Richard Florida
by Richard Florida
Thu Feb 12th 2009 at 8:00am UTC

Department of Huh?

Larry Summers (via Calculated Risk) says a key objective of economic policy must be to:

…address the problem which has, frankly, gone unattended for much too long of declining house prices.

Calling planet earth… Housing prices – according to even a cursory reading of say the Case-Schiller Index – have a long, long way to come down, and until then the economy simply cannot be reset for growth.

We won’t recover until we move beyond the fictitious asset bubble economy, as Nouriel Roubini outlines:

For the last 30 years the US has been growing fast only during periods of asset bubbles that eventually burst with significant economic and financial costs. The 1980s real estate bubble went bust in the late part of that decade leading to a severe banking crisis for the Savings and Loan banks, a credit crunch and a severe recession in 1990-91; next the 1990s tech/internet bubble went bust in 2000 leading to the 2001 recession; massive monetary and credit easing – as well as lax supervision/regulation of mortgages and credit – led to another housing and credit bubble that has now gone bust creating a severe financial crisis and recession.

The current monetary easing may lead to another bubble but we are somehow running out of bubbles to create … We need to create an economic system that is less prone to bubbles and more likely to lead to sustainable stable growth.

For the last few years the US has overinvested in the most unproductive form of capital – residential housing stock that increase utility but not labor productivity – and not enough into physical capital that increases the productivity of labor.

Also we overinvested in the financial sector, a corollary of the housing boom … And having a country where there are more financial engineers than computer engineers or mechanical engineers means a misallocation of human capital as well.

So we need to create a growth model relying less on housing/real estate, less on finance and less on having the brightest minds of the country going into financial services rather than into the production and innovation of new and improved goods and services.


3 Responses to “Department of Huh?”

  1. Michael Wells Says:

    Can an economist help me out with this question?

    Aren’t there two kinds of bubbles, the ones that create new industries and the ones that just move money around?

    For example, America’s railroads and telegraph system were both bubbles that lost investors lots of money, but laid the groundwork for real growth. And wasn’t the dotcom bubble one of these, laying thousands of miles of fiber optic cable, building the Web, creating Google & Amazon — and training lots of computer engineers?

    On the other side are the famous Dutch tulip bulbs, 1980’s junk bonds, the recent financial/credit bubble. These made a few people very rich but left little or nothing of value and impoverished many.

    Follow-up. Have all of the recent bad bubbles been because of deregulation that removed protections set up because of the Great Depression?

  2. hayden fisher Says:

    Amen! Even more reason to move towards a direct-lending governmental model. Eliminate the middle-men, get money into the hands of the entrepreneurs, not the wheeler-dealers! The sad reality is that we have plenty of potential new-business embryos out there but not enough surrogate mothers, metaphorically of course. Super-fund the SBA programs immediately and re-invest in new science and technology by re-committing to NASA.

    That said, biotech looks promising and steady even in the current market.

  3. Nikolai Kondratieff Says:

    This is yet another example of how bankrupt the Obama economic team is. Obama needs to clean house immediately. Geithner, Summers, Goolsbee, and Gensler are going to accelerate and amplify the economic crisis with their misguided policies.