The WAPO Still Has Not Heard About the Housing Bubble

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Saturday, 07 June 2014 13:05

It is amazing that the country has not taken everyone involved with economics -- academic economists, policy economists, economics reporters, and investment advisers -- and thrown them in prison or at least exiled them to some ungodly place where we (I'll go too) could never do any harm again. Look, the housing bubble was incredibly easy to see. I took arithmetic in third grade, apparently I'm the only economist who remembers it.

The housing bubble sent construction and consumption demand soaring, hence the relatively strong growth and low unemployment in the years 2004-2007. Then the bubble burst. In addition to all the fun associated with the financial crisis (bankers too dumb to see the bubble, but well-connected enough so that it didn't matter), the collapse of the bubble meant a huge loss in demand. Instead of having a boom in construction, we went to a big time bust since there had been enormous overbuilding. And consumption plummeted since the bubble-generated equity that was driving it had disappeared.

This is the cause of the recession and the weak recovery. We lost over $1 trillion in annual demand. What was going to replace it, hot air from politicians? Demand comes from consumption, investment, residential investment, government spending, and net exports.

That's it folks -- ain't nowhere else to get demand. So where did we expect the demand to come from to replace what we lost from the collapse of the housing bubble? Were consumers supposed to spend a a larger share of their income after they lost $8 trillion in housing wealth than when they still had that wealth? What have you been smoking?

Were we going to get an investment boom when most companies have vast amounts of excess capacity? I'll come back to residential construction in a moment. We could have the government spend lots of money to boost the economy, but Very Serious People in Washington want us to worry about the budget deficit.

That leaves net exports. If the "net" has you fooled, that's because it is exports minus imports that generate demand. We don't get any jobs from exporting car engines to Mexico to be assembled into cars that are re-imported into the United States. We could look to increase net exports, but that would mean talking about our trade deficit and we aren't supposed to do that. (Don't ask me why, but I don't recall any big pieces on the large jump in the April trade deficit that the Commerce Department reported on Wednesday.)

Okay, let's get back to residential investment which was the motivation for this tirade. The Post had an article with a headline complaining:

"The economy has reached a milestone. No thanks to the housing sector."

The point is that while employment has returned to its pre-crisis level, jobs in the residential construction are still way down.

"While jobs overall are back to their pre-recession peak, residential construction jobs are 34.5 percent below their peak.

"Even if the specialty contractor jobs are stripped away, the residential construction jobs are still way off, almost 27 percent down from the peak, according to a Freddie Mac analysis."

Ummm folks, no one told you about the housing bubble? We aren't going to get back to the number of jobs during the bubble years. We were building homes at a ridiculous rate during the bubble years, why would we expect to get back to the same rate? And, we still have extraordinarily high vacancy rates, according to our friends at the Census Bureau. This will depress new construction. There is no mystery here. 

(There is a separate issue in this article that requires some serious ridicule. The piece notes a sharp rise in the number of construction workers for each home being built. It attributes this to labor hoarding. This is what big manufacturing companies do during a downturn. It is not what small fly by night construction companies do. The reason why reported employment did not fall as much as housing units is that many workers were never reported on company payrolls. Construction companies hired hundreds of thousands of undocumented workers many of whom probably never appeared on their books. Also, many workers will be misclassified as independent contractors. That way the company doesn't have to pay for unemployment insurance, workers' compensation, and other benefits. The household survey finds close to 1.5 million more people working in construction than the establishment survey, which is pretty good evidence for this story.)