Tag Archives: economic growth

Trumponomics

Moody Analytics has tried to take what Trump says and predict what would happen to the economy if he could actually do what he says.

Broadly, Mr. Trump’s economic proposals will result in a more isolated U.S. economy.
Cross-border trade and immigration will be significantly diminished, and with less trade and immigration, foreign direct investment will also be reduced. While globalization has created winners and losers in the U.S. economy in recent decades, it contributes substantially to the ongoing growth of the U.S. economy. Pulling back from globalization, as Mr. Trump is proposing, will thus diminish the nation’s growth prospects.

Mr. Trump’s economic proposals will also result in larger federal government deficits and a heavier debt load. His personal and corporate tax cuts are massive and his proposals to expand spending on veterans and the military are significant. Given his stated opposition to changing entitlement programs such as Social Security and Medicare, this mix of much lower tax revenues and few cuts in spending can only be financed by substantially more government borrowing.

Driven largely by these factors, the economy will be significantly weaker if Mr. Trump’s economic proposals are adopted. Under the scenario in which all his stated policies become law in the manner proposed, the economy suffers a lengthy recession and is smaller at the end of his four-year term than when he took office (see Chart). By the end of his presidency, there are close to 3.5 million fewer jobs and the unemployment rate rises to as high as 7%, compared with below 5% today. During Mr. Trump’s presidency, the average American household’s after-inflation income will stagnate, and stock prices and real house values will decline.

the productivity puzzle

Nouriel Roubini has a nice run-down on the technologies that theoretically might be having some impact on productivity, but aren’t:

  • ET (energy technologies, including new forms of fossil fuels such as shale gas and oil and alternative energy sources such as solar and wind, storage technologies, clean tech, and smart electric grids).
  • BT (biotechnologies, including genetic therapy, stem cell research, and the use of big data to reduce health-care costs radically and allow individuals to live much longer and healthier lives).
  • IT (information technologies, such as Web 2.0/3.0, social media, new apps, the Internet of Things, big data, cloud computing, artificial intelligence, and virtual reality devices).
  • MT (manufacturing technologies, such as robotics, automation, 3D printing, and personalized manufacturing).
  • FT (financial technologies that promise to revolutionize everything from payment systems to lending, insurance services and asset allocation).
  • DT (defense technologies, including the development of drones and other advanced weapon systems).

He also runs through the various possible explanations for why the data do not show any progress in productivity:

  1. These technologies are just not as game-changing as the ones that sparked the revolutions of the past.
  2. The measurements of productivity that worked in the past are outdated.
  3. There is a lag between innovation and its effects on productivity.
  4. The current recession has been so bad it has caused a permanent reduction in capital investment, skills of the work force, and consumer confidence.

I was waiting for Roubini to tell us which combination of these factors is the right one, but he doesn’t so I will speculate myself. #1 is just wrong, although I can see an argument that the new technologies are still in an early stage. Although the plow, the printing press, the steam engine, electricity, etc. were game changing, the game didn’t change as soon as they were invented. They had to catch on, infrastructure had to be built, resistance to change had to be overcome, and it took awhile. Each successive revolution happened faster though, which is why I am skeptical that this time is different.

#2 doesn’t make much sense to me. You can tell people who are poor, unemployed, starving, and angry that their condition is just being measured and reported incorrectly, but they are not going to buy that

#4 probably has some validity in the short to medium term, but hopefully it won’t last forever.

My money is on #3. I think there is a lag, and it just hasn’t hit yet. If and when there is a sharp technology-driven surge in productivity, it doesn’t mean everything is going to instantly be great for everybody. As we produce more with less effort, there will be winners and losers, haves and have nots. And there will be a lag between when that starts and when it gets resolved. And just to beat a dead horse, we can’t just keep producing and consuming more forever unless we figure out a way to do that without growing our ecological footprint. And, we need to watch out for those defense technologies.

too much democracy?

Andrew Sullivan has written a somewhat ridiculous article in New York Magazine called Democracies end when they are too democratic.

Socrates seemed pretty clear on one sobering point: that “tyranny is probably established out of no other regime than democracy.” What did Plato mean by that? Democracy, for him, I discovered, was a political system of maximal freedom and equality, where every lifestyle is allowed and public offices are filled by a lottery. And the longer a democracy lasted, Plato argued, the more democratic it would become. Its freedoms would multiply; its equality spread. Deference to any sort of authority would wither; tolerance of any kind of inequality would come under intense threat; and multiculturalism and sexual freedom would create a city or a country like “a many-colored cloak decorated in all hues.”

This rainbow-flag polity, Plato argues, is, for many people, the fairest of regimes. The freedom in that democracy has to be experienced to be believed — with shame and privilege in particular emerging over time as anathema. But it is inherently unstable. As the authority of elites fades, as Establishment values cede to popular ones, views and identities can become so magnificently diverse as to be mutually uncomprehending. And when all the barriers to equality, formal and informal, have been removed; when everyone is equal; when elites are despised and full license is established to do “whatever one wants,” you arrive at what might be called late-stage democracy. There is no kowtowing to authority here, let alone to political experience or expertise…

And it is when a democracy has ripened as fully as this, Plato argues, that a would-be tyrant will often seize his moment.

That’s an entertaining tale, but it’s somewhat silly to suggest the United States has “too much democracy”, if you define democracy as equality. For a long time we have had rule by a stable triumvirate of elites – a civilian government elite, a big business elite, and a military/security/intelligence elite. The big business elite pays off the politicians and bureaucrats in the civilian government so they can produce the propaganda to stay elected, the civilian government makes sure the rules are written unfairly in favor of big business so they can make enormous profits at the expense of the rest of society, and the military/security/intelligence elite gets a huge share of our national resources and free reign to do just about anything it wants abroad, in exchange for not overthrowing the civilian government which it could easily do any time. It’s been a very stable three-legged stool.

In the past there has been just enough upward mobility for those of us in the general population to look the other way and buy into the propaganda enough to keep the system stable. Most of us can’t join the true elite, but the middle class have been able to train in professions and become moderately wealthy, while the working class have been able to get jobs that pay enough to join the middle class. The poor have been too few and too divided to organize politically. I think what is starting to happen is that this system of upward mobility is starting to break down now on a large enough scale that a significant chunk of the population is no longer buying into the propaganda and supporting the elites, and the whole political system is starting to teeter. I think it’s due partly to economic factors outside our control, like automation, and partly due to the short-sighted greed of the elites who are insisting on gobbling up a larger and larger share of a pie that is no longer growing as fast as it once did, if all. Environmental factors may be starting to play a role too, although I am still unsure of that.

True democracy, to me, would be a system that allows us to come to a consensus on policies that most of us, not just a majority but almost all of us, can accept, even if these policies are not everyone’s first choice. In a U.S. context it also has to be about true equality of opportunity, if not equality itself. How can anyone look at what is going on in our society and political system and think we have “too much democracy”?

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.