Houston Democrats

Then there's the jump in house prices. Over the past five years housing prices have grown much faster than the overall cost of living, adding about $5 trillion to the public's wealth. Typical estimates say that each additional dollar of housing wealth adds about 3 cents to annual consumer spending, as families reduce their savings and borrow against their newly valuable homes. So we're talking about an additional $150 billion in spending, and roughly 1.5 million more jobs.

Does anything else in the U.S. economy rival housing as a source of job creation? Well, there's also the military buildup. The Economic Policy Institute estimates that increased military spending over the past four years has created 1.3 million private-sector jobs.
And, yes, there are the Bush tax cuts, which the administration insists are the source of everything good in the economy. And it's true that some portion of the tax cuts, which amounted to $225 billion this year, must have been spent in ways that created jobs. Given reasonable estimates of the effect of tax cuts on spending, however, they were probably a smaller force for job creation than the military buildup, and dwarfed by the housing boom.

Two new reports, one from the Center on Budget and Policy Priorities and one from the Congressional Budget Office, compare the current economic expansion with other postwar recoveries. By any measure except corporate profits, which have done very well, this one comes up short.

Let’s look at some government statistics to see the importance of housing to the US economy.

According to the Bureau of Labor Services, total seasonally adjusted nonfarm employment totaled 132,454,000 in January of 2001 and 133,786,000 in July 2005. Therefore, the total net gain in jobs was 1,332,000 over that period.

Over the same time, the net gain in construction employment was 418,000, or 31% of total employment growth. In addition, financial services jobs increased by 474,000 over the same period. All of the financial jobs are not related to real estate. I have not seen any statistics that break this number down into a real estate and non-real estate portion. So let’s make a simple conservative assumption and say that 20% of the financial services jobs are related to real estate activities. That would mean 7.1% of the jobs created in the financial services area are related to real estate, bringing the total number of housing related jobs to 38.1% of total ob creation during the recovery. Finally, business and professional services increased employment by a little over 100,000. Assuming 10% of these are real estate related, an additional 1.5% of job growth is real estate related, bringing the grand total of housing based employment to 39.6% of all jobs created in the last 5 years.

At the same time, we have lost many high-paying manufacturing and high-tech jobs. From January 2001 to July 2005, manufacturing lost 2.6 million manufacturing jobs and information technology lost 560,000 jobs.

Here’s why the manufacturing and information service jobs are so important: they are higher-value jobs that diversify the US’ economic base. The US would be very healthy economically if the economy created jobs in diverse economic areas such as real estate, information and goods production. Diversity of assets lowers the risk that a shock to one area of economic activity will negatively impact the whole economy. However, placing all of your proverbial economic eggs in one basket heightens the risk that when that industry slows down the whole economy will experience trouble.

It is the latter point that Krugman is making in his column. The concentration of economic activity in one housing heightens the risk that a slowdown in housing will slow the entire US economy.

And that slowdown may not be far away. Interest rates are rising. The inventory of homes available for sale in a variety of markets is increasing. Home prices have escalated rapidly in the last 5 years. A variety of consumer debt measures are at historic highs, indicating there is very little borrowing capacity left. Mortgage companies are relying on more exotic financing methods to sell mortgages. In short, all the signs of the end of a cycle are currently present in the US economy.

BLS Statistics

Krugman’s Column