In a recent piece for the New York Times, economist Rebecca Patterson boldly claimed, “Housing is the foundation of the economy. Homes represent the single largest asset for most Americans. They are a vital source of wealth creation that supports consumer spending, which in turn accounts for about two-thirds of U.S. economic output.” Unfortunately, that assertion misses the mark.
To grasp why, readers should consider which part of the U.S. truly thrives on housing for its economic strength. Is it Silicon Valley, Hollywood, Manhattan, or Houston? The answer is no across the board, despite the fact that luxurious homes in places like Atherton, Beverly Hills, the Upper East Side, and River Oaks can be quite impressive.
The economies of these areas are fueled by distinct sectors: technology in Atherton, entertainment in Beverly Hills, finance on the Upper East Side, and oil in River Oaks. While other factors contribute, these are the most notable. There is no region, either domestically or globally, where housing alone serves as the backbone of economic activity.
This is a fundamental truth, serving as a reminder that, contrary to the beliefs of Keynesian economists, consumption does not drive economic growth—housing is merely a form of consumption.
Looking again at Atherton, Beverly Hills, the Upper East Side, and River Oaks, residents excel in technology, entertainment, finance, and oil. The impressive housing purchases are a result of that production, not the cause.
Patterson’s assertion that “consumer spending” represents “two-thirds of U.S. economic output” is misleading. She likely understands this. Our desires for consumption are infinite. If mere consumption could fuel the economy, the U.S.
would be in a perpetual state of growth—and so would the entire world. Humanity’s wants are vast and unending.
However, we can only satisfy a fraction of those desires through prior production. It’s a clear cycle: production must precede consumption.
This brings us back to the flawed notion of what drives economic output. The reality is that consumption is the result of production, not the engine. In essence, 100% of an economy is grounded in production, while consumption is simply the reward for that effort.
Returning to Patterson, her mistaken belief that “housing is the foundation of the economy” poses problems, particularly as it influences economic policy. Consider how the government incentivizes housing consumption, treating it as an investment, which often leads to tax breaks on housing appreciation that don’t apply to stock sales.
Thus, Patterson’s views warrant a rebuttal, as does any commentary suggesting that consumption fuels economic growth. In reality, it’s a byproduct of production, which thrives on investment. When individuals consume existing wealth (like housing or art), it can detract from investments in stocks and bonds that generate new wealth.
In short, Patterson is mistaken. That’s her right, but it’s unfortunate that all Americans must bear the consequences of an economic consensus that puts the cart before the horse.
