"In other words, a fuller answer to my former neighbor would be that
these days, Americans make a living selling each other houses, paid
for with money borrowed from the Chinese. Somehow, that doesn't seem
like a sustainable lifestyle."



I used to live next door to a Russian émigré. One day he asked me to
explain something that puzzled him about his new country. "This place
seems very rich," he said, "but I never see anyone making anything.
How does the country earn its money?"

The answer, these days, is that we make a living by selling each
other houses. Since December 2000 employment in U.S. manufacturing
has fallen 17 percent, but membership in the National Association of
Realtors has risen 58 percent.

The housing boom has created jobs in two ways. Many jobs have been
created, directly and indirectly, by a surge in housing construction.
And rising home values have fueled a simultaneous surge in consumer
spending.

Let's start with home building. Between 1980 and 2000, which was
before the housing boom, spending on the construction of new homes
averaged 4.25 percent of G.D.P. In the most recent quarter, however,
the figure was 5.98 percent. That difference is equivalent to about
$200 billion a year in additional spending, generating roughly two
million extra jobs.

Then there's the jump in house prices. Over the past five years
housing prices have grown much faster than the overall cost of
living, adding about $5 trillion to the public's wealth. Typical
estimates say that each additional dollar of housing wealth adds
about 3 cents to annual consumer spending, as families reduce their
savings and borrow against their newly valuable homes. So we're
talking about an additional $150 billion in spending, and roughly 1.5
million more jobs.

Does anything else in the U.S. economy rival housing as a source of
job creation? Well, there's also the military buildup. The Economic
Policy Institute estimates that increased military spending over the
past four years has created 1.3 million private-sector jobs.

And, yes, there are the Bush tax cuts, which the administration
insists are the source of everything good in the economy. And it's
true that some portion of the tax cuts, which amounted to $225
billion this year, must have been spent in ways that created jobs.
Given reasonable estimates of the effect of tax cuts on spending,
however, they were probably a smaller force for job creation than the
military buildup, and dwarfed by the housing boom.

So it's an economy driven by real estate. What's wrong with that?

One answer is that it has been a pretty disappointing recovery. Two
new reports, one from the Center on Budget and Policy Priorities and
one from the Congressional Budget Office, compare the current
economic expansion with other postwar recoveries. By any measure
except corporate profits, which have done very well, this one comes
up short.

Even the good months would have been considered subpar in the past:
the administration hailed last month's job growth as something
wondrous to behold, yet there were 68 months during the Clinton years
when employment grew faster.

Still, the economy is expanding. But because that expansion depends
so much on real estate - without the housing boom, the economic
picture would look dismal indeed - you have to wonder how much to
trust it.

I've written before about the reasons to believe that current house
prices in much of the country represent a bubble. When that bubble
begins to deflate, so will housing-related employment.

Beyond that, there's the disturbing point that we're paying for the
housing boom (and the military buildup and tax cuts) with money
borrowed from foreigners.

Now, any economics textbook will tell you that it's fine to borrow
from abroad if the money is used to expand the economy's productive
capacity. When 19th-century America borrowed from Europe to build
railroads, it was also enhancing its ability to repay its debts
later. But we aren't borrowing to build productive capacity. As a
share of G.D.P., investment other than housing construction is below
its average between 1980 and 2000, and way below its level at the end
of the 1990's.

In other words, a fuller answer to my former neighbor would be that
these days, Americans make a living selling each other houses, paid
for with money borrowed from the Chinese. Somehow, that doesn't seem
like a sustainable lifestyle.

How solid, then, is America's economic recovery? The British have a
phrase that applies: "safe as houses." Our economy is as safe as
houses. Unfortunately, given current prices and our dependence on
foreign lenders, houses aren't safe at all.

www.nytimes.com/2005/08/12/opinion/12krugman.html