Tag Archives: economic growth

infrastructure infrastructure infrastructure

Hillary wants to spend $250 billion on infrastructure. Bernie wants to spend $1 trillion. Infrastructure investment is good. Economists all say so. Politicians who care at least a little about reality all say so. The American Society of Civil Engineers says so. I happen to be a civil engineer so it is definitely good for me.

The idea is that the infrastructure we have in the ground now wears out gradually, and we almost never do enough maintenance to keep it in its original condition. So there is a constant loss of value to the economy. You can also think of infrastructure as reducing friction, transaction costs, wasted time, effort, and energy in the economy. If people and goods can get where they need to go efficiently and cheaply, they can do more productive work and produce more value each day with less waste. The same idea applies to getting energy and water around. Finally, there is the economic idea that when economic growth is below capacity, as it is now, you could pay people to dig holes and fill them back in again, and there would be a net economic gain. So any infrastructure investment, even if it is not optimal, has even more benefit and it is a sort of free lunch, something for nothing, two birds with one stone. And interest rates are so low that it makes sense for the government to borrow money, or even print it, and realize this almost automatic, guaranteed, magical return on the investment. Politicians who oppose infrastructure investment on debt or deficit grounds just don’t understand or don’t care about reality, or else they are telling a cynically calculated story to people who don’t.

Optimal, planned infrastructure investment would be even better, of course. We really don’t do any planning at the national scale in the United States. Maybe we are still trying to differentiate ourselves from the Soviet planned economy, but seriously, it is time to get over that particular hangover.

I like Elon Musk’s Hyperloop because it is a big idea and it asks if we should be considering something bold, big, and different, not to mention more efficient and cost-effective than the same old ideas from the 1950s! But we need to remember infrastructure is not just about transportation, it is about energy, water resources, food, commerce, trade, information, environmental quality and ecosystems. Infrastructure has an ecological footprint which needs to be measured and considered in decisions. Let’s think big, take a holistic, long-term look at the whole system, and ask what kinds of investments would be best. What kind of integrated infrastructure system do we think would make sense in the future, and what steps would we take today to get there? One of the hard things about infrastructure, though, is that it is long-lived. The technology available actually changes much faster than the infrastructure wears out, so blindly repairing and perpetuating old infrastructure ends up retarding the pace of change. A good plan needs to take a long-term view, but it has to be flexible enough to adapt to changing technology, environmental, climate and socioeconomic conditions during the course of its implementation. This is the essence of good planning, but it is hard for many of today’s hyper-specialized, local- and short-term-thinking professionals to pull off.

refugee cities

This post makes a case for establishing cities for refugees rather than “camps”.

Second, the world now has 60 million refugees. That is a number roughly the size of six Belgiums, Hungarys, or Swedens. If they were to create their own country, it would be the size of France. In the face of such staggering numbers, commitments to take thousands or even tens of thousands of people will do almost nothing to alleviate the misery of millions.

Rather than conflating the issues of refugees and terrorism, politicians and policymakers should be addressing each separately. On the question of refugees, Western countries should take in as many as their populations can assimilate, demonstrating a willingness to make good on the universal values they profess for both moral and political reasons.

But the world also needs far bolder solutions than twentieth-century approaches like limited asylum quotas and “temporary” refugee camps. In particular, it is time to embrace the prospect not of camps but of cities – places where up to a million refugees of any particular nationality can live safely and learn how to build a better future.

This reminds me a little of Paul Romer’s “charter cities”. The idea was to create entirely new city states focused on economic growth that people from anywhere in the world could opt into, provided they agreed to certain norms of behavior. I find the idea compelling, although Romer’s attempts to realize it on the ground in Honduras ended up on the rocks. You can argue that Singapore developed somewhat along these lines, although it was not founded based on this ideology (in fact, it was not even founded voluntarily, but just sort of cast adrift.)

