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Simple economics that most economists don’t know

Summary:
From Dean Baker Economists are continually developing new statistical techniques, at least some of which are useful for analyzing data in ways that allow us to learn new things about the world. While developing these new techniques can often be complicated, there are many simple things about the world that economists tend to overlook. The most important example here is the housing bubble in the last decade. It didn’t require any complicated statistical techniques to recognize that house prices had sharply diverged from their long-term pattern, with no plausible explanation in the fundamentals of the housing market. It also didn’t require sophisticated statistical analysis to see the housing market was driving the economy. At its peak in 2005 residential construction accounted for 6.8

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from Dean Baker

Economists are continually developing new statistical techniques, at least some of which are useful for analyzing data in ways that allow us to learn new things about the world. While developing these new techniques can often be complicated, there are many simple things about the world that economists tend to overlook.

The most important example here is the housing bubble in the last decade. It didn’t require any complicated statistical techniques to recognize that house prices had sharply diverged from their long-term pattern, with no plausible explanation in the fundamentals of the housing market.

It also didn’t require sophisticated statistical analysis to see the housing market was driving the economy. At its peak in 2005 residential construction accounted for 6.8 percent of GDP. This compares to a long-run average that is close to 4.0 percent. Consumption was also booming, as people spent based on the bubble generated equity in their homes, pushing the savings rate to a record low.

The existence of the bubble and the fact that it was driving the economy could both be easily determined from regularly published government data, yet the vast majority of economists were surprised when the bubble burst and it gave us the Great Recession. This history should lead us to ask what other simple things economists are missing.

For this holiday season, I will give three big items that are apparently too simple for economists to understand.

1)Profit shares have not increased much — While there has been some redistribution in before-tax income shares from labor to capital, it at most explains a small portion of the upward redistribution of the last four decades. Furthermore, shares have been shifting back towards labor in the last four years.

2) Returns to shareholders have been low by historical standards — It is often asserted that is an era of shareholder capitalism in which companies are being run to maximize returns to shareholders. In fact, returns to shareholders have been considerably lower on average than they were in the long Golden Age from 1947 to 1973.

3) Patent and copyright rents are equivalent to government debt as a future burden – The burden that we are placing on our children through the debt of the government is a frequent theme in economic reporting. However, we impose a far larger burden with government-granted patent and copyright monopolies, although this literally never gets any attention in the media.

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Dean Baker
Dean Baker is a macroeconomist and codirector of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.

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