Matt Yglesias pens an extremely readable version of the Smithian view on the near future of the US economy.
What will this recovery look like in concrete terms? Total bank credit, which collapsed during the crisis, is growing again and will keep growing. That will make it easier for Americans to buy new cars and reverse the four years of growth in the average age of America’s passenger vehicles. Families will also invest in other kinds of durable goods—refrigerators, washing machines, etc.—that they’ve been hesitant to upgrade or replace. The housing bust, meanwhile, has been followed by an epic construction slump that’s actually left us with a shortage of homes. But every downward tick in the unemployment rate is another twentysomething moving out of his parents’ basement, stimulating a return to a more normal level of construction. Multifamily housing starts are already up 80 percent over the past year to accommodate the likely coming flood of renters, and there’ll be more to come once people have more cash in their pockets.
This increase in economic activity will boost state and local tax revenue and end the already slowing cycle of public sector layoffs. Re-employment in the construction, durable goods, and related transportation and warehousing functions will bolster income and push up spending on nondurables, restaurants, leisure and hospitality, and all the rest
Not everyone is convinced. Kelly Evans writes
Along with nascent signs of recovery in the housing market, it is tempting to forget about 2011’s disappointments and think 2012 will be the year economists aimed not too high, but too low. Trouble is, recent history suggests it usually turns out the other way around.
Some of this skepticism is I think fueled by the fact that in the winters of 2009 and 2010, things were looking up as well, only to fall apart as the Spring and Summer came along.
This, it appears, was largely a computational artifact. The winter of 2008 was so shockingly and inexplicably bad that the computer programs designed to analyze economic data concluded that winter must be the most perilous time for an economy.
When they saw tepid but not disastrous winters in 2009 and 2010 the computers concluded that the economy must be on sure footing. If the winter isn’t awful then how bad could things really be they reasoned.
Of course, there was nothing about the “winter” itself that was so bad in 2008. It was simply that most dramatic drop in 75 years occurred after Lehman collapsed in mid-October.
Smithianism, however, is not charting. It asks fundamental questions about how people are going to live and work. It then combines that with what we know about the way money and finance work to produce a forecast for the overall economy.
I should resist the urge to wax more philosophic but of course I won’t.
Part of the underlying view here as well is that there is only one world, though there are dozens if not hundreds of reasonable narratives about that world. To the extent that those narratives reflect the world they have to be using different words and phrases for the same thing.
So despite radically different frames, New Keynesianism, Old Keynesianism, Monetarism, Market Monetarism, Modern Monetary Theory, New Monetarism, Vector Autoregression Forecasting, the kitchen table economics of the average family and the synergistically strategic jargon of corporate board rooms, must all be referring to the same underlying mechanics.
Some typical assumptions might be faulty or tweaks necessary to make them give the same answer. But, we should be able to do it. Indeed, much of the time the answers aren’t even substantively different, its just a hidden normative spin that’s different.
What all these narratives tell us is that a recession is somehow related to people not buying stuff. So, the natural questions then are
1) What are they not buying?
2) Why are they not buying it?
A cursory look at the data makes the answer to the first question abundantly clear: cars and houses. Or, more generally, transportation equipment and structures.
Its not even really a close call here. At the nadir of the recession year-over-year sales of motor vehicles and parts was collapsing at, $240 Billion, faster than all other non-gasoline retail and food service sales combined.
The peak-to-trough fall in total final sales of domestic product was roughly $400 Billion. During that same period residential construction spending fell by $200 Billion and from its peak-to-trough residential construction spending fell by close to $500 Billion.
Here is a rough and ready comparison of final sales of domestic product with and without construction and transportation.
The data series aren’t fully comparable, so don’t take that graph to the bank, but it gives you a sense of the importance of those areas to US sales.
Now you can pipe this through any narrative you want and say that:
- Once consumer balance sheets collapsed even a zero federal funds rate was too high to make it optimal for consumers to keep buying transportation and structures.
- Fear among investors and consumers caused them to scale back purchases of long lived items like transportation and structures
- The federal reserve failed to accommodate a huge spike in the demand for money leading to a fall in the demand for transportation and structures
- The federal reserve tightened monetary policy in late 2008 causing a decline in the demand for transportation and structures
- Total debt levels in the economy began to decline in 2008 leading to inadequate demand for transportation and structures
- Failures in the banking system caused a tightening of credit in 2008, leading to less purchases of transportation and structures
- The shock from the fall in asset values in 2007-2008 rippled through the economy leading to a decline in the purchase of transportation and structures
- With retirement accounts and homes collapsing in value, folks thought twice about going out and making big ticket purchases like transportation and structures.
- Consumer deleveraging led to a decline in discretionary purchases of transportation and structures.
However, these are all talking about the same thing. Something happened to credit markets that made people unwilling or unable to purchase transportation and housing.
Thus to a large extent we can judge the ebbing of this phenomenon by looking at whether people are more willing or able to purchase transportation and housing.
Part of that depends on how badly people need new transportation and structures. Part of that depends on whether they can get easy financing for transportation and structures. Both of those things are improving. This leads to a baseline view that the process causing the Great Recession is about to unwind.