Georgescu-Roegen

From Wikipedia:

Nicholas Georgescu-Roegen, born Nicolae Georgescu (4 February 1906 – 30 October 1994) was a Romanian American mathematician, statistician and economist. He is best known today for his 1971 magnum opus The Entropy Law and the Economic Process, where he argued that all natural resources are irreversibly degraded when put to use in economic activity. A paradigm founder in economics, Georgescu-Roegen’s work was seminal in establishing ecological economics as an independent academic subdiscipline in economics…

He was a protégé of the renowned economist Joseph Schumpeter. His own protégés included foundational ecological economist Herman E. Daly and Kozo Mayumi who further extended Georgescu-Roegen’s theories on entropy in the study of energy analysis…

The Entropy Law and the Economic Process, described by the Library Journal as “…a great seminal work that challenges economic analysis”, is a wide-ranging technical and philosophical exposition which promotes the case that economic activity can not be adequately described without taking into account the implications of second law of thermodynamics. It notes that the discovery of the second law in the mid nineteenth century resulted in the downfall of the mechanistic dogmas of Classical Physics. Whereas the equations of Newton‘s Laws of Motion were symmetrical with respect to time, the new law introduced the concept of irreversibility. Although the processes of living organisms appear to violate the second law, Schroedinger demonstrated in What is Life? that there is no inconsistency – organisms feed on low-entropy sources of energy to build and preserve their complex structures, and dissipate the energy in a higher entropic state. It argues that social and economic endeavours are an extension of these biological processes and are governed by the same principles.

time to worry about the national debt?

While the Republican candidates are obsessing over the national debt, economists are thinking the opposite, that Keynesianism is back and a lot of borrowing and spending is going to be necessary to keep the economy going. Your average person on the street can follow the first argument, because it seems similar to his household finances, and because it has an undertone of morality (debt=bad). But very few people understand the theories behind fiscal or monetary policy. Because our education system hasn’t given us the mental tools to understand the nested complex systems we are all embedded in. How are we supposed to elect the right people to make the right choices then?

Finally, there is a fourth view, championed most prominently by Larry Summers and Paul Krugman. They argue that there is little evidence that monetary policy will ever restore full prosperity. In this view, Milton Friedman’s dream of using strategic monetary interventions to offset economic shocks remains just that: a dream. It was only the unique circumstance in Europe and the US over the last half-century – most notably rapid demographic and productivity growth – that made his ideas seem plausible. “If nobody believes that inflation will rise, it won’t,” is how Krugman put it. “The only way to be at all sure of raising inflation is to accompany a changed monetary regime with a burst of fiscal stimulus.”

I do not claim to know which of these views is the correct one. But I do think that this discussion is the most important debate in the field of macroeconomics since John Maynard Keynes wrestled with similar questions in the 1930s. For Keynes, the answer was clear, and it was something close to what is being argued by Summers and Krugman; indeed, his conclusions are what transformed him from a monetarist into a Keynesian.

“It seems unlikely that the influence of [monetary] policy on the rate of interest will be sufficient by itself,” Keynes wrote in 1936. “I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment.” Those are words worth considering the next time we find ourselves needing the courage to act.

Oh, even if monetary policy did work, the Republicans want to destroy the Federal Reserve.

credit, interest, and a steady state economy

This article in Ecological Economics says that a positive interest rate and a no-growth economy could coincide.

Does credit create a ‘growth imperative’? A quasi-stationary economy with interest-bearing debt

This paper addresses the question of whether a capitalist economy can ever sustain a ‘stationary’ (or non-growing) state, or whether, as often claimed, capitalism has an inherent ‘growth imperative’ arising from the charging of interest on debt. We outline the development of a dedicated system dynamics macro-economic model for describing Financial Assets and Liabilities in a Stock-Flow consistent Framework (FALSTAFF) and use this model to explore the potential for stationary state outcomes in an economy with balanced trade, credit creation by banks, and private equity. Contrary to claims in the literature, we find that neither credit creation nor the charging of interest on debt creates a ‘growth imperative’ in and of themselves. This finding remains true even when capital adequacy and liquidity requirements are imposed on banks. We test the robustness of our results in the face of random variations and one-off shocks. We show further that it is possible to move from a growth path towards a stationary state without either crashing the economy or dismantling the system. Nonetheless, there remain several good reasons to support the reform of the monetary system. Our model also supports critiques of austerity and underlines the value of countercyclical spending by government.

work sharing

Work sharing – it’s an idea to look into before the robots take over most of the work.

