Krugman: bubbles are good while they last because they prop up demand…

“It gradually becomes clear, however, that they’re each living out their own improbable fantasies, and Lister, Rimmer and The Cat must accept the fact that they’ve not returned to Earth, but are trapped within an addictive virtual reality called Better Than Life, a game which is killing them, but is incredibly difficult to escape from

The title of the blog is a shortened statement from a Paul Krugman article, Why Weren’t Alarm Bells Ringing?, the larger part of which I reproduce below.  The opening paragraph is an excerpt from a Wikipedia commentary on the first Red Dwarf novel. 

And now to Krugman’s article:

If the secular stagnationists are right, advanced economies now suffer from persistently inadequate demand, so that depression is their normal state, except when spending is supported by bubbles. If that’s true, bubbles aren’t the root of the problem; they’re actually a good thing while they last, because they prop up demand. Unfortunately, they’re not sustainable—so what we need urgently are policies to support demand on a continuing basis, which is an issue very different from questions of financial regulation.

I have to disagree with the idea that bubbles are a good thing, and while they may not be the root of the problem (i.e. low growth dynamics are not caused by debt) they certainly add much instability to the economic framework and additional structural risks that strike at its heart as they implode. 

I would rather have the low growth and stability than the pump and dump of the bubble.  Not only do we have the outcome of the bubble, but we have also become more deeply entangled in the underlying secular dynamics of decline.  The bubble obscured problems, built up additional problems and risked almost everything as it imploded, all in the pursuit of some nebulous satiety.  The depression we have is the compounded impact of excess on slow growth dynamics.

This belief in the goodness of bubbles masking the reality of decline, i.e. bubbles are “Better than Life”,  is a bit like the impact of drugs on the addict and reminded me of a Grant Naylor book of the late 1990s, Red Dwarf Infinity Welcomes Careful Drivers.

It gradually becomes clear, however, that they’re each living out their own improbable fantasies, and Lister, Rimmer and The Cat must accept the fact that they’ve not returned to Earth, but are trapped within an addictive virtual reality called Better Than Life, a game which is killing them, but is incredibly difficult to escape from

I found the article, as a whole, engaging, but I found this belief in the goodness of bubbles to be far too benign a representation of their risks.

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