21 Oct 2008

A Call to Popperians: How Can We Pit Cowen vs. ABCT?

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In this post, Tyler Cowen acknowledges my capital-consumption story, and contrasts it with his own explanation. In a nutshell: Tyler is saying that the housing boom was fueled by the real savings of foreigners, and this explains how it is physically possible that Americans consumed more (TVs, iPods, etc.) at the same time that they were expanding the housing sector.

In contrast, Tyler says, the Austrian story would need to link the booming housing sector with falling consumption. After all, if the boom is artificial and based on Fed funny money, then there is a tradeoff between houses and iPods; Americans couldn’t have had more of both from 2001 – 2006.

Especially as Tyler clarifies in the comments of the above thread, his point is that yes, capital consumption (a la my sushi story) is theoretically possible, in order to reconcile the facts with the Austrian story. But, he says, the evidence seems to point to his theory.

Well let’s do a test! And to make it extra scientific, let’s lay out our criteria right now, and THEN go look at the data. (Obviously I know how some of the below will turn out, but not all of it.) So in the comments please give me additional areas in which Tyler’s theory and mine give opposite post-dictions (i.e. predictions after the fact).

(1) If I’m right, housing prices should have gone up when Fed was cutting rates, and they should have peaked/started falling when Fed starting raising them.

(2) If Tyler is right, housing prices should have gone up with increased savings in foreign countries that invest in US assets. We could probably refine this some; help here. E.g. maybe we want to look at growth in Treasury holdings by the Bank of China. And then housing prices should peak / fall when the foreign banks slow down their purchases.

(3) If Tyler is right, rising home prices should be accompanied by a rising (or at least stable) dollar. After all, if it’s foreign savings coming in that are pumping up the housing sector, that has to put upward pressure on the US dollar. (I grant this this is self-serving, since we know what happened to the dollar. But the direction is right, don’t you agree? I.e. if Tyler’s story were true, wouldn’t it have propped up the dollar?)

(4) I admit I haven’t fully worked out all the nuts and bolts of it, but surely the theory that there was massive capital consumption occurring is consistent with a falling dollar. As I say, it’s a bit tricky because the Austrian story is that people were consuming capital without being aware of it.

Any other ideas? The obvious problem with the above is that I know how at least 3 of them are going to turn out, so there’s a danger that I say, “Yeah, my story predicts a falling dollar” when maybe I wouldn’t have said that in 2000.

So can people come up with ways to separate Tyler’s theory from mine, that rely on rather obscure things that aren’t currently common knowledge? Or maybe that rely on things that switch, to mark the difference between the expansion and the contraction? I’m thinking of things that would happen in the different sectors of the Chinese and US economies, in terms of a Hayekian triangle.

I guess another obvious one is:

(5) Tyler’s theory shouldn’t require a major recession, whereas mine does.

And the beauty of (5) is that it’s still not decided! So I will say this, if unemployment has peaked, then I am wrong. We have not yet begun to recess, if the ABCT explains what happened with housing.

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