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River Basin for coal mining. Nonetheless, as awareness of coal’s
contribution to global warming and human health impacts grows,
American coal companies are going to fight to keep the mines operating
and the coal burning. Even it if means helping to fuel one of our country’s
main economic rivals, China. Read More
Quantitative Easing is a Bust
What’s Wrong with the Economy?
by
Mike Whitney
The reason the US economy is still sluggish 4 years after Lehman
Brothers defaulted, is of lack of demand. Demand dropped off after the
housing bubble burst and has never really recovered. Economist Dean
Baker calculates that hit to demand is somewhere in the neighborhood of
$1 trillion per year, a sum that’s been impossible to replace. Here’s how
Baker breaks down the costs in terms of GDP and weak consumption:
“We saw a sharp falloff of residential construction as we went from a
near record boom, with construction exceeding more than 6.0 percent of
GDP at the 2005 peak, to a bust where it fell below 2.0 percent of GDP.
This meant a loss in annual demand of more than $600 billion a year.
We also saw a large falloff in consumption due to the loss of $8
trillion in housing wealth. The housing wealth effect is one of the oldest
and most widely accepted concepts in economics. It is generally estimated
people spend between 5 and 7 cents each year per dollar of housing
wealth. This means that the collapse of the bubble would be expected to
cost the economy between $400 billion and $560 billion in annual
demand.
There is no mechanism that would allow the economy to easily
replace the combined loss of between $1 trillion and 1.2 trillion in demand
that would be predicted from the collapse of the housing
bubble.” (“Underwater Homeowners Cannot Explain the Weak Recovery,
Dean Baker, CEPR)
So, while household indebtedness, off-shoring of jobs and so called
“onerous” regulations may have dampened overall activity, the proximate