April 14, 2013 11:50 AM UTC

Sunday Morning Must-Read Econo-Blogging

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• by: ParkHill

Brad DeLong has a great, user-friendly article discussing the causes of the 2008 crash of the economy. It is rare to get such a clear explanation. Highly recommend that you make a cup of coffee, and pull up an easy chair.

DeLong points out that the four main drivers of the economy are: Housing, Exports, Equipment and Government. Between 2005 & 2008, the Housing bubble was unwinding, but Exports and Equipment were absorbing the problem. In 2008-2009 there was a sudden collapse in Housing, Exports & Equipment caused by the meltdown in the finance sector. Since 2009 Exports & Equipment have been improving, but Government and Housing are stuck in the mud.

Government Spending and Housing:

Government should borrow at 0% to invest in infrastructure and services (education/health care), pulling spending from the future to the present, while postponing taxes to the future. Housing will recover as 4 million people living in their sisters’ basements have the income and the security to move into their own homes.

Practically everything that goes wrong in micro goes wrong because somewhere in the system some people have what we regard as the “wrong” incentives, and have responded to them. In such a situation you frantically scramble to fix it and correct it. And you do so by finding ways to change public policies so that people in fact have the right incentives.

Micro is somewhere between half and three-quarters of economics.

The other quarter or so of economics is macroeconomics.

Macro is different. Macro deals with the fact that sometimes the economy seems to have some sort of a grand mal epileptic seizure. It freezes up. Something goes mysteriously wrong–and wrong not with an individual firm, or an individual industry, or an individual sector of the labor market, but wrong with pretty much the whole thing. This happened to the US economy in 2008 and 2009.