Summers Argues Against Bubble-Led Growth


Larry Summers is not a great orator or even a competent one. But he gave a speech today at Brookings that I thought made a lot of good points. For example, this one about why the impulse to try to solve problems by re-inflating bubbles is wrongheaded:

We have seen housing prices reach unsustainably high levels and credit spreads reach unsustainably low levels in the middle of this decade. And we saw bubbles in technology in the late 1990s.

Bubble driven economic growth is problematic because of disruption and dislocation – affecting those who took part in the bubble’s excesses and those who did not. And, it is not entirely healthy even while it lasts. Between 2000 and 2007 – a period of solid aggregate economic growth – the typical working-age household saw their income decline by nearly $2000. The decline in middle-class incomes even as the incomes of the top 1% skyrocketed has a number of causes, but one of them is surely rising asset prices and the fact that financial sector profits exploded to the point to where they represented 40% of all corporate profits in 2006.

Confidence today will be enhanced if we put measures in place that assure that the coming expansion will be more sustainable and fair in the distribution of benefits than its predecessor. That is why the President has priorities that go beyond the immediate goal of containing the downturn and promoting recovery.

One of the things you see is that the voice of the top 1 percent usually speaks with orders of magnitude more volume in politics, and even more volume than that in the media, but sound policy requires you to keep it all in perspective.