Boy, economists are sure obsessed about the housing bubble, aren't they? Pages and pages about the dire effects of the bubble popping--how horrible it's going to be, how we will all suffer, how the Fed should act quickly to raise rates and pop the bubble now before things get even worse.
But there's a wonderful new paper which links the whole boom and bust thing to the question of productivity growth. It's called "The Anatomy of Start-Stop Growth," by Benjamin Jones and Benjamin Olken. (you can find an abstract of the paper here). Here's some excerpts:
....all but the very richest countries experience both growth miracles and failures over substantial periods.
....growth “miracles” and “failures” appear to be ubiquitous at ten and fifteen year time scales, with only the very richest countries immune from these dramatic fluctuations. Despite talk of poverty traps, almost all countries in the world have experienced periods of growth lasting a decade a longer during which they appeared to be growing fast enough to converge to the United States. Conversely, nearly all countries have experienced sustained periods of abysmal growth.
....The primary conclusion is that capital accumulation and utilization do not appear to explain large portions of the change in economic performance....total factor productivity, as the residual in growth accounting, is left as the primary explanation for structural breaks in growth, particularly accelerations.
the results in this paper suggest that TFP is much more important for growth than capital accumulation, even in the short and medium run – where factor accumulation could have,in theory, played a large role.
Let me draw some implications from the paper.
1) Every country has booms and busts--it's normal.
2) What drives the booms are accelerations in productivity growth, not increases in investment.
3) To make sure that your booms are bigger than your busts, pay attention to productivity.
Conclusion: The U.S. has had an enormous productivity boom in recent years, and some of these gains went into housing. The biggest danger to the U.S. economy is not the end of the housing boom, but a slowdown in technological and organizational change. Adaptability wins in the end.