About that “malinvestment”

When I first started blogging, a number of Austrian commenters told me the real problem was not tight money.  Rather there had been “malinvestment” in housing, especially in the “sand states”.  The recession was the price we had to pay for all of this poorly thought out investment.

That theory never even made sense in 2009.  If the problem was malinvestment in housing, then resources would have shifted to the other 95% of the economy. Instead, output fell in almost all sectors.  (I’m referring to 2008-09; resources did shift to other sectors during the 2006-07 construction slump.)

Today it makes even less sense. The NYT has an article on the housing market in North Las Vegas, which was the epicenter of the bust. It’s now booming:

Amazon has opened two huge centers in North Las Vegas for distributing goods and handling returns, bringing thousands of jobs. A third facility is on the way. Sephora, the cosmetics company, recently broke ground here for a giant warehouse.

With nearly a quarter-million people, North Las Vegas is one of the fastest-growing cities in the country. It’s also young — the average resident is just 33 years old.

The Times reports that prices are soaring and homes typically sell in three days.

I agreed that there had been some excessive housing construction in the inland portion of the sand states, perhaps because builders expected the US population in 2050 to be 50 million higher than is now predicted.  (Recall that 2006 was the year of the immigration crackdown.)  But I argued that these cities were fast growing, and this problem was relatively mild.  In my view the malinvestment is better termed “too early investment”—some houses were built a few years before they were needed.  The Austrian counterargument was that these houses would remain empty for decades, and eventually depreciate sharply (in a physical sense.)  It looks like I was closer to the truth.

I would add that Kevin Erdmann’s take on the crisis is being increasingly confirmed by events:

Jazzmine Guiberteaux moved here a few years ago from Oakland, Calif. — one of many California real estate refugees who headed to Nevada in search of more space and cheaper housing. But she is increasingly being priced out.

A 35-year-old mother of two, with another child on the way, she works in a clothing shop and drives for Uber to earn extra cash. She has had to move three times in five years.

Ms. Guiberteaux’s previous landlord terminated her month-to-month lease on Mother’s Day. It took her 10 days to get a new place. “The rent is higher,” she said. “But it’s in a better neighborhood.”

When Kevin’s book comes out in a few months, it may end up being the most important housing book of the decade.

BTW, the NYT has this picture of a downtrodden resident, who is forced to rent rather than own:
Screen Shot 2018-09-14 at 8.34.30 PM

You can see the picture more clearly in the NYT article. I couldn’t help but notice the Pottery Barn look.  The downtrodden have certainly come a long way from the 1960s, when the NYT carried pictures of shacks in Appalachia and slums in the Bronx.

I know, I’m a heartless out of touch elitist who doesn’t understand how much people are suffering.

PS.  Ten years after Lehman, market monetarists should feel really good about how things are playing out.  Not only is the boom in the housing market tending to confirm the MM/Erdmann view of the world, but more and more policymakers are talking in terms that sound suspiciously market monetarist.  Clare Zempel directed me to an article discussing Janet Yellen’s take on what we should do next time:

Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.

Does that remind you of anything?  Hint, here’s my new California license plate, which I picked up a few days ago:

Screen Shot 2018-09-11 at 2.08.35 PMOh, and NGDP just keeps chugging along at a fairly stable rate.

There may be no blogging tomorrow, as I plan to attend a 13-hour film in crime-ridden Santa Ana.  Wish me luck.

 


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50 Responses to “About that “malinvestment””

  1. Gravatar of B Cole B Cole
    14. September 2018 at 19:23

    Nice post, would have liked to have seen a paragraph on property zoning included.

  2. Gravatar of Christian List Christian List
    14. September 2018 at 20:34

    she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.

    Sounds very pro-cyclical to me and not like NGDPLT at all.

    I also thought that it’s not really possible to remain above the historic growth rate trend line, at least not in a sustainable way. So lost time is lost time that can’t be made up for.

    I also assume that you have chosen the license plate, a random plate with letters in that exact order seems extremely unlikely.

  3. Gravatar of ssumner ssumner
    14. September 2018 at 22:15

    Christian, You are right that it would be pointless today. But if adopted as we go into the next recession, it would be very useful.

  4. Gravatar of Kevin Erdmann Kevin Erdmann
    14. September 2018 at 23:56

    Thanks for the kind words, Scott.

