Before the housing market in the United States went into convulsions, you heard a lot of talk about the positive "externalities" of home ownership. The Bush administration made something of a fetish of the idea, saying its goal was to create an ownership society.
The best-known dissenter was the British economist Andrew Oswald. As early as 1996, Oswald was producing papers that forcefully argued that home ownership causes unemployment. The effect Oswald claimed to have discovered was strong: Every 5 percent rise in home ownership resulted in a 1 percent rise in unemployment. Oswald's original paper set off a cascade of others that largely confirmed his results.
Oswald is out with a new study, co-authored with David Blanchflower, that sheds more light on the link between unemployment and home ownership rates:
CNBC NetNet
John Carney | Senior editor
An interesting conundrum.
John proposes an Austrian solution based on "malinvestment." But I tend to regard that kind of explanation as giving a reason instead of showing a causal factor.
There's a big difference between reasons and causes. There are lots of reasonable explanations. The challenge of scientific explanation is to identify which of the many reasons are actually causal factors.
24 comments:
You just like to pretend that the self-evident causal factors do not exist.
People tend to buy houses as an inflation hedge and thus a form of savings. This is further subsidized by artificially low interest rates and the deductibility of mortgage interest and property taxes. Escaping the worst of the government schools is also a factor.
Without the inflation that is caused by the criminal funny money fiat system, there would be no need for an inflation hedge. Absent these various interventions, people could determine what was the more appropriate action regarding buying or renting based upon the unadulterated relative prices of things to make more informed decisions.
That is the reason economic calculation must be expunged from the thought processes of MMTers and Keynesians. Absent Keynesian obfuscation, people would tend to see the alleged economic problems they face don't actually exist but for the distortionary interventions of the interventionists.
"What goes unnoticed is that other areas of the economy wind up starved for capital. That is, policies that make home ownership more affordable crowd out other investments."
Sounds like Loanable Funds.
In discussing things with my Austrian homies, we really don't know WTF "loanable funds" has to do per se with funny money fiat loans artificially bidding up relative prices. Or why saying the term "loanable funds" refutes the Austrian analysis.
Bob, why do you feel the need to keep repeating exactly the same garbage over and over again, in exactly the same way?
Do you think that, by repeating the same garbage over and over again you might somehow achieve something?
You're wasting your time. Go and do something less stupid and pointless instead.
Bob,
loanable funds -> finite amount of 'loandable' money -> money lent for home purchases is thus unavailable as loans for capital investment for "other areas of the economy" -> consequently "policies that make home ownership more affordable crowd out other investments"…
Except the loanable funds model is incorrect. So, the resultant conclusion is also incorrect.
Remember… what's being posited here is a possible reason why higher homeownership could lead to worsening employment. They crux is "other areas of the economy wind up starved for capital" … which would be true in a truely loanable funds world, but is not true in our actual reality (so far as I understand).
JK -- I'm a bit more sympathetic to Carney's argument here. The notion that home ownership reduces labor flexibility seems logical. Such inflexibility may not be a bad thing, as opposed to having an even more rootless society.
Also, the income of workers is somewhat fixed, so money spent on home consumption generally means less money spent on other things.
I don't know, but it's an interesting theory...
You just like to pretend that the self-evident causal factors do not exist.
Science is about showing evidence for claims, especially wrt causation. In fact, that's pretty much what science is.
When principles are taken as self-evident, that's philosophy.
If you want to claim that (Austrian) economics is philosophy rather than science, be my guest.
At full employment of resources - Labor, Capital, Technology - there should be crowding out, in the sense that society can only get an extra amount of goods (including investment goods) and services by giving up a
certain amount of other goods and services.
For instance, in order to have more homes built, labor will have to be transferred from, say, car production. Society will have more housing starts and fewer autos being produced.
When productive resources are unemployed, however, there is no "crowding out" - production of additional amounts of goods and services will have zero opportunity cost.
For instance, in order to have more homes built, labor will have to be transferred from, say, car production. Society will have more housing starts and fewer autos being produced.
