Cause, Effect, and Foreclosure

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I think Atrios’ second criticism of today’s Tim Geithner op-ed was spot-on, it’s analytically mistaken to state that the main problem facing the long-term unemployed today is skills mismatch. The recession has lasted so long that I imagine this problem will manifest itself at some point while unemployment is still fairly high, but at the moment we’re looking at an equal opportunity recession driven by inadequate demand.

But he’s previous criticism that Geithner didn’t dwell enough on foreclosures seems mistaken to me. It’s true that the housing market is increasing geographical rigidity, but geographical rigidity is no more our main problem than skills mismatch is. The only places with really low unemployment are giant empty square states that can’t support a huge influx of people. I keep reading about Texas’ economic miracle but they have an 8.2 percent unemployment rate so it’s not as if more mobility will let us all get rich in Houston.

That’s not to deny it’s a problem that people can’t pay their mortgages, but at this point that’s largely a symptom of deeper economic dysfunction. I’m paying my mortgage just fine but that’s because I have a job and hence an income with which to pay it. But if you get laid-off or have your hours cut back, that’s a different story. What’s more, if the road we take to reduced unemployment involves a years-long process of falling nominal wages then even people who don’t lose their jobs will find it increasingly difficult to pay off debts. We need more overall demand in the economy or else there’s not going to be a viable way out of these problems. You could try to do this through targeted interventions aimed at homeowners in distressed, but you don’t have to do it that way and there’s no particular reason to think that would be a particularly politically viable means of getting the job done. A lot of the commentary I read on this topic underrates the level of resentment that would exist around the notion of “responsible” renters/homeowners “bailing out” heavily-indebted scofflaws. An effort to raise the overall price level would in practice benefit underwater homeowners more than other people, but would mainly result in faster economic growth in general and make everyone feel better about the situation.