    I think you may have an unnecessary caveat here. Resources didn’t shift from construction to other sectors in 2006 to 2007 either. Real GDP growth dropped by about 1% or a little more during that time. But GDP excluding residential investment grew about 3 1/2% annually through that period. Construction dropped significantly, but that production just disappeared. It didn’t shift anywhere.
    https://fred.stlouisfed.org/graph/?g=ldBD

  5. Gravatar of Vaidas Urba Vaidas Urba
    15. September 2018 at 00:52

    Scott,

    10 years after Lehman, the epicycles are still being debated:

    https://www.nytimes.com/2018/09/14/opinion/the-credit-crunch-and-the-great-recession-wonkish.html

  6. Gravatar of Bob Bob
    15. September 2018 at 06:11

    You are right that the downtrodden have far more than they used to. But when it comes to housing, we have to remember that cheap and small is difficult to get these days in many parts of the country, for a combination of regulation and markets for new houses. Many a municipality that wants to stop “the poor” from moving in changes zoning laws and happily uses a variety of tricks to make sure cheap houses get demolished, and no builder in a strong market is going to make something that isn’t focused on the affluent. This makes being poor pretty expensive.

  7. Gravatar of Marcus Nunes Marcus Nunes
    15. September 2018 at 06:13

    @ KE The fall in RGDP growth in 06-07 was in large measure a reflection of the negative supply shock (oil). Also, while employment in residential construction fell, employment in nonresidential construction increased.

    @SS Like all Central Bankers, Yellen has become “revisionist” after leaving. She forgets that by her actions, she presided over what I call the “Yellen Slump” between mid-14 and mid-16, when NGDP growth fell from a little over 5% to 2.3%

  8. Gravatar of Marcus Nunes Marcus Nunes
    15. September 2018 at 06:33

    Interestingly, when a similar NGDP growth fall (from 6% to 2.1%) happened in 00-01, the economy experienced a recession!

  9. Gravatar of ssumner ssumner
    15. September 2018 at 07:12

    Kevin, You said:

    “Resources didn’t shift from construction to other sectors in 2006 to 2007 either.”

    I base that claim on a stable unemployment rate. You’d expect RGDP growth to slow a bit during “re-allocation”.

    Thanks Vaidas.

    Bob, Yes, I agree. By the way, my comment here was a throwaway joke, not an overall appraisal of poverty in America.

    Marcus, Good points.

  10. Gravatar of ssumner ssumner
    15. September 2018 at 07:19

    Vaidas, I’ve been meaning to do a post on Bernanke’s paper, but now I’ll look at Krugman’s argument too.

    I think Krugman is right about Bernanke, but wrong about housing, for all the reasons I’ve already identified.

  11. Gravatar of Brian Donohue Brian Donohue
    15. September 2018 at 09:55

    Very good sentences:

    “In my view the malinvestment is better termed “too early investment”—some houses were built a few years before they were needed.”

    Good post and comments.

  12. Gravatar of Kevin Erdmann Kevin Erdmann
    15. September 2018 at 13:34

    Marcus and Scott, in terms of rates of change, non-construction employment had a trend shift down at the same time construction employment did.

    https://fred.stlouisfed.org/graph/?g=le1o

  13. Gravatar of Kevin Erdmann Kevin Erdmann
    15. September 2018 at 13:36

    Oops. There was a small error in that graph.

    https://fred.stlouisfed.org/graph/?g=le1y

  14. Gravatar of E. Harding E. Harding
    15. September 2018 at 15:19

    Interesting interpretation.

    If the problem was malinvestment in housing, then resources would have shifted to the other 95% of the economy. Instead, output fell in almost all sectors.

    They would have, but at a slower pace than the decline in housing. Also, malinvestment in housing tends to result in malinvestment in the areas the housing is built. Also, for a good example of a depression surely caused by malinvestment, look at the 1990s Eastern Bloc after the fall of Communism.

