It's the Houses, Stupid

The big-government/anti-business recovery has been neither big-government nor anti-business. It's just been a total disaster for everything that has to do with housing.

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Mitt Romney and Newt Gingrich like to call the White HouseĀ  "the most anti-business, anti-investment, anti-job creator administration" in modern history, because they can. The economy is weak, and their audiences are likely to agree with the vague sentiment of these ominous accusations. But these statements aren't merely untestable declarations. They are falsifiable claims. And they're probably false.

When you compare Obama's term to our last eight recoveries, the record looks almost normal. Almost. Even with the awful summer of 2011, the economy added nearly 2 million jobs in the last 12 months, the best in five years. The recovery in business investment tracks very closely to the average of the last eight recoveries. Our recovery in exports has been an expected highlight. And it hasn't been dependent on sustained growth in government. The stimulus kicked in before the end of the recession, but since that time, it's tapered off so that today, the increase in real federal government spending is also totally average (see below -- graphs from the economic memo Bouncing Like a Slinky by Michael E. Feroli, of JP Morgan, and Ethan S. Harris, of Bank of America).


What's different? Housing is different. And it's been a nightmare. Single-home construction took a nosedive after ascending through the previous decade. Home equity, which makes up 80% of household wealth for the bottom fifth, has collapsed. Service jobs around the real estate industry have been decimated, especially in the Michican/California/Arizona/Nevada/Florida nexus of doom. Residential investment is the key variable here, and it's been flat out decimated. Related is the misery of state and local government financing. Local governments get up to 80% of their revenue from property taxes, so you can imagine why they've been killed. State government have suffered similar financing droughts since the end of the stimulus.

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"For the first time in the post-war period there has been essentially no recovery in residential investment," the report says. This is atypical for a recession. But it's typical of a financial crisis that devastates home prices. Graded against the last eight U.S. recoveries, we're running well behind in GDP growth. But compared to the last five major financial crisis, we're firmly middle of the pack.

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This isn't to absolve the administration or Federal Reserve of all responsibility or blame. There is more that can be done, and the range of options, listed roughly in order of how much I think they would help, includes: a monster government intervention in underwater homes, another round of monetary easing, a larger fiscal stimulus, a reduction in tax rates, a regulation holiday, and tax reform.

But the illusion of a big-government, anti-business administration holding back the recovery doesn't seem to hold up. The evidence suggests the recovery has been neither big-government nor anti-business. Total government has declined, the federal government has grown at a slightly-above-normal pace since 2009, and business investment has been normal for a recovery. The claim that regulatory uncertainty is a burden for small companies might be true on a small scale, but it is not as powerful as the clear-cut demand-side arguments. The recovery has been a drag because housing has provided a monstrous anchor, dragging down construction, local tax revenues, service jobs, entrepreneurship, credit availability and overall spending.