Our guest blogger is Heather Boushey, Senior Economist at the Center for American Progress Action Fund.
Economist Paul Krugman highlights Raghuram Rajan arguing in today’s Financial Times that the Federal Reserve should begin raising interest rates because “the US had far too much productive capacity devoted to houses and cars, because consumers could obtain financing for them easily.” Essentially, Rajan is arguing that monetary tightening is necessary to shift resources out of the too-large housing and car sectors. Krugman points out that this makes no sense because most of the job losses during the Great Recession haven’t been in the construction sector:
OK, I actually haven’t taken cars into account; someone with more time can do that. But let’s look at the role of job losses in construction versus other sectors, since December 2007. It looks like this:
If high unemployment were largely about shifting workers out of an overblown construction sector, wouldn’t you expect job losses to be concentrated in that sector? Wouldn’t you expect employment elsewhere to be, if anything, rising? In fact, however, the vast majority of job losses have occurred in parts of the economy with little direct connection to the housing bubble. Yes, as a percentage job losses have been much larger in construction; but nothing in Rajan’s argument explains why we shouldn’t be using policy in an attempt to prevent vast job losses in parts of the economy that aren’t overblown.
Let me add a bit more meat to this story. In fact, the Great Recession has been more of an “equal opportunity” recession than other recent recessions (click here for a larger image):
Certainly, construction has lost a significant chunk of jobs, but other industries — manufacturing, professional and business services, transportation and warehousing, financial activities, leisure and hospitality, and information services — have all lost a larger share. Much of financial activities could be considered tied to the run-up and bust of the housing market, but all the others? This Great Recession has had fairly broad, widespread job losses across industry, which contradicts the idea that there’s one or two sectors that U.S. workers need to transition out of.