A Goldilocks economy exists when growth is neither too hot nor too cold. Heat can cause inflation, and cold can create a recession. It's a healthy economy named after the famous children's story, "Goldilocks and the Three Bears."
The little girl only ate the bear's porridge if was neither too hot nor too cold. Like the porridge, the Goldilocks economy is one that's "just right."
Definition and Examples of a Goldilocks Economy
A Goldilocks economy has an ideal growth rate of 2% to 3% as measured by gross domestic product growth. It has moderately rising prices as measured by the core inflation rate. The Federal Reserve has set this target inflation rate at 2%.
The term may have been created by David Shulman, senior economist of the UCLA Anderson Forecast, who wrote an article in 1992 called "The Goldilocks Economy: Keeping the Bears at Bay."
The title "The Goldilocks Economy: Keeping the Bears at Bay" includes a clever pun because the term "bears" describes stock traders who believe the market is declining or entering a bear market.
Shulman described the economy during the Clinton administration when the economy was hot enough to spur profitable business growth, but cool enough to keep the Fed from using contractionary monetary policy to ward off inflation. That means higher interest rates, which stock traders and businesses dislike because of their negative impact on profit margins.
Goldilocks Economies in U.S. History
There have been some notable Goldilocks economies in recent history.
- 1956 and 1957: The economy was stable following the end of the Korean War.
- 1960 and 1961: President John F. Kennedy ended a recession by increasing government spending on defense, the Food Stamp Program, farm supports, and state highway aid funds.
- 1967: The economy expanded during the Vietnam War.
- 1981: President Ronald Reagan’s aggressive tax cuts, increased government spending, and reduction of money supply pulled the economy out of stagflation.
- 1993: The Omnibus Budget Reconciliation Acts of 1990 and 1993 increased taxes and limited government spending. This created a budget surplus and an expanded economy.
- 1995: The Fed raised interest rates, which slowed down the previous year’s high growth rate of 4%.
- 2003: President George W. Bush’s Jobs and Growth Tax Relief Reconciliation Act helped the economy out of a recession.
- 2006: The Fed raised the rates, which slowed down the previous year’s expansion rate to an ideal 2.7%.
- 2010: Obamacare was launched, helping the government to cut down healthcare costs. The Dodd-Frank Reform Wall Street Reform Act was enforced to regulate financial markets and to patch up the catastrophic failures of the banking industry in 2008.
- 2012: The U.S. was in an expansion phase, despite almost falling off a fiscal cliff that year.
- 2014–2015: The country was still in an expansion phase, with a strong dollar, low oil prices, and a steady, predictable rise in interest rates.
- 2017–2018: A weakened dollar and President Donald Trump’s tax plan boosted growth.
How a Goldilocks Economy Works in Politics
The goal for both the Fed's monetary policy and Congress' fiscal policy is to create enough demand to keep the economy humming at a healthy pace, but Congress also has political goals that can interfere with creating a Goldilocks economy.
Congressmen sometimes disagree with how to create this type of economy. Many fiscal conservatives advocate supply-side economics and Reaganomics, which favor lower taxes and fewer regulations. Many liberal politicians believe in Keynesian policies, which advocate for more of a managed market economy, and this involves more frequent government intervention.
The Fed often compensates as a result when political goals interfere with fiscal policy's ability to create a Goldilocks economy. In fact, many analysts believe the Fed has become sophisticated enough to create a healthy economy no matter what fiscal policy does. They focus completely on the Fed as a result.
“It’s as though Goldilocks entered the house of the three bears and found the porridge was being heated in a big microwave oven,” said Seth J. Masters, the chief investment officer of Bernstein Global Wealth Management. “Sure, it’s just the right temperature inside, but there’s a reason for it. It’s hard not to focus on the microwave.”
Notable Goldilocks Mentions
Clinton's Labor Secretary, Robert Reich, described the 1990s as a Goldilocks recovery in a 1995 White House news conference.
Former Federal Reserve Chairman Ben Bernanke reassured markets that the United States would continue to benefit from another year of its Goldilocks economy when he testified before the House Budget Committee on Feb. 28, 2007. This was to counter a stock market sell-off triggered by former Federal Reserve Chairman Alan Greenspan’s comment that there was a 50% chance of a recession later that year.
Greenspan also mentioned that the U.S. budget deficit was a significant concern. Fed board member William Poole added that stock prices were not overvalued, as they were before the 2001 recession.
The President's Council of Economic Advisers disagreed in its 2007 Economic Report of the President, warning of the end of the Goldilocks economy that the country had enjoyed since 2004. The report incorrectly assumed that the bank liquidity crisis wouldn't spread beyond banks, mortgages, and real estate. It predicted growth would continue through 2008, with an upturn toward the end of the year.
Advisers thought that the Bush tax cuts would solve the subprime mortgage crisis.
Horizon Investment's chief global strategist Greg Valliere said in 2017 that the economy had entered another Goldilocks period, noting that there was solid economic growth without inflation.
- A Goldilocks economy is “just right,” neither too hot nor too cold.
- It has an ideal growth rate of 2% to 3% as measured by gross domestic product growth.
- The U.S. has experienced 12 Goldilocks economies since 1956.
- Politics can interfere with the creation of Goldilocks economies.