It’s interesting how economists talk about money, debt, investment, and growth. If you’re not an economist, you have to tie your brain lobes in a few knots to make sense of it. This is Michael Spence from NYU:
high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.
Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.
Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.
Here’s what I think it means. “Global shortage of adequate demand” means people aren’t spending enough money to support productive activity in the economy. Either they don’t have the money or they are saving it instead of spending it. Of course, we need a productive economy to generate the jobs and wages that get people money to spend. So it’s a chicken and egg problem that can spiral downwards once it gets started (“deflationary pressures”). Governments also aren’t investing in productive activity, either because they are afraid of debt or aren’t taking in enough taxes, or both. “Available balance sheets” means they should just wish new money into existence (governments can do that!) and spend it on investments like infrastructure, education, and research that tend to support long-term growth, which would get people more money, which they could spend to support more productive activity, and so on in a virtuous cycle. Money isn’t really real, as long as we think it is real. Debt doesn’t matter, as long as we believe it does matter. Belief in money and fear of debt usually stops us short of the absolute physical limits placed on us by our physical environment.