  15. Gravatar of Kevin Erdmann Kevin Erdmann
    15. September 2018 at 15:37

    That Krugman post is interesting, because it hinges on the key problems with conventional narratives. He has the premise that there had been too much residential investment, caused by loose credit, so that the drop in residential investment requires no explanation. And, he sees the post-crisis credit regime as a return to normalcy. So, he says:

    “Let me focus specifically on investment, which is what you’d expect a credit crunch to depress — and which did indeed plunge in the Great Recession. First, there was the housing bust, which led to a huge decline in residential investment, directly subtracting around 4 points from GDP:
    So can we attribute this decline to credit conditions? If so, why did residential investment remain depressed five years after credit markets normalized?”

    He shows a graph where residential investment takes a sharp downward turn in early 2006 and continues linearly until 2009. He can imagine a decline in residential investment happening because of a credit or demand shock. But, it is simply outside the Overton Window to think that residential investment could have continued on in 2006 without dropping like it did. Without those presumptions, he would naturally look at that graph and, as an immediate intuitive response, wonder if there was a shift in aggregate demand in early 2006 that caused it. The graph is right there in front of him, and those presumptions about housing supply veto an obvious inference of the graph that he would consider in any other downturn. Bernanke is right to point to the panics of late 2007, and the reason those panics happened is because there had been more than a year’s worth of harvesting equity, walking away from escrow on newbuilds, etc. building up to them, which Krugman’s graph would make obvious to anyone who wasn’t predisposed to ignoring the macro signals coming out of the construction market.

    If he didn’t have those presumptions, it would, in fact, seem perfectly natural to start to see financial panics in late 2007 with only that graph of residential investment to go on. If you showed him that graph and told him it was from another country, and said there were financial panics from late 2007 to late 2008, he’d say, “Well clearly there was some sort of shift in early 2006 in aggregate demand that wasn’t effectively stabilized.”

    Then, he asks why residential investment didn’t recover after the crisis, as if the post-crisis credit market was a return to normalcy. Just because spreads went back down doesn’t mean credit markets went back to normal. What Krugman doesn’t account for is that the most extreme shift in credit markets for this whole period happened from late 2008 to today, when we made it nearly illegal to lend to roughly the bottom half of the homeowner market. There is nothing normal about the post-2008 credit market. But, the false notion that credit created the boom led to the even more false notion that any resting place where credit markets landed after 2008 was a return to normalcy.

    The presumptions about housing supply and the causal power of credit markets in 2005 are what make those mysteries for Krugman in 2007 and after.

  16. Gravatar of Rajat Rajat
    15. September 2018 at 21:26

    I had a similar reaction to Christian List. Scott, you consider NGDP targeting to imply counter-cyclical monetary policy in keeping with the dual mandate, often suggesting that those who argue for a hotter economy right now in 2018 (including accepting higher-than-2% inflation) are arguing for a more pro-cyclical policy than a single mandate, which you think doesn’t make any sense. I agree. But even if Yellen’s proposal were adopted not now but at the start of the next downturn, it would – to the extent it was ineffective in reducing the size of the downturn – imply a pro-cyclical policy. After all, in that link, Yellen said:

    The Fed could “emphasize that it anticipates that the additional stimulus provided by this approach will result in a period of exceptionally low unemployment and that inflation would likely overshoot … perhaps emphasizing the desirability of compensating for a previous shortfall … It could articulate that the FOMC’s objective is to achieve inflation near 2 percent, on average, over the business cycle.”

    “Exceptionally low unemployment” suggests that she means allowing the economy to run hotter for longer in order to push UnN below the natural rate. This makes me wonder whether level targeting is a good idea. I can see how it increases the credibility of the target and thereby reduces the impact of demand shocks, but at the cost of creating its own instability. Could the net effect be negative? The ‘counter-cyclical’ aspect of NGDP growth targeting is not really about cycles in AD; it’s about seeking to offset supply shocks. That makes sense to me and I think is consistent with the dual mandate. But I’m not convinced that level targeting is.

  17. Gravatar of Rajat Rajat
    15. September 2018 at 21:42

    I guess a more favourable way to interpret Yellen’s comments is that as a New Keynesian Phillips Curve adherent, she cannot envisage a world where inflation runs above target while unemployment is not below the natural rate. If she had just left “exceptionally low unemployment” out of it and focussed on achieving above-target inflation, such that the PLT target was met and unemployment gracefully arrived at the natural rate at the conclusion of the ‘overshoot period’, then maybe the level targeting aspect of her proposal would not be destabilising.

    PS. Hope you made it back in one piece!

