Paul Krugman and Larry Summers both seem to believe that bubbles are a necessary part of maintaining a functioning economy (boldface mine):
We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate.
So you might be tempted to say that monetary policy has consistently been too loose. After all, haven’t low interest rates been encouraging repeated bubbles?
But as Larry emphasizes, there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation? Where has the overheated economy been visible?
So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.
Krugman then goes on to discuss some of the potential political and regulatory ramifications of this. But I think Krugman and Summers are missing the point–in a highly advanced society, where most jobs are not ‘essential’ in terms of providing food, shelter, and energy (a ‘Judge Dredd economy‘), one solution is private debt driven bubble growth.
But instead of viewing this as a problem, the other solution presents itself as an opportunity (boldface mine):
In 1900, about half of the U.S. population was engaged in agriculture. While some of this was ‘non-essential’ in that the U.S. exported these products, that’s still a huge fraction. Today, less than two percent are engaged in agriculture. Yet somehow we keep most people employed. There were dislocations during the shift, such as the migration northward of African-Americans as sharecropping fell by the wayside (not that sharecropping was a wonderful living).
We can find plenty of worthwhile things for people to do, even if they are not ‘essential’: arts, education, research, improving our infrastructure. If we still lived in a world where we needed half of our workers on the farm or else we couldn’t eat, funding these things would be wasteful. But with idle workers, idle industrial capacity, and real needs, the only limiting ‘resource’ is currency. The federal government can create that at a drop of a hat–money should never be limiting.
There’s an obvious solution to Krugman’s and Summers’ concerns, even if in some quarters, it’s considered ‘make work’ (though how that differs from much of either military or basic research spending, not to mention our paltry support for the arts, escapes me). Spend the damn money. Though that might send inflation ‘skyrocketing’ to four or five percent.
And the one percent can’t have that, even if that’s the least onerous ‘tax’ for the majority of us.
Added: Brad DeLong seems to wind up at a similar policy conclusion (I think)