Understanding the Causes for the Current Economic Slump

In a recent column in the Guardian in which he rails about the poor quality of most economic journalism, economist Dean Baker argues that those factors usually given as the cause for the continued economic problems–low savings, poor business confidence and the continued housing slump–are really not to blame:

There are many accounts in the business press about consumers holding back as a result of concern about the state of the economy. The same is frequently claimed about investment. The story is that businesses are still so uncertain about the future that they are unwilling to take a risk by investing more money. But if we look at the data from the commerce department, investment in equipment and software is almost back to its pre-recession level, measured as a share of GDP ([US Commerce Department website,] Table 1.1.5, Lines 1 and 11). It was 7.9% of GDP in 200; it was 7.4 in the second quarter of 2012, the most recent quarter for which data are available.

Given the huge amounts of excess capacity in many sectors, this is actually an impressive level of investment. This is certainly not consistent with the story of firms who are hoarding cash and scared to go out on a limb.

In the case of housing, we continually hear stories asserting that the housing market is depressed. However, if we look at the data on the volume of existing home sales, the recent annual rate of 4.8 million (pdf) is more than 20% above the 3.9 million average of 1993-1995, the last years before bubble-generated exuberance began to drive sales.

The same story applies to house prices. Inflation-adjusted house prices are even with or above their long-term trend, according to the Case-Shiller national index. We would only expect a further rise in house prices if we expect the bubble to re-inflate.

Baker goes on to ruminate about the political implications of this misunderstanding of the current economic situation.  You can read his thoughts here.  We just thought it worth noting the apparent discrepancy between how economic conditions are described in the popular press versus what the data actually tell us.

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