  18. Gravatar of ssumner ssumner
    16. September 2018 at 09:11

    Kevin. You said:

    “Marcus and Scott, in terms of rates of change, non-construction employment had a trend shift down at the same time construction employment did.”

    But that in no way indicates a failure of re-allocation, as you would have expected that slowdown even if there had been no housing crash. Employment growth in 2005-06 (about 2%) was way above trend and not sustainable (especially after the crackdown on immigration.)

    Rajat. You said:

    “to the extent it was ineffective in reducing the size of the downturn”

    Yes, but the whole point is that NGDPLT will greatly reduce the severity of the initial downturn. Otherwise it’s not worth doing.

    But I do agree with your second comment, she somewhat misses the point.

  19. Gravatar of S D S D
    16. September 2018 at 12:46

    Nice post Scott.

    I’m sure you’re right, but a few statistics on home vacancy rates would make your argument a lot more solid than anecdotal stuff from newspapers.

  20. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    16. September 2018 at 14:18

    I will write “Ngdpltoon2” on the ground of Splatoon2’s stage by Kugelschreiber

  21. Gravatar of Kevin Erdmann Kevin Erdmann
    16. September 2018 at 18:23

    I will probably do a blog post on this, because I’m finding some interesting data.

    My point would be that it isn’t useful to think of the economic shifts in 2006 in terms of sectors. The shifts were geographic. There were many places where the economy motored on as if nothing had happened. And there were some places where employment growth dropped sharply.

    The places where it dropped sharply were the places where population grows, and where construction employment was high. Those places had large drops in construction employment growth and total employment growth. There was no shift out of construction into other sectors there. There were just hundreds of thousands of households that didn’t move to those cities, who otherwise would have.

    The thing that makes it especially difficult to parse is that, in aggregate numbers, this didn’t lead immediately to declines in employment, because the places more sharply affected were places with high population growth, and thus high employment growth. So, the pre-recession hit was focused on places that went from 4% employment growth down to 2% or 1%. And, that didn’t result in unemployment, because the potentially unemployed workers didn’t move.

    I’ll let you know when I have a post up. I think there could be a couple of interesting points of fact here that I haven’t uncovered yet.

  22. Gravatar of Matthew Waters Matthew Waters
    16. September 2018 at 22:58

    Kevin,

    We talked about credit standards in 2004-06 before. My dad bought a house in foreclosure from “MLMI Trust Series 2005-BC3.” I also reread Big Short recently and I was curious to see the prospectus for this MBS.

    Here is the registration statement filed with the SEC for MLMI Trust Series 2005-BC3:

    https://www.sec.gov/Archives/edgar/data/809940/000095012305011607/y12663e424b5.txt

    In previous conversations, I believe you put too much emphasis on LTV and FICO scores. For this subprime MBS, 43% of the loan pool was interest-only and nearly all of the rest had teaser rates (2/28 or 3/27 LIBOR with average initial rates below 3%). Stated documentation was 44%.

    Even for full documentation, more subtle factors hurting underwriting were common. Occupancy fraud was common, where borrowers said they occupied a home that was really an investment property. The average LTV of 82% is misleading when the borrower got a piggyback second lien mortgage or “silent second” for the down payment. Finally, mortgage brokers removed the dire warnings about criminal mortgage fraud.

    Subprime mortgage defaults increased beyond previous subprime loans. While the underwriting standards were technically the same, two things were different:

    1. Changing characteristic of loans, with IO, 2/28 and 3/27 loans.

    2. Changed incentives at the ground level. All incentives became based around volume versus the subprime underwriting standards.

    All that said, merely bad investments (or “malinvestment”) should not have caused the steep NGDP delcine.

  23. Gravatar of Matthew Waters Matthew Waters
    16. September 2018 at 23:18

    “What Krugman doesn’t account for is that the most extreme shift in credit markets for this whole period happened from late 2008 to today, when we made it nearly illegal to lend to roughly the bottom half of the homeowner market.”

    Also, I disagree strongly with the “illegal” part of this statement. Truly private subprime lending never became outlawed. But there was no truly private capital available for these loans after 2007.

    The maturity mismatch of banking has only existed with government guarantees. The fully private and unregulated “shadow banking sector” did not work out very well. Money Market Funds and Prime Broker accounts suffered runs and the Fed guaranteed the entire shadow banking system. The shadow banking system then ceased to exist, as Goldman Sachs and Morgan Stanley became Bank Holding Companies.

