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A bubble-less recovery

Austan Goolsbee, president Obama's former economic adviser and professor at the University of Chicago Booth's School of Business.

David Brancaccio: Now from an anthropologist's view of getting out of debt to an economist's view of the way forward. Namely, how do we build the U.S. economy without relying on another debt-driven bubble? You may remember the bubble -- real estate prices that always seemed to go up, leading up to home equity loans galore and a splurge of spending.

Austan Goolsbee is a professor at the University of Chicago. Until late this summer, eh was the chair of President Obama's Council of Economic Advisers. Professor Goolsbee, welcome to the show.

Austan Goolsbee: Hey, my pleasure.

Brancaccio: Here's what a wise man once told me: We had an economy based on buying things we don't need, using money we don't have, made somewhere else. Do you see any truth in that epigram?

Goolsbee: You know, there's some grain of truth in that. There's no question that in the 2000s, we had an economic expansion that was fueled by consumer spending and housing construction, neither of which was sustainable.

Brancaccio: Maybe it's a cycle. Give the economy some time and we'll start building houses again, buying houses, furnishing houses and happy times can be here again.

Goolsbee: There was an old Onion headline, "America demands new bubble to invest in." I hope we don't do that. Our consumer spending was growing faster than our income and that brought our national savings rate at three points in the 2000s to less than zero. So if you added up all the savings of everyone in the United States combined, it was less than nothing.

Brancaccio: So, in a sense, we've gone through the looking glass already. Something is now different with the economy. Maybe, what, we should think about it in a new way? Less waitin' for the consumer to stand up and salute?

Goolsbee: Yeah, I think a little bit of that and there's still in the economics community a big argument about were we going at a moderate pace in 2010 and then we hit some bumps from Europe, from Japan, from gas prices, from debt ceiling negotiations? Those things slowing us down? Or, are we more like these countries that have gone through massive financial crises, like Japan in the '90s. You've got some economists arguing it's just gonna be many many years before we're back on a growth path. Now, I personally don't think that's true, but we certainly have to look at how much deleveraging has taken place and how much has got to continue to take place.

Brancaccio: Deleveraging, that's a fancy way for moving away from debt, and at the personal level, consumers using debt more wisely.

Goolsbee: Yeah, and if people have to get their debt levels down by a tremendous amount, that can sometimes take a while. Now, the good news, much of the pain we had to go through to do that, we've now already gone through. So, a lot, if not all, of the deleveraging for many consumers already took place. They just had to bite these awful bullets.

Brancaccio: So we've been through this period of pain, and it's one way to look at it is at least the pain is behind us, not in front of us. But you know, there's still potential for cheap money to swirl through our economy in ways that get us back into debt. I mean, look at the Fed with it's low longer-term interest rate policy. There's the potential here for bringing debt back into the equation and fueling the economy, the old fashioned way, you know, debt to consumers who then spent.

Goolsbee: I would say that if you were in a normal time, and you said, unemployment's 9 percent-plus, core inflation's well below the 2 percent target level -- everybody would say, "Well, sounds like you want a loose monetary policy." So I don't fault central bankers around the world for taking a posture that's about growth. We've just got to shift our focus away from the consumers and consumer debt to business investment and export growth. It's not just what we want to do. That's what's the market's going to be pushing us to do.

Brancaccio: Now I just want to understand this better before I let you go, which is we have a lot of companies in the U.S. sitting on a lot of money. We'd like them to be investing them to help with growth, there's a lot of caution out there. What needs to happen now or soon to get those companies to start using the money?

Goolsbee: Well, I'd say one thing to note is companies had started accumulating money well before this recession began, interestingly. And there was a puzzle among the economic community of why our firms are accumulating so much cash. In my read and talking to a lot of CEOs, is that there's a great deal of fear and uncertainty about the state of the world and the state of the economy and until they're feeling that the economy is back to a steadier growth path, they're still going to sit and wait before they're gonna actually start spending the money.

Brancaccio: So hopefully soon, right?

Goolsbee: Yeah, hopefully soon.

Brancaccio: Alright, Austan Goolsbee, I want to thank you for this. This is extremely helpful to us. I really appreciate it.

Goolsbee: Great talkin' to you again.

Brancaccio: Austan Goolsbee is a professor of economics at the University of Chicago's Booth School of Business.

About the author

David Brancaccio is the host of Marketplace Morning Report. Follow David on Twitter @DavidBrancaccio

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