Monthly Archives: August 2014

More Evidence Supporting the House of Debt

August 8, 2014
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More Evidence Supporting the House of Debt

Economists of all stripes are baffled by continued economic weakness in the United States. The easiest way to see the weakness is to compare where we are in terms of GDP today relative to historical trend growth, something we did in a previous post. It is clear that one of the main drivers of this weakness is the tepid recovery in consumer spending since the Great Recession. We made note of this fact in another previous post, but we are certainly not alone in noticing this fact.

Our book, House of Debt, makes an evidence-based case for what caused the severe Great Recession and what explains the continued economic weakness. The debt-fueled housing boom artificially boosted household spending from 2000 to 2006, and then the collapse in house prices forced a sharp pull-back because indebted households bore the brunt of the shock. The lack of policies targeting this problem exacerbated the effects of the housing crash on consumer spending.

The BEA released state-level personal consumption expenditure data today, and it strongly supports our view. In the charts below, we take the 20% U.S. states that had the largest decline in housing net worth from 2006 to 2009, and we compare . . .

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