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Roubini Sounding Austrian

July 29, 2008

NYU Economist Nouriel Roubini, is quoted at length the Naked Capitalism blog. While the entire article is fascinating, this passage in particular is of great interest:

Sixth, the existence of GSEs….is a major part of the overall U.S. subsidization of housing capital that will eventually lead to the bankruptcy of the U.S. economy. For the last 70 years investment in housing – the most unproductive form of accumulation of capital – has been heavily subsidized in 100 different ways in the U.S.: tax benefits, tax-deductibility of interest on mortgages, use of the FHA, massive role of Fannie and Freddie, role of the Federal Home Loan Bank system, and a host of other legislative and regulatory measures.

The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt – by the household sector, the government and the country – to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs.

Mainstream economics has largely ignored capital, at least in terms of its role in macro-economic phenomenon. Roubini here takes what is essentially an Austrian view of capital. Capital must be funded by savings; the savings must be invested; the quantity and type of capital determines labor productivity; consumption goods do ont increase labor productivity; and increasing labor productivity is a consequence of economic growth.

Roubini is a very interesting thinker to Austrians in that he seems to have almost discovered many aspects of Austrian economics on his own by common sense and looking at what is going on in the world in a curious way.

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