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?

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Comments on “Has Our Economy Become Dependant On Bubbles?”

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36 Comments
S says:

I think an energy bubble would probably be the most beneficial, preferably one that focused on alternative energy sources. If we come up with new processes for energy production, not only do we help to secure our own energy independence, we can export the technology to other nations and begin to collect revenues based on energy as opposed to hemorrhaging money to oil producing countries as we do now.

Anonymous Coward says:

Energy R&D

It seems every 5 years some new concept comes along on how to generate wealth which has inflated value. We end up with fragmented ways of doing business which lacks tangible value. Until there is a deliberate, focused return to Keynesian Economic principals will we be dependent on these faux wealth creation bubbles.

Some think energy is not sexy enough to get into. But I think otherwise. Specifically, Transportation Energy Usage is by far the least efficient energy user, and there seems to be a huge opportunity in R&D in that area.

Also, Obama has indicated a strong need to pursue that direction for national security reasons. Gas will undoubtedly go back up in price, and fluctuates violently. Exploring Alternative Transportation energy from an emissions and efficiency standpoint could kill two birds with one stone.

JMB says:

The Size of The Ripple

I see no clear distinction between bubbles that eventually burst and an economy that has large ripples. There will always be an upside and a downside and just because we are in the trough of a ripple now it is easy to be pessimistic about the changes our economy experiences. As long as you look at a time scale that is long enough the economy is still growing and should continue to do so. I would argue that a steady state economy is far worse as innovation is non-existent in that state. And that is the only alternative to a rippling economy. Change cannot exist without some variation in that rate of change. This is a matter of how much is too much in terms of deviation from that rate of change.

Anonymous Coward says:

This is the mess you get when you encourage a Walmart country.
Everything is cheap, low quality rapidly produced merchandise.
Good luck digging America out.

USA doesn’t produce anything but weapons, drugs and propaganda at a higher level than other countries.
Oh, and I almost forgot. You are also the largest producer of useless leadership.

DCX2 says:

Re: Re:

Agreed, first alternative energy bubble and then a biotech bubble. We should be able to take a drop of blood, drop it on a computer chip, and quickly get results back against massive numbers of tests that could be done on massive numbers of people. Combined with genetic screening to personalize medicine, this could produce a revolution in health care.

Nobody says:

The Best Idea

I always thought that the best way to stimulate the economy was with public works. You get the government to build a big-ass thing, and pay a lot of people to make it. They spend that money on consumer products, and rich people pay money to see the big thing. Then the government gets their money back, and the economy is stimulated.

An alternative solution is a good old-fashioned war. We’ll get the war machine cranked up, and make the auto companies useful again building tanks. We just have to make sure we win so we don’t get nailed with reparations.

Joe (profile) says:

um...what about the gas bubble?

I know you are talking about “technology” and “housing” bubbles, but what about the gas bubble? Do you honestly think that gas naturally went up to $150 per barel? almost 4 times the current worth of a gallon of gas? That bubble crippled the economy, raising inflation and squeezing almost every american outside of urban areas and the Omish.

The housing bubble led to the gas bubble as people fled to the “commodities” after the bubble started to burst and people tried to save their money by being in something stable…to the tone of $60 Billion dollars more than usual being dumped into one commodity…without even going into gold/platinum/pork bellies and OJ.

That was a big bubble and dumb investors jumped in as analysts trying to get as much return as possible talked up $200 gas.

I didn’t invest as it was an obvious bubble, but unlike other bubbles where just investors are hurt the general consumer got hurt, and not in just the US, it was felt across the globe in almost every developed nation not subsidizing it’s energy costs.

Anonymous Coward says:

Amatuers make bubbles

To have enough magnitude to be a bubble, there has to be seriously low barriers to entry. Every serious bubble (e.g. radio, personal computers, internet, even housing) has gotten big because it was fairly easy for the amatuers to join in.

For that reason, I don’t see anything involving green+auto becoming a bubble without some serious de-regulation. I seem to recall (this was back in the 80s) that it cost more than a new car to get California to run the full battery of tests necessary to approve a particular engine+carburetor configuration.

Anonymous Coward says:

Re: Amatuers make bubbles

I can imagine quite a few areas where some de-regulation could cause economic growth and perhaps some interesting innovations: the medical, legal, and agricultural industries spring to mind.(I know there’s lots of ‘dangers’ involved in letting amatuers do these things, but some people are grown up enough to be able to choose whether to accept these risks).

