Juanson World

Excellent Krugman this morning:

I used to live next door to a Russian émigré. One day he asked me to explain something that puzzled him about his new country. "This place seems very rich," he said, "but I never see anyone making anything. How does the country earn its money?"

The answer, these days, is that we make a living by selling each other houses. Since December 2000 employment in U.S. manufacturing has fallen 17 percent, but membership in the National Association of Realtors has risen 58 percent.

The housing boom has created jobs in two ways. Many jobs have been created, directly and indirectly, by a surge in housing construction. And rising home values have fueled a simultaneous surge in consumer spending.

Krugman goes on to point out that the current economic expansion has been driven in part by increased military spending and the Bush tax cuts, but that the housing bubble is mostly responsible for this. This bubble becomes more fragile when you consider the number of US treasury bonds that are being held by China:

Now, any economics textbook will tell you that it's fine to borrow from abroad if the money is used to expand the economy's productive capacity. When 19th-century America borrowed from Europe to build railroads, it was also enhancing its ability to repay its debts later. But we aren't borrowing to build productive capacity. As a share of G.D.P., investment other than housing construction is below its average between 1980 and 2000, and way below its level at the end of the 1990's.

In other words, a fuller answer to my former neighbor would be that these days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn't seem like a sustainable lifestyle.

Those that have purchased real estate as a profit-making venture, having taken out huge mortgages, are in for a inevitable meltdown when the bubble slowly deflates. They will have Bush to thank for his massive levels of deficit spending.