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Home Publications Blogs Beat the Press What Does It Mean to Say the Economy Will Not Recover Until the Housing Market Recovers?

What Does It Mean to Say the Economy Will Not Recover Until the Housing Market Recovers?

Friday, 26 August 2011 05:51

Morgan Stanley director Laura Tyson included this line in a piece that argued for the need for government stimulus. It is common for people to make this assertion, but it is not clear what they mean by "recovers."

The economy was driven by a housing bubble in the last upturn. It lead to both a building boom and a consumption boom. Is the implication that we need another housing bubble to drive the economy?

There is a simple issue of accounting identities. Currently the country has a large trade deficit. To make up the shortfall in demand created by this deficit, we either need negative private savings or negative public savings (e.g. budget deficits) or some combination. It seems that Tyson is arguing for negative private savings as a long-run solution, as opposed to pushing the dollar down to eliminate the trade deficit.

Comments (11)Add Comment
written by wkj, August 26, 2011 7:42
This is an excellent question, but wouldn't it be clearer to use the term "leakage" of demand rather than to call it a "shortfall"? The demand is there, it is just directed in a way that adds to foreign rather than domestic employment.
written by dean charles marshall, August 26, 2011 8:26
Tyson is just another "maven of deregulation" advocating for casino capitalism, where at the end of the day the US taxpayer underwrites all of Wall Street's shenanigans and debauchery. These people are so void of creative ingenuity and intellectual capability that their only recourse is to re-inflate "bubbles" to sustain the economy. Pathetic!
written by wallyfurthermore, August 26, 2011 8:47
The simpler point is this: construction was absent from the recent recovery from recession, and that was obvious from the weakness of the recovery. However, there is much construction other than single family homes; 'housing' includes multi-family and rental. Housing demand has continued to grow all the while, and it will break out in a form other than single family construction. When it does, it will be a self-reinforcing cycle because it will create jobs. When? Spring of 2012.
written by Jay, August 26, 2011 9:10
Between the stock and housing bubbles, I wonder how things would have been without those bubbles to increase spending. Also, the allure of ever increasing values got people to invest heavily into housing as well. Similar scenario with the stock market but many people are more risk adverse towards the stock market than houses.

The trade deficit has been going on for a long time. I looked at the value of the dollar too. It's been high for a very long time as well. It's looks like it exploded upwards in the 70's. I think anyone discussing devaluing the dollar will have to explain how it is beneficial to workers and consumers. Otherwise, I think people will resist because they will fear even less purchasing power.
written by denim, August 26, 2011 9:27
In the good old days, Farmer Brown received farm price support for his produce from the government. Price support for housing could work the same way. All would benefit, even local real estate tax revenue would be higher without raising the rates. Better schools, police, and fire services. Good government is good for America.
Housing Bubble Was Caused by FRAUD
written by Paul, August 26, 2011 10:47
No, we don't need another fraudulent housing bubble driven by the likes of Countrywide, WaMu, S&P and Moody's.

We do need housing sales and prices to increase for obvious reasons. Without increasing investment in housing, consumer demand - 70% of the economy - will remain depressed and unemployment will remain extremely high for years, if not decades to come.

Dean's statement - Tyson is arguing for negative private savings as a long-run solution, as opposed to pushing the dollar down to eliminate the trade deficit. - is not correct.

The dollar's value can be reduced AND private savings can be negative simultaneously. In fact, private saving is the problem now as any real Keynesian would understand.
"painful de-leveraging"
written by Union Member, August 26, 2011 6:28

What might any "recovery" mean when pseudo public/private officials, such as Tyson, use ridiculous euphemisms like "painful de-leveraging" to describe the harm and permanent injury dumped on millions of unsuspecting workers, consumers, and tax payers, by the collapse of the housing bubble? (Something which sounds innocuous in and of itself, but which she and too many like her failed to anticipate) "Creative destruction" indeed.

Is the word "recovery" an emblem for something else? Is there some sort of Washington Glossary of mendacious happy talk which only the media have access to? (Or is it a Wall Street Glossary?)

(Note how Tyson congratulates herself for linking economic "recovery" with "recovery" of the housing market in 2008. Is she prescient or obtuse?)

The Tea Party maybe a bunch of idiots. and their leaders payed off by powerful interests, but it's easy to see how genuine the cynicism of some must be.
Sister, could you spare a dime^H^H^H^H, a million?
written by Calgacus, August 26, 2011 8:47
Hey Laura, since you love negative private savings as a long run solution, why not lend me a Morgan Stanley million on the full faith and credit of an anonymous interweb guy? Promise to spend like a drunken sailor, and I will repay you with the million+ loan from Morgan Stanley I get in a year.
written by PatR, August 26, 2011 9:42
As can be seen by reading some other commenters here, the dream of magically realizing additional income through 'buying' a house (with someone else's money) and owning it, continues to be strong. And the dream can be a reality, with enough government intervention, as long as those who must pay for subsidies designed to benefit homeowners remain politically weak. It's a straightforward system of voting for one's own pocket.

As Mr Baker has pointed out many times, this addiction to housing subsidies and bubbles is weakening our economy. We'd all be better off without it, in the same way that we'd be better off eating vegetables and fruit instead of fat and sugar. However, we'll continue eating fat and sugar.
written by PatR, August 26, 2011 9:51
Laura Tyson and some other commenters reveal a continued addiction to housing subsidies and bubbles. For many people, saving is hard, involving sacrifices. It's much easier to make fewer sacrifices, and then have one's income boosted by nice big lifetime total capital gains on housing. That dream of getting paid to own a home is unsustainable, since it has no economic basis. So we have to pile on ever-greater subsidies to keep the dream alive a little longer. Laura Tyson is smart enough to know this is no long-term economic solution, and is the wrong move for the economy even in the short term, but she sounds more like a politician than an economist.
"addiction to housing subsidies "
written by Paul, August 27, 2011 1:03
Yes, I am certain that eliminating all housing subsidies, including Fannie Mae and Freddie Mac, would do wonders for our economy - like 20% unemployment for decades and homelessness on a massive scale, just like the good old days of the Great Depression when there were no such subsidies and FDR had to invent them.

OTOH, there is another way out just like people found during the GD - WWIII which would clear the market of excess housing inventory and surplus labor as Classical Economists recommend.

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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.