Does the U.S. Economy Need Bubbles to Live?

[xchrom]

http://www.theatlantic.com/business/archive/2014/01/does-the-us-economy-need-bubbles-to-live/282867/


Larry Summers can't spot any catchup growth that doesn't come from a bubble (Reuters)

Larry Summers thinks the economy is broken, and has been for awhile.

It's not just the Great Recession and the not-so-great recovery. It's the 8 years before that too. As Summers points out, even low interest rates, deficit-financed tax cuts, and nonexistent lending standards weren't enough to overheat the economy then. Sure, housing prices boomed, but nothing else did. Inflation was low, and unemployment wasn't that low. In other words, demand wasn't excessive, but it wasn't sustainable either.

Summers worries that this isn't only a story about our economic past, but about our future, too. That we won't be able to create enough jobs without bubbles, now and forever. It's a new old idea called "secular stagnation." Economist Alvin Hansen first proposed it in the late 1930s when it looked like slow population growth might slow investment, and create a permaslump. But, thankfully, the baby boom, and 16 years of pent-up consumer demand proved him wrong.

Goodnight, Sweet Sustainable Growth?

This time, though, might be different. See, there's something called the "natural rate of interest," which is the inflation-adjusted one that gets the economy to its Goldilocks state of low inflation and low unemployment. If the Fed sets rates above it, inflation should fall and unemployment should rise (though, in practice, wages and prices don't tend to fall below zero).

As Summers points out, this natural rate has been negative for most of the last decade. And that's why we've alternated between bust and boom. The Fed's 2 percent inflation target means that even if it sets rates at zero, it might not be able to generate negative enough real rates to hit the natural one. That's the bust. But these kind of persistently low rates might eventually encourage risky behavior that, well, bubbles over. That's the boom. And our economic trap.

[CFLDem]

1. How else are the wealthy supposed to make their money?

Honest hard work?

[House of Roberts]

3. Absolutely.

Being the recipient from the 'first phone call' from your broker is the key to making money out of others' misfortune.

[bemildred]

2. So the "natural rate of interest" has been negative for most of the last decade.

And that's why we have bubbles. Right. This is Babble.

[House of Roberts]

4. Capital that is taxed too cheaply

is the reason we have bubbles. It is more lucrative to play the Wall Street casino, than it is to start a company that makes things and creates jobs.

[bemildred]

5. I concur. Idle money should be taxed aggressively. It's not just to sit on or play with. nt

[CFLDem]

8. Amen! nt

[DCBob]

6. Some economic bubbles are real.. some are not.

The Internet bubble was real but over-reacted to. The world's economy has indeed changed dramatically because of internet technology but the dot boom of the late nineties was indeed a unrealistic bubble.

[Wounded Bear]

7. Somehow, it didn't need them from the 40's to the 80's...

I mean, 40 years of pretty consistent growth doesn't mean much, now does it? Better to go back to the boom-bust-boom-bust cycles of pre FDR, I guess.

[on point]

9. No. The 1% need them as vehicles to steal from the rest.

The liberal economists can't understand why their supply side trickle down economics aren't working. They go to ever greater lengths to explain it, instead of just admitting their theory is WRONG and doesn't work.

All it has done is push more capital to the top, which is now casino money leading to asset price inflation, played out as sequential bubbles