Theoretically maybe, but not actually. Construction doesn't take either financial capital or investment capital from say, the auto industry. Apples and oranges.
If an economy is able to expand profitably, then banks will expand lending to accomodate the increased demand, and innovation will be forthcoming to increase productivity in order to do more with less.
Say the economy is at full employment and the banks extend lending to the housing sector. There is a bubble and they increase credit in a massive way.
The housing sector will have to hire people employed in other sectors of the economy.
Fewer goods and services will be produced by said sectors, where there will be a scarcity of labor. More houses will be built - at the opportunity cost of fewer goods and services delivered outside the construction industry.
The point is: an economy cannot produce above potential. When full potential is reached a physical, real form of "crowding out" necessarily applies.
@ Detroit Dan … I wasn't disagreeing with the entirety of Carney's piece. Some of it is an interesting argument. I was just disagreeing with the Crowding Out / Loanable Funds part of it.
Which leads us to Jose's point..
"At Full Employment" …. which is what the IS-LM model generally assumes (if I'm not mistaken), then yes, there is crowding out of real resources. So even with the accurate description of Loans Create Deposits and there being no finite amount of 'loanable funds' …. crowding out of real resources would occur "at full employment"
But come on… we're never at full employment. And we're never at "full prudctive capacity" if that phrase even has any real world meaning. These are just ideas that make hte model work. But, surprise surprise, the model doesn't really reflect reality.
How about it, Bob? Not enough Economic Calculation for you? :)
I suppose one could argue that in the 1960s the U.S. was at full employment and that Viet Nam war spending, not being previously financed by taxes (or by money destruction to enable noninflationary money creation) was a case of crowding out.
The economy could not withstand additional spending and thus inflationary consequences followed - a form of "real" crowding out.
Say the economy is at full employment and the banks extend lending to the housing sector. There is a bubble and they increase credit in a massive way. The housing sector will have to hire people employed in other sectors of the economy. Fewer goods and services will be produced by said sectors, where there will be a scarcity of labor. More houses will be built - at the opportunity cost of fewer goods and services delivered outside the construction industry. The point is: an economy cannot produce above potential. When full potential is reached a physical, real form of "crowding out" necessarily applies.
As I said, theoretically. But it doesn't actually work that way. Auto workers are not going to lured into construction, and contractors won't hire them. Instead, contractors will go out any buy air tools (made in China) to replace hammers in order to increase productivity. Artists will moonlight to do finish work.
Where there will be bottleneck is where skilled workers are not available. But then, automation and robotics become cost-effective.
Once automation and robotics are introduced, the labor issue pretty much evaporates. In fact, industrial production is already beginning to follow the route that agriculture took in going from almost 100% of the workforce down to 1% in developed countries due to technological innovation.
With technological innovation and the productivity increases that innovation brings, the so-called full employment constraint disappears.
Also, in the US anyway, when construction heats up, "guest workers" flood in from across the border. It's an expanding and contracting buffer stock of labor that chiefly serves agriculture and construction, and agriculture and construction depend on it.
Increasing imports is another way to import labor.
How about it, Bob? Not enough Economic Calculation for you? :)
I saw none whatsoever in your comment. Or in any of the others.
But then again, I never have.
While not denying the importance of innovation I don't think we can so easily dismiss the concept of "an economy at full potential".
Maybe it's been a long time since the U.S. last had such a situation. But take the recent Brazilian case, where the economy has been at effective full employment for the last couple of years, at the very least. An overheated construction industry had to lure workers from the service sector by offering significantly higher wages. This contributed to the current inflationary tendencies that have forced the central bank - much against its original wishes - to increase interest rates in order to prevent the situation form running out of control.
So I'd submit the U.S. In the 60's and Brazil in the 10's as two likely instances of "real" crowding out. I'm sure we'd find many more in other countries if we looked more closely.
This does not mean that the IS/LM narrative is correct - but it does imply that an economy with underutilized resources (say, present day European Union) is a very different animal from the fully employed version that quite a few happier countries with more enlightened rulers have managed to attain during certain periods.
