June 24, 2015
The Washington Post ran a piece on Glenn Hubbard, the chief economic adviser to President George W. Bush and now an adviser to Jeb Bush, which ignored much of Mr. Hubbard’s history. For example, it told readers:
“Hubbard believes that for too long, the United States has only experienced rapid growth in the midst of what he calls ‘bubble economies,’ which don’t deliver broadly shared prosperity to workers. For example, he blames the Federal Reserve for stoking a bubble in the mid-2000s by keeping interest rates too low for too long.”
While the piece notes that Hubbard had been an adviser to Bush during part of this period, it neglects to tell readers that he never said anything about the housing bubble. In other words, Hubbard’s analysis is 100 percent hindsight, he completely missed the $8 trillion housing bubble, the collapse of which has devastated the economy.
He is also mistaken in claiming that bubbles cannot lead to “broadly shared prosperity to workers.” During the 1990s stock bubble, the unemployment rate eventually fell as low as 4.0 percent. During these years workers at the middle and bottom of the wage distribution saw healthy wage gains. The problem is that this growth could not be enduring, since it was based on a bubble.
It also would have been useful to remind readers that Hubbard had done excellent research indicating the Bush tax cuts would not be likely to have the promised effect of increasing investment. Hubbard’s research showed that investment is very unresponsive to reductions in the interest rate. The stated goal of tax cuts directed at high income households was to give them more incentive to save and thereby lower interest rates. If investment is unresponsive to a reduction in interest rates, then this is unlikely to be an effective route to boosting investment and growth.
Addendum:
My colleague, Nicholas Buffie, calls my attention to a paper that Professor Hubbard co-authored for Goldman Sach’s Global Markets Institute in 2004, near the peak of the bubble. The executive summary of the paper told readers:
“The ascendancy of the US capital markets — including increasing depth of US stock, bond, and derivative markets — has improved the allocation of capital and of risk throughout the US economy. Evidence includes the higher returns on capital in the US compared to elsewhere; the persistent, large inflows of capital to the US from abroad; the enhanced stability of the US banking system; and the ability of new companies to raise funds. The same conclusions apply to the United Kingdom, where the capital markets are also well-developed.” [emphasis added]
“The development of the capital markets has also facilitated a revolution in housing finance. As a result, the proportion of households in the US that own their homes has risen substantially over the past decade.”
“The capital markets have also acted to reduce the volatility of the economy. Recessions are less frequent and milder when they occur. As a result, upward spikes in the unemployment rate have occurred less frequently and have become less severe.”
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