Big Think is doing a series titled "What When Wrong?" on the economic crisis. This comment on David Wessel's video clip is a contribution to this series. At the end of 2007 I was on the NPR show On the Media. I complained that the media did not give enough attention to economists who saw the housing bubble and the recession that would be caused by its collapse. David Wessel followed me and commented that i was just upset that the media didn't rely on more economists who agreed with me. As I pointed out to him later, my complaint was that the media did not give enough attention to economists who were right. He now seems to largely agree with me on this point, but I am still not satisfied. The housing bubble was not difficult to spot for any serious analyst of the economy. In the decade from 1996 to 2006 there was an increase in nationwide house prices of 70 percent above the rate of inflation. This run-up was a sharp divergence from a 100-year long-trend. It could not be explained by any change in the fundamentals of the housing market. It also was not accompanied by any notable increase in rents. As one final piece of evidence, vacancy rates were hitting record levels. If the fundamentals of supply and demand were driving house prices, then the country would not be flooded with an excess supply of housing It also should have been evident that the bursting of the bubble would devastate the economy. This article wrongly focuses on the financial aspects of the collapse. While this is important for Wall Street, the real aspects are far more important for the economy. The bubble added more than 3 percentage points to GDP in the form of excess housing construction and another 4 percentage points of GDP in the form of excess consumption driven by bubble generated housing wealth. This demand was absolutely certain to disappear when the bubble burst. The Fed has no mechanism that can readily replace a drop in annual demand equal to 7 percent of GDP or more than $1 trillion. (The downturn was exacerbated by the collapse of a bubble in non-residential real estate that is still in process.) This is all very simple. None of this requires complex economic analysis, just competent economists and for that matter, competent economic reporters. How did they miss it? That’s a very good question. One thing that is striking is that no one seems to get fired for this failure. There are no reporters being fired for failing to see the housing bubble (nor Fed chairman). This creates an asymmetric system of incentives. If you just repeat what everyone else is saying, no matter how stupid (e.g. “there is no housing bubble”) then you don’t ever need to worry about being penalized if you’re wrong. On the other hand if you make an independent assessment of the economy and stick by it, then you face enormous risks. If you’re wrong you’re dead meat. If reporters are always safe just repeating the conventional wisdom, but face great risks departing from this wisdom, then we know which direction their reporting will take. The vast majority with just repeat the conventional wisdom. Welcome to Washington.
--Dean Baker