    These government guarantees required capital and underwriting standards. But ideally, all government guarantees should cease, including GSEs, FDIC and discount window. Monetary policy then needs to be absolutely unquestionable in its ability to meet NGDP targets.

  24. Gravatar of Kevin Erdmann Kevin Erdmann
    17. September 2018 at 00:33

    Matthew, I don’t really disagree with anything in your first comment.

    On your second comment, the decline in low FICO score lending and the concurrent decline in low tier home prices are so extreme, and anecdotal evidence is also pretty stark. I’m not really interested in trying to convince you if it’s not obvious to you.

  25. Gravatar of Benjamin Cole Benjamin Cole
    17. September 2018 at 01:56

    Speaking of potential malinvestment…although maybe this will work….

    “Beijing has affirmed the leading role of state firms in China’s technological and economic progress amid the escalating trade war with the United States, with a major nationwide conference planned for the end of September.
    Two sources have confirmed to theSouth China Morning Post that the conference will be chaired by China’s top economic adviser and will showcase Beijing’s strong support for state-owned enterprises (SOEs). Washington’s strong objection to the prominent role of SOEs in the Chinese economy is at the heart of the trade conflict.
    Vice-Premier Liu He – President Xi Jinping’s top economic adviser and chief trade negotiator with the US – is expected to urge China’s state enterprises to “make breakthroughs in key aspects” of cutting-edge technologies and call on them to “take a leading role at the front” of the country’s drive to make technological progress, according to one source involved in the planning for the conference.
    Speaking to the Post on condition he not be identified, the source said the meeting would highlight the role of SOEs in advancing technological innovation as the government pushes ahead with its plan to play a large, if not dominant, global role in 10 major hi-tech sectors by 2025.”

    —-30—-

    Beijing is sending out conflicting signals, btw.

    Liberalization and SOEs to the fore!

    My guess is the China Communist Party SOEs win any battles with the liberalists. If there are any.

  26. Gravatar of John Hall John Hall
    17. September 2018 at 05:14

    I thought about this post a bit over the weekend, but I’m still not sure the best way to make clear what my issues are…

  27. Gravatar of Ralph Musgrave Ralph Musgrave
    17. September 2018 at 06:07

    Austrians are like Jehova’s Witnesses: it’s impossible to get them to shut up. I’ve been tempted to shoot some of them, but have resisted the temptation so far….:-)

  28. Gravatar of Matthew Waters Matthew Waters
    17. September 2018 at 07:19

    Kevin,

    I didn’t dispute lack of low FICO score lending. It certaintly had something to do with decline in house prices. Also, subprime lending could be okay without the misplaced incentives from securitization.

    The “illegal” part seems odd to me. The market can certainly sour on a certain form of investment after a string of losses. The prices or primary investment could go down below the ideal level of prices and investment.

  29. Gravatar of mpowell mpowell
    17. September 2018 at 08:10

    Kevin/Matthew,

    It seems like the question is how best to describe the drop in low FICO score lending. From previous comments from Erdmann, I think he blames Dodd-Frank for a lot of this. That would explain his ‘illegal’ framing and would also support his broader claim. A different story is that government guarantees subsidize home loans, making them less expensive for home buyers. But those subsidies have been discontinued for low FICO scores. In this story, there is nothing particularly wrong with the low end of the housing market, except that the biased arrangement of government guarantees are providing an unfair subsidy to high FICO score home purchasers in comparison to low FICO score would be buyers (many now renting instead).

  30. Gravatar of ssumner ssumner
    17. September 2018 at 08:45

    SD, I’ve read the manuscript for Kevin’s book, and it will have a mountain of data.

    Ben, I hope the paragraph you quoted didn’t come from the fake news media.

    Matthew, i agree that subprime lending would have declined sharply even without a government regulations discouraging the activity.

  31. Gravatar of Lewis Lewis
    17. September 2018 at 09:48

    Kevin,
    Will your book also include data on public investment and pensions? My impression is that a lot of local governments were really counting on high property prices to fund spending and pensions by property taxes. I would be interested in hearing more about that story.

