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| The Unnoticed Statistic
August 29, 2005
The Housing Bubble: Bad news, or sign of prosperity?
Boy, economists are sure obsessed about the housing bubble, aren't they? Pages and pages about the dire effects of the bubble popping--how horrible it's going to be, how we will all suffer, how the Fed should act quickly to raise rates and pop the bubble now before things get even worse.
But there's a wonderful new paper which links the whole boom and bust thing to the question of productivity growth. It's called "The Anatomy of Start-Stop Growth," by Benjamin Jones and Benjamin Olken. (you can find an abstract of the paper here). Here's some excerpts:
....all but the very richest countries experience both growth miracles and failures over substantial periods.
....growth “miracles” and “failures” appear to be ubiquitous at ten and fifteen year time scales, with only the very richest countries immune from these dramatic fluctuations. Despite talk of poverty traps, almost all countries in the world have experienced periods of growth lasting a decade a longer during which they appeared to be growing fast enough to converge to the United States. Conversely, nearly all countries have experienced sustained periods of abysmal growth.
....The primary conclusion is that capital accumulation and utilization do not appear to explain large portions of the change in economic performance....total factor productivity, as the residual in growth accounting, is left as the primary explanation for structural breaks in growth, particularly accelerations.
the results in this paper suggest that TFP is much more important for growth than capital accumulation, even in the short and medium run – where factor accumulation could have,in theory, played a large role.
Let me draw some implications from the paper.
1) Every country has booms and busts--it's normal.
2) What drives the booms are accelerations in productivity growth, not increases in investment.
3) To make sure that your booms are bigger than your busts, pay attention to productivity.
Conclusion: The U.S. has had an enormous productivity boom in recent years, and some of these gains went into housing. The biggest danger to the U.S. economy is not the end of the housing boom, but a slowdown in technological and organizational change. Adaptability wins in the end.
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Any way you look at it rising home prices they are inflationary and a Fed target. The economic impact of the hurricane only ads to the inflation problem. The call for the Fed to stop hiking rates is merely a psychological one having little to do with macroeconomics. However, I suspect at the moment the Fed is more concerned with a run on money in the exodus out of New Orleans and the potential for people to max out home equity lines of credit backed by homes that are now destroyed.
Posted by: Mark Mahorney at September 1, 2005 05:02 PM
People crack me up when the talk about how the cost of one commodity like housing, or more often today, gas causes inflation. The cost of all goods combined is equal to the amount of money in the system. If the price of oil goes up, the price of everything else must fall--Unless the fed pumps more money in the system by buying stuff (usually bonds but toothpaste would work just as well.) with money that has never been spent before. People get all worried about inflation like it is some sort of power unto itself when in fact the Fed almost has absolute control over it. The only thing holding the Fed back an ignorant public and the politicians who have to listen to them. In countries where their money supply is not expected to spur growth they do have absolute control over inflation. The housing boom is a supply and demand issue. One only needs to look at Metro Detroit to see this. There is no boom here.
Posted by: Joe at September 3, 2005 08:36 AM
You need to address the issue of the % of buyers of homes and investment property that have got them selves up to there eye balls in low variable intrest debt! Americans buying homes they can't afford if the rate was 5% but can because they qualifyed at a 1% teaser rate to get into the home , What happens when the rates adjust and the payment goes to the moon? how about getting a 1 million dollar loan with no income verification? "Just tell us what you make and if your credit is good we will lend you the money" Then the bank just sells the paper to Fannie mae and Freddie mack as investment grade paper and they inturn put it out to the bond market. My sugestion is to do a little homework!
Posted by: steven at September 15, 2005 08:21 PM
The cost of all goods combined is equal to the amount of money in the system. If the price of oil goes up, the price of everything else must fall--Unless the fed pumps more money in the system by buying stuff (usually bonds but toothpaste would work just as well.) with money that has never been spent before.
This analysis ignores the importance of velocity in determining the actual size of the money supply. To increase the money supply either money has to be injected into the economy, or transactions can simply happen quicker. Can there be any doubt that advances in commercial and banking technology have vastly increased the money supply in the last twenty years? Furthermore, I would like to see the product or commodity that is coming down in price. Real life examples of compensatory falling prices don't seem common.
Posted by: Mark Bishop at September 29, 2005 10:31 AM