To me at least, the boom and bust cyclical economy seems like more trouble than it’s worth. Yes it can create a huge amount of wealth for some, but it also creates many financial difficulties for previously financially stable people who are not lucky and/or do not know how to ride the cycle, which is seemingly becoming increasingly more difficult as our economy becomes more complex.
Is it possible to stop the boom and bust cycle while still maintaining a strong economy? Or do some here think contrary to me that the boom and bust cycle is perfectly fine?
What causes boom and bust cycles in a big economy like the US is poor monetary policy. In the last recession just when the credit bust was calling for aggressive monetary policy the Fed was too focused on inflation dangers and did nothing until it was too late. This is because there is too much discretion in setting monetary policy. There needs to be a rule that targets nominal gdp growth. Nominal gdp is real gdp plus inflation. Thus if real gdp grows too fast, monetary policy tightens up automatically and if it grows too slow then monetary policy automatically loosens up.
I don’t think you can get away from boom and bust in a capitalistic economy. Given the requirements for continuing expansion to maintain growth the best you can do is hope to moderate the growth/recession cycle.
I agree with this 100%. The danger is in assuming that booms will last forever. The majority of the harm to economies come from bubbles bursting which are driven by a “Boom forever, baby!” attitude.
Which the US and most other countries try to do already…that’s one of the roles of the Fed in the US system. But if you want the benefits of capitalism you have to accept that you’ll have booms and busts from time to time.
As for the OP:
Even in economies that have central planning or at least a firmer control by a central government you get a boom and bust cycle…and often it’s much, much worse. Look at China, for instance. They have some aspects of capitalism, but the CCP still has it’s hands on the controls. They have gone through a bunch of boom/bust cycles in the last few years, from the artificial stimulation of their real estate and building boom/bust or their own stock market boom/bust.
That’s pretty much what I had in mind. I know just enough about economics to know that perpetual growth doesn’t happen, but it seems like we need to get away from the perpetual cycle of ridiculous bubbles that inevitably burst and wreck sizeable economic havoc. Directing policy towards establishing more moderate growth/recession cycles would seem prudent to me. I just have no idea if that’s possible or if every even thinks that’s desirable if it is possible.
Pretty much every major country tries to do this already. That’s why we have a Fed and we have regulations. It won’t ever prevent booms and busts, but, in theory at least, it will smooth out the really high and low spots. If you are willing to stifle the highs more to compensate for less extreme lows then you regulate more with a focus on whatever it is you want to cool down or heat up. If you are willing to have more extreme lows for those more extreme highs then you deregulate more. All the while the Fed attempts to heat up or cool down the economy through it’s control of interest rates and monetary policy.
This graph may be interesting. During the seventy years since the reset after WW II victory, the U.S. economy has experienced contraction at a 2.5% rate only twice, and both of those contractions were tiny compared with most of the eleven 2.5%+ contractions during a comparable-length period before WW II. The boom/bust cycle has already been brought down to a manageable level.
The 2009 contraction wasn’t caused by bad monetary policy so much as reckless Wall Street behavior that brought the world’s banks to the brink of ruin.(*) The 1981 contraction was a deliberate effort to puncture the stagflation that followed OPEC’s sudden price hike. Neither of these were “normal” boom-bust cycling.
The economy was saved by strong swift actions of the F.R.B. in 2008. Their main tool, whacking 5% off the cost of short-term money, is no longer available so the situation may be much graver if Wall Street recklessness leads to another crisis — as is likely given the incoming political regime and the absence of moral hazard lessons from the 2008 crisis.
It is the Feds job to keep recessions from happening by changing monetary policy. The fact that a recession happened and it was as deep as it was shows that they did not do their job.
The Fed can no longer cut interests rate as much as they did but they have plenty of other things they can do if they want to.
