The reason for the depth and duration of the downturn is far too simple for most economists to understand

Real-World Economics Review Blog

from Dean Baker

Many economists and business writers view the duration and severity of the downturn as being a mystery. They argue that it has something to do with the financial crisis, although the exact nature of the relationship is often not quite clear, with the financial crisis looming as a dark cloud hanging over the head of an otherwise healthy economy.

Fortunately, for arithmetic fans the story was never very difficult. In the last business cycle the economy was being driven in large part by a housing bubble. The unprecedented run-up in nationwide house prices lead to booms in both residential construction and consumption.

This was easy to see even before the bubble burst and should be completely apparent to everyone now. In the 1980s and 1990s before the bubble began to drive the housing market, residential construction in the United States accounted for an average of less than…

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