Tag Archives: economic growth

more on money, economic growth, and sustainability

Here’s a new study looking at economic growth, interest rates, the money supply, and ecological footprint.

Ecological monetary economics: A post-Keynesian critique

The monetary analysis of some ecological economists currently appears to be mostly articulated around the following core: a stationary economy (and a fortiori a degrowth economy) is incompatible with a system in which money is created as interest-bearing debt. To question the relevance of the debt-money/positive interest rate/output growth nexus, this paper adopts a critical stance towards the currently emerging ecological monetary economics from the standpoint of another strand of heterodox economics – the post-Keynesian approach. In its current state, ecological monetary economics is at odds with post-Keynesian economics in its analysis of the money–growth relationship. This will be shown using the theory of endogenous money and a simple Cambridgian–Kaleckian model where debt-money and a positive interest rate are compatible with a full stationary economy.

free trade

I just thought I would counter yesterday’s discussion of “blowback economics” with a typical pro-trade argument from a mainstream economist, in this case Kenneth Rogoff at Harvard:

The rise of anti-trade populism in the 2016 US election campaign portends a dangerous retreat from the United States’ role in world affairs. In the name of reducing US inequality, presidential candidates in both parties would stymie the aspirations of hundreds of millions of desperately poor people in the developing world to join the middle class. If the political appeal of anti-trade policies proves durable, it will mark a historic turning point in global economic affairs, one that bodes ill for the future of American leadership…

The right remedy to reduce inequality within the US is not to walk away from free trade, but to introduce a better tax system, one that is simpler and more progressive. Ideally, there would be a shift from income taxation to a progressive consumption tax (the simplest example being a flat tax with a very high exemption). The US also desperately needs deep structural reform of its education system, clearing obstacles to introducing technology and competition.

Indeed, new technologies offer the prospect of making it far easier to retrain and retool workers of all ages. Those who advocate redistribution by running larger government budget deficits are being short sighted. Given adverse demographics in the advanced world, slowing productivity, and rising pension obligations, it is very hard to know what the endgame of soaring debt would be.

Like I said, I am still thinking these things through. I find the mainstream economic arguments very elegant and appealing, but clearly they haven’t led to the promised gains for everyone in either the developed or developing countries. I am suspicious of the trickle down claims, although I have spent time in so-called “middle income” countries in Asia and I can’t deny that even the relatively poor have made huge gains in areas in health, nutrition, and life span, even if monetary incomes are lagging. The fact that things are better than they used to be doesn’t mean they are as good as they could be. I would like to hear more details about these training technologies and education reforms that are going to make everyone competitive in the global economy – when are they going to be rolled out, how and by whom? Or if there is not a plan yet, who exactly is working on one?

Blowback Economics

I’m nearing the end of Blowback: The Costs and Consequences of American Empire by Chalmers Johnson. Towards the end he makes some novel economic arguments that I will have to think about. Basically, he argues that the rhetoric of free trade and globalization that arose after World War II was at first political in nature, acting as an ideological counterweight to communism. It supported a geopolitical strategy which was to get industry off to a fast start in Japan and later Korea, open the U.S. market to their exports and allow their economies to grow quickly, creating strong Cold War allies in Asia. The U.S. itself was highly industrialized, growing fast, and its markets were by far the largest in the world, so at first it could absorb these exports and drive growth abroad just fine. But over time, Japan and Korea grew large relative to the U.S., and other economies like Singapore, Taiwan, and Hong Kong began to copy the model, and later the nations of Southeast Asia and of course China. Johnson argues that the U.S. kept its own markets open without insisting that these countries do the same. The result was the slowing of growth in the U.S., loss of the industrial base, loss of well paying blue collar jobs, and inner-city and small-town poverty. Meanwhile, he argues that because labor costs stayed low in Asia, which by now western multinational corporations were insisting on, the middle class in Asia was not growing fast enough to be able to afford the things they were making. With the U.S. stagnating at the same time, the U.S. couldn’t afford to buy all the things being made either. All this led to manufacturing over-capacity in Asia and under-demand globally, which he sees as leading directly to the Asian financial crisis of 1997. So in his view, the free market, free trade ideology we somewhat take as a given now began as a cynical propaganda campaign, which outlived its usefulness with the end of the Cold War. He blames the financial industry for pushing the system over the edge, but does not see financial speculation or risk taking as a root cause. Publishing in 2000, he suggests that 1997 may end up being seen by history as the high water mark of the American empire, after which it went into decline.