Dano (profile) says:

Economic Bubbles

I agree that the Feds investing in Energy R&D would be a smart thing to do. As for fixing our ‘bubble’ problem; I thnk we need to change our tax structure so that long term action is encouraged and the big money people (banks, stock brokers, etc) act like they talk about in their ads – that they are interested in the long haul. But then we get news reports every few minutes about the stock market, and company’s actions are governed by the latest quarterly report and making sure they get every dollar possible, to make their investors happy now, and worry about later when they get there.

citizenj (profile) says:

To go in a different direction...

I’d like to see money thrown at the problem of building skyscraper farms (think produce- fruits and veggies) for use in urban areas. That’d be fun- probably beneficial in some way too.

Next, I’d like to line every street in this country with some sort of magnetic energy bearing strip, then move forward in two phases: First, get every individual an converter kit so their cars will adhere to, be driven automatically by and powered by these strips, and second, start phasing out personal vehicles altogether and replacing them with taxpayer bought public cars that are able to be ordered online and are usable by everyone as a massive public transit system nation wide.

Finally, I’d like to see pigs crossed with sables/minks/martens. We can harvest their fur for clothing and eat their tasty flesh. Think how long the strips of bacon could be!!! YES!

Lawrence D'Oliveiro says:

"Bubble" Meaningless

In terms of the natural ups and downs of the economy, calling something a “bubble” is a meaningless distinction. As Benoit Mandelbrot showed years ago, plots of stock market prices over time are a fractal curve. Bachelier did an analysis of US wheat prices over 100 years, and demonstrated that there was no “average” price over that entire time–it simply kept on wandering along a mathematical “random walk”.

So even something as common and banal as commodity prices are subject to what one might call “bubbles”, but really price fluctuations are happening all the time, on all scales; we just call the bigger ones “bubbles”, and assign special significance to them just because they’re big, not because they’re actually significant.

@zmyth says:

Bubble Confusion

The “bubbles are good” argument suffers from a confusion of marginal and total gains. A marginal gain is a gain of the last unit of input. The total gain is the gain of the entire bubble to the entire economy. The total gain of a bubble is quite high. Many houses were built during the housing bubble. Tons of fiber optic cable were made and many innovative companies were created during the tech bubble. However, these are total gains. The problem with bubbles is that money is flowing so chaotically that many projects are done that are very inefficient. The evidence of these projects is clear to see in all bubbles, for example, loaning people money to buy a house that they clearly could not afford, and .com companies whose market capitalization was far greater than any potential earnings could ever be. The Austrian Business Cycle focuses on this “malinvestment” as the source many business cycle problems. The costs of undoing these poor investments drives the recession. You can have investment without bubbles, you just don’t get the “whoosh” sound.

Twinrova says:

I have an idea.

(oops)
I’ve never fathomed why so many investors would jump on the same bandwagon of a particular arena as opposed to doing what they’re supposed to do. Even a moron in a hurry would know that wagons can only carry so much before they break.

I don’t believe another bubble is needed. I believe the people who have the money want to hold on to it because they just don’t know what’s going to happen. Even if loans are given, there’s that fear something will go wrong. So why take a chance?

With $350 billion already spent, my question is: Where the hell is it? The auto industry has $15B of it and the banks took a large chunk of it, but consumers can’t get loans so where is the money?

To think, for once second, a bubble is needed to get the economy back in swing is a scary notion because it just means we’ll go through all this again.

Investors, here is my idea:
TAKE A DAMN CHANCE AND REINVEST IN THIS COUNTRY.

GIVE PEOPLE A CHANCE TO MARKET THEIR IDEAS.

GIVE PEOPLE A CHANCE TO RUN A BUSINESS.

INVEST IN THE PEOPLE THAT HELPED PUT YOU WHERE YOU ARE TODAY.

If you can’t do that, get the hell out of the investment world. You don’t belong there.

Rob N (user link) says:

Re: I have an idea.

Small business investment is a very good solution, giving tons of breaks to those who employee – the more people you employee, the larger the breaks.

An even better solution is to build an international economy where those in developing countries have the same opportunity to earn as those in the States or Europe. The common connection is the Internet.

What’s a job that anyone from anywhere can do over the net?

George C says:

Some good can come out of this

With the current crisis just starting and another crisis in the credit card industry on the way, I can see a fantastic way to use government money to build an infrastructure that can eventually help most (if not all ) Americans. This would be investing in the creation of a healthcare infrastructure that facilitates data transfer from one institution to another. Rather than throwing money exclusively at companies 9and individuals) that have demonstrated irresponsible behavior, why not use some of that money for the creation of an entirely new infrastructure that can benefit the public good and serve as a springboard for healthcare reform? The purpose of government is to serve the public good, not necessarily to facilitate business. I suspect that might have been neglected in the “trickle down” thought process developed in the ’80s

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