in order to get votes. What is actually achievable in terms of policy matters much less than getting elected.
“We need a force along the lines of FDR in 1932. What we’re getting is Bush 2000. Not exactly cool beans.”
A parliamentary govt would be nice.
Steve
That’s always been appealing to me because it would sure increase the chance of there being a party or platform I could actually support.
On the other hand, parliamentary governments work well for nations states and we are a political union. The states aren’t going to vote themselves into irrelevance and I’m not sure a parliamentary system would better manage our diverse population.
British Commons is significantly more diverse than our House of Representatives. Many of its members are in their 20s or 30s and most are not lawyers.
Our problem isn’t that we don’t have a parliamentary system. Our problem is that our Congress is too darned small. It should be at least four times its present size for reasonable representation.
Icepick,
We get the government we want. Necessary changes have always ensued. It’s just that it seems a bit ponderous at times. The genius of our system is that it frees people from having to attend to administrative matters and get on with the business of life, liberty, and the pursuit of happiness. Obama announced that, after the election, that he was going to fundamentally change our way of life. You watch how well that has played come Nov. 6th.
Dave,
The last thing we need is more diversity. That just leads to more factions and more demands and an expansion of the role of government. Rocks and pebbles and glue, on the other hand, can work wonders.
Roy
I like that idea Dave.