In a recent post, Scott Sumner writes:
To summarize, the severe financial crisis could not have caused the great GDP collapse, because monthly GDP estimates show it was half over before the post-Lehman crisis even began. But even if this view is wrong, there is not a shred of theoretical or empirical evidence linking the current 9.2% unemployment with the 2008 financial crisis. Theory suggests that if a central bank inflation targets, it drives NGDP. The Fed says it has the economy where it wants it (in nominal terms), and doesn’t think we need more inflation. When it did think we needed more inflation mid-2010 (when the core rate had fallen to 0.6%) it did QE2, which raised core inflation back up to roughly where the Fed wanted it. Of course (just as in mid-2008) commodity price inflation is distorting Fed policy, but that’s a problem attributable to the Fed, not the financial crisis.
The “conventional” causal link runs from the crash of the house bubble to the financial fall-out to the great economic collapse and high unemployment. The first thing to note is that the “bubble” argument lacks “punch”. After all, the price movements in different regions were significantly different, especially if the “cause” of the “bubble” is, as usual, attributed to the Fed keeping “rates too low for too long”.
The Austrian argument – that too many houses were built – in which case the resulting slump (correction) has led to high unemployment also lacks “conviction”.
The panel below provides interesting information.
As indicated in the second graph of the panel, in the late 1980´s population growth “jumped”. From an average of 1% growth in 1966-1989, it went to 1.2% during 1990-00. This is associated with strong immigration.
The first graph shows that population has remained above the 1965-1989 trend. The last graph is interesting because it indicates that towards the end of the 1980´s the House-Population ratio (H/P) reached a “steady-state” (SS). From there, looking at the third graph, we can understand the persistent rise in house construction (house starts) after 1990. In 1998-2000 construction stayed flat and with population growing robustly the H/P dropped below the SS-level, giving rise to renewed house construction in the 2001-05 years to get the ratio back to the SS-level.
The second graph also shows that after 2005 population growth dropped considerably, from an average of 1.2% in 1990-00 to 0.92% in 2005-10, noting that since 2008 population growth has fallen below 0.9%. No mystery that house starts have also fallen dramatically with the high unemployment causing “doubling-up”, especially among people in their 20´s, helping explain the rise in the vacancy rate, which went from an average of 11.9% in 1994-05 to 14.4% in 2008-10.
The next graph shows that while employment in residential construction peaked in early 2006, nonresidential construction employment only “dived” when NGDP “crashed” after mid 2008.
Most likely, monetary policy bears the brunt of the responsibility for turning a “regular” recession into a “great” one (more likely, given the time span, a “little depression”).
This month marks 2 years since the NBER declared the “recovery” began. Since what´s transpired so far bears little resemblance to what people perceive as “recovery”, just like before there was intense search for the “causal chain” behind the crisis now there is an intense search for the “cause(s)” behind the “absence” of recovery.
Recently, this piece by David Leonhardt has spawned a lot of discussion:
There is no shortage of explanations for the economy’s maddening inability to leave behind the Great Recession and start adding large numbers of jobs…
But the real culprit—or at least the main one—has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making…
If you’re looking for one overarching explanation for the still-terrible job market, it is this great consumer bust.
In David Altig´s comment there is an interesting argument:
First, some perspective on the pace of the current recovery. Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery.
Gives the impression that the “depth” of the recession is just a minor detail that obfuscates the almost “standard” pace of the recent recovery. Once it is perceived that the “depth” of the downturn is the “anomalous” fact, and that it was due to monetary policy errors, the “cause” of the absence of recovery becomes crystal clear. Ryan Avent at the Economist, in his take on Leonhardt´s piece has said it best:
The government’s ability to affect real growth is constrained, but real growth is highly correlated with nominal growth, and the government’s ability to influence nominal growth is absolute. The Federal Reserve could commit to faster nominal GDP growth and begin using the tools available to get there. Some portion of the growth in nominal GDP (and I’m willing to bet the lion’s share) would represent a real increase in output. The outlook for investment would look better, employment conditions—and expected incomes—would improve, asset values would rise, and deleveraging would quickly (almost as if by magic) seem like less of a problem.