A Philosopher's Blog

Bubbling

Posted in Business by Michael LaBossiere on July 13, 2012
Official photographic portrait of US President...

Get this man a bubble! (Photo credit: Wikipedia)

While many corporations are doing great, the economy is still in fairly rough shape. As is to be expected, the two political parties are busily forging their rhetorical weapons for the 2012 election and claiming that only their ideological points can save the day. For example, the stock Republican line is that cutting taxes and removing regulations will save the day. The Democrats counter with what one would expect from the Democrats.

While politicians can obviously impact the economy (see, for example, prohibition) by their decisions, it is reasonable to consider whether or not specific proposals would have a positive impact (or any impact at all). Consider, for example, taxes. As noted above, the stock Republican line is that we need to cut taxes to grow business to get the economy going. There are, of course, some obvious problems with this view.

First, there have been periods of prosperity with higher taxes, such as during the Clinton area. This indicates that the impact of tax cuts is somewhat limited. Second, taxes are rather low now. Despite the rhetoric to the contrary, Obama has been largely following the Bush strategy of lowering taxes. As the Republics delight in claiming, unemployment is still high and the economy (aside from the top corporations) is still limping. Third, thanks to loopholes and the ways the laws are written, the very wealthy and corporations are able to pay remarkably low (sometimes no) taxes. If low taxes were the true engine of recovery, we should be doing amazingly well. As such, cutting our way to prosperity doesn’t seem any more likely to work than trying to tax and spend our way out of it. So, what would save the day? Turning back to history, three interesting potential solutions  present themselves.

First off, there is war. Winning one seems to have really helped us after WWII. Of course, there are some problems with this option. We are, obviously enough, at war and it does not seem to be getting us out of the hole. Also, what really helped out after WWII was that our competition had been bombed into rubble. So, unless we are willing to bomb our competition, war does not seem like it will get us out this time.

As a second option, there is a new frontier. It can be a “new” land rich with resources or technological innovation(s) that change the world. Unfortunately, all the land seems to have been grabbed up (requiring option one if we want to get it). We could try space or the deep sea, but we lack the technology to really exploit those environments-at least for now. As far as the technology goes, some might point out that we have Facebook. While that made some billionaires and millionaires, it wasn’t enough-mainly because it might not actually be a real frontier, but is probably part of a bubble. So, unless someone is assembling a warp drive in their garage, we are still stuck with a slow climb out of the recession. Unless, of course, we can take advantage of the third option.

As a third possibility, there is the bubble. Looking back, it seems what saves us (then dooms us) is the bubble. In the 1980s we had the Savings and Loan Bubble (better known as the S&L crisis). The economy grew with the bubble and then burst with the bubble. We struggled along until 1995 with the beginning of the dot-com bubble. This bubble expanded until about 2000 and then burst. Pets.com was the mascot of this bubble-the company went from having its sock puppet being interviewed by People to vanishing in a puff of $300 million in lost investments. After the dot-com bubble, the geniuses in finance gave us a massive housing (and finance) bubble that expanded the world economy until it burst, almost taking down the world. We are still cleaning up that burst bubble.

As is to be be expected, the presidents and politicians presiding over the rises love to take credit for them. However,  the main connection between policy and the bubble expansion seems to be that there are policies that allow people to act in ways that will ultimately cause the bubble to burst. For example, the policies governing housing and finance allowed the bubble to grow via financial wizardry and deceit. Since the growth was largely illusory, it was hardly a shock that the bubble burst under the very same policies that allowed it to grow.

In some cases, it is like a situation in which a parent allows the kids to feast on sugar and junk rather than good food. While they will run around madly for a while, this cannot be sustained on sugar and they will crash. Likewise for the economy. In some cases, it is like adults gorging on sugar-they should know better, but they do it anyway. And then some of them are shocked when the vomiting begins. There are some signs that we are bubbling again.  For example, there is the Facebook economy that seems to have bubbled up nicely and housing seems to be inflating a bit again.  Once we get the next bubble inflated, someone (Obama or Romney) will take credit for getting is back to the good times. Then the bubble will burst and we’ll go through yet another round of proposed solutions. But all we really need is another bubble. Then another. Then another. Fortunately, the bubble residue can be like coral-sometimes it provides a solid foundation upon which something can live.

Stay bubbly, my friends.

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2 Responses

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  1. T. J. Babson said, on July 13, 2012 at 5:32 pm

    “Despite the rhetoric to the contrary, Obama has been largely following the Bush strategy of lowering taxes.”

    Mike, you really need to start boning up on economics. Obama has been pursuing short term tax relief in order to stimulate the economy, but Obama has signaled again and again that he really wants to raise taxes in the future. It is the long term tax picture that affects hiring decisions. Also, health insurance costs have jumped in the past couple of years, and employers are waiting to see how that plays out. There is really very little reason right now for employers to take the extra risk of hiring someone. Better to hunker down and wait for things to get better.

  2. magus71 said, on July 14, 2012 at 7:39 am

    Barack Obama blows other presidents out of the water when it comes to Dept to GDP ratio. Actually, GW Bush was better than Reagan in this regard. But Obama doubles Reagan’s percentage. Who can argue with these numbers?

    http://www.forbes.com/sites/jamesglassman/2012/07/11/the-facts-about-budget-deficits-how-the-presidents-truly-rank/


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