I suppose one could argue that in the 1960s the U.S. was at full employment and that Viet Nam war spending, not being previously financed by taxes (or by money destruction to enable noninflationary money creation) was a case of crowding out.
The economy could not withstand additional spending and thus inflationary consequences followed - a form of "real" crowding out.
I see it more as demand side inflation due to wartime spending that was not taxed away. War spending is inflationary because what is produced is not investment or consumed but destroyed, and some of the extra income goes to increased domestic demand. If that demand cannot be met by economic expansion, then demand side inflation results. If the excess had been taxed away, then demand side inflation would not have occurred.
ON the other hand, it could have been supply side, in that use of resources for war deprived the economy of resources for consumption and investment. But I doubt that was the case, in that the US war machine was already geared up after WWII and it was expanded rather than being geared down. It's just part of the economy. During war, part of the investment is used up in warfare and needs to be replenished and that can drive prices of some materials up.
y:
It makes far more sense for you MMTers to viciously attack the Austrian School without the slightest understanding of even its basic concepts.
BTW, I didn't see Mosler express any understanding of economic calculation at Columbia the other night.
Gee, I failed to find an argument in what Carney wrote.
I also felt uneasy about the supposed causality, for two reasons. First was the long time lag, and the confinement to the US. The effect could easily be the result of an accidental correlation. Second was the lack of a showing that unemployment came down after a reduction in home ownership. Generally speaking, causally related events should covary. If there is a causal relationship, foreclosures should cause a rise in unemployment. We're waiting.
Typo. I meant to say that foreclosures should cause a rise in employment.
You buy what should have been a $150,000 house for $300,000 with a new $275,000 funny money fiat loan which helped to artificially bid up the price of the house because "real estate always goes up". Reality listens to Peter Schiff and to not Mike Norman, the bubble pops and your house can't be sold for more than $150,000.
You can't move to a new state to find a better job because you can't sell your house and pay off the funny money fiat loan.
See how easy that was? Watching you guys evade reality is fun.
Bob,
Its not the 'funny money' that does it, its the govt authorizing the banks to initiate/ratify price increases by raising the conforming loan limits on conforming loans that the banks sell to GSEs and will eventually become securitized by the GSEs...
Everything first keys off of petroleum, the cartel gets a price increase to stick for a while, creating a price shock in building materials, materials transportation, excavation equipment operational costs, labor transporation, etc...
Then the govt ratifies these short term price increases via the authorization of higher loan limits for housing.
All of this process is the product of human action from the conduct of the petroleum cartel to the increase of prices by the refiners, the response by our govt reps to increase the loan limits, etc...
There is no such thing as the teleological concept of "economic calculation", there is just human action and other human actions in response ....
If we dont want prices to go up for housing like this, we are faced with either sending our warriors in to take over the external oil fields while exterminating the cartel people, or developing alternative domestically sourced fuel systems for our ground transportation systems... (which btw will create BIG problems for the cartel nations ...)
rsp,
PS, Here's an 'economic calculation' for you: Apples cost 50 cents each and I have $1 therefore I can buy 2 apples with my $1...
Bob,
You have no view of authority via your heavy libertarian bent...
Prices go up or down because certain humans occupy positions of authority and as such are authorized to raise them or lower them... the cartel people declare a price increase and our people declare a loan limit increase in response back and forth to avoid war, chaos, people on the street, etc.....
so you have to come up with this teleological idea of 'calculation' which is something that can only be accomplished by intelligent beings like individual humans... because of your basic aversion to this authority.
Nothing can "calculate" other than human beings.
Here's the etymology of the word itself:
http://www.etymonline.com/index.php?term=calculate
1560s, "to compute, to estimate by mathematical means," from Latin calculatus, past participle of calculare "to reckon, compute," from calculus (see calculus).
Only human beings can do the math and/or try to screw each other over...
Suggest seek the ability to recognize the concept of just authority...
rsp,
I don't think home ownership causes unemployment for builders and maintenance workers!
-Jackie
Post a Comment