Fans of National Income Accounting Are Not Surprised by the Weak Recovery

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Monday, 26 November 2012 05:11

Robert Samuelson is again perplexed by the failure of the economy to recover more rapidly. It is difficult for those of us who understand national income accounting (the stuff we teach in intro econ) to understand the confusion.

Prior to the economic collapse the economy was being driven by a housing bubble. When the bubble burst, we lost more than $600 billion in annual construction demand and more than $500 billion in annual consumption demand. There is no obvious mechanism in the economy to replace this demand.

Samuelson tells us that companies are cautious and reluctant to invest due to the uncertain state of the economy. However the equipment and software share of investment is pretty much back to its pre-recession level. It's not clear why we should expect the share to rise higher, especially at a time when there is so much excess capacity in many sectors.

equip-software-inv-11-2012

 Source: Bureau of Economic Analysis.

Consumption is also unusually high relative to disposable income, although below its bubble peak. This drop is also not surprising given the loss of $8 trillion in housing wealth.

consumption-disp-income-8-2012

Source: Bureau of Economic Analysis.

Samuelson also expresses surprise that there has not been more of a rebound in housing, telling readers:

"The Fed’s low interest rates and plunging home prices (down about a third nationally) might have triggered a strong housing revival."

Of course given that vacancy rates remain close to the record highs hit earlier in the downturn, it is not surprising that construction has not been stronger.

If more people engaged in policy debates learned national income accounting it would eliminate much of the confusion that dominates debates.