Monday, November 03, 2008

Sunnier skies

For a markedly rosier outlook on the economy and the financial crisis (and the spectre of deflation), check out Dr. Casey Mulligan's blog. It's very textbook and very helpful.

"Shouldn't a housing bust have the opposite effects of the housing boom? The party line about the economy is that the housing boom was a time of inefficient excess. Shouldn't a period of low housing investment bring efficient prodigality: that is, MORE GROWTH FOR GDP AND EMPLOYMENT and less growth for consumption? Why then does the party line feature gloomy predictions for real GDP and employment growth going forward?"
This is a good point. The increase in saving (due to less consumption) should result in lower interest rates, greater investment, and greater future economic growth. He proves the point that non-residential investment is on the rise. Holding all else constant it should also result in a decrease of selling U.S. assets to foreigners and an "improvement" in the trade balance (more exports relative to imports).

However, all else isn't held constant. Public (ie: government) dis-saving should offset (crowd out) much of the private saving. An exogenous increase in demand for dollars abroad to buy risk-free Treasury assets has contributed to a dollar depreciation, potentially worsening the trade deficit and hampering export growth.

Anyway, Dr. Mulligan projects no deflationary problems and greater economic growth than other economists are predicting.

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