The Next Recession

Many signs indicate that the economy is headed into another recession. The stock market is dropping. China’s growth is slowing. The Baltic Dry Index is at its lowest level in history, which means there is less international trade. Many predict that housing prices are about to collapse again.

While progressives such as Naomi Klein blame capitalism for these problems, the reality is that our current economic doldrums are the fault of too much government. As investment analyst Lacy Hunt points out, all of the economic tinkering since the 2008 crash has failed to spur the economy.

Some of it has done more harm than good. Remember when Chrysler and General Motors were taken over by the government to prevent them from going bankrupt–and then the government immediately forced them into bankruptcy? In a normal corporate reorganization, bond holders have first claim on the assets of the company. But the Obama Administration zeroed out Chrysler’s bonds in favor of its labor unions. That meant automakers would have to pay a premium for any future bond sales. Inconsistent government policies make investments risky and drive investors to less productive areas of the economy.

Excessive regulation by every level of government is another hindrance to economic growth. In the 1990s, Peruvian economist Hernando de Soto showed that the reason why capitalism worked in developed nations like the United States and not in undeveloped nations like Peru was that government regulation in the latter countries made it extraordinarily difficult to get permits to start small businesses and get title to real estate. Today, the burdens of regulation in states like California and Hawai’i have practically reached Peruvian levels.

Then there’s housing, which in many places is suffering another bubble. As the Antiplanner has pointed out many times before, housing prices didn’t bubble before nations like Britain, states like California, and urban areas like Vancouver started imposing strict land-use regulation. Housing still doesn’t bubble in relatively unregulated regions. Unfortunately, pretty much all of western Europe, Australia, and the coastal regions of both Canada and the United States (which most of those nation’s residents live) are heavily regulated and thus subject to volatile housing prices.

Wall Street has learned the lessons of collateralized debt obligations, credit default swaps, and other financial instruments that caused the 2008 crash. But volatile housing prices exacerbate the financial effects of stock market swings and other economic indicators. Removal of those land-use rules would go far to smoothing out the business cycle and its effects on the average person.


4 thoughts on “The Next Recession

  1. Frank

    “Housing still doesn’t bubble in relatively unregulated regions.”

    I’m still waiting for an explanation why the Antiplanner heaven of Kansas City has seen median house values increase 20 times the inflation rate in the last year.

  2. Builder

    I know almost nothing about the Kansas City real estate market but a quick Google search revealed that according to Zillow the median home value has increased 6% in the last year to $107,300.

  3. Frank

    Thanks for your reply, Builder. A week or so ago the claim was made that cities without UGBs don’t see wild fluctuations in housing values. I replied with this:

    The median home value peaked in 2007 at $160k. Seven years later, values bottomed out at about $100k, a loss of nearly 40%.

    I maintain that 40% loss in seven years is indeed a wild fluctuation.

    I had found a stat showing a 10% increase from mid-2014 to mid-2015 and can’t find that stat now, although I did find info for the most desirable neighborhood, which experienced 10%+ increase.

    Rent is increasing there faster than any other cities except SF, SJ, and Den. I’m surprised to see other non-UGB cities on this list.

    The official rate of inflation in the US is 0.5%.

    Even a 6% increase in housing value equates to 12x inflation.

    At any rate, I stand by my assertion that monetary policy is the number one factor in housing value fluctuations, anywhere, regardless of UGB and other government regs, and I would really like to see the AP address why KC housing has increased at a pace far beyond inflation since it has no UGB.

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