Must-Read: The 2001 Recession Actually Was Really Bad News: "I see that I have to disagree with Brad DeLong again...:
...Brad wants to see the 2008 downturn as a uniquely bad event due to the overextension of credit and the ensuing financial collapse. I see it as overwhelmingly a story of a burst housing bubble and the resulting fallout in the real sector....
The collapse in the U.S. may have happened first and triggered the collapse in other countries, but this would only be in the sense that the U.S. collapse might have alerted lenders to the possibility that house prices can fall. Presumably the bankers would have discovered this basic economic fact at some point regardless of what happened in the United States. If we recognize that the collapse in Europe and elsewhere had its own dynamic, then we take away some of the drama from Brad’s story of a small bubble causing a massive downturn.
But I want to take away some more. First, the bubble was much larger than Brad implies. Second, we have seen this story before, specifically in 2001....
My take-away is to be wary of situations in which a bubble is driving the economy. This was easy to see in the late 1990s, as consumption soared and spending by dot.nonsense pushed investment to its highest share of GDP in two decades. It was also easy to see in the housing bubble years. It is a good idea to crack down on nonsense promulgated by the financial sector, but the basic story really is a simple one. When an asset bubble is causing large and unusual spending patterns, you've got a problem.
I would (and do) say: yes, you have a problem. You need to rebalance, but competent policymakers can balance the economy up, near full employment, rather than balancing the economy down. And from late 2005 to the end of 2007 the balancing-up process was put in motion and, in fact, 3/4 accomplished.
There is no reason why moving three million workers from pounding nails in Nevada and support occupations to making exports, building infrastructure, and serving as home-health aides and barefoot doctors needs to be associated with a lost decade and, apparently, permanently reduced employment. A lower value of the currency can boost exports. Loan guarantees and burden-sharing can get state governments into the infrastructure business. A surtax on the rich can employ a lot of home health aides and barefoot doctors. If these roads were foreclosed, they were foreclosed by the laws of American politics, not the laws of economics.
And the lack of successful and rapid rebalancing--the weak post-2001 recovery--was also, overwhelmingly, a matter of choice: to use tax cuts rather than infrastructure and other social capital-building forms of spending on the government side, and to direct the dollar earnings of foreigners selling us imports into funding house construction rather than buying exports on the private-spending side.