Karl Smith Says The Boom Wasnt All That Big, But The Bust Has Been Huge

Karl Smith wants us to push money into the economy through redistribution. That’s his hammer and everything looks like a nail. In today’s posting, he finds another nail:

This is a theme I talk about it a lot so I can go into it more but the boom in housing construction was not actually that big. It peaked around 2005. It was offset by a decline weakness in commercial construction. That picked up in 2005 but was in decline by 2007. And public construction ran low right up until 2007.

Combine that with the fact that construction is not that big a part of the economy to begin with and the bubble wasn’t really that big.

It looks big in part because prices were so distorting and because single family suburban construction really was moving like gangbusters. That’s where a lot of us live but its not where all Americans live and its not where most Americans work. Urban and rural construction was in the dumpster.

There is a strong argument that this was classic crowding-out though I am not totally convinced. In any case the boom was small and nothing compared to the bust.

Karl,
People are not only price oriented, but future (opportunity) oriented. Their willingness to spend is based not only on prices but on meta-level discourse, and their ability to flock or school to opportunities.

I know you know this, but how does that play into your model? If people see an uncertain future (like before an expected war, or loss of national competitiveness) then simply reducing interest rates won’t work. If they don’t trust their government (from either pole) then they won’t allow government to grow. The only thing left is a great deal of strategic spending on competitive industries that people will politically support. There are plenty of avenues for that investment. And simply channeling the political discourse to direct investment will eliminate both the irritation with the government and the uncertainty, allowing people to flock/school toward those investments (creating new patterns of sustainable specialization and trade so to speak), and creating demand.

Demand comes from schooling/flocking toward opportunities. I realize that in a neutral polity, lower rates allow people to chase status-oriented consumption. But in a non-neutral, hostile polity, status-chasing can come from destroying the economy itself.

You’re right that we need stimulus. You’re wrong that we can take the lazy way out. That stimulus must go into increasing the international competitiveness of the private sector and productive returns. The population will support that. They wont support aggregate spending, or political expansion. THey just won’t and you won’t convince them.

So what’s stopping you from solving the problem through the third axis? Is it knowledge of what to invest in? (Maybe.) Is it time (you’re losing time anyway by tilting at the political windmill). SO WHO IS BEING IRRATIONAL? In effect, you are.

THe people have decided. And no, your desire for totalitarianism so that you can use your two preferred methods in stead of the third is just not a good idea in the long term.

Curt