Saturday, September 10, 2011

Analyzing The Recession Without The Recession

Karl Smith thinks the below chart from David Altig disproves the Austrian explanation of the U.S. recession.
There are several problems with this. First of all, the housing bust didn't just hurt the overall economy because construction employment declined. Even more important was the effect of falling house prices.

Secondly, because the crisis in the overall economy was the lagged effect of the housing bust, some of the decline in construction took place before the recession.

And thirdly, the chart is misleading for several reasons, including the aforementioned lagged effect, the fact that it represents change in terms of number of jobs and not percent and even more importantly the fact that it doesn't include the recession! The Y-axis represents employment change during the so-called recovery and excludes change during the most intense contraction period (Which is why manufacturing is doing so good). Analyzing a contraction without including the contraction is bound to be misleading.


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