Writing at the New York Times, economist Rebecca Patterson confidently asserted that “Housing is the foundation of the economy. Homes represent the single largest asset for most Americans. They are a vital source of wealth creation that supports consumer spending, which in turn represents about two-thirds of U.S. economic output.” No, that’s just not true.
To understand why, readers need only stop and ask (or read Bringing Adam Smith Into the American Home) what part of the U.S. is known for housing as its source of economic vitality. Would it be Silicon Valley, or Hollywood, or Manhattan, or Houston? The answer is no each time, and that’s true despite the greater truth that the houses and apartments in Atherton, Beverly Hills, Upper East Side, and River Oaks are often rather impressive and expensive.
Underlying Atherton’s economy is technology, entertainment supports Beverly Hills, finance the Upper East Side, and oil River Oaks. No doubt there are other drivers for each, but for the purposes of this opinion piece we can stick to the best known. Yet there’s no domestic or global location in which housing is the foundation of economic activity.
That there isn’t is a statement of the obvious, but also a reminder that opposite the deeply held beliefs of Keynesian economists (yes, a redundancy) consumption doesn’t drive economic growth. And housing is consumption.
Looked at yet again through Atherton, Beverly Hills, the Upper East Side, and River Oaks, residents of all four produce impressively in the technology, entertainment, finance, and oil sectors, and remarkable housing purchases are the effect. Production first, then consumption.
This is important when it’s remembered that Patterson is arguing that “consumer spending” accounts for “two-thirds of U.S. economic output.” No, it doesn’t. Patterson surely knows why.
Lest she forget, our consumptive desires are limitless. Which means that if all it took to grow the U.S. economy was consumption, the U.S. would never not be booming. And for that matter, the whole world would never not be booming. Humans aren’t very complicated on the matter of wants. They’re endless.
Except that we can only fulfill even a fraction of our unlimited wants insofar as we produce first. Once again, it’s production then consumption.
Which speaks to the absurdity about what allegedly powers economic output. What’s important here is that consumption is the effect of output, not the driver. In other words, 100% of an economy is always and everywhere production. Consumption is merely our reward for producing first.
Bringing it back to Patterson, that she errantly believes “Housing is the foundation of the economy” is only a problem because the delusion increasingly has a negative impact on economic policy. Think of the myriad ways in which government rewards consumption of housing, not to mention how it treats the consumption of housing as an investment such that housing appreciation frequently isn’t taxed upon sale in the way that the sale of equities are.
Which is why Patterson’s opinion piece rates rebuttal, as does any commentary suggesting consumption powers economic growth. No, it’s an effect of production, and production is routinely enhanced by investment that suffers a little or a lot to the extent that those with title to money are consuming wealth that already exists (think housing, land, rare stamps, art, etc.) at the expense of investments in stock and bond returns and income streams representing the creation of new wealth.
In short, Patterson is incorrect. Which is her prerogative. What’s sad is that all Americans must suffers the consequence of an economic consensus that puts the cart before the horse.
