Friday, August 17, 2012

Why the prolonged economic slump? One word: Housing.

Economist Dean Baker writes about a recent research paper from the Federal Reserve Bank of Cleveland:
The study goes on to note the extraordinary weakness in housing in this recovery and point out that this weakness could explain much of the weakness of the recovery.

While the study notes that there are questions of causation (a weak recovery could lead to weakness in housing), there can be little doubt that if residential construction had returned to its pre-recession level, as had been the case by this point in all prior post-war recoveries, the economy would be back near full employment.

Of course it is not hard to understand why housing has not recovered. The massive over-building of housing during the bubble years lead to an enormous over-supply of housing, which shows up in the data as a record vacancy rate in the years 2006-10. In the last couple of years the vacancy rate has begun to decline which can explain the recent uptick in housing over the last few quarters.

This housing story explains why we should have expected a long and drawn out recovery. There is no easy way to replace the massive loss in demand associated with the collapse of the housing sector. And, it is hard to blame the collapse on President Obama, since the overbuilding took place in the years 2000-2006 and the collapse was already well underway at the point where he took office. ...

Ultimately we will need an increase in foreign demand, meaning a lower trade deficit, to fill the gap. This will require a lower valued dollar which will make U.S. goods more competitive internationally. Unfortunately, neither candidate seems willing to make the case for a lower valued dollar, which means that we can probably expect a weak economy for many years into the future, regardless of who gets elected.


  1. Great post!

  2. Wrong. The housing market has been making it's recovery for a year now. It's time you stop blaming housing for the economy. The whole gist of your blog is only to report about negative stories - whether they be true or not. It's like those morons who talk about how many homeowners are under water. It doesn't matter how many homeowners are under water if they don't plan on moving. It's irrelevant information with the intent to sensationalize but, really, it just shows ignorance. 

  3. Economists can't measure economic growth properly, but Alex Gheg can show what other inferior models can't. Two equations will reveal what really matters.

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