Work-sharing for a sustainable economy

Achieving low unemployment in an environment of weak growth is a major policy challenge; a more egalitarian distribution of hours worked could be the key to solving it. Whether work-sharing actually increases employment, however, has been debated controversially. In this article we present stylized facts on the distribution of hours worked and discuss the role of work-sharing for a sustainable economy. Building on recent developments in labor market theory we review the determinants of working long hours and its effect on well-being. Finally, we survey work-sharing reforms in the past. While there seems to be a consensus that work-sharing in the Great Depression in the U.S. and in the Great Recession in Europe was successful in reducing employment losses, perceptions of the work-sharing reforms implemented between the 1980s and early 2000s are more ambivalent. However, even the most critical evaluations of these reforms provide no credible evidence of negative employment effects; instead, the overall success of the policy seems to depend on the economic and institutional setting, as well as the specific details of its implementation.

election season

I try not to get too political on this blog, but as we approach the election season, I have to say that I am just sick of the Republican candidates. These are not serious grownups proposing serious grownup solutions to real problems. We have problems like financial instability, food and water security, sea level rise, economic stagnation, weapons of mass destruction, and global issues of war and peace that need serious attention. There is no time to waste on bullshit. Some are suggesting a GOP implosion is a real possibility.

So what caused the current rebellion in the GOP ranks? It finally dawned on loyal foot soldiers in the odd-couple coalition that they were being taken for suckers. Their causes always seemed to get the short end of the stick. The GOP made multiple promises and fervent speeches on the social issues, but, for one reason or another, the party establishment always failed to deliver.

This belated realization stirred the anger that has flared across the ranks of the followers — and not just in the South. The financial crisis, the bailout of the banks, and collapsing prosperity intensified their sense of betrayal. People began mobilizing their own rump-group politics to push back. The tea party protests were aimed at President Obama, of course, but they were also an assault on Republican leaders who had misled and used the party base for so long. Tea party revenge took down long-comfortable legislators and elected red-hot replacements who share the spirit of rebellion…

If my lobbyist friend is right, the Republican establishment brought this crisis on itself by cynically manipulating its own rank and file. The party can’t deal with the real economic distress threatening the nation as long as rebellion is still smoldering in the ranks. Of course, that suits the interests of the country-club and Fortune 500 wing of the party — the last thing they want is significant economic reform. Confusion and stalemate have their political uses. On the other hand, the GOP can’t give the tea party rebels what they want without darkening its electoral prospects for 2016. Chaos to be continued.

I try not to get overly political on this blog, but I will be starting to think and talk about policies that relate to growth, sustainability, and risk and the upcoming election season.

Viktor Glushkov

Viktor Glushkov was a Soviet computer science who developed an idea for a cash-free, computer-controlled economic system. The theory is seductive because the idea was to improve information flows and feedback loops while reducing lag times. In other words, if you could collect perfect information and make it perfectly available, the economy could be perfectly efficient and in perfect balance. It didn’t work out, running into the crushing Soviet bureaucracy and technological limits. But in theory at least, the technology would be less of a constraint today.

Glushkov’s initial proposal included one particularly controversial provision. He envisioned that the new network would monitor all labor, production, and retail, and he proposed to eliminate paper money from the economy and to rely entirely on electronic payments. Perhaps Glushkov hoped that this idea would appeal personally to Khrushchev. The elimination of paper money evoked the Marxist ideal of money-free communist society, and it seemed to bring the Soviet society closer to the goal of building communism, promulgated by Khrushchev at the Twenty-Second Party Congress in 1961. The Academy president Keldysh, who was much more experienced in top-level bureaucratic maneuvers, advised Glushkov to drop the provision, for it would ‘only stir up controversy.’ Glushkov cut out this section from the main proposal and submitted it to the Party Central Committee under a separate cover. If ideology were to play any significant role in Soviet top-level decision-making, this was its best chance. Glushkov’s proposal to eliminate money, however, never gained support from the Party authorities.

World Economic Forecast

The IMF has issