It Was Always About Demand

This Bloomberg article is making the rounds in the econ blogs as Atif Mian and Amir Sufi investigate the causes of recession.  It gets into the weeds a bit but it's a good read (emphasis mine):

Our research suggests that 65 percent of the job losses from 2007 to 2009 came from the drop in household spending induced by the collapse in home prices and its effect on a highly levered household sector.

The first observation we made was that there was a large amount of variation across the U.S. in household-debt levels just before the recession began. In areas that experienced strong increases in home values, debt skyrocketed from 2001 to 2007. However, there were many places that avoided the housing boom and experienced no significant house-price appreciation. In these areas, household-debt levels remained steady in the years before the recession began.

By examining the differences in household balance sheets as of 2006, we were able to tease out how the weak ones are affecting the economy. In a study with Kamalesh Rao of MasterCard Advisors, we showed that areas of high debt experienced a severe shock to house prices and spending from 2007 to 2010.

For example, in U.S. counties in the top decile of the household-debt distribution, house prices fell 30 percent from 2006 to 2009 and spending dropped 15 percent from 2007 to 2009. The consumption decline was across the board; even grocery spending was significantly lower in U.S. counties with severe debt problems. 

In other words, the housing depression created the larger recession that by all accounts we're still in, and what the housing depression continues to do is eliminate demand in all other sectors.  I have always argued that this was a demand-driven recession, not a supply side one as many conservatives continue to scream about.

Where the two schools of thought differ the most is whether or not the government should do anything.  Conservatives say that government interference in itself caused the housing depression, so we must now have government do nothing to fix it.  That's like saying "an innocent bystander was killed in a police shootout with criminals, let's get rid of police."

The last 30 years has so destroyed the American middle class that finally we ran out of power to buy things.  The Republicans want to remedy this by reducing that buying power even more.  Without consumption in a consumption-driven economy, you get what we have right now, a weird bifurcated economy with falling prices on big ticket stuff and rising prices on staples and commodities basically rowing in opposite directions on the economic rowboat, in addition to recovering prices on the really, really high end stuff.

Which is why all the nonsense about "we're spending too much" is idiocy.