An excellent Ramesh Ponnuru piece on the crash of 2008
Marcus Nunes sent me what might be the first mainstream media article to correctly describe what went wrong in 2008. It appears in the National Review, one of those conservative magazines that Paul Krugman thinks only publishes articles written by gold bugs and austerians.
Ramesh Ponnuru relies heavily on the views of quasi-monetarists like David Beckworth, Josh Hendrickson and myself. And he gets it right. (I hope this doesn’t sound condescending, but the MSM often doesn’t quite understand monetary economics, as the field is full of counter-intuitive arguments and subtle distinctions that are hard to grasp.)
Josh Hendrickson””an economist at the University of Toledo, and like Beckworth a right-leaning blogger””has shown that the Fed did a pretty good job of stabilizing the growth of nominal income at roughly 5 percent per year during the “great moderation” that lasted from the mid-1980s until the current recession. (Although Beckworth notes that growth was slightly above trend during the housing boom, for which he faults the Fed.) Most debts””notably, most mortgage debts””are contracted in nominal terms, with no inflation adjustment. If people are used to 5 percent growth in nominal incomes each year and make their arrangements accordingly, then an unexpected drop will make their debt burdens heavier and also make them reluctant to make plans for a suddenly uncertain future.
That’s what happened during the recent crisis. Scott Sumner””yet another right-of-center econoblogger, this one based at Bentley University””often notes that in late 2008 and early 2009, we saw the sharpest fall in nominal income since 1938. In his view, much of what we think we know about the recession of 2007-09 is wrong. Not only has money not been loose since the crisis began, but tight money is the fundamental reason the recession was so severe and the recovery has been so halting. He argues that it was more fundamental than the housing bust, since residential-construction employment started falling long before the crisis hit.
The article is entitled “Not Enough Money: Why QE2 Worked.” Sorry, I can’t find a link.
Karl Smith should be much more famous. Here he criticizes Paul Krugman’s defense of the liquidity trap.
I wrote an article for the Adam Smith Institute called “The Case for NGDP Targeting.” I can’t find it online, but they have paper copies.
Tags: conservatism
19. March 2011 at 13:02
Apparently, the article (“Not enough money: why QE2 worked”) is subscriber only.
19. March 2011 at 13:15
Ramesh Ponnuru I hope has a good PR guru, to get him some air time in right-wing outlets. The name “National Review” carries a lot of weight. I wish an argument could be won on its merits, but maybe people seem to take their cues from “brands” if you will.
Aggravating that the article is not online. Maybe soon, or maybe it will get reposted somewhere.
19. March 2011 at 13:44
To everybody
If you want a copy of the article (actually the whole magazine) just send me an e-mail and I´ll attach it on the reply;
joaomarcus.marinhonunes@gmail.com
19. March 2011 at 14:16
Lorenzo, That’s right.
Benjamin, We are making progress.
Marcus, Thanks for that offer.
19. March 2011 at 14:36
It’s not just macro that journalists don’t understand, the laws of supply and demand are pretty much terra incognita for them. How many would get the lessons in this video:
http://www.andrewklavan.com/2011/03/10/koc-your-public-sector-union-at-work-2/
20. March 2011 at 01:08
But this is false — as You must know by now.
“residential-construction employment started falling long before the crisis hit”
20. March 2011 at 01:11
Your housing “start” numbers have beeb bogus — they don’t reflect hoises actually under construction. See the graphs I posted here from Calculated Risk some time ago.
And your housing construction labor numbers have also been off.
20. March 2011 at 01:11
sorry for the Ipad typos
20. March 2011 at 01:19
Here’s the reality of the number of homes under construction, by month:
http://www.calculatedriskblog.com/2011/01/new-home-inventory-by-stage-of.html
20. March 2011 at 04:26
Link to the Ponnuru article:
https://mail-attachment.googleusercontent.com/attachment?ui=2&ik=76dc07e752&view=att&th=12ed3348df970f03&attid=0.1&disp=safe&zw&saduie=AG9B_P9wJ6ie3jdkIdkvfm7M7Yyg&sadet=1300623817580&sads=qHa22bsLj7n8-gkszUtZK8iUjBU&sadssc=1
Courtesy of commenter Lawrence Indyk
20. March 2011 at 04:53
Patrick, I agree.
Greg, I don’t agree, and the data you link to supports my argument, indeed I use that graph in my PowerPoint presentation. Both housing starts and housing completions fell sharply before the crisis his.
I seem to recall that employment in residential construction also fell sharply, although total construction employment was held up by the booming commercial RE sector. So I think you are also wrong there.
If you are going to claim my numbers are wrong, you need to present some evidence showing they are wrong. If you don’t, I’ll assume you don’t have such evidence. So where is it?
I answered all your earlier criticisms in a follow-up post, and no one was able to show I was wrong. Bob Murphy tried but failed.
BTW, I was just in the OC area, and found the housing market was booming. You said it crashed. Who’s right.
Marcus, Thanks for the link.
20. March 2011 at 05:03
Scott
I suggest you put the link to Ponnuru in an update to your post. Many may not read the comment section in detail.
20. March 2011 at 06:23
[…] “Not Enough Money” that was published in the latest issue of National Review Online (NRO) to Scott Sumner. Scott did a post on it. Than I remembered sometime in the second half of 2009 I had put in picture […]
20. March 2011 at 06:32
Marcus, It doesn’t work when I click it on. I get gmail instead.
20. March 2011 at 06:40
Sorry. It only works from my computer! We´re back to the e-mail option that some have already received.
20. March 2011 at 08:17
Why is it suprising that there was a decline in residential contruction employment prior to the financial crisis?
The writing was on the wall by 2006, so such construction declined. Then the delinquencies started to pile up and eventually led to the financial crisis. Seems like a normal time frame to me.
And as noted, “although total construction employment was held up by the booming commercial RE sector”.
The coming ARM problems in the commercial RE sector will be another crisis. And almost in the same time frame as the residential crisis.
21. March 2011 at 07:40
EMichael, I didn’t say it was a surprise, I said the huge drop in residential construction had little impact on the unemployment rate from January 2006 to April 2008.