Like I said, I have to think about all this. For one thing, while the U.S. might have directly subsidized the rise of Cold War allies like Japan, Korea and Taiwan to some extent, you certainly can’t make that same case for China, which followed almost exactly the same trajectory a bit later. And the economic theory behind free trade is pretty elegant and appealing. You can’t base a national economy on subsidized, inefficient domestic industries forever and expect to remain competitive. You need to adapt to change rather than resist change. On the other hand, you need strategies to slow the rate of change so you have time to adapt, retrain as many workers as possible, educate the next generation of workers, build public infrastructure that allows the private sector to operate efficiently, and provide a safety net for those who are still left behind. The U.S. clearly failed to do these things, at least in the city centers and small factory towns that used to depend on heavy industry. To some extent I think Chalmers is right that we believed our own Cold War propaganda and let ideology prevent us from taking the measures that would have allowed us to adapt better.

Menino Survey of Mayors

The Menino Survey of Mayors is a survey where mayors are surveyed. Basically they say they need help with infrastructure, and they complain that states are useless at best and anti-city at worst.

It would make sense to have some kind of infrastructure planning at the scale of the metropolitan area. If a metro area could agree on a planning body to represent it, and that planning body could come up with a truly comprehensive infrastructure plan, the federal government could bypass the state and pass funding directly along to that body for implementation. An infrastructure bank, part of the Federal Reserve or alongside it, could issue infrastructure bonds as part of the country’s monetary policy – invest when the private sector is underinvesting and the overall economy is lagging, and let the private sector play as large a role as it is willing to when the economy is strong. This shouldn’t be controversial – there is a near-consensus among economists that expanding infrastructure spending would be a win-win for jobs and economic growth.

This wouldn’t have to mean states would be completely obsolete. They could do the planning and implementation for the infrastructure that connects the metro areas together, and for agriculture policy and the infrastructure that brings agricultural goods to market. Their political power could be equal to a metro area in proportion to the people they represent, not the empty land they represent.

Changing the balance of power on paper between the federal government, states, and cities might require constitutional changes. But create the infrastructure bank and the funding mechanisms might change the practical balance pretty quickly.

March 2016 in Review

3 most frightening stories

3 most hopeful stories

3 most interesting stories

measuring productivity

There was a recent Wall Street Journal (which I don’t subscribe to) article arguing that productivity has not really slowed down, that we are just not measuring it correctly. This Brookings paper argues against that idea.

After 2004, measured growth in labor productivity and total-factor productivity (TFP) slowed. We find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services. First, mismeasurement of IT hardware is significant prior to the slowdown. Because the domestic production of these products has fallen, the quantitative effect on productivity was larger in the 1995-2004 period than since, despite mismeasurement worsening for some types of IT—so our adjustments make the slowdown in labor productivity worse. The effect on TFP is more muted. Second, many of the tremendous consumer benefits from smartphones, Google searches, and Facebook are, conceptually, non-market: Consumers are more productive in using their nonmarket time to produce services they value. These benefits do not mean that market-sector production functions are shifting out more rapidly than measured, even if consumer welfare is rising. Moreover, gains in non-market production appear too small to compensate for the loss in overall wellbeing from slower market-sector productivity growth. Third, other measurement issues we can quantify (such as increasing globalization and fracking) are also quantitatively small relative to the slowdown. Finally, we suggest high-priority areas for future research.

“Non-market” eh? I think some of the twisted sentences in there are arguing that we may have reached a point in richer countries where we value things that are not measured in money. Bradford Delong kind of agrees with me, saying:

Isn’t “measuring consumer welfare” the point? We (a) arrange atoms (b) in forms we find pleasing and convenient, and then use them in combination with (c) information and (d) communication to accomplish our purposes. That our measures of economic growth are overwhelmingly “market” measures that capture the value of (a), much of the value of (b), and little of the value of (c) and (d) is an indictment of those measures, and not an excuse for laziness by shrugging them off as “non-market” and claiming that measuring the shifting-out of market-sector production functions is our proper business.

Finally, I got on this growth and productivity kick after reading this article in FiveThirtyEight, which links to a lot of the above sources.

None of this economic commentary ever talks about links to the physical world or ecosystem services. I will puzzle that out one day.

Robert Gordon

Robert Gordon has expanded his argument that innovation and growth are over into a book. Here’s the description from Princeton University Press.

In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, home appliances, motor vehicles, air travel, air conditioning, and television transformed households and workplaces. With medical advances, life expectancy between 1870 and 1970 grew from forty-five to seventy-two years. Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth provides an in-depth account of this momentous era. But has that era of unprecedented growth come to an end?

Gordon challenges the view that economic growth can or will continue unabated, and he demonstrates that the life-altering scale of innovations between 1870 and 1970 can’t be repeated. He contends that the nation’s productivity growth, which has already slowed to a crawl, will be further held back by the vexing headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government. Gordon warns that the younger generation may be the first in American history that fails to exceed their parents’ standard of living, and that rather than depend on the great advances of the past, we must find new solutions to overcome the challenges facing us.

A critical voice in the debates over economic stagnation, The Rise and Fall of American Growth is at once a tribute to a century of radical change and a harbinger of tougher times to come.

