DeLong: Obama turns neo-austrian

*facepalm*

OBAMA ON THE ECONOMY IN GALESBURG: STUBBORN POWER OF FALSE NEO-AUSTRIAN NARRATIVES WEBLOGGING by DeLong

Obama turns neo-Austrian:

Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up. But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes, and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.

This analysis is, you will not be surprised to see, in my view simply wrong.

We have had three things go wrong:

1. A thirty-year failure of economic growth to be equitable growth.
2. A six-year macroeconomic disaster caused by a shortage of aggregate demand that was driven by a collapse of the credit channel.
3. An economy that in the mid-2000s spent too much of its energy building houses and transferring financial assets.

Of these, the first is by far the biggest, the second is also huge, and the third is relatively minor.

But there is no sense in which the level of employment or of GDP that we had in the mid-2000s was unsustainable, or the result of any artificial juicing of an economy. We know what an economy that is artificially juiced beyond its sustainable productive potential looks like: it has rising inflation. That is not what the economy of the mid-2000s looked like:

That is not at all what the economy of the mid-2000s looked like.

And yet there's Dean Baker's point of the $8 trillion housing bubble. That demand was artificial in that it wasn't sustainable and it was "juicing" the economy. It could have been juiced up to its potential instead of beyond its potential.

It needed replacing after it vanished. And yet monetary and fiscal policy in the recovery has been subpar in that there has been the opposite of "juicing" from the state and local governments. Obama's stimulus was by and large canceled out by cuts at the state and local level. After 2010, there were cuts at the federal level as the private sector picked up modestly with help from the Fed.

My half-baked comment (probably will be moderated away):

The housing bubble "juiced-up" the economy in the sense that it wasn't sustainable. Once it popped, the demand generated by the bubble would need to be replaced by something else. I do think there is more to the story which he describes in point 2: "A six-year macroeconomic disaster caused by a shortage of aggregate demand that was driven by a collapse of the credit channel." Before the credit channel collapsed, it was misallocating into an unsustainable area. Now it's not even misallocating.