Kevin Erdmann on the housing “boom”

Kevin left this comment after my last post:

I will just add that if we asked someone to point out where reckless monetary policy led to a demand-side housing bubble, nobody looking at those last two graphs would pick the 2000s. Nobody. The entire public discussion of finance over the past 15 years has been a massive exercise in reasoning from a price change. It’s not even like there is a point to it but some people take it too far. There is simply nothing there besides reasoning from a price change.

NGDP growth at the peak in the 2000s barely even reached the average growth rate of post WW II, yet the description that is considered above a burden of proof is the one that sees this period as some sort of crazed bubble where debt and money were flowing out of control.

Marcus Nunes also made a good point:

Scott, I think there are several things wrong in this post!
You should reread your early Feb 09 post: GDP=Y+C+I+NX=Gross Deceptive Partitioning!

If we use that earlier post as a starting point, we’d begin by looking at NGDP instability.  Then we’d ask why RGDP instability deviated from that level during certain periods, such as the 1970s.  And almost by definition it would have to be due to non-procyclical prices, such as the oil shocks, or price controls, or perhaps AS shifting due to changes in expected inflation.  All three occurred during the Great Inflation.  In other words, the analysis of components was a sort of dead end in Marcus’s view, and he’s probably right.

Caroline Baum sent me a NYT story with “reasoning from a price change” implications. It is entitled “A Global Chill in Commodity Demand Hits America’s Heartland.”  To its credit they do also mention the previously popular “tax cut” theory:

The 37 percent drop in gasoline prices since the summer of 2014 is the equivalent of a $100 billion tax cut, providing much-needed relief while wages remain stuck.

Certainly falling commodity prices have different effects on different sectors, but as for overall RGDP?  That would be reasoning from a price change.

And finally, someone needs to tell Greg Mankiw that “objects in his rear view mirror may be closer than they appear”.  (And for the first and last time in my life I’m one ahead of Krugman on a list.)

Screen Shot 2015-10-26 at 5.08.54 PMYes, I know, it’s not textbook season.



12 Responses to “Kevin Erdmann on the housing “boom””

  1. Gravatar of Jim Ancona Jim Ancona
    26. October 2015 at 15:37

    It’s currently the #1 Bestseller in Macroeconomics! Congratulations!

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. October 2015 at 15:42

    ‘Yes, I know, it’s not textbook season.’

    I hear it will be in 2019.

  3. Gravatar of Kevin Erdmann Kevin Erdmann
    26. October 2015 at 18:38

    Congrats on the book

  4. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. October 2015 at 20:19

    “Number 1 new release in Macroeconomics”: that’s what Amazon said when I pre-ordered it.

  5. Gravatar of marcus nunes marcus nunes
    27. October 2015 at 02:58

    There´s also The Depression´s Great Moderation!

  6. Gravatar of marcus nunes marcus nunes
    27. October 2015 at 03:01

    And RFPC continues unabated:

  7. Gravatar of Major.Freedom Major.Freedom
    27. October 2015 at 03:39

    Kevin’s belief is nothing but one more instance in a massive exercise in reasoning from spending changes.

    IF because of partial relative overinvestment in some goods, like housing, and a partial relative underinvestment in other goods, which we cannot see, would otherwise be associated with a massive decline in aggregate spending as the real economy is corrected, then should the Fed inflate and inflate so much that aggregate spending does not decline but actually rises, then the 2000s would indeed be ample evidence of a “demand side” housing boom.

    It is absurd to suggest that aggregate spending has to rise no ifs ands or buts, before the Fed can be identified as having printed too much money during the time that it did, given the prevailing real conditions (distorted by the Fed by past inflation).

    All the repetitive “don’t reason from a price change” seems to be completely misunderstood, as the same principle applies to spending.

    Never reason from a spending change. Why? Because we have to ask what caused the massive increase in cash preference.

    Of course MMs won’t address this with any serious effort, because they know that what they advocate, is the cause for the problems that they claim can be fixed with more inflation.

  8. Gravatar of collin collin
    27. October 2015 at 05:47

    So why did Americans act so differently with the 1988 – Housing Bubble when NGDP was not historically high? Simple, the length of economic growth was 1990 – 2000 was historically high and expectations changed. 10 years without a recession was unheard of before The Great Moderation. (And remember the 1983 – 1990 was relatively long period growth as well.) If you live through the 1950s, consistent Fed induced recessions was a way of life which seemed to make sense after the experience of the Great Depression. (Additionally, the original definition of being Laid Off in the 1950s was the company had to cutbacks during these short recessions and then first hired Laid off employees.) In 2000 Real wages and Labor Participation hit their historical high point and most workers even knowing a recession was in the cards did not change behavior.

    In many ways, I think our Social-Political system has changed since the Housing Bust, and look we have had slow recovery since 2010 and I would not be surprised we break the 10 year span of avoiding recessions. (And no I don’t know what we call the next 25 years.)

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. October 2015 at 05:52

    Lars Christensen gives a thumbs up to Scott’s new book;

    What I particularly like about the book – yes, I have read it – is that it re-tells the story of the Great Depression by combining financial market data and news stories from the time of the Great Depression. I very much think of this as the Market Monetarist method of analyzing economic, financial and monetary events.

    By studying the signals from the markets we can essentially decompose if the economy has been hit by nominal/monetary or real shocks and if we combine this with information from the media about different events we can find the source of these shocks. It takes Christina (and David) Romer’s method of analyzing monetary shocks to a new level so to speak. This is exactly what Scott skillfully does in The Midas Paradox.

  10. Gravatar of ssumner ssumner
    27. October 2015 at 11:38

    Thanks everyone.

    Patrick, 2019? Who have you been talking to?

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. October 2015 at 13:24

    Just have my ear to the Econoground.

  12. Gravatar of Brian Donohue Brian Donohue
    29. October 2015 at 07:58


    Interesting point about the regularity of short recessions during the post-war period.

    Here’s a theory: the labor market (in terms of hours worked and variable pay) is much more flexible than in the 1950s. So (apart from Fed-inflicted pain) recessions are fewer and milder, and recoveries are more “jobless” and “lower pay increase” than they used to be.

    Much better in my mind for lots of people to take a temporary haircut in their paycheck then having fewer people completely laid off and later rehired to adjust.

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