16 July 2008

The Growth Cult

I was talking to my dad about the housing meltdown (we are both real estate agents), and how the government is frantically trying to keep housing prices from dropping. Besides the obvious problems (the government/Federal Reserve exacerbated for the crisis by, respectively, extending federal insurance to more loans/keeping rates too low in the early 2000s), we got into a discussion of the forces behind the boom (and now bust) in housing and the economy.

The forces are not markets, but government policies dedicated to ever-greater levels of output, i.e., ever-larger GDP. Las Vegas gives perhaps the best example of out-of-control growth, but the "economic stimulus" package, the obsession for off-shore drilling, the desperate attacks on "oil speculators", etc. are all examples of politicians trying to "pump" an economy that needs to take a break.*

Environmentalists have decried "growth is good" for years, and I agree with them on this issue. In particular, I do not think that all growth is good. Sometimes it's good to slow down economic activity or destroy some wealth; such a respite gives us the chance to regroup, to put more energy into useful activities and dump wasteful activities.

For the definitive wisdom on this, we can turn to Peter Sellers's Chance the Gardener character [so naive, he's wise] from Being There (1979):
President: Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
Chance: As long as the roots are not severed, all is well. And all will be well in the garden.
President: In the garden.
Chance: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President: Spring and summer.
Chance: Yes.
President: Then fall and winter.
Chance: Yes.
Benjamin: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we're upset by the seasons of our economy.
Chance: Yes! There will be growth in the spring!
Benjamin: Hmm!
Chance: Hmm!
President: Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I've heard in a very, very long time. [Benjamin applauds]
President: I admire your good, solid sense. That's precisely what we lack on Capitol Hill.
Bottom Line: The economy, like Nature, needs to have cycles if it is going to stay healthy in the long run. The pro-growth crowd needs to control its gluttony at the all-you-can eat and go for a run.

Remember Mr. Creosote!


* Note the incentives: Politicians stimulate in the short run to get re-elected, but we all suffer in the long run from unsustainable growth and/or debt incurred to bring future growth forward.

5 comments:

TokyoTom said...

David, sorry but I don`t buy this: "Sometimes it's good to slow down economic activity or destroy some wealth".

Yes, busts often come after boons, due to mistakes, misjudgments and irrational behavior. Politicians should let the market work through the pain, instead of compounding it by shifting costs and creating greater moral hazard.

David Zetland said...

TT, we agree. I didn't mean to imply that politicians should try to slow things down!

Bob Murphy said...

Hi David,

You're a real estate agent too? Next you'll tell us you once were part of MI6.

Anyway if you are bored you might peruse my article on why the Fed caused the housing bubble. I'd be curious to hear your reaction.

David Zetland said...

Agreed. The Fed *did* cause the housing bubble :)

TokyoTom said...

Bob, I agree with you that the Fed caused the bubble, but was still disappointed - I thought you were going to tell us WHY the Fed did what it did.