Long-time readers know that I am not a fan of Scott Sumner’s signature idea, namely that the Great Recession was caused by Ben Bernanke’s tight monetary policy. However, if you’re really an expert on my writings, you’ll know that I’ve said Sumner would be a very formidable debating opponent–much more than Krugman. Indeed, when I said Sumner was “insane,” I meant it as a (backhanded) compliment: Sumner can back up his “outlandish” (to me) views with all sorts of internally-consistent facts and arguments. It’s like you run into a guy who claims to be Napoleon, and you realize five minutes into the conversation that you can’t prove he’s wrong. In that context, then, it’s refreshing to see Sumner slip. (This is just a re-hash of Sumner’s same slip back in 2011. I
Robert Murphy considers the following as important: Economics, Federal Reserve, Scott Sumner
This could be interesting, too:
Wolf Richter writes Who the Heck Bought .2 trillion in New US Treasuries over the past 12 Months?
Robert Murphy writes Murphy Interviewed by Mance Rayder
Long-time readers know that I am not a fan of Scott Sumner’s signature idea, namely that the Great Recession was caused by Ben Bernanke’s tight monetary policy. However, if you’re really an expert on my writings, you’ll know that I’ve said Sumner would be a very formidable debating opponent–much more than Krugman. Indeed, when I said Sumner was “insane,” I meant it as a (backhanded) compliment: Sumner can back up his “outlandish” (to me) views with all sorts of internally-consistent facts and arguments. It’s like you run into a guy who claims to be Napoleon, and you realize five minutes into the conversation that you can’t prove he’s wrong.
In that context, then, it’s refreshing to see Sumner slip. (This is just a re-hash of Sumner’s same slip back in 2011. I don’t know if he saw my response at the time.) It reassures me that he’s a man, and can be beaten…
Anyway, in a recent post, Scott is kinda-sorta taunting the people who warned of the housing bubble, last time around. Since a popular US housing price index is above its peak (in nominal terms) from the prior boom, Sumner wants to know if they think another crash is coming? (My answer is “yes,” and Scott at least concedes I am being consistent–he probably thinks I’m insane!)
Then to drive home just how goofy these bubble-theorists were, Scott asks them a bunch of provocative questions:
Is it possible that the housing boom was not a bubble? Is it possible that fundamentals (such as building restrictions and lower real interest rates) support much higher real housing prices during the 21st century than during the 20th century? Is it possible that the real problem was nominal, a fall in NGDP engineered by a monetary policy that (during 2008) held the Fed’s target interest rate far above the equilibrium interest rates? Is that why unemployment stayed low as housing construction fell in half between January 2006 and April 2008, and then soared when tight money pushed NGDP down in late 2008? [Bold added.]
Scott thinks he’s got a real zinger here. In fact, superficially it’s so good that Arnold Kling admitted defeat back in 2011 when Sumner made the same point. But as I pointed out at the time, Kling threw in the towel unnecessarily. Scott’s point blows up in his face once we pick better data. As with two of Krugman’s examples (here and here), the attempt to destroy a coordination-of-resources story (and replace it with a shortfall-in-demand story) actually turns against them. And since it was Sumner who picked this example, that gives it extra significance when it actually supports the Austrian (and Klingian) view.
First, let’s make sure we get what Sumner is doing. He’s saying that the casual association of the financial crisis of 2008, and more generally the Great Recession of 2007-2009, with the collapse of the housing boom, doesn’t actually work when you look carefully at the numbers. Specifically, between early 2006 and mid-2008, new home starts fell in half, while the national unemployment rate didn’t move up very much. See for yourself:
So, Sumner is arguing that *clearly* the slowdown in house construction has little to do with the onset of the Great Recession or the financial crisis that struck in September 2008.
Yet as I pointed out back in 2011, “new housing starts” isn’t the right metric. Clearly a much better test of the Kling/Austrian story–about workers needed to move out of construction and into other sectors, and this reallocation (or “recalculation” in Kling’s terminology) takes time–would be to look at *employment* in construction, and relate that the to the national unemployment rate. If you doubt me, here’s what Sumner himself said when he thought he blew up Kling back in 2011: “So housing starts fall by 1.3 million over 27 months, and unemployment hardly changes. Looks like those construction workers found other jobs, which is what is supposed to happen if the Fed keeps NGDP growing at a slow but steady rate.” So clearly, Sumner thought that the collapse in housing starts was a good proxy for construction employment.
But we don’t need to use a proxy for construction employment. We can use total construction employment itself. And when you compare *that* to the national unemployment rate…
…the fit is gorgeous. That’s exactly what Kling (or Murphy) require for their story. Not only does the story work for the crash, but the prior boom works too: The national unemployment rate falls, as more and more workers are sucked by the real estate bubble into construction.
If you’re trying to put your finger on the problem, it’s this: Sumner just assumed that a large drop in new housing starts went hand-in-hand with a large fall in construction employment. But as the data show, that’s not what happened. So no, there weren’t a bunch of “construction workers [who] found other jobs” because the Fed kept NGDP growth up.
If you want to offer various theories about why that should be, go ahead. It’s an interesting puzzle, presumably having to do with rates of growth, the fact that you build shopping centers etc. around new housing developments, that there is a lag for add-on work to newly constructed houses, etc. But, it’s not my job to explain *why* the collapse in new housing starts didn’t translate into a collapse in construction employment. Once we realize that, apparently, the one didn’t cause the other, then Sumner’s whole point falls apart. We are back to the original “common sense” view that it’s not a coincidence that the housing bubble collapsed, and then the financial crisis / Great Recession happened.
If you’re curious, the following sheds some light on it: