His example of something he has been wrong about is that he was somewhat sanguine about the loss of manufacturing jobs, and that the housing bust convinced him that the shift from manufacturing has been more painful than he had acknowledged. He cites a study with the following excerpt:
….We also find that housing booms significantly reduce the likelihood that displaced manufacturing workers remain non-employed, suggesting that housing booms masked non-employment growth that would have otherwise occurred earlier in the absence of the booms… Collectively, our results suggest that much of the non-employment growth during the 2000s can be attributed to manufacturing decline and these effects would have appeared in aggregate statistics earlier had it not been for the large, temporary increases in housing demand.So, ironically, as IW readers know, Adam wasn't wrong at all. The boom wasn't unsustainable. It didn't mask anything. The bust was avoidable and unnecessary. So, without the presupposition about the unsustainability of the housing boom, this study actually reinforces Adam's prior beliefs. The lost manufacturing employment wasn't masked by housing. It was shifted to other sectors, just as Adam would have thought.
This is what is so important about getting the housing issue right. So much new research on so many issues is built on presuppositions which are false, that this one mistake is affecting many areas of economics and finance. Since we had two housing booms - the boom with little construction and high prices, and the boom with abundant construction and moderate prices - any presumption of how prices and supply related to one another on a national level is tainted.
The authors make the following comment (page 19):
given that our housing demand change measure is constructed with the assumption that there are no housing supply shocks, it is likely an error-ridden version of true housing demand changes.
They purport to try to fix that. The statistics, admittedly, are a bit above my understanding without some assistance, but they appear to try to adjust for existing supply and demand elasticities in various cities. I think the problem this may create is that supply elasticity is not stable. In any given city, supply tends to be very elastic, up to some maximum level of bureaucratic or political ceiling, at which point it shifts to very inelastic. In Dallas and Houston, that ceiling is very high. In San Francisco, it is very low. They interpret sharp price changes in places like Phoenix as shifts in demand, so that the price changes can be attributed to demand changes, but Phoenix has had high demand for housing for decades. I think what we see in 2005 in Phoenix is probably more of a shift in demand that triggered a shift in supply elasticity.
The idea that construction employment was positively correlated to home price increases just isn't plausible, given how much of the price boom was due to cities that were extreme outliers in limiting housing supply. Outside the Closed Access cities, which had prices well beyond what we saw in other cities, the places that did see price shifts tended to be sharp, late, and temporary (2004-2005). For instance, even if we attribute the sharp rise in home prices in Phoenix in 2005 to housing demand, clearly this had little to do with construction employment and its relationship to changes in manufacturing employment, which would have been steadily shifting throughout the period. And housing starts among MSA's just didn't shift that much in relation to local price shifts.
The housing boom wasn't unsustainable. The high prices were coming from the places that wouldn't accommodate a booming construction sector. The idea that the housing boom masked manufacturing losses because of construction employment in the Closed Access cities (the red lines in the housing permits graph above) is implausible.
Adam, you weren't wrong. Maybe you should be more confident about your intuition, after all!