Thought for the day: why didn’t we look under the streetlamp
from Merijn Knibbe
There is a famous joke about the drunk who, at night, lost his watch and started to search under the streetlamp, not because he lost it there but because he could see something. But economists did not even bother to look under the lamppost. Dean Baker complains about the inability of economists to spot the housing bubble. He’s right. Economists did not only fail to construct a ‘bubble indicator’ (see Shiller and Baker, however), they did not even bother to look at available information. Let’s take a look at the next data, freely available at Eurostat, not really the most obscure of all statistical agencies: the household investment rate (mainly investements in houses). I compare the countries with the biggest bubbletrouble with Germany, which thanks to good rules did not have a bubble:
Household investment rate, 2000, peak (2006 or 2007) and 2009 (% of disposable income)
Other countries with deflating bubbles (with different timing): The Netherlands, Estonia, Finland, Denmark. In all these cases, the investment rate increased to a level above 10%. In all these cases, the problem appeared at the latest in 2006, sometimes much earlier (Ireland, Spain, The Netherlands). I did not check it, but I do dare to take a bet (100,– in Euro) that in all these cases deregulation and globalisation of the mortgage market aggravated and even caused the problems.
Is it a surprise to anybody that Dutch economists (CPB, Nyffer, Francke) still deny that there has been any bubble? Recently, The Dutch RABO bank seriously proposed that we should tear down houses, to protect prices – let’s destroy real capital to protect balance sheets… But this bank at least understands what has happened.
By the way: Colander made extensive use of this joke when he testified before the USA congres on DSGE models and it is starting to catch on:http://economistsview.typepad.com/economistsview/2010/10/is-macroeconomics-just-looking-under-the-streetlamp.html#comment-6a00d83451b33869e20133f51f6bdb970b