Tag Archives: housing bubble

HOT LINKS 11/22/10…

Now that it is Thanksgiving break I find myself without much to do. So why not try blogging on a regular basis this week? I think I can handle that. I’ll begin this week with some articles I read this morning…

2. Obama Should Cut the Corporate Tax Rate

America has the highest corporate income tax in the world. Is this good for productivity? Not according to the OECD (Organization for Economic Cooperation and Development), which reported last year that the corporate income tax is the most damaging tax for long-run development (this may or may not be the original OECD study, but if not it looks close enough). America’s corporate income tax is 40% (that includes both State and Federal tax rates). The article nicely points out that since capital is relatively mobile, labor is going to end up taking the brunt of corporate tax rates. If you want to increase wages and productivity, lower tax rates.

1. The rapid declawing of the debt-ridden Celtic Tiger should spell the demise of supply-side economics—especially for Congress

Now, I may be misreading this article but it seems to me this fellow is mixing a few different points up. Basically, his main point is that Ireland was the supply-sider’s favorite example of success. Ireland cut its taxes, productivity surged, and everyone seemed happy. That is until it was revealed that it had some serious financial issues to deal with. So far so good. Nothing to quibble with here. So how did lower tax rates lead to Ireland’s financial instability? One would be tempted to say, “because they didn’t cut government spending along with the tax cuts,” but, according to his author, you would be very wrong. No, what led to all the problem’s was the deregulation during the late 90’s and early 2000’s that fueled the housing bubble which eventually collapsed into the world-wide recession we are experiencing today. Here’s where I am confused: What in the hell do lower-tax rates have to do with deregulation? They don’t necessarily imply one another. One can have lower tax rates AND sound regulation. In case the author didn’t notice, Ireland isn’t the only country that experienced a housing bubble, and amongst the countries that did, the regulatory schemes differed at times quite dramatically. The author tries to make the argument that lower tax rates ultimately led to the housing bubble and Ireland’s current financial predicaments. But I see no evidence for that. I haven’t really heard anyone arguing that lower tax rates led to the housing bubble anywhere. Most see it as either a failure of the regulatory systems in various countries, or foreign savings gluts, or central bank mischief, and so forth. Lower tax rates did not cause Ireland’s troubles.

 

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The Problem is Structural…Again

Over at the NY Times Economix page, the editors point to a new study by the Economic Policy Institute which makes the case that the state of unemployment today is cyclical rather than structural. Cyclical unemployment being the idea that unemployment exists because of a lack of demand in the economy. Structural unemployment, on the other hand, sees unemployment as arising because of a change in the structure of the economy (new products, sectors, and technologies requiring workers to move or learn new skills).

The authors of this study want to argue that the problem is simply one of demand. They recommend increased deficit spending to get the economy moving so that workers will be reemployed generally in the areas they used to work in. This is all fine and good, but only if you think the economy was following some natural trend line from 2001-2008 and the recession was just an event not at all connected to the housing boom that came before it. In other words, the problem isn’t structural if you think the economy was structurally sound during the housing boom years.

Is this is a realistic view? I would say no. One can argue about the causes of the housing bubble (low-interest rates, lax lending standards, global savings glut, etc), but one cannot argue that there was, indeed, a housing bubble.  Paul Krugman rightly points out that

The 2007-9 recession was driven by the collapse of a huge housing bubble, and the resulting financial fallout. The Fed couldn’t cut rates sharply, because they weren’t all that high to begin with; there couldn’t be a housing boom, because housing was already overbuilt.

Obviously houses don’t magically appear out of nowhere. To build houses requires material and labor. If houses are being overbuilt than we can only conclude it happened because resources and labor were diverted from other areas of the economy into the construction and manufacturing sectors. Notice that what was going on there was structural. People who would have worked in other sectors of the economy found themselves looking for employment in those areas of the economy connected to housing (obviously this isn’t the full story because hiring was taking place in plenty of other sectors as well).

Just look at wages and salaries of construction workers during the housing bubble:

That’s a pretty clear upward trend right there. Clearly, wages were being bid up which attracted workers from other sectors. More to the point, however, is the fall in construction jobs since the recession began. Employment in the residential building sector alone peaked at a little over 1 million jobs in 2006 but had fallen to a little over 500,000 jobs this last February. That’s almost a 50% drop. What the authors of this study are advocating for is for all of those people to wind back up in the construction sector, which is only going to happen with another housing bubble (at least for the immediate future).

Additional attempts at increasing aggregate demand through fiscal stimulus will only have the effect of maintaining the pre-recession structure of the economy. Goodness knows the Federal government is still trying its darndest to prop up housing prices. This is a recipe for disaster or, at the very least, a non-recovery that goes on for years to come.