  32. Gravatar of Dan Culley Dan Culley
    17. September 2018 at 12:45

    Scott, I’m not sure I follow the full refutation. Take a simpler example of an economy that is half corn farming and half other activities. For many years, farmers have harvested 100, and then replanted 20 as seed corn, each of which produces 5 viable ears. Consumption of corn is thus 80 and is in dynamic equilibrium.

    Now, along comes a scientist who claims he has invented a more efficient planting method, so that only 10 ears of corn seeded will produce a harvest of 100. Suppose all the farmers believe this, and that preferences are such that they shift everything into present consumption, taking 90 and only replanting 10. There would be an immediate spurt of growth, as those additional 10 ears lead other sectors to invest and expand production themselves.

    Now further suppose that the new planting method didn’t pan out. Instead of the normal 100, the harvest is only 50. GDP will certainly shrink, as the production possibility frontier has shrunk. The other sectors that would have sold goods to the farmers now have to lower their prices. If all of their production were sunk, then I take your point, output should indeed stay the same in other sectors just at lower prices. But if they have nonzero marginal costs we should expect some reduction in production, no?

    And the economy would need to continue on at these lower levels, with the harvest growing slightly each yea, until the situation returned to the previous equilibrium.

    Replace corn with mortgages on new properties in Central Florida and new planting with exotic CDOs, and it doesn’t sound that far off the housing crisis.

    That’s not to say tight money didn’t also play a role. But it seems odd to totally dismiss malinvestment as a contributing factor.

  33. Gravatar of Benjamin Cole Benjamin Cole
    17. September 2018 at 16:53

    https://m.scmp.com/economy/china-economy/article/2163927/trade-war-escalates-china-intensifies-role-state-owned

    The SCMP has been pretty good…

  34. Gravatar of Benjamin Cole Benjamin Cole
    17. September 2018 at 19:56

    Stray thought, OT but in the ballpark re malinvestment.

    In the West, we thought that as China modernized and was exposed to Western business techniques and free markets, it would also Westernize.

    Instead China has become increasingly repressive, suppressive and oppressive since Tiananmen Square in 1989, reaching fresh nadirs presently under President-for-Life Xi.

    So what happened?

    Okay, multi-nationals moved into China, seeing a manufacturing base, and began to cooperate with the Chinese Communist Party, as they had to.

    Once multi-nationals were into the Sino sphere, the supply lines further developed, and the multi-nationals became very committed to stability in China, which easily trumps human rights as a concern for multi-nationals. The multi-nationals must act carefully to preserve their access to the huge China market and manufacturing base.

    So multi-nationals became Beijing apologists and also strident “free traders.”

    To say the least, multi-nationals are heavy financiers of US media, think tanks, and academia. And under new law, multi-nationals can commit unlimited funds to US elections. Obviously, multi-nationals deploy lobbyists in platoons in DC.

    So we have reached the strange current circumstance, where the “US” Chamber of Commerce has become a virtual mouthpiece for the Chinese Communist Party, and avidly beating the drums against tariffs on China-made goods.

    So how does this tie back to malinvestment?

    The Chinese Communist Party wants to entrench itself, and now has allies in the multi-nationals and often works hand-in-hand with multi-nationals on developing industry. I expect state-owned enterprises, and central planning to persist in China for the foreseeable future, often enabled by multi-national technical knowhow.

    Also, I suspect dissent has become impossible in China. With the advent of radically improved surveillance technology, and a powerful dedicated state bureaucracy, dissent cannot exist. There is no media in China, only CCP propaganda.

    Will China work?

    They have a good central bank. They can probably grow at 5% GDP for a long time. Some malinvestment will probably not matter much.

    I expect China to eclipse the US as an economic player on the world stage. They may ossify somewhere along the line.

    Making predictions is hard, especially about the future.

  35. Gravatar of Karim Karim
    18. September 2018 at 01:51

    One concept in the framework of nominal GDP targeting I’m struggling to understand and hoping someone could help me out with: In ex-US countries, would the central bank target nominal GDP in USD or domestic currency? (note currency fluctuations would have a significant impact, let alone full-fledged sudden devaluations)

  36. Gravatar of P Burgos P Burgos
    18. September 2018 at 05:34

    Admittedly a little off-topic, but not totally off-topic, did anyone read Krugman’s post about “what we know about economics?” Does Sumner have a similar piece of writing somewhere? It would seem that the IS-L-M model that Krugman praises is a lot more consistent with a monetarist view of short term fluctuations in economic activity than with the Austrian malinvestment view.

  37. Gravatar of P Burgos P Burgos
    18. September 2018 at 05:52

    Another thought; isn’t the one of the lessons from the political economy of both the Fed and elected politicians in the US that we need more pro-cyclical policy in order to get anywhere close to full employment? I think one of the positive developments of the current Fed board is that they seems to be moving in the direction of realizing that they their models don’t actually give them much confidence of what a non-accelerating inflation rate of unemployment actually is. So if you cannot rely on the models, it seems that the only way to figure out that NAIRU is to actually be aggressively pro-cyclical (at least on the upswing) until you start seeing inflation going higher (or maybe some market based forecast of inflation).

    Maybe another way to put it is that NGDPLT strikes me as something that when first implemented would necessarily be anti-cyclical in a down-turn and pro-cyclical in an expanding economy, because when first implemented there will be a little bit of hesitancy of people to believe the monetary authority, and to prove their commitment the monetary authority will have to be pro-cyclical to gain the trust of markets. Even after that initial round or two of trust building, I still suspect that it will be the case that recessions will catch the monetary authority a little flat footed at times, leading to a dip in nominal GDP growth for at least a little bit, requiring the monetary authority to be stimulative even when the economy is growing to make up for that lost NGDP growth.

  38. Gravatar of W. Peden W. Peden
    18. September 2018 at 11:31

    Scott,

    I note that the Hypermind prediction has risen above 5% for the first time…

  39. Gravatar of Bob Murphy Bob Murphy
    18. September 2018 at 14:51

    Scott Sumner wrote: “In my view the malinvestment is better termed “too early investment”—some houses were built a few years before they were needed. The Austrian counterargument was that these houses would remain empty for decades…”

    Scott, can you give me one example of an Austrian saying that?

  40. Gravatar of Mark Paskowitz Mark Paskowitz
    19. September 2018 at 05:19

    Scott,

    Say houses are built for 100, with the expectation they’ll be sold at 110. Then the market crashes, builders and initial investors go bust, and banks take losses on loans. But eventually the market finds its level, and the houses fill at a value of 70. I think this would qualify as malivestment, but it could also be seen as “too early investment”.

    Say things recover, and values climb to 80 or 90. People who came in at 70 would get priced out. But the initial 100 was still poorly invested.

    I’m not claiming this is the case, but it seems it could fit the facts as you set then out here. And anecdotally, I know a number of people who still say they’re underwater on their mortgages. But I don’t know what the market-level price data looks like. But I expect that you (or at least Kevin) have thought of this already, so I’d be interested in hearing more. In any event, isn’t “too early” just a mild form of “mal” rather than a fundamentally different thing?

    Thanks

    Mark

  41. Gravatar of Kevin Erdmann Kevin Erdmann
    19. September 2018 at 07:21

    Mark, the problem is seeing the bust as inevitable or a return to normalcy. We imposed a permanent backward shift in liquidity on the housing market. Sort of like if we closed down stock markets and then claimed that there had been malinvestment because owners of Apple shares couldn’t find willing buyers at the old price.

    My view differs somewhat from what I think Scott is saying here. There were never homes built “too soon”. In every place where prices were high it was because homes weren’t being built soon enough.

    In a city like Atlanta, homes that used to sell for 100 went to 70 because the ownership class has been publicly restricted, so there is a liquidity premium on real estate and the people who can own those homes earn higher returns because of it. Since rent is somewhat sticky, prices had to fall to equilibrate.

    Cities like Phoenix were partially successful because they were locations where middle and lower middle class households could migrate to and own homes. The regime shift cut off that competitive advantage. So, in Phoenix, it only appeared that there were too many homes for a few years in 2007 and after because the decades-long flow of migrants was suddenly broken. First, there weren’t enough homes in Phoenix (because the migration flow suddenly spiked as households flooded out of California where there really aren’t enough homes). That made prices rise. Then there was a demand shock that was stronger than the lack of supply, and the dislocation caused by prices falling back to replacement value only made matters worse.

  42. Gravatar of ssumner ssumner
    19. September 2018 at 15:54

    Dan, In your example the fall in production was caused by lower productivity. But the problem during the Great Recession was lower employment, not lower productivity. Falling employment is caused by lower NGDP.

