Goolsbee on Supply-Side and Subprime.

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If anyone can hold the line on not extending the Bush tax cuts for the richest 3% of Americans it’s someone whose academic work and popular writing has found that “the new Laffer curve has looked more like a fleeting figment of economic imagination.”

He also wrote an editorial, very typical of the time, that risky, explosive subprime loans were great for the economy because people were obviously income smoothing. How can you tell people were income smoothing? Because they were taking out risky, explosive subprime loans!

‘Irresponsible’ Mortgages Have Opened Doors to Many of the Excluded

And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, “Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.”

This was very typical of elite economic thinking, and I hope Goolsbee, like many, feel a bit of egg on their face for this kind of exaggerated talk about how “perfect” the subprime market was chugging along. Here he is defending the Consumer Financial Protection Agency:

He’s using language that I think 2007 Goolsbee would be comfortable with if he was aware of the amount of fraud (on both ends) and off-selling of risk that was going on in the subprime securitization market.

As a side note, reading that editorial reminded me of my long-time interest in consumption smoothing as a theoretical tool: is it performative or normative? When Milton Freidman introduced the idea in 1957 he wrote: “The permanent income component is not to be regarded as expected lifetime earnings… It is to be interpreted as the mean income at any age regarded as permanent by the consumer unit in question, which in turn depends on its horizon and foresightedness.” It was a sneak attack on Keynesian thought, not a guide to assume that people are always thinking 10 years out on their mortgages versus their earnings. But should people be income smoothing as a normative issue? If they take on excessive debt should we de facto assume it is because of income smoothing?