Why does the National Review allow John Tamny to publish such utterly stupid comments:
If a homeowner secures a loan that enables him or her to purchase more goods, by definition there is a lender who has foregone that same consumption. There’s no direct stimulus here, just a shift of money from one person to another.
Tamny is trying to suggest that the increase in the relative price of houses has no wealth effect and hence no impact on consumption or aggregate demand. The empirical evidence suggests otherwise. But the real concern is whether residential investment will decline. One cannot dismiss the fact that residential investment has propped up overall investment demand over the past few years. Tamny may have a point here:
Far from harming our economy, a downturn in real estate has the potential to bring more capital to the stock market. England, Australia, and New Zealand offer useful examples here in that stocks rallied 17, 28, and 38 percent respectively in the years after property booms in those countries ended around the beginning of this millennium.
The slump in business investment after 2000 lowered interest rates, which is one reason why residential investment was so strong. My hope is that the recent recovery of business investment can allow continued strong aggregate demand growth even if residential investment declines.
So what is my real beef with the latest nonsense from the National Review?
If there is an economic slowdown on the way, it will arguably be the result of the same weak-dollar phenomenon that drove the above-mentioned property rallies in the 1970s, and which drove the most recent one.
Does Tamny understand that part of the reason why aggregate demand growth was so weak over the 2001 to 2003 period was the decline in net exports? Does he not get the simple point that the devaluation of the dollar will tend to increase net exports? Or perhaps Tamny subscribes to the National Review theory that only core GDP (sum of consumption and investment) matters?