As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.
Matt Yglesias’s response:
There was, obviously, a huge boom in the price of land in the United States of America during this period. But was there really an extraordinary boom in housebuilding?
At the height of the “boom” we were adding units about as quickly as we were adding them in the late 1970s, when the total population was smaller and China’s “opening up” was just a glimmer of an idea of a possibility. If the Federal Reserve was trying to engineer a homebuilding boom it didn’t really work.
Hmmm. So, after the dot-com bust and the subsequent recession, instead of looking for ways to increase the long-term growth rate of the economy (whether by making the tax code or the regulations more efficient, or through an increase in public investments in physical infrastructure and human capital), the Bush Administration and Greenspan Fed relied on easier money – monetary easing by the Fed and an increase in housing lending – to provide stimulus.
And not only did we not get a sustainable recovery across the board, according to Yglesias we didn’t even get (in aggregate) massive overinvestment in the housing sector (though we certainly did get ludicrous overinvestment in certain areas, like California’s Inland Empire and southern Florida). Instead, what we mostly got was a speculative bubble.
So the solution to our current recession must be Yglesias’s preferred policy of increased monetary stimulus. Because that’ll definitely lead to a sustained increase in aggregate demand, rather than another speculative bubble.
And Yglesias, if I understand him correctly, has argued that since the late-1980s monetary policy has been too tight, the evidence being that unemployment has remained stubbornly higher for longer after recessions and that we’ve had only one period of sustained wage growth (the late 1990s). So maybe the problem with the economy in the 1990s and 2000s was insufficiently large speculative bubbles.
Meanwhile, count Jeffrey Sachs as another liberal skeptic, along with Joseph Stiglitz, of the reigning liberal economic paradigm.