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

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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.