Has Our Economy Become Dependant On Bubbles?

from the that-wouldn't-be-good dept

I've said in the past that economic bubbles aren't necessarily a bad thing for the overall economy. Afterall, a bubble (at least one in a productive area, such as technology) tends to get a lot of money thrown at some problems, allowing a variety of innovation to take place very rapidly -- effectively throwing a lot of ideas at a wall to see what sticks. The fallout from a bubble popping often harms investors who bet on the wrong players in the bubble, but the fundamental benefit to society is often positive: a lot of infrastructure gets built very, very fast, and the strongest survives (and often buys up leftovers for pennies on the dollar).

However, there are others sides to the story as well. Joel West points to a recent interview of economists Martin Feldstein and Joe Stiglitz, where Stiglitz worries that we've built an economy based on bubbles:

Joseph Stiglitz: We had the tech bubble, followed by the housing bubble. But once we fix the recent mess, what will replace these bubbles as the engine for the economy?

Feldstein: What will replace the consumer spending bubble?

(Both men): We run the risk of the economy becoming depend on constant stimulus to replace these bubbles.

Stiglitz: I worry that after two years of stimulus, that the economy won't be going on its own, and then what will we do?

Along those same lines, economist Hal Varian has written, in the Wall Street Journal, a very straightforward and clear explanation of why the economy is stuck in neutral right now. Basically, (and, yes, I'm significantly paraphrasing), there's no new bubble to invest in, so (as Stiglitz implies above), everyone's looking for the government stimulus package to basically act as an artificial bubble until such time as a new bubble rises out of the mess. And, for that to happen in a productive way, any sort of "stimulus" needs to create incentives for others to invest in productive, growth-producing parts of the economy, rather than just throwing cash at pork barrel spending projects. This is a pretty fine line to walk (especially since it's politicians who are working out the details, and they love pork barrel spending).

And, to make matters even scarier, economist David Henderson points out that recent research from economists Christina and David Romer (it's worth noting that Christina Romer is Obama's choice to chair the Council of Economic Advisers) suggests that gov't fiscal policy in an attempt to modify business cycles doesn't work. In other words, things are going to be pretty messy in the economy for a while, unless we can come up with a productive and useful bubble quickly. Anyone have any suggestions?

Filed Under: bubbles, christina romer, economy, hal varian, joe stiglitz