Our economy is so large and so complex that understanding it requires some kind of paradigm or framework. But there can be many competing frameworks, which gives us many ways of looking at the economy. N.C. State University economist Mike Walden takes a look at a framework that has been revived – one proposed by long-departed economist Irving Fisher.
“Well, Fisher, … like many economists, observed the fact that the economy does … go through ups and downs — the so-called business cycle. We’ve certainly seen that recently. We had a boom in the 2000s. Now we’ve had a bust in the late 2000s and early part of the second decade of the 21st century. And … the big question is why. Why do we see these booms and busts in the macro-economy?
“And Fisher argued it had to do with, first of all, asset buildup and then too high of debt. What he argued was when the economy was good and booming — assets are going up, stock market’s going up (and) recently (the) housing market went up. And that motivates people and businesses to take on more debt to expand, because again they have that asset base to backstop their higher debt.
“Then, however … — and we don’t understand this very completely — but when the economy turns and people become disenchanted with those assets which have gone up in value — for example, the housing market in our recent example — and begin selling those, that causes there to be an asset bust.
“In our case again, stock market went down, housing market went down and households there and businesses are left with debts that are too high relative to their assets. And depending upon how high the debt is relative to the assets, that can cause the down part of the economy to extend for many, many years.
“So, you can see how Fisher’s ideas certainly play in today. Now what Fisher recommended is to get out of this so-called debt burden, you could either work on the asset side or the debt side — do things to try to reduce the size of debt. One thing you can do is to spark inflation. Or do things to try to spur increases in asset values. And some say that’s what the Federal Reserve has been trying to do, particularly in terms of the stock market.”