On Deep Dysfunction and the U.S. Economy

The more I hear about “secular stagnation”, the more it sounds like the U.S. and global economy are like some massive software project that had fundamental design flaws that prevented it from ever functioning properly, yet all the managers want to do is get it fixed (and they’ll try just about anything short of a complete redesign).

Of course, fundamental design flaws in big software projects almost always end up leading to redesigning the thing from the ground up after everything else has failed, but, aside from a few Austrian economists who continue to preach to the choir, you never hear a peep about rethinking the overall design of the U.S. or global economy.

In another example of “real life meets Onion satire” to produce some terrifying implications (i.e., this 2008 classic Recession-Plagued Nation Demands New Bubble To Invest In), we read in this New York Times story that former Treasury Department Chief Larry Summers is still thinking about our “secular stagnation” predicament.

Want a thriving labor market? Blow a bubble.

That’s one implication of a theory about the contemporary American economy developed by Lawrence H. Summers, the former Treasury secretary and prominent public intellectual.

The theory is a frightening one, implying deep dysfunction in the way the American government treats the economy. It is a trendy one, all the talk among policy makers and those at think tanks. And Mr. Summers expanded on it at a forum on full employment hosted on Wednesday by the Center on Budget and Policy Priorities.

The big idea is that — absent extraordinary intervention in the economy through fiscal policy, monetary policy or both — growth and employment will prove lackluster.
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What’s a government to do? Well, the Fed could keep its easy monetary policy indefinitely and watch the bubbles form, like the dot-com bubble of the late 1990s or the housing bubble of the mid-2000s. But, Mr. Summers pointed out, bubbles burst, with hugely destructive consequences.

“A strategy that relies on interest rates significantly below growth rates for long periods of time virtually guarantees the emergence of substantial bubbles and dangerous build-ups in leverage,” Mr. Summers wrote recently. “The idea that regulation can allow the growth benefits of easy credit to come without the costs is a chimera.”.

Despite Summers urging, that’s about all we’ve got – Fed sponsored bubbles – and that situation doesn’t look as though it will improve after this fall’s mid-term elections.