[quote=davelj]Straw man alert!! Krugman tries to convince us that these other economists are counting capital gains as GDP growth… when they’re not. They’re merely (correctly) suggesting that booming house prices led folks to borrow against their houses and… wait for it… “spend”. Which they did. And it’s documented. And last time I checked, “consumption” (aka, “consumer spending”) accounted for about 2/3 of GDP. This is neither controversial nor debatable.
I have no problem with Krugman in general… but it seems like he’s just twisting others’ views in order to nitpick in this article. (Must have been a slow economics news week.)
Contrary to your assertion, I don’t think there’s any confusion on the topic here. The arguments that “recent GDP growth is somehow artificial” has nothing at all to do with “asset price increases”. Rather, it has to do with debt creation driving demand (as opposed to “core,” non-debt driven demand). I’ll be so excited when the economics profession learns how to model debt into the workings of our economy. Until that time, we’ll remain lost in the financial wilderness.[/quote]
Not sure how much this adds to the discussion, but: Using the “Mortgage Equity Withdrawal” data from the Fed, I figured out that repaying the “Mortgage ATM” would not drain the economy all that much. Even taking the position that all increase in mortgage debt had to be reduced back to trend line did not result in a substantial decrease in GDP. A recession, to be sure, but no Great Depression. This was in answer to those predicting armageddon. I suspect the explanation for the length and depth of our current recession and slow recovery therefrom lies in other areas.
