Seem to have ended the year strong but not quite as strong as I might have thought. I was looking for continued gain, up to 13.8M SAAR or so and it doesn’t look like we will see that. The numbers for Honda and Toyota are key as I had expected a stronger rebound from them than we are seeing so far.


Construction ended the year completely as expected, up slightly mainly on residential multifamily. Public construction seems to have stopped falling and this is consistent with my view going forward. We should see sales tax receipts improve for state and local governments and with that a willingness to fund more projects.

Non-residential construction will probably continue to be driven by oil exploration well into 2012. The office market just doesn’t feel ready to come back. Though we might see increased hospital construction. I would have to look more into that.

Fed Policy

It looks like the Fed is building the institutional infrastructure to make a creditable commitment to be irresponsible. Of course, it is couched in terms of the Fed making explicit what it thinks a responsible path for interest rates would be. This is potentially very helpful, but it naturally depends on how bold they are willing to be.


Kevin Drum makes the point that the global economy is energy constrained. I think that is correct and it underlies some of views about US energy policy. I don’t think we are likely to see “many" wild swings in oil prices, though. Such swings generate a huge arbitrage opportunity. To take advantage of it what you need is a place to store excess capacity. Oil – being the accommodating resource that it is – provides that naturally. We call it the ground.

In a world of high prices and tight capacity the smart thing is for folks with shallow wells to actually decrease pumping. This will lead to higher prices sooner, but smaller spikes as you start pumping only during the spike.

Also, its not clear that in the face of very easy money that this has to be contractionary. I’d have to think more about it, but the natural response is to push labor and capital towards energy extraction, conservation and alternative production. What’s key is that high energy prices should make the Fed less hawkish not more.

Growth is Banal

I wanted to do this as post titled “BREAKING: Humans primarily concerned with survival and procreation.”  My point is that Matt Yglesias is right that economic growth is primarily about doing the same old stuff in new ways because quite frankly the range of stuff that most humans want to do is not that wide.

Fruit Tree Recessions

Nick Rowe does business cycles with fruit trees. I should write more on this but if Nick reads the following he probably know what I mean.

If there is uncertainty in this economy then Y will not equal C, properly defined, because some folks will hoard trees and allow the fruit to go uneaten or at least use it in some non-typical way.

Further, the propensity to hoard trees should create a bond market and an interest rate which reflects the desire of folks to tree hoard.

Ron Paul

I take the opposite position as Will Wilkinson and Adam. To quickly get to the heart of my opinion, even if Ron Paul were at some point an out-and-out white supremacist, I don’t think this should be a permanent albatross around his neck.

I have an easy time forgiving these things because I grew up in an environment where homophobia was simply the air that we breathed. The things I have said, and honestly done, bring me to tears when I think about them.

I am forever sorry. I cannot even bare to ask for forgiveness.

Why A Recovery Now

Brad Delong asks why I think the recovery is starting now and how fast it will be. So the short answer is I don’t know how fast. It depends on how fast the natural rate of interest rises and how long the Fed signals that it will keep the overnight rate at zero.

My answer for why now and not before is that what drives of the natural rate of interest in this environment is marginal productivity of capital, which rises as the capital-to-labor ratio falls from depreciation and population growth.

When we think of growth models we usually have something like a factory in the back of our heads but the same thing should apply to household consumption. More folks combined with older cars and no new housing units increases the marginal return to durable goods.

Eventually it rises high enough to push the natural rate above zero. What I was looking for were signs that this was happening which I expected to show up in rents and used car prices. Both were rising through the middle of 2011, telling me that this would likely begin to happen in 2012.

Yves Smith is Not a Smithian.

She rips into Matt Yglesias’s Smithian take on 2012. A couple of things to note.

  • I don’ think the distressing gap tells us much as a predictive device. The short answer is that its not clear which way the gap will close.
  • I don’t think the shadow inventory is hyper relevant as far as my forecast are concerned because if the houses stay vacant the people have to go somewhere – likely apartments. Moreover, these numbers actually aren’t that big when you compare them to the short fall in housing production. And remember a multifamily project can take over a year to complete. So when we are talking 2012 starts we are talking 2013/2014 inventory.
  • The point about the Wicksellian natural rate is not that it is determinate of rates we see but that it tells us whether the prevailing rates are contractionary or expansionary.
  • Lastly, and this is a long conversation, I just don’t think its true that middle class incomes will need to rise for the economy to recover. The quickest road to recovery in my mind would be an inflationary burst that caused middle class debt burdens to erode but real incomes to fall. The set-up of the global economy right now seems to be to shift income shares towards resource extractors and a high earning elite. Monetary policy that makes it difficult for this to happen – by holding down inflation – will slow the recovery.

How Many Conversions Were There?

Dean Baker makes the point that lots of housing units came from conversions of industrial or commercial property and thus aren’t counted in starts. My sense is that they should be counted in new home sales and inventory which track starts pretty closely. We don’t see a lot of new home sales or inventory that never showed up in starts. However, this is an point to look deeper into.

Honey, Flies and Macro

Paul Krugman says that he only treats mendacious idiots as if they are mendacious idiots. The thing is, that its not clear to me that badgering political opponents is an effective strategy for convincing contemporaries or speaking to posterity.

Part of what Paul winds up doing is causing people to resent reasoned analysis or even intelligence generally. This is the opposite of helpful.

Send Me to Siberia

Mike Casey wants to send me to Siberia. I am happy to go. Novosibirsk is nice, in June.

More seriously, moving to the top of the world is an obvious response to a warming world. Its made even more appealing by the fact that in some of the damage models you see negative numbers for Russia and Canada. Its seems natural that this would prompt someone to say – ah, well then we should get more people into Russia and Canada.

Now, I would expect responses along the lines of, yeah we thought of that but here’s the deal . . .

Instead, the – I believe exclusive – response I’ve gotten on Siberia is mocking me for suggesting that people move to North to avoid global warming, implicitly on the grounds that Siberia is cold and barren. Yet, that seems like an objection that certainly doesn’t make sense, no?