Commentary / World

Has the next bubble arrived?

by Robert Samuelson

There are still some economists who fear another crash. The latest is Eugene Steuerle of the Urban Institute, a liberal think tank in Washington. In a new article, he warns that the economy may be on the edge of a giant “wealth bubble” that will collapse with possibly-dire consequences.

Steuerle is especially worried by parallels between Americans’ present wealth — stocks, homes and private businesses — and the overvaluations of 2000 (the “tech bubble”) and of 2007 (the “housing bubble”). Suffering was widespread. In the 2007-2009 Great Recession, monthly unemployment peaked at 10 percent.

To test his theory, Steuerle compared U.S. household net worth (what people own minus all they owe) to the economy’s annual output, gross domestic product. Since 1950, the ratio has mostly remained 4-to-1 or less. Americans’ assets, from homes to stocks, grew roughly in tandem with the overall economy.

But there were two glaring exceptions. In early 2000, the ratio jumped to 4.5-to-1, and at the beginning of 2007, it rose to 4.9-to-1. There are two possible explanations for these leaps: Americans had become permanently richer — their accumulated wealth was rising faster than their annual incomes (GDP); or for some reason, the value of their assets had temporarily increased.

With hindsight, we know that the second answer is correct, because in each case, the economy soon entered a recession that reduced the ratios. What worries Steuerle is that the same pattern is now unfolding. Toward the end of 2018, the ratio hit an all-time high of 5.3-to-1.

The implication is that asset prices — particularly for stocks and real estate — are artificially high and that, when the bubble inevitably pops, a serious recession will occur, Steuerle writes in the journal Business Economics. People will feel poorer; joblessness will rise; confidence will slacken; business investment will weaken.

Of course, this is not a certainty; if it were, the declines would already have occurred. One alternate explanation for the unfamiliar spending behavior is that Americans increasingly tie their consumption spending to changes in their wealth — if the stocks go up, people feel richer and spend a bit more. This could both stabilize and accelerate economic growth.

The opposite happens, too. If stocks drop, consumers may pull back. This would make the economy more vulnerable to an economic slowdown or recession.

Steuerle blames the “wealth bubble” on a variety of factors: “money flowing [into the United States] from abroad, expansionary fiscal and monetary policy [and] the low [interest rates] those activities generate … and growth in business profits.” All these factors allegedly pumped up asset prices.

The possibility of a bubble hovers over what otherwise seems a strong economy. We don’t know for sure that the bubble exists and, if it exists, when it will pop and with what consequences. Stay tuned.

Robert J. Samuelson writes a column on business and economics for The Washington Post. © 2019, The Washington Post Writers Group

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