Editor’s Note: Dean Baker takes George Will to task for misapprehending the cause of California’s budget woes:

George Will Never Heard of the Housing Bubble (or Labor Economics)

Sunday, 22 May 2011

By Dean Baker

Fortunately, his job as a columnist for the Post doesn’t require that he have any knowledge of such things. His articletoday touts California’s fiscal hardships. It includes no mention whatsoever of the housing bubble.

California was at the epicenter of the housing bubble with prices in some areas more than tripling in the decade from 1996 to 2006. This led to a massive construction boom as well as a consumption boom based on bubble-generated home equity.

Now that prices have returned to pre-bubble levels in many of the former bubble markets, construction has fallen through the floor and consumption has plunged as underwater homeowners struggle to keep current on their mortgages. This collapse is the main cause of the state’s economic downturn as well as its fiscal crisis.

While Mr. Will looks forward to the prospect of the state’s public employees being forced to take large pay cuts, in most sectors public sector wages are not substantially higher than for their private sector counterparts with similar education and experience. Basic economics dictates that if wages are lowered by much below their private sector level then the state will be unable to attract qualified people to work as teachers, nurses and other positions in the public sector.

Reprinted from the Center for Economic and Policy Research (CEPR) under a Creative Commons License.