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Home Publications Blogs Beat the Press Robert Samuelson Still Hasn't Heard About the Housing Bubble, #24,201

Robert Samuelson Still Hasn't Heard About the Housing Bubble, #24,201

Monday, 27 January 2014 05:50

The story of the housing bubble and the impact of its bursting is pretty damn simple. If we go back to the bubble years, 2002-2007, the housing market was driving the economy. It was doing this both directly as construction spending peaked at close to 6.5 percent of GDP, two percentage points above its average over the prior two decades. It also drove consumption as people spent based on the equity in their home created by the bubble. The savings rate fell to almost zero based on this housing wealth effect.

When the bubble burst, we had nothing to replace the lost demand. Housing construction fell to well below normal levels in response to the huge overbuilding of the bubble years. At the trough construction was down by more than 4.0 percentage points of GDP or $660 billion a year in today's economy. Consumption also fell as the home equity that was driving it disappeared. If we assume a housing wealth effect of 5-7 percent (i.e. a dollar of housing wealth increases annual consumption by 5-7 cents) then the loss of $8 trillion in housing wealth would correspond to a reduction in annual consumption of between $400 billion and $560 billion. Taken together, the loss of construction and consumption spending imply a loss in annual demand of more than $1 trillion.

That's the basic story, unfortunately it is far too simple for most analysts to understand. Hence we have Robert Samuelson bemoaning the fact that the Fed wasn't able to instill the confidence to get businesses to invest and consumers to spend. The problem with the Samuelson story is that its basic facts are wrong.

Non-residential investment is almost back to its pre-recession share of GDP. Given the weak demand in the economy, this is very impressive. It certainly doesn't give any evidence of a lack of confidence. And consumers are spending. The savings rate is now below 5.0 percent of GDP. This compares to a pre-stock and housing bubble average of more than 10.0 percent of GDP. The only time that the saving rate has been lower has been at the peaks of the stock and housing bubbles. In short, Samuelson is looking for an explanation for weaknesses in spending that do not exist.

The need for additional demand stems primarily from the trade deficit. This creates a gap in demand of roughly 3.0 percent of GDP, which would be closer to 4.0 percent of GDP if we were at full employment. For some reason, Samuelson doesn't discuss this issue, perhaps because he doesn't have access to the data.

(Reports are that Ezra Klein left the Post because it's so hard to get government data there.)

Comments (10)Add Comment
Financial Crisis
written by jonny bakho, January 27, 2014 5:20
So why do so many economists try to explain the recession in terms of financial crisis?
- jonny bakho
The real story is too simple
written by Dean, January 27, 2014 5:27
Economics is largely about making simple things seem complex. It creates jobs, for economists.
Housing blind spot
written by Robert Salzberg, January 27, 2014 6:37
When it comes to housing, the NYT isn't much better on understanding data. From the housing article Dr. Baker posted on yesterday:

" But perhaps more significant, individual attitudes have changed. A house is a residence, sure. A better investment than renting, yes. But it is no longer an A.T.M., a source of ready cash for a better lifestyle."

Housing is a "better investment than renting"? When did renting become an investment? But saying housing "is no longer an A.T.M., a source of ready cash for a better lifestyle." isn't true for those lucky enough to have significant equity in their homes. Have they never heard of the housing wealth effect?

If there has been a change in attitude, it's that more people recognize that housing prices can both rise and fall. Maybe a few more also realize that housing prices should be grounded in things like income.

Klein really left because he wanted a few million to take Wonkblog to the next level and I guess Bezos was too cheap to invest in the best thing going at WaPo. (Maybe Bezos should have checked under his cushions for the extra cash.)

written by skeptonomist, January 27, 2014 8:51
Investment is best viewed on a per-capita basis rather than as a fraction of GDP - this shows long-term trends better. For rapid recovery investment should be above average as a fraction of GDP. I updated my graph of private investment to show residential/nonresidential:


This graph is for another purpose but it shows that both residential and non-residential investment are still well below trend. Or if you accept that they're "normal" you are accepting that the trend has bent over, or that there is a "secular decline".
written by Mike Muoio, January 27, 2014 10:37
You are correct, but we lost 60,000 factories and 30 Million jobs over the last 33 years.From 1776 to 1980, the United States accumulated $998 Billion in National Debt. Including; all wars, social programs, infrastructure, journeys to the moon and planets, National Parks, Interstate Highways, and many other programs too numerous to detail here.

Our National Debt now totals over $17 Trillion and our GDP, adjusted for inflation, is $13.8 Trillion. We have increased our Debt to GDP ratio from 17% to 123% or a 7-Fold increase, and we are at the limit of affordability.

So what or whom has driven us to these damaging unsustainable levels of national debt?

Three specific Presidential Administrations produced $12 Trillion or 70% of the total National Debt of $17 Trillion. The specific administrations were Reagan, Bush I, and Bush II. What did Reagan, Bush I, and Bush II do with the $12 Trillion in Debt they created? They spent it on massive reductions of personal and corporate income tax, needless defense spending, two endless irrational wars and Medicare Part D that Bush II added with no provision to pay for it.

