Hoisted from the Archives: Department of "Huh!?": Raghu Rajan Is a Member of the Pain Caucus, and I Don't Understand Why...

stacks and stacks of books

Department of "Huh!?": Back in 2010, there were a great many people for whom I had immense respect who were members of the Pain Caucus. And I still cannot follow what they were thinking at all. Construction had already shrunk fully by late 2007. It remains a great mystery—was it just a Chicago echo chamber in which people did not look at data?:

Raghu Rajan Is a Member of the Pain Caucus, and I Don't Understand Why...: Raghu Rajan: "this recession is not a 'usual' recession. It followed a period of ultra-low interest rates when interest sensitive segments of the economy got a tremendous boost. The United States had far too much productive capacity devoted to durable goods and houses, because consumers could obtain financing for them easily. With households recovering slowly from the overhang of debt resulting from the binge, and with lenders extremely risk averse, it is unrealistic to expect households to spend beyond their means again, and unwise to try to tempt them to do so...

...If households are going to want fewer houses, industries such as construction will have to shrink (as should the financial sector that channeled the easy credit). A significant number of jobs will disappear permanently, and workers who know how to build houses or to sell them will have to learn new skills if they can. Put differently, the productive capacity of the economy has shrunk. Resources have to be reallocated into new sectors so that any recovery is robust, and not simply a resumption of the old unsustainable binge.  The United States economy has to find new pathways for growth. And this will not necessarily be facilitated by ultra-low interest rates...

But... but... but... construction already shrank!

As of the end of 2010, the construction sector will have shrunk in nominal terms to its size in 1999, when the economy as a whole was only 57% as large as it is today...

As of the end of 2010, the summed deviations of residential construction spending from their long-term trend will be zero: we will have underbuilt relative to trend in late 2007, 2008, 2009, and 2010 by about half again as much as we overbuilt relative to trend in 2003, 2004, 2005, 2006, and early 2007.


#economicsgonewrong #hoistedfromthearchives #macro #paincaucus 

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