Twenty years ago, I was jumping up and down yelling and screaming about the huge housing bubble and warning that its collapse would give us a bad recession. I turned out to be right. That’s not a good story. It would have been better for the country and the world if I had been wrong, but reality is what it is, and we are best off trying to recognize it.

I bring this up because my experience being just about alone in warning of a dangerous bubble says volumes about the ability of highly educated and presumably intelligent people to ignore evidence that is right in front of their face. To be clear, I didn’t have access to any special data or secret formula that allowed me to see a bubble that the Fed, the President’s Council of Economic Advisers, and endless private analysts missed. I just looked at very basic data on the housing market and the economy.

I noticed that house prices were vastly outpacing inflation in the years since 1996, when they had just tracked inflation over the period from 1950 to 1996. (Robert Shiller subsequently compiled a data set of nationwide house prices going back to 1890, showing that they had roughly tracked inflation for more than a full century prior to run-up beginning in 1996.) It was also easy to see that nothing remotely comparable was happening with rents, which continued to move roughly in line with the overall inflation rate.

That divergence in house prices, both from historical experience and from rents, should have been enough to raise some eyebrows from anyone at all familiar with the data. If house sale prices were rising due to a shortage, why wasn’t there evidence of a housing shortage in rents? Furthermore, why did we just start seeing a nationwide housing shortage in the late 1990s, which happened to coincide with the Internet stock bubble, when we had never seen anything like it in the prior hundred years?

Closer examination just made the story more ominous. A housing shortage presumably means few units are sitting vacant. That was the case with the recent run-up in both house prices and rents in the pandemic and recovery. But the vacancy rate was high and rising in the bubble years.

And we saw the sort of crazy lending that one might expect in a bubble driven by irrational exuberance, to use Alan Greenspan’s famous phrase. The explosion of subprime lending and exotic mortgage instruments was not a secret as leading economists liked to pretend after the fact. The industry was boasting about how they had devised ways to sell mortgages to people who would never previously have been able to buy a house based on their income and assets.

Anyhow, all this was clearly visible to anyone who cared to look, but as much as I tried, I could not get almost anyone to see what was right in front of their face. (Paul Krugman and then NY Times reporter David Cay Johnston were notable exceptions.)

The Market Did Not Cause Inequality

I mention this history to remind myself how difficult it can be to get economists or other policy types to see things that really are right in front of their eyes. Last week I spoke to a producer for a video show, and I was giving my usual spiel about the upward redistribution of the last half-century was not just something that happened, but rather was driven by deliberate policy choices.

The top of my list is always government-granted patent and copyright monopolies, which make otherwise cheap drugs very expensive. These government-granted monopolies likely transfer more than $1 trillion a year ($8,000 per household) from the rest of us to Bill Gates, the drug companies, and others in a position to benefit from them.

These monopolies serve a purpose, providing incentives for innovation and creative work, but the key point I struggle to get people to recognize is that they are policies. They can be made longer or shorter, or stronger or weaker. We have made the decision over the last half-century to make them longer and stronger. As a result, their economic impact has exploded. In 1980 we were spending about 0.4 percent of GDP (roughly $120 billion a year in today’s economy) on prescription drugs and other pharmaceutical products. Currently we spend more than 2.3 percent of GDP ($700 billion a year).

To be clear, we have benefited from this additional spending. We have treatments and cures that were unimaginable 50 years ago. But we might have been able to get these treatments and cures at a lower cost.

There are also alternative mechanisms for financing innovation and creative work. There has been much discussion recently, as Elon Musk applied his chainsaw, of the great discoveries that have come out of the research financed by the National Institutes of Health. Direct public funding is one alternative to patent monopolies. We also support much creative work through the tax deduction for charitable contributions, some of which goes to support cultural work of various types.

The key point here is to recognize that patent and copyright monopolies are government policies. They are not just the free market. When people point to upward redistribution that resulted to a substantial extent from these policies, they are not talking about the natural outcome of the market being left to itself.

This is just one of many ways where we wrongly say that we have been leaving things to the market in the last half-century. Our trade policy was very deliberately crafted to put manufacturing workers in direct competition with low-paid workers in the developing world, with the predictable outcomes for manufacturing workers here. We largely protected doctors and other highly paid professionals from the same sort of competition. As a result, our doctors earn on average twice as much as doctors in other wealthy countries.

We have also encouraged a badly bloated financial sector. This was done through a variety of policies, such as exempting the industry from the sort of sales taxes we charge on most other items. We also rushed in to bail out banks and other financial institutions when they faced bankruptcy as a result of their greed and incompetence during the housing bubble. Financial bailouts are not the natural working of the market.

I could add the Section 230 protection for giant social media platforms like Facebook and X, which makes some of our favorite billionaires even richer, is also not the free market. The New York Times and CNN are liable for defamation suits from third party content, there is no obvious reason the billionaire owners of these platforms need special help from the government. (For those who are interested, I’m talking about takedown requirements after being notified of defamatory material. This is similar to the requirements for allegedly infringing material in the case of copyright violations.)

Anyhow, I guess I’m primarily going through this spiel for myself. Those who follow my stuff know I’m recounting my book Rigged (it’s free), where I laid out the case at more length that we have structured the market to redistribute income upward.

I never did get any substantial number of policy people to take the housing bubble seriously. The housing bubble did that work for me when it collapsed and gave us the Great Recession. Even after the fact, the official story was that “no one” could have seen the danger the bubble posed to the economy. (Yes, that’s what my friends call me.)

Anyhow, we have an intellectual class that can be utterly impervious to the facts in front of their face. They could completely ignore an unprecedented run-up in nationwide house prices, creating trillions of dollars of bubble wealth that would vanish with the bubble.

Why should they let someone disrupt the convenient story that the upward redistribution of the last half-century was just the natural, if unfortunate, workings of the market? And incredibly most progressives have actually bought this line so that they find themselves attacking the market, rather than the way it was structured.

I have commented in the past that this is like attacking the wheel because a car ran over your brother. The market is a tool that is infinitely malleable. I will keep pressing that point, but I know it is a hard sell. Perhaps if democracy survives the Trumpian chaos, there will be room for some new thinking.