Can We Fix the Economy?

I don’t really have anywhere to go with this post, but I’ve been musing for the past few days over all the theories floating around that imply — or are used by others to imply — that we really can’t do much of anything to help the economy recover, so there’s not much point in pursuing either monetary or fiscal stimulus. Here’s a brief list:

• The basic Rogoff/Reinhart observation that financial collapses due to asset bubbles just take a long time to work through. Given the size of the 2008 collapse, historical evidence suggests that it’s going to take five or six years to recover, and that’s that.
• The Tyler Cowen “Great Stagnation” hypothesis. We’ve picked through all the low-hanging economic fruit over the past century, and like it or not, we’re now entering an extended period of low productivity growth because we’re not inventing lots of cool new stuff.
• The related (I think) investment drought hypothesis. Ben Bernanke famously ascribed the housing bubble partly to a “savings glut” from overseas, and the flip side of that is an investment drought. The reason financial assets became so popular is that, even with all that money sloshing around the system, there simply weren’t very many high-quality investment opportunities available in firms that make real-world goods and services, and that hasn’t changed.
• The peak oil theory. Production of oil has pretty much maxed out, which means that every time the economy gets moving it will create a spike in oil prices, which will send the global economy back into recession. We’re now in a continual oil-fueled boom/bust cycle that limits our long-term growth rate.
• The Michael Mandel contention that increased consumption simply leaks out of the economy to China and other countries. Stimulating consumption in the U.S. just won’t do much for the American economy if all those extra dollars mostly get spent on overseas goods and services.
• Various structural explanations that suggest the United States has an increasing number of workers who flatly don’t have the skills to do anything useful in the modern economy — a problem that was temporarily masked by the housing bubble and was only fully exposed when the economy collapsed. This takes various forms, both weak (workers can be retrained but it will take a while) and strong (forget it, they’re simply useless).
• The self-serving group of partisan hack theories: regulatory uncertainty is the real problem, taxes are too high, the EPA is strangling America, hyperinflation is just around the corner, markets are cowering in fear of future deficits, etc. etc.

Please note that I don’t mean to suggest that Reinhart, Rogoff, Cowen, or Mandel are themselves arguing that fiscal and monetary policy are pointless. I’m just using their names for some of these ideas because they’re the ones most associated with them.

Anyway, as I said, I’m not really going anywhere with this right now. I’m just collecting theories. Any others to add to the list?

Mother Jones

5 Comments on "Can We Fix the Economy?"

pike on Tue, 23rd Aug 2011 10:17 pm 



What about environmental collapse because of over exploitation. Not this fake global warming crap.

The earth is entering a cooling faze because of low sun spot count anyway.

Ham on Tue, 23rd Aug 2011 11:14 pm 



I’m going for the Plutocratic Disharmonization Theory i.e the rich steal everything and wait till
everything is depleted and bugger everyone else.

Gates Outcast on Wed, 24th Aug 2011 2:08 am 



Jared Diamond’s theories and Peak Oil and human magical thinking instead of evidence based thought processes and of course the above poster stated so well, GREED.

BillT on Wed, 24th Aug 2011 6:41 am 



Hot or cold, our world is changing for the worse as far as humans are concerned, but, maybe in tome to save some of the ecosystem.

The economy cannot be ‘fixed’ this time. There is nothing to fix it with. Oil is getting more and more scarce, add in ditto for water, food, minerals, etc. The US has no base to build on just the Charmin we trade for our labor and food.

Beam Me Up Scotty on Wed, 24th Aug 2011 3:02 pm 



Nothing grows forever. An economic system that requires growth is bound fail… permanently.
We may see tepid “recovery” (weak growth) again, but a return to the roaring ’90s could only be fueled by innovations that get us off fossil fuels… and that wouldn’t be permanent either.