At the beginning of a long rant aimed at Raghuram Rajan, Karl Smith takes aim at Rajan’s contention that “bloated finance, residential construction, and government sectors need to shrink.” That may or may not be true of finance and government:
But there is no evidence that the residential construction sector is bloated. A cursory look at actual production levels would tell you that the United States is producing far too few homes. If you don’t trust that then you can look at prices. Rents — the price of the service flow from housing — are rising rapidly against a backdrop of depressed demand and high unemployment.
If you wanted to argue that a structural problem facing the United States was the inability of the residential construction sector to jumpstart itself, that would make sense. However, the idea that a problem facing the US is that it is spending too much capital and labor on residential construction is directly at odds with the facts.
There are lots of ways of looking at the construction market — and Karl has a couple of them here — but the easiest way is to simply look at the size of the housing boom of the aughts and the housing bust of 2008-12. That’s the chart on the right, and its story is pretty obvious: the housing bust has been way bigger than the boom. For a year or two after 2008, you could plausibly argue that we had too much housing, which meant construction workers needed to find jobs elsewhere, but after that it just became a lazy mental tic that got repeated endlessly by people who hadn’t taken a look at the actual numbers lately. If you do, it’s obvious that we now need more housing, not less.
And yet, despite the fact that there’s a lot of pent-up demand for housing, we haven’t seen a real recovery in the housing market. That’s a sign not of structural problems, but of the fact that people don’t have enough money and bank credit is tight. That’s the problem we need to address.