rose-colored glasses

Larry Summers Still Hasn't Heard About the Stock Bubble by Dean Baker

It looks like more trouble with Harvard economists (e.g. Reinhart-Rogoff). It seems Larry Summers, who was Treasury Secretary in the last two years of the Clinton administration, is still unaware of the stock bubble that propelled growth in those years.
In a Post column today he tells readers: 

"As a consequence of policy steps in 1990, 1993 and 1997 [deficit reduction measures], it was possible by 2000 for the Treasury to retire federal debt. Deficit reduction and the associated reduction in capital costs and increase in investment were important contributors to the nation’s strong economic performance during the 1990s, when productivity growth soared and unemployment fell below 4 percent. We enjoyed a virtuous circle in which reduced deficits led to lower capital costs and increased confidence, which led to more rapid growth, which further reduced deficits." 

Of course the reason that the country was repaying debt was that a $10 trillion stock bubble led to an investment boom (much of it in junk dot.com investment) and a much larger consumption boom through the stock wealth effect. This bubble fueled the strong growth at the end of the 1990s. 

While the growth and resulting low unemployment rate were great news, bubbles are inherently unsustainable. This bubble burst beginning in 2000 and led to the recession of 2001. It is difficult to recover from a recession caused by a bursting bubble. The economy did not begin to create jobs following the 2001 recession until September of 2003. It did not make up the jobs lost in the downturn until January of 2005. Until the current downturn this was the longest period without job growth since the Great Depression. 

The demand from the stock bubble was necessary to support the economy as a result of large trade deficit the country was running at the time. Robert Rubin, Larry Summers' predecessor as Treasury Secretary, pushed a strong dollar policy. He put force behind this policy with his control of the IMF's bailout from the East Asian financial crisis. The sharp run-up in the value of the dollar over these years made U.S. goods uncompetitive in the world economy leading to a sharp rise in the trade deficit. The deficit eventually peaked at 6.0 percent of GDP in 2005. The demand from the stock bubble and later the housing bubble were needed to offset the demand lost due to the trade deficit. 

It is remarkable that Summers does not seem to be aware of this history, but I guess economics at Harvard is different from economics elsewhere in the world.