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Article Artículo

Robert Samuelson Wants People to Be Unemployed: The Economics of the Economics of the Great Recession

The basic story of the Great Recession is about as simple as they come. The economy was being driven by a housing bubble and the bubble burst. The combination of the loss of housing construction, due to the enormous overbuilding of the bubble years, and the loss of the consumption that had been driven by bubble generated housing wealth, created a gap in annual demand of more than $1 trillion. That's all simple and easy.

And what did economists think would fill that gap in demand, manna from heaven? Did they expect another building boom even when vacancy rates were at record highs? Better go study the basics of supply and demand. Did they expect investment to soar at a time of massive excess capacity? That one would not be supported by any studies of the determinants of investment I have seen. Would consumers just ignore the $8 trillion in housing wealth they saw vanish and spend just as though nothing had changed?

None of these sound remotely plausible, so what did economists think would fill a trillion dollar gap in annual spending? Of course the government could do it with more spending and/or tax cuts, but since we have a religious cult in Washington that says it is better to keep millions out of work than to run deficits, this was a political impossibility. (Of course we could have a lower valued dollar to reduce the trade deficit, but economists try to ignore the $500 billion trade deficit. That's another part of the cult.)

Anyhow, we have a simple story as to why we are facing a severe downturn. And of course it was simple to see the bubble. House prices had risen by more than 70 percent in real terms, breaking with a century long trend in which they had just kept pace with inflation. There clearly was nothing in the fundamentals to justify this sudden price surge. Income growth was weak as was population growth. And, there was no shortage of housing as indicated by both record vacancy rates and the fact that there was no increase in real rents.

In short, this is about as easy and simple as it gets and nearly every economist in the country completely blew it. For this the economics profession has enormous grounds for embarrassment. It's sort of like the fire department that rushes to the burning school building and watches in horror as it goes up in flames because they had forgotten to turn on the fire hydrant. No one would want to own up to that mistake. Nor are economists anxious to own up to the horrible economic disaster that happened because they were utterly clueless about basic economics.

Dean Baker / June 30, 2014

Article Artículo

Economic Growth

Workers

Vacation as a Job Creator

Basic economic logic predicts that an increase in the productivity of American workers should lead to some reduction in work time, the logic being that workers would take some of the benefits of higher income in the form of more leisure. Despite substantial productivity growth over the last four decades, time-use studies show the opposite trend, average hours worked in a year have actually risen somewhat over this period. It is worth noting that the United States is very much an outlier in this respect. Average hours worked have declined sharply in other wealthy countries over this period, with workers in countries like the Netherlands and Germany now putting in 20 percent fewer hours than workers in the United States.

CEPR and Ben Wolcott / June 25, 2014