The top marginal personal Federal Income Tax rate since creation in 1913 have averaged 59%. It peaked in the last 2 years of World War II at 94%. Today, it has been reduced, to 39.6% for dollars earned above $457,600.

This historically low tax policy was sold to us as “Supply-Side Economics”. It is an economic theory that states, “if you tax the wealthy and corporations less, increased investment and growth will result and society, in total, will benefit through higher tax revenues”.

We implemented this Wall Street inspired theory in 1981 and it has proven to be an economic disaster. We have generated an incremental $16 Trillion in National Debt. If Reagan, Bush I, and Bush II had balanced their respective budgets over their collective 20 years of governance, we would have National Debt of $5.1 Trillion versus the $17 Trillion we are currently burdened with. Conservatives continue advocating for even further tax reductions and paying for them with the elimination or reduction of Social Security, Medicare, Medicaid, the Affordable Care Act, Education, and a host of other programs.

The imposed burden of debt from Reagan, Bush I, and Bush II and the Conservative idea of how to mitigate it, is the equivalent of rewarding your grandfather for stealing your wallet, spending all your cash, running up 6 years worth of salary on your credit cards. Then have him suggest to you to simply not pay your bills.

If we reduced the $1.1 Trillion in annual tax breaks we enjoy by 50%, we would balance the annual budget and we would stop adding to our National Long Term Debt and with an improved growth rate we would begin to actually reduce the debt.

These three Conservative administrations, rather than investing in our industry, infrastructure and education, advocated for and received reduced taxes and the National Debt began to grow.

While these delusional Conservative economic policies may feel good in the short-term, our structural budgetary problems can only be resolved if we make longer-term growth investments in our industry, education and infrastructure.

Just why “Conservatives” are called “Conservative” may be singularly the most illogical naming convention in the history of the nation. Conservatives simply are not conservative at all, having spent $12 Trillion like drunken sailors over 20 years.

There is an unavoidable price to be paid for the benefit of living in a growing vibrant civilized society, and for the atonement of the past 33 years of reckless Conservative economic folly.

The price is an existential levy we must endure, as our forebears have before us, to preserve and defend our Republic.

The alternative is the abhorrent fate of continuing degeneracy in domestic industries, incomes, employment, quality of life, wealth distribution, infrastructure and our democratic processes.
written by Kat, January 27, 2014 10:45
Is the Peterson Foundation sending troops to BTP now?
not an economist
written by djb, January 27, 2014 11:07

The real story is too simple
written by Dean, January 27, 2014 6:27

Economics is largely about making simple things seem complex. It creates jobs, for economists.


or in the case of samuelson it creates jobs for people who arent economists


written by sherparick, January 27, 2014 12:17
Although I agree with some of Investor's rant, nominal GDP in 2013 was $16.25 Trillion dollars. od.http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

Since nominal debt, when you count the Treasury holdings in the Social Security and Medicare trust funds is $16.7 trillion in nominal dollars in 2013, the debt to GDP ratio has already fallen to around 100% even if you count Government holdings, and many economists think you shouldn't. Further, since the Government's deficit is rapidly falling, and is now growing at a slower nominal rate than nominal GDP is growing, this ratio is going to shrink pretty quickly, unless a Republican gets elected in 2016 with a Tea Party Senate and a Tea Party House. Then it will be tax cuts for the rich, financial crash, and the "Oh My God, The DEFICIT is coming to eat us all!! Time to cut Social Security!!"
But Reagan proved that deficits don't matter ...
written by Squeezed Turnip, January 27, 2014 5:09
Conservatives are debt/deficit hypocrites, what else is new?

Right now, the debt doesn't matter. Jobs matter. Restoring balance to the distribution of wealth. Those are the things that matter (the 'Conservatives" have masterfully used the debt/deficit to accomplish a massive wealth transfer of taxpayer subsidies through the financial system, and they're not done yet. If you think Ted Cruz is dumb, wait until he finishes his current magic trick, where he ends up with your wallet in his wife's hand at Goldman Sachs: don't blink!)
Regarding Ezra
written by Dave, January 27, 2014 10:55
Since you mentioned Ezra, I thought I'd give a brief comment on his new venture since I only comment on a couple of blogs (commenting elsewhere has become too much of a pain, and I won't join Facebook).

I hope he is successful with his venture. I think it is hard to describe in concept, but the results should be good. I began making comments to the NYT regarding the problem with newspapers and their adherence to old ideas in the face of technology, and one of my main points was that each story starts anew, with no context. One of the main points of Ezra (and Yglesias?) is that news isn't always new, that it often comes with context that has already been covered.

I'm very, very glad that 2 of the best in the business are joining forces and noticing this problem. I think it is possible they got the idea from me, and I'm proud to be of help to making a better press.

Again, I have high hopes for this new venture. If I might be of independent service to it in the future, I will certainly try.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.