Tumblr Icon RSS Icon

Slow Growth Impeding Recovery

Posted on  

"Slow Growth Impeding Recovery"

Share:

google plus icon

According to USA Today “Increase in Household Size Could Slow Economic Recovery” (via Scott Sumner).

If you think about what they’re reporting, you’ll see that this isn’t what’s happening in practice. If American 20-somethings all spontaneously developed an increased inclination to live with their parents, this would reduce demand for new housing stock and thus reduce output of new houses. That said, in a healthy economy, a lack of demand for new houses would express itself in the form of increased demand for something that’s not houses, and so we’d see an increase in output for that sector. What we have right now is a depressed level of output in general, which can’t be explained by a decrease in the level of demand for something in particular. What’s actually going on is the reverse of this. Because there’s excess demand for super-safe super-liquid assets, there’s too little demand for real goods and services. That means lots of people are suffering from joblessness and low income. One way to cope with low income is to live at home with your parents, so household size is increasing. This, in turn, expresses itself in part as a continued unprecedented bust in housing construction.

I note that this is one way in which a higher inflation target is important to economic recovery. Right now, just imagine some stroke of good luck hitting the economy. That would mean some people with some more cash in their pockets. That in turn would mean more housing demand. Which would mean more construction jobs. Which would mean even more people with some more cash in their pockets and can put us on the path to a self-sustaining recovery. But between “some people with some more cash in their pockets” and “more construction jobs” comes some kind of lagging period when the elevated housing demand leads to higher rents and a (transient) uptick in core CPI. If people think the Fed will stomp on a nascent recovery when it hits that housing demand –> higher rent step then long-term expectations will naturally anchor around the idea of slow growth and low levels of investment.

« »

By clicking and submitting a comment I acknowledge the ThinkProgress Privacy Policy and agree to the ThinkProgress Terms of Use. I understand that my comments are also being governed by Facebook, Yahoo, AOL, or Hotmail’s Terms of Use and Privacy Policies as applicable, which can be found here.