I see lots of discussion in the press about how the housing bubble made Americans poorer, and that this explains the low level of AD. Yet the conclusion doesn’t follow from the premise.
Every bone in my body tells me the conventional view is correct. We built too many houses and got too deeply in debt. Now we need to spend less, and that means we need to produce less (as trade is too small a share of GDP to make up the gap.) Intuitively this seems true, but it’s actually false. To see why, consider the following parable:
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