October 18, 2011
David Brooks is so cute when he tries to talk about economics. He apparently never heard of the “wealth effect,” one of the most basic concepts in economics. Brooks tells readers that we are seeing a change in American values with people turning away from debt.
Actually, people have simply seen much of their wealth disappear with the collapse of the housing bubble. Close to $7 trillion of housing wealth has disappeared since the peak of the bubble. In the bubble years, people went into debt because they had this wealth to cover their debt. Now that this wealth has vanished, people are reducing their debt accordingly. This is the principle that you can get a larger mortgage on a $400,000 home than a $200,000 home. That is not a change in philosophy as Brooks suggests.
The other part of Brooks piece is the implicit celebration of unemployment. Brooks tells us (correctly) that people are cutting back consumption. He also proudly tells us that they don’t the government to spend more money either. That’s just great. We get less demand from the private sector and we also get less demand from the government. This translates into less demand. That means fewer jobs and more unemployment.
That could be a counter to this if investment would rise, but there is no plausible story under which it would. Firms don’t rush out to invest because the economy is shrinking. The world doesn’t work that way.
Ultimately, the U.S. will have to get the dollar down to restore full employment without large net borrowing by either the public or private sector. A lower valued dollar will make U.S. goods more competitive internationally and reduce our trade deficit. However, this will not happen tomorrow and certainly does not appear to be a phenomenon that Brooks has thought about.
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