    Ben, Why should I believe anything I read in the SCMP? You told me the press is fake news.

    Karim, Domestic currency.

    Burgos, If you want “full employment” then a pro-cyclical policy is the worst possible choice. You want a countercyclical policy.

    Bob, Go back to my comment section in 2009 and read Greg Ransom’s comments.

    Mark, Yes, I agree that too early investment is malinvestment.

  43. Gravatar of Bob Murphy Bob Murphy
    19. September 2018 at 19:29

    Scott,

    I spent 10 mins or so looking through your 2009 archives, but there was no obvious post to look through.

    So instead, I asked Greg Ransom directly if he remembers saying what you claimed. He responded (and gave me permission to repeat) “it’s not a thought I’ve ever had or ever would have.”

    So, would you mind giving me a different example, or finding where Greg actually said that?

  44. Gravatar of Bob Murphy Bob Murphy
    19. September 2018 at 19:31

    Just to make sure you see where I’m coming from, Scott: It seems pretty obvious that even if housing were a malinvestment, the owner wouldn’t sit on an empty house for “decades” as you claim. The owner would obviously let the price fall to get a renter in there, even if that implied a loss. After all, sunk costs are sunk. Austrians understand sunk costs.

    So, I’m arguing that no Austrian ever said what you claim.

  45. Gravatar of Kevin Erdmann Kevin Erdmann
    20. September 2018 at 08:36

    Given the conversation here, I was amused to run across this this morning:
    https://therealdeal.com/miami/2018/09/19/sunny-isles-beachs-ultra-high-end-condo-market-has-a-big-inventory-problem-report/

    Part of the problem is the language used by the real estate industry itself. This is just price stickiness. Frequently price stickiness is most problematic where supply has been obstructed and prices have risen far above cost. This language turns the problem upside down, making it look like too much supply is the problem. This leads to support for secularly constrained and cyclically unstable markets.

  46. Gravatar of P Burgos P Burgos
    21. September 2018 at 06:13

    Is there some sort of terminology that I am not understanding, or misusing? I guess that my basic contention is that the political economy surrounding inflation and employment is so biased in favor of avoiding inflation that unless you have a government and monetary authority that acts “pro-cyclically”, you will never get to full employment. Perhaps we are agreeing with each other, or not, I cannot tell. But isn’t a key tenet of NGDPLT that the monetary authority is committed to “acting irresponsibly” by allowing inflation to rise above the long-term trend target so as to make up for periods when inflation falls below target? That is it what I mean by pro-cyclical. Because at least in current parlance, wouldn’t a lot of people say that the Fed is acting pro-cyclically by allowing inflation to rise above 2% (not that this is good reasoning, just that a lot of people seem to think this way)?

  47. Gravatar of ssumner ssumner
    21. September 2018 at 14:42

    Bob, You said;

    “The owner would obviously let the price fall to get a renter in there, even if that implied a loss. After all, sunk costs are sunk. Austrians understand sunk costs.”

    Well then what was Greg’s point? He had dozens of comments about the horrors of ghost neighborhoods with nobody living in them. I don’t recall him saying the price will simply drop to equate supply and demand. He talked about “zombietowns” like Ladera Ranch. (Close to where I live now.)

    But then Austrians are like MMTers, I never seem to get their point.

  48. Gravatar of Bob Murphy Bob Murphy
    22. September 2018 at 08:50

    Scott wrote:

    “Well then what was Greg’s point? He had dozens of comments about the horrors of ghost neighborhoods with nobody living in them. I don’t recall him saying the price will simply drop to equate supply and demand. He talked about “zombietowns” like Ladera Ranch. (Close to where I live now.)

    But then Austrians are like MMTers, I never seem to get their point.”

    Scott, I’m just pointing out that you cited a position as “the Austrian counterargument” that sounded crazy to me. I asked what you meant, and you pointed me to one guy who wrote things in your comments in 2009. I asked the guy about it and he denied that he ever said such a thing.

    You’re acting like it’s the Austrians fault for being hard to pin down, but I think you’re being a bit unreasonable here. For the record, I don’t think any Austrian economist believed in 2009 that Las Vegas would be a ghost town for 30 years.

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