Real Estate Bubble Needs to Pop for Economy to Rebound

In The Washington Post, Robert Samuelson explains that the government is doing more harm than good by attempting to delay the inevitable popping of the real estate bubble, resulting in artificially inflated home prices that buyers can’t afford to purchase. “The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last. It’s elementary economics.”

Government officials don’t seem to have learned anything from the Great Depression, and what made it last longer than prior recessions. The Great Depression started out in 1929 as less severe than some preceding recessions with very nasty beginnings, like the 1920-21 recession that followed the enormous upheaval of World War I. But the Great Depression lingered on for a decade rather than the short time span of the 1920-21 recession, which quickly ended and turned into an economic boom.

Why did the Great Depression last so much longer? Because presidents — Herbert Hoover, and then Franklin Roosevelt — attempted to artificially prop up prices and wages to keep them from falling, preventing the economic bubble of the late 1920’s from popping and then getting the recession out of its system. Since big businesses were discouraged from cutting wages much, employees became prohibitively expensive, and got laid off instead of getting pay cuts. And since they were discouraged from cutting prices, buyers found what was on sale just too expensive to buy, resulting in increased inventories, and reduced industrial production (which led to further lay-offs).

(By contrast, there was “remarkably sharp price deflation” in the 1920-21 recession).

Roosevelt continued in this unproductive path of trying to artificially prop up prices and wages until the Supreme Court stood up to him in Schechter Poultry v. United States (1935), a landmark court decision that struck down the price and wage floors imposed by Roosevelt’s National Industrial Recovery Act, which created economy-wide cartels that favored big businesses over small ones (like the Jewish immigrant small businessmen who won the Schechter Poultry case).