Arithmetic Trumps Bad Economics: The
Simple Story of the Great Recession
a r e
Q c
ui k Tim e ™
Dean Baker
a n d a
d ec o m p r e s s o r
n e ed e d t o s e e t h i s c
p i t ur e .
Co-Director
Center for Economic and Policy Research
October 1, 2011
Key Points on the Economic Crisis
1) The main cause was the collapse of
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d ec o m p r e s s o r
a r e n e ed e d t o s e e t h i s c
p i t ur e .
the $8 trillion housing bubble
2) The financial crisis was secondary
3) In the short-term the government must fill
demand gap, in the longer term the dollar
must fall to reduce the trade deficit.
Real Sales Prices v. Rents
200
180
160
140
120
1953 = 100
100
80 a r e
Q c
ui k Tim e ™ a n d a
d ec o m p r e s s o r
n e ed e d t o s e e t h i s c
p i t ur e .
60
40
20
0
Sale Price Rent
Source: Case-Shiller 20-city index.
The Housing Bubble Drove the Economy,
2002-2006
1) Near record rates of construction, 2002-2005.
2) Non-residential bubble 2005-2008.
3) Consumption boom pushes savings rate to zero.
Q c
ui k Tim e ™ a n d a
d ec o m p r e s s o r
a r e n e ed e d t o s e e t h i s c
p i t ur e .
Q c
ui k Tim e ™ a n d a
d ec o m p r e s s o r
a r e n e ed e d t o s e e t h i s c
p i t ur e .
The Financial System is Not the Problem
1) Homebuyers are able to get mortgages (Mortgage Application
Index).
2) Firms can borrow on credit markets at unusually low interest
rates (we are not Japan).
a r e
Q c
ui k Tim e ™ a n d a
d ec o m p r e s s o r
n e ed e d t o s e e t h i s c
p i t ur e .
3) Even small firms do not consider credit a problem.
4) Investment in equipment and software is close to pre-
recession levels.
Q c
ui k Tim e ™ a n d a
d ec o m p r e s s o r
a r e n e ed e d t o s e e t h i s c
p i t ur e .
Investment in Equipment and Software as a Share of GDP
2000-2011
12.00%
10.00%
8.00%
Percent of GDP
Q c
ui k Tim e ™ a n d a
d ec o m p r e s s o r
a r e n e ed e d t o s e e t h i s c
p i t ur e .
6.00%
4.00%
2.00%
0.00%
Year (Q1)
Ways Out of Current Downturn
1) Stimulus – spend money
a) youth jobs programs
b) aid to state and local governments
a r e
Q c
ui k Tim e ™ a n d a
d ec o m p r e s s o r
n e ed e d t o s e e t h i s c
p i t ur e .
c) infrastructure projects
2) Federal Reserve Board
Ways Out of Current
Downturn
3) Work Sharing – fewer hours per job,
more jobs.
4) Lower valued dollar – move toward
a r e
Q c
ui k Tim e ™ a n d a
d ec o m p r e s s o r
n e ed e d t o s e e t h i s c
p i t ur e .
balanced trade.
Conclusion: We Must Act
Quickly to Restore Economy
1) Long-term unemployment is
devastating to workers and families.
2) Unemployment is an enormous
a r e
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ui k Tim e ™ a n d a
d ec o m p r e s s o r
n e ed e d t o s e e t h i s c
p i t ur e .
waste of resources.
3) We know how to do it.
4) It was not the unemployed who
messed up on the job.