Here’s an interview with Gordon where he talks about the book.

economic “derailment”

David Lipton, a deputy director at the IMF, gave a speech on March 8 in which he stated, “Global economic recovery continues, but we are clearly at a delicate juncture, where risk of economic derailment has grown.”

Why?

In many parts of Europe, for instance, sovereign and private sector balance sheets remain highly leveraged and banks’ non-performing loans high. In the US, aging-related spending pressures and unfulfilled infrastructure needs diminish economic prospects. And in Japan, deflation is putting the recovery at risk.
At the same time, we are witnessing an emergence of new risks. The global economic slowdown is hurting bank balance sheets and financing conditions have tightened considerably. In emerging markets, excess capacity is being unwound through sharp declines in capital spending, while rising private debt, often denominated in foreign currency, is increasing risks to banks and sovereign balance sheets.

Concerns about the global outlook have weighed heavily on world financial markets. The decline in equity price indices in 2016 so far this year has averaged over 6 percent, implying a loss of global market capitalization of over US$ 6 trillion (or 8.5 percent of global GDP). This is roughly half the US$ 12.3 trillion loss incurred in the most acute phase of the global financial crisis. Some Asian markets, such as in China and Japan, have been particularly hard hit, with losses of over 20 percent since the beginning of the year. Meanwhile, emerging market currencies have weakened, while their sovereign credit spreads have continued to widen—in Latin America and Africa by over 300 basis points over the past year.

What may be most disconcerting is that the rise in global risk aversion is leading to a sharp retrenchment in global capital and trade flows. Last year, for example, emerging markets saw about $200 billion in net capital outflows, compared with $125 billion in net capital inflows in 2014. Trade flows meanwhile are being dragged down by weak export and import growth in large emerging markets such as China, as well as Russia and Brazil, which have been under considerable stress.
Furthermore, inflation has fallen to historical lows. Headline inflation in advanced economies in 2015, at 0.3 percent, was the lowest since the financial crisis, and in emerging markets core inflation remains well below central bank targets.

The solutions proposed are mostly things you might expect from the IMF – free trade, free capital flows, floating exchange rates, and reduced regulation of big business. But buried in the fuzzy language, they are nowhere near as hawkish on debt as they once were and are talking about richer countries reducing taxes on labor, and taking on debt to invest in infrastructure, education, and research.

Remaking Economic Development

This is a new Brookings study on a vision for economic development at the metro scale. Here’s an excerpt, but the rest is worth reading.

As Michael Porter, the Harvard authority on competitiveness, describes it, the anchor firms, supply chains, supporting entities and organizations, research centers and specialized knowledge assets that make up industry clusters arise from a “highly localized process” that creates differentiated competitive advantages tailored for particular industry clusters.

Those assets are sometimes called “market drivers,” “factors of production,” or the “industrial commons”— because they benefit a wide array of firms. They include applied research and technical expertise, supports for entrepreneurial activity, robust pipelines of skilled labor, deep benches of suppliers and related firms, globally connected infrastructure, and responsive, predictable governance to maintain them all. It is the productive mix and synergy among these distinctive drivers—innovation, traded sectors, human capital, infrastructure, and governance—that create the conditions in which industries thrive, create value, and generate growth and income.

Globalization and technology have not dispersed these market assets but instead have further concentrated them in cities and metropolitan regions, with leading centers of knowledge and production capturing an increasingly greater share of specific market opportunities.

That is in part because innovation today reinforces the power of place. The rapid pace of competition requires solutions often developed through collaborations among firms, research institutions, national labs, competitors, customers, venture capitalists, and entrepreneurs—collaborations that are most readily forged through the networks formed within metropolitan regions.

 

This sounds right to me. Policies like minimum wage and affordable housing have their place, but ultimately I feel like they are treating the symptom and not the disease. The pie has to be growing.

how freight moves

Here are some statistics on how freight moves in the U.S. Compared to my preconceived notions, trucking is even more dominant compared to rail than I thought. Even pipelines move more than twice the weight of rail. Air is vanishingly small in terms of weight, but used to move higher-value items. It’s not too surprising that the monetary value of everything shipped is projected to grow along with the economy, but it is a little surprising to me that the weight of everything shipped is projected to grow by 40% over the next 30 years. It argues against the idea that we are “dematerializing”, or achieving economic growth without physical growth. Sure, people like Alan Greenspan can make an argument that the weight per dollar is not increasing, but what does that mean exactly when a dollar is a fairly arbitrary human measure of value? Ultimately the tonnage of everything we move, from raw materials and fossil fuels to manufactured goods to waste, is one proxy for ecological footprint, and it doesn’t look like we are going to turn the corner soon. The only way that would change is if we had a closed loop, “circular economy” where the waste becomes raw materials again. Then we could theoretically keep shipping it around the loop faster and faster without increasing our footprint. That is, given enough clean, cheap energy.