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Wednesday, November 12, 2008

Tim Duy's Fed Watch

by Calculated Risk on 11/12/2008 08:09:00 PM

Professor Duy writes a regular column at Economist's View called Fed Watch - it is definitely worth reading (as is Economist's View).

From Fed Watch: Misguided Policies

From the wires:
Such comments always leave me with a sick feeling in my stomach – if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. ... I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable.
emphasis added
Dr. Duy offers some suggestions for policy makers:
Policymakers need to come clean with the American public: Future patterns of growth will simply be less dependent on consumer spending. We are entering a period of structural adjustment, and it will be painful. We spent decades pretending that the relentless focus on producing nontradable goods and relying on a ballooning current account deficit to hide our lack of productive capacity was an appropriate policy approach. But ultimately, those policies have failed us, with stagnant income growth for median income families and the deepest recession since the 1980’s (or even worse).

This admission, however, in no way, shape, or form means policy options are limited. The admission simply defines your policy. In the short term, policy can cushion the transition by expanding the social safety net. In the medium term, if consumption is falling, and private investment is unable to compensate, then the federal authority should fill the gap. There is no shortage of sectors of the economy that offer opportunities for investment. In so many ways, we are running on the fumes of the infrastructure investment made by the last generation. Roads, bridges, channels, etc. – you name it, there is an opportunity. Or human capital, via education?... Reasonable policymakers free from ideological constraints can develop a host of potential projects without relying on bridges to nowhere.
Investment in infrastructure makes sense, especially since construction (and construction employment) is one of the hardest hit sectors of the economy. And with the commercial real estate slump picking up steam (and more construction job losses to come), what better area to invest than in the infrastructure of the U.S.A.?