November 28, 2013
Neil Irwin gave us a list of five economic trends to be thankful for this Thanksgiving. Two of the items do not belong there, or at least not without serious qualification.
First, Irwin lists lower gas prices. This is good news in the sense that it means more money in consumers’ pockets. However it is not good news insofar as it encourages more gasoline consumption and therefore more greenhouse gas emissions. This will mean more loss of life and damage to property from rising ocean levels, desertification, and extreme weather events like the typhoon that hit the Philippines earlier this month.
Ideally the price of gasoline and other uses of fossil fuels would be taxed in a way that discouraged their use and provided revenue for developing green technologies and conservation measures. However this does not seem like a politically realistic prospect any time soon. Nonetheless, the prospect of much more global warming related damage does not seem the sort of thing that we should be thankful for.
The other item wrongly placed on the list is rising house prices. Even in normal times this would be an ambiguous story. Higher home prices is good news for homeowners, however it is bad news for anyone who hopes to own a home in the future. In this sense it is sort of a generational transfer from young to old. (The old are disproportionately homeowners, while the young are disproportionately people who would like to own homes.) In fact, if the Peter Peterson-Fix the Debt types actually did care about resources being transferred from the young to the old, they would be actively lobbying for policies that would lower house prices. But hey, no one ever accused them of being consistent.
Anyhow, the rise in house prices is clearly bad news in the current context since we are getting back into bubble territory. Real house prices are now more than 20 percent above their trend level and only about 8 percent lower than when people who understand the housing market first began warning of a bubble in 2002. If house prices continue to rise into bubble territory, this raises the prospect of another collapse with millions of people again losing their life’s savings as their homes go underwater.
Ideally the Fed would be taking steps to ensure that another bubble does not develop. The rise in mortgage interest rates following Bernanke’s taper talk in June may have accomplished this purpose. However, if house prices do continue their upward path then the Fed should be prepared to use regulatory measures and explicit warnings (i.e. having Bernanke/Yellen tell people that they are likely to lose lots of money buying into this market, with the research to back up the warning). The prospect of millions of new homebuyers losing their life’s savings in another housing crash is not something to be thankful for this Thanksgiving.
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