Decomposing the Recession

Decomposing the Recession

Decomposing the Recession

Moneybox
A blog about business and economics.
Aug. 8 2012 2:59 PM

Decomposing the Recession

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Brad DeLong has this great chart decomposing the sharp recession and sluggish rebound into its component elements.

You see that the back-and-forth swing of business investment has been the main motor of the recession. When it falls off the cliff is when the economy was collapsing, and its comeback has brought the stabilization of growth and return to a steady path. But it's not a steady path of full employment. Why? The way Brad puts it is "Fix spending on residential construction, and you will have fixed the downturn."

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But the chart also shows us that contrary to a lot of myth-making, the recession is not identical to the downturn in housing. Residential construction peaked way back in 2006, but for about two years the declines in housing were offset by increased imports. That's a window into a happier alternative history of the housing boom in which the same process just continued. The construction industry collapses and workers shift out of homebuilding into import-competing and exporting occupations. Living standards sort of stagnate awhile because growing net exports means "making more stuff without consuming more stuff" but there's no mass unemployment. After several years of growth in net exports, households and firms have deleveraged a fair amount and we can go back to building houses. But instead, that happy saga was interrupted by the great crash of 2008, which pulled business investment and exports down with it.