What’s with US GDP ? DeLong politely critiques Tett and I snear.

Brad DeLong shows he can be firm but polite here

A puzzling piece from the very sharp Gillian Tett of the FT. My tentative conclusion was that she has fallen victim to the anthropologist’s disease–getting so far into the heads and the mindsets of the culture she is observing that she loses track of the fact that there is a world outside.


HBS alumni… asked to explain why America’s economic growth has been so dismal…. The most hated culprit was the political machine. … Can the midterms change the mood?… This matters…. Company executives have been sitting frozen in recent years, reluctant to invest, because of uncertainty…. $2tn of spare cash is sitting on US corporate balance sheets… banks have another $2.8tn of funds sitting idly at the Federal Reserves…. If just a tiny proportion can be deployed, the economic impact could be significant. And if a few tangible policy changes emerge from Congress, it is possible animal spirits will return.

Tett edited down by DeLong and then me.

But when I look at the numbers for the economy-wide components of fixed investment:


Depressed business animal spirits do not jump out at me. Private nonresidential fixed investment spending is above its average share of GDP since 1950. It is at its average since 1990. … It is residential investment spending that is 1.8%-points below its post-1950 and 1.4%-points below its post-1990 average–and of this shortfall, all is in single-family housing and none in multiple-unit dwelling construction. And it is public infrastructure investment that is way low.

So when I look at this, I see an economy depressed because public investment and single-family residential construction are depressed. The first is depressed because of austerity: it’s a policy choice. The second is depressed because the Obama administration has failed to take any of the steps that would have been necessary to unblock the clogged single family-housing finance credit channel.


and he concludes

If business executives’ animal spirits were unduly and irrationally depressed, it would be more credible to say that some political Potemkin village press events in Washington–Obama, Boehner, and McConnell proving that they can get things done, a minor trade deal, a small corporate tax deal, might summon the Confidence Fairy. But if business executives’ current level of investment reflects a more-or-less normal assessment of fundamentals, such an argument becomes less credible.

I agree with his argument and his conclusion. Of course he is asking Tett to not only put up with Harvard Business School graduates but also argue that she learned nothing important from them, because their concerns aren’t the problem.

But his points are extremely important and not made often enough (DeKrugman have been making the points for a while but two voices are too few).

My contribution is to snipe and boast.

My comment

I am very impressed by your courtesy. I think you are right about Tett and “the anthropologist’s disease”. You know I have an extremely high opinion of you. Oh hell I can’t manage this courtesy crap. I’m going to be rude, petty, and vain in the rest of this comment.

1. Why is housing investment low ? You assert without presenting evidence or displaying doubt that it is due problems with housing finance. The evidence you have presented in the past is that the ratio of housing investment to GDP is lower than it was back in 2000 when there wasn’t irrational optimism about houses as in investment. I have repeatedly noted that in 2000 almost all home buyers were convinced that houses were a good investment as their relative price had increased enormously in the 20th century while it hadn’t.

What is the no bubble and normally functioning level of housing investment ? You have to look before the bubble. Standard analysis even of irrationbal bubbles assumes that people know past prices (including of a house with given characteristics and of a given basket of non-durable consumption goods). The assumption that people know past returns on investments and only chase trends which are actually there is what makes bubbles inflate and burst.

I think it is entirely possible that the current level of housing investment is that that would occur if there were rational expectations and no unusual financial frictions.

At least one should look for (which means ask Shiller for) survey data on forecasts of the trend of relative house prices, look at housing investment over GDP as a function of those forecasts and ask if there is currently an anomaly to be explained (one should, but the one typic sure won’t).

Here I suspect that you are considering politics. You are arguing that Mel Watt should use his control of Fannie Mae and Freddie Mack to stimulate the economy by subsidizing housing investment. I sure agree that it is better to focus on Watt (who can do a lot) rather than Bernanke (who has shot his bolt and given his all while holding the pedal to the metal). I’m not sure why you spell “Watt” “O b a m a” but I have a guess (I just googled Mel Watt to check that I was typing the right name).

But I suspect that you prefer to present this as addressing a market failure in the housing market rather than proposing distortion of the housing market (compared to the no bubble normal frictions state) to balance problems somewhere else.

I don’t know where Glenn Hubbard comes from (I’d guess the mid West) Uh ooops got personal, I mean I trust you don’t think that any concession will convince Republicans in Congress to collaborate constructively and I hope you know that Watt has considerable automony (Edward DeMarco showed that in what struck me as his determined and successful effort to keep US GDP low).

2 (this is really petty) What happened to the alleged shortage of safe assets which has frequently been described on this blog as *the* problem ? It seems to have vanished presumably scared off by the “$2tn of spare cash [that] is sitting on US corporate balance sheets.” US GDP has no moved towards the exponential trend that it always used to follow (as it did say over the period 1929-1936).

I think this current post and Tett’s article both support the view that fear of insolvency (of ones firm or its counterparties) played an important roll it pushing GDP down but not in keeping it down — in the crisis not the sluggish recovery. I think you have tended to assume that the crisis and the sluggish recovery are two aspects of the same problem. I think I first wrote that here very tentatively (and actually politely from caution not courtesy) in 2010 (but it may have been 2011).

Anyway, now in 2014 the problem sure doesn’t seem to you to be a shortage of assets which are considered safe and the solution seems to you to include higher public investment (higher government purchases of goods and services in any case) not the issuance of more T-bills. As always, I note you can have higher G without higher deficit if one raises taxes (I add with similar effects on aggregate demand if the higher taxes are collected from rich people). You can have higher deficits without higher G by cutting taxes. The question more safe assets or more G is extremely policy relevant and your reasoning has shifted from ” *the* thing we need is higher supply of safe assets to higher deficits” which implied that “it would be just as good if we got them by temporarily eliminating taxation of labor income over $250,000 per year and by infrastructure investment” to something completely different (for which I have argued here many times over years).