I just read a great article in The Atlantic about Nouriel Roubini, an economist at NYU who had received international acclaim for accurately predicting back in 2007 that the then proclaimed “contained” problem of the depressed housing market was actually nowhere near the bottom. After going into detail about the steps that led to our current financial crisis as well as what future problems Mr. Roubini sees unfolding in the years to come, the article ends with this question: “Can the U.S. grow in a non-bubble way?”
Can it?
I think this is the paramount question that our economy faces today. Think about it. We have just barely begun to lift ourselves out of the current recession, and there is already worry among economists that our efforts to revive the economy (i.e. the huge amount of money poured into the system) will in fact lead to near-term inflation and the development of yet another asset bubble. Are you kidding me? We’re not even back to normal yet and there is growing concern about future problems developing?
Let’s take a step back for a second. Any introductory macroeconomics course teaches you about the “Business Cycle”—the idea that the economy fluctuates in a cyclical manner. First there is growth. The growth then peters out, and this almost always leads to some form of recession or slowdown. Eventually, the economy picks up again, bringing us back to growth. Rinse, wash and repeat. These cycles are justified by the fact that with each passing iteration, the economy as a whole is better on an absolute level. In a lot of ways, such cycles are inevitable and arguably immutable. While we like to believe that, in theory, markets are efficient; we must also believe that they are irrational. For example, the “efficient markets hypothesis” states that there should not be any arbitrage opportunities in any truly efficient market. But we all know this isn’t the case. Irrational “mob mentality” leads to the development of asset bubbles, and when these bubbles pop…well, we all know what happens.
For the past 30 years, we’ve gone through quite a few of these cycles—the Savings & Loans crisis of the 1980s, the tech bubble of the 1990s, and the current housing bust. And through this all, it’s almost as if American investors and consumers resemble a bunch of freshmen college kids who never quite learn how to party responsibly. They’ll drink way too much one Friday night, only to throw up all over their friend’s apartment and wake up Saturday morning with a massive hangover. Though they’ll vow to never drink again…come next week, it’ll be pretty much the same story. Our economy is exactly the same way. It’s a bunch of investors and consumers who binge irresponsibly during the good times when interest rates are low and credit is flowing like a tapped beer keg. Then when the recession comes, the hangover hits. Investors and consumers de-lever themselves and those lucky enough to still have jobs vow to save more and spend less. Except, unlike these college freshmen, we never quite learn.
What can we do? Relying on the Fed and on monetary policy to singlehandedly curb inflation as an indirect means to impede the growth of asset bubbles is not sufficient. In addition, it’s also ridiculously hard. Knowing when and how much to raise interest rates is far from easy (its no joke that many refer to it as “performing brain surgery with a sledgehammer”…a lovely image indeed). Monetary policy helps, but I think that a true solution will need to come from a cultural change. We could look to the models of other developed nations. France, in particular, comes to mind (though I cringe at the mere thought of admiring anything French). They have had consistent (albeit modest) growth in recent times and also have not been hit as hard as many other nations. Sure their economy is less volatile, but it comes at the expense of growth, innovation, and entrepreneurship, and to follow this would seem…well, very un-American.
A solution could also lie in our nation refocusing itself and its priorities. Take finance, for example. It is without a doubt a very integral part of our economy—much of our strengths as a nation and the reason we’ve experienced such remarkably high innovation and growth is because our capital markets are very accessible. Yet every year it seems as if our best and brightest graduates all flock to this field (I also feel the same about those entering law as well). Can anyone say: “diminishing marginal returns”? I do believe that in a lot of ways we’d be better off as a whole if we could find some way to incentivise the growth of different and more productive industries—science and technology, in particular, come to mind. A more balanced growth would undoubtedly be better for our country as a whole. However, I’m not sure if this would necessarily diminish the severity of business cycles. Furthermore, I’m not even sure if this is even possible in America.
Why do talented individuals flock to these industries? Quite simply it is because they offer a high compensation, and that they also serve as a stepping stone for a well-paid career path. The foundations of our American culture is built off individualism and self-interest (also known as greed), and while this isn’t necessarily a bad thing, I believe that it ultimately is the reason behind our drastic bust-and-boom cycles. It’s easy to blame greed as the reason behind the formation of these huge asset bubbles and the subsequent crash (the media often paints a picture of a sketchy Wall Street financier thoughtlessly pouring money into overvalued tech-stocks or subprime mortgages). But at the same time, it is also this culture of self interest that drives investors to finance startup ventures and new projects. Such innovation and entrepreneurship then leads to economic growth. This is the American way.
So while I do believe that the U.S. can grow in a non-bubble way, to do so would be to completely uproot our culture. Is this worth it? I don’t think so. Don’t get me wrong, I don’t like the idea of a recession at all, and it pains me to see individuals struggle to find new jobs or to figure out how to make ends meet. As a country, I think it is imperative that we tackle some of these issues and lessen the severity of these downturns—whether that be through more aggressive monetary policies or a refocusing of our economy. But in the end, our strength as a nation comes from our uncanny ability to innovate and adapt (albeit driven by self-interest), and this is one of the primary reasons why our model has achieved success and why our economy has been historically strong. To temper this would in many ways cripple our competitive advantage and limit our potential as a country.
