I am so naive. In response to what I think was a magnificent defense of Arnold Kling against Scott Sumner (and Brad DeLong), I was expecting Scott to either blow me up, or to admit that I had a good point and the Austrian theory went up one notch in his book.
But alas, all Scott did was elaborate on one of my own points, while thinking (a) this somehow helped his case and (b) that he was telling me something I didn’t realize.
I am truly strapped for time, so I can’t spell this out completely. In the interest of brevity, I’m going to simply repost the relevant sections from my article, and then give Scott’s response (which to repeat, in my mind is a simple elaboration of my own point). Then I’ll end with my wise-aleck comment that I left on Scott’s post.
So here goes. Remember the context, Scott thought he had dealt a crushing blow to the Austrian/Recalculation explanation of the recession, when he noted that housing starts fell by more than half from January 2006 to April 2008, whereas the national unemployment rate barely blipped upward. Scott said, “So housing starts fall by 1.3 million over 27 months, and unemployment hardly changes. Looks like those construction workers found other jobs, which is what is supposed to happen if the Fed keeps NGDP growing at a slow but steady rate.”
(1) I rushed to the rescue by arguing the following:
There’s just one problem with Sumner’s argument: housing starts are not synonymous with construction jobs. In fact, from January 2006 to April 2008 — the period when Sumner thinks construction workers must have been laid off in droves because housing starts fell by more than half — US construction employment only fell from 7.6 million to 7.3 million.
Then I went on to say:
In the years leading up to 2006, housing starts steadily expanded. Now if they had simply leveled off in January 2006 — so that (annualized) housing starts every month thereafter remained at the permanently high plateau of 2.3 million — construction employment would have continued rising after that date.
The reason is that there’s more to the construction sector than simply starting new houses. That fact alone buys us another few months, as a look at housing completions shows.
But more important, construction workers are needed to maintain an existing stock of housing. In other words, if the builders had kept constructing new homes at an annualized rate of 2.3 million from January 2006 onward, and if families moved in to them as in normal times, total construction employment would have needed to rise above its January 2006 level. Those workers were needed to keep cranking out the brand new houses, and it would have taken new workers (siphoned from elsewhere in the economy) to, say, add a new deck in the backyard or build a shopping mall down the street from a new housing development.
I am an economist, not an expert in housing or construction. I do not pretend to know exactly what construction workers were doing in the two years after housing starts peaked. But what I do know is that Sumner is wrong in his assessment of the labor markets. Contrary to Sumner, there is no huge reallocation of construction workers (from January 2006 to April 2008) that Kling or the Austrians must explain.
Note that the part I’ve put in bold above is new emphasis; this is my point that Scott himself will elaborate in his own response.
(2) Now here’s Scott’s response to my article, in a post titled “Bob Murphy wrongly assumes I won’t peek”:
Bob Murphy responded [to my point about housing starts like this]: “The reason is that there’s more to the construction sector than simply starting new houses. That fact alone buys us another few months, as a look at housing completions shows. [Bob has a link here] But more important…”
Waaaait a minute. Note how Bob tells me housing starts are the wrong data, because construction workers keep working for some time after the starts, and then tells us to look at housing completions. But then he merely provides a link, moving right along to something “more important.” I wonder why? Perhaps because housing completion data also supports my view? Here are the numbers. I’ve also averaged the two, as the average of starts and completions might be a good indicator of ongoing activity.
January 2006: starts 2,303,000 completions 2,058,000 average 2,180,000
April 2008: starts 1,008,000 completions 1,014,000 average 1,011,000
October 2009 starts 527,000 completions 745,000 average 636,000
Using the housing activity average, an even greater share of the total slowdown occurred between 2006 and 2008, when unemployment was stable, and an even smaller share occurred after April 2008. I want to thank Bob Murphy for further strengthening my argument.
Bob also makes another argument, citing data showing that construction employment declined much less than housing construction between 2006-08. But that’s easy to explain, as commercial real estate prices didn’t peak until late 2008. So the commercial RE sector may have picked up some of the workers laid off from building houses. (I don’t know about infrastructure and government building.) And even if commercial RE didn’t add housing workers, if housing is half of all construction then a 20% decline in housing construction jobs would translate into only a 10% decline in all construction jobs. All this of course supports my point. The big drop in housing construction between January 2006 and April 2008 did not cause a significant impact on the US unemployment rate. Doesn’t that suggest that those housing construction workers weren’t [sic] able to find jobs in other forms of construction, or other activities?
As I said, I am not going to connect the dots. If people don’t see that Scott is literally filling in the gaps of my own argument, I don’t know what to say. Those allegedly embarrassingly reallocated construction workers (who stopped cranking out new houses in 2006) didn’t go into fruit picking or software design, Scott hypothesizes that they apparently went into commercial real estate–one of the things I guessed in my quote above (“shopping mall down the street from a new housing development”).
(3) And as far as me hoping against hope that Scott wouldn’t click the link and verify my wild assertions, all I can do is repost my comment on Scott’s blog:
What did you think I meant when I said this:
That fact alone buys us another few months,
I know Austrians aren’t good at math, but did you think I believed that from January 2006 to April 2008, only a few months had passed?
In closing, I should note that I’m not expecting Scott to capitulate. I just want him to admit that the Klingian/Austrian story isn’t as farfetched as he and DeLong originally thought. For example, I admitted (not going to dig up the link) that I was “shocked” by the behavior of TIPS yields in the fall of 2008, when Scott told me the Fed had a really tight stance and I thought he was nuts. So I concede that Scott’s theory can much more easily accommodate that fact than mine.