So the Coalition's economic assumptions only work in the event of a renewed housing and consumer-debt bubble, and in fact the only sector of the housing market that looks like doing its part is the very bubbliest, buy-to-let. They're not the only ones. Inside this magisterial fisking of the US Republicans' budget proposals - and it is masterly stuff, like great boxing - we find this:
In the simulation, the component of GDP that initially increases most, both in absolute and in percentage terms, is residential investment. This is really hard to fathom. There’s no change in pre-tax interest rates to speak of, hence the after-tax mortgage rate presumably rises with the decline in marginal tax rates even as the proposed tax reform curtails some or all of the mortgage interest deduction. It’s hard to imagine the financing cost of housing not rising, at least initially. True, the simulation shows the number of households increasing 75 thousand in the first year, but the simulation also shows residential investment jumping $89 billion, or 21%. Given the size of this increase, we can suspect that residential investment was also adjusted up directly. In any event, at today’s real value of approximately $210 thousand per newly completed housing unit, the extra investment is enough to build roughly 425 thousand units in 2012, of which 350 thousand would be empty at a time when we estimate there already is an excess of more than a million units that could be absorbed by new household formation. And this imbalance only worsens through time. Cumulating the increases in residential investment by perpetual inventory using a 1.5% annual depreciation rate, we calculate that by 2021 the real residential housing stock is up $1.023 trillion. At a decadal average of roughly $234 thousand per newly completed housing unit, this translates into an additional 4.4 million units. By the end of 2021 households are up only 379,000, so that 4 million unoccupied housing units have been built, creating an overhang as large as we estimate developed at the peak of the recent housing boom.
Menzie Chinn and J.D. Hamilton's Econbrowser has more, including a excellent chart.
In fact, the Republicans also expect a surge ahead in investment in capital equipment and software, but nothing like what they expect in commercial property, and that itself is as nothing to the boom they demand in the residential sector.
It is really quite astonishing. Macroadvisors, Chinn, and essentially anyone else vaguely worth listening to in economics are busy crawling over their numbers trying to work out how they came to these conclusions. The answer usually seems to be that they just fudged them, just added a bit. But this is irrelevant.
The worrying thing is that they must be hoping for some sort of pseudo-Keynesian effect like we discussed here. In fact, it’s illuminating that they chose to cook the numbers they cooked - they are numbers for investment, which implies they accept the basic Keynesian insight that investment is the swing item in the national accounts, fundamentally exogenously determined and highly volatile and therefore the determiner of everything else.
Like the other mirror-world Keynesians, though, they are working on the principle that entrepreneurs’ animal spirits will be restored by a good solid recession. They believe themselves to be the representatives of business; therefore, implementing their own ideological preferences will fill industry with confidence. Nothing else but a reversal of feeling could explain such a rapid upward shift in investment.