08/12/2005: Speaking of "Increasingly Bubbly Housing Sector"...
...Paul Krugman (NY Times) has this piece: Safe as Houses:
"...Does anything else in the U.S. economy rival housing as a source of job creation? Well, there's also the military buildup. The Economic Policy Institute estimates that increased military spending over the past four years has created 1.3 million private-sector jobs.
And, yes, there are the Bush tax cuts, which the administration insists are the source of everything good in the economy. And it's true that some portion of the tax cuts, which amounted to $225 billion this year, must have been spent in ways that created jobs. Given reasonable estimates of the effect of tax cuts on spending, however, they were probably a smaller force for job creation than the military buildup, and dwarfed by the housing boom.
So it's an economy driven by real estate. What's wrong with that?
I've written before about the reasons to believe that current house prices in much of the country represent a bubble. When that bubble begins to deflate, so will housing-related employment.
Beyond that, there's the disturbing point that we're paying for the housing boom (and the military buildup and tax cuts) with money borrowed from foreigners.
Now, any economics textbook will tell you that it's fine to borrow from abroad if the money is used to expand the economy's productive capacity. When 19th-century America borrowed from Europe to build railroads, it was also enhancing its ability to repay its debts later. But we aren't borrowing to build productive capacity. As a share of G.D.P., investment other than housing construction is below its average between 1980 and 2000, and way below its level at the end of the 1990's.
In other words, a fuller answer to my former neighbor would be that these days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn't seem like a sustainable lifestyle.
How solid, then, is America's economic recovery? The British have a phrase that applies: "safe as houses." Our economy is as safe as houses. Unfortunately, given current prices and our dependence on foreign lenders, houses aren't safe at all.
Karen on 08.12.05 @ 05:21 AM CST