Thursday, May 19, 2011

Unforeseen Consequences of the Housing Bubble

During the housing bubble most money was been used to build homes, commercial offices, and strip malls. The money was not being used to expand our infrastructural in transportation (roads, airports, trains, and bridges) or to create new innovations. The failure to expand our infrastructural does not show up immediately in lower growth, but shows up in a lower potential output five to ten years later. Currently our potential GDP for 2011 is $14.5 trillion (actual GDP is $13.5 trillion). This means we are producing $1 trillion less than we should be. This doesn't account for the potential output being revised lower over the last 5 years. The revisions were done because of a slowdown in productive investments. Ten years ago based on the current rate of innovation and investment potential output was projected to be $15.5 trillion (from the CBO).

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