NOT YET FINISHED: Musings on Recent Macroeconomic Events since 2000
Macro Through þe Lens of Key Components of Demand
Start with one of my standard graphs. I call this one: four key components of aggregate demand. In this version, it:
Takes four components of spending—on exports, on purchases by the government, on residential construction.
It divides them by total nominal spending, thus getting these four as nominal shares of total spending.
It then subtracts off the nominal spending share as it stood in the first quarter of 2000.
So what we get are deviations, in percentage points, of the share of the spending flow on that component from the levels at the start of 2000.
Is this a useful way to look at things? I think that it is:
Let us pick up the story in 2016. Donald Trump is about to squeak into the presidency because of the oddities of the electoral college (in spite of his having been rejected by a clear majority of American voters). The unemployment rate has just cracked the 5% level. That is what I think of as the maximum plausible number that anyone could ever identify with any concept of “full employment” whatsoever:
It had, note, as of then been a very long slog since 2010. Unemployment had fallen at a rate of only 3/4%-point since the economic nadir of the Great Recession. There has been a profoundly anæmic recovery—in fact near-stagnation—for half a decade:
Looking at my four relative shares of the components of spending, it is clear, at least arithmetically, what had happened since 2010:
The largest drag on the economy was the wave of Republican-sponsored austerity that creamed government investment and other purchases up through 2014. What could offset that?
There was no investment boom—with recovery slow and labor slack, why should businesses install equipment?
There was no big shift to a lower-valued dollar and an export boom; rather a sharp fall in exports after 2014, for the dollar was regarded as too good a safe haven.
Other components of national product not shown? At the zero lower bound, and with quantitative easing at anything thought of as a feasible scale a very weak reed, the Fed could do nothing effective except yell for a more-expansionary fiscal policy. Strike that. The Fed could do nothing effective. And the outrage from the cynical and the stupid claiming what support it was providing to the economy was “debasing the dollar” and “inflationary” did not help.
There was no full housing-spending recovery to anything like normal shares of spending at all. In spite of rising house prices signalling an increasingly dire housing shortage in America. In spite of whatever excess-construction housing “overhang” having been created over 2001-2007 having been fully counterbalanced by a housing-construction gap by the end of 2010. In spite of that housing-construction gap having then grown to enormous magnitudes in the years after.
Why no full housing recovery? NIMBYism in blue states perhaps played the biggest role. A lack of interest in the Obama Treasury in fulfilling its promise to revamp the system of housing finance was certainly part of the melody. The housing-finance system needed to be gotten in gear again after its derangement in the 2000s housing boom, bubble, and crash. The Treasury had announced that a reformed system would be coming soon. What bank would want to lean in to making 30-year loans with the structure of the markat about too change? And yet... nothing…
In the end, future economic historians may well conclude that this complete lack of interest in getting policymakers of any vision into place to rebalance housing finance and fight NIMBYism in high-price areas was the worst policy failure of the Obama administration.)
Still, in the end recovery did come. When Donald Trump took office,