Inflating the bubble?

Today, Furman and Landsburg discuss unemployment and the mortgage crisis. Previously, they debated whether the stimulus package would work and assessed the government’s ability to mitigate economic downturns given its record deficit spending. Later in the week, they’ll discuss reasons for the economy’s slowdown and what the government should do if the stimulus fails to prevent a recession.

This isn’t your parents’ mortgage market
By Jason Furman


I wanted to come back to a point you alluded to in your first post. You argue that the stimulus package will only delay the necessary adjustments in the economy. Elsewhere you argued more fully that the “new stimulus package only delays that process by propping up dying industries for a while and postponing the day of reckoning.” Presumably chief among these industries would be real estate.

Let me first say that I agree: Policymakers should not try to prop up individual industries. Real estate clearly was overpriced and too much was built; it would be impossible and undesirable to postpone the needed adjustments. More broadly, I oppose trade restraints, regulatory rules and financial support for specific industries or regions for precisely the same reasons you do.

But the problems that started in housing markets in a handful of states are now spreading across the country and across a variety of sectors in the economy. The fiscal stimulus plan is designed to prevent or minimize this broader slowdown. It does not include substantial sums to bail out the housing industry or create jobs in particular industries or states. Instead, it provides essentially neutral incentives for consumer spending or business investment. The stimulus bill represents an implicit admission by policymakers that they cannot predict from where the new jobs will come; they are leaving that to the decentralized decisions of millions of consumers and businesses. (As an aside, this is one advantage of fiscal stimulus over relying on the Federal Reserve alone, because the Fed’s interest rate cuts operate more through specific sectors, notably housing.)

But would preventing the unemployment rate from rising dramatically stop the economy from adjusting, weak industries from dying and successful new industries from emerging? The experience of recent history suggests not. From the middle of 1992 through 2000, the economy enjoyed a sustained economic expansion, falling unemployment rates and a net gain of more than 20 million jobs. But this net gain concealed the enormous transformations occurring in the economy: Over that period, the economy created 274 million new private sector jobs and lost 252 million old private sector jobs. The manufacturing sector’s job share fell, but new jobs simultaneously rose to take their place. And no recession was required.

Having said all that, let me end with one caveat about housing. There are a few modest but potentially helpful steps that could benefit both lenders and borrowers in the housing market with little or no harm to taxpayers or other third parties. In this era of securitization, a person’s mortgage is sliced and diced and sold all over the world. That can lead to coordination problems, resulting in defaults and foreclosures that cause unnecessary harm to both homeowners and lenders. One type of beneficial step to avoid this Solomon-type slicing the baby in half was the voluntary interest rate freeze coordinated by U.S. Treasury Secretary Henry Paulson but implemented on an entirely voluntary basis by the private sector.

The recently passed House stimulus bill also allows Fannie Mae and Freddie Mac to temporarily hold larger mortgages in higher-priced areas, a step that will help prevent some markets from freezing up. Eventually, these higher limits should be allowed to expire or be extended only in exchange for tighter regulation of Fannie and Freddie. Another promising step along these lines is allowing the Federal Housing Administration to insure somewhat larger loans; this would be even better if it were combined with some of the FHA reforms that are supported by both the Bush administration and Rep. Barney Frank (D-Mass.), which would make the FHA more effective in preventing avoidable foreclosures.

I do not believe that we should allow the economy to slip into a serious downturn in the hopes that a systemic crisis will help foster the needed adjustment in housing. While propping up housing should not be our central goal, I certainly would be happy if helping the overall economy — with a few low- or no-cost measures for the housing sector — provided some relief for struggling homeowners who can eventually afford to stay in their homes.


Jason Furman is a senior fellow and director of the Hamilton Project at the Brookings Institution. He served as a special assistant to the president for economic policy from 1999 to 2000.

Why weren’t last year’s unemployed worth helping?
By Steven E. Landsburg

Tuesday, you asked me why unemployment rose in December, and you gave me multiple choices. I answer: “None of the above.”

Your preferred choice was “C” — “The economy has hit a weak patch and needs to be stimulated.” It would be more accurate to say that a few industries, particularly housing, have hit weak patches. Now, workers in those industries face the unpleasant prospect of finding new ways to be useful.

It does not follow that anything needs to be stimulated. It does not follow that “stimulation” would help these people. And it does not follow that we should help them even if we could.

I explained Monday why I don’t think the stimulus package will work. Now allow me a separate observation: People lose their jobs all the time. An above-average number might have lost their jobs in December, but plenty of others lost their jobs in November, or October, or a year ago. Why should people who endured this trauma last year — and others who will endure it a year from now — be taxed to help those who happen to be enduring it today?

It seems fundamentally unfair to say that we’ll help you out with an expensive stimulus package if you lost your job this month, but we’ll foot you with the bill for that package if you lost your job a year ago and then found your way back into the workforce. Not only is it unfair, but if the package doesn’t work, it’s unwise to boot.

The economy does not need to be stimulated so much as people need to find new ways to be useful. If you’re good at building houses and too many houses have been built, then sooner or later you’re going to have to become good at doing something else. It is a false favor to delay that process.

Moving on to today’s post, I’m glad we agree that policymakers should not try to prop up individual industries. But after acknowledging this agreement, you go on to support the expansion of Fannie Mae and Freddie Mac, which, as far as I can tell, is nothing but an attempt to prop up the housing industry. What gives?

Steven E. Landsburg is a professor of economics at the University of Rochester and the author, most recently, of “More Sex is Safer Sex: The Unconventional Wisdom of Economics.”

<< Previous day’s Dust-Up | Main Page | Next day’s Dust-Up >>
Day 1 | Day 2 | Day 3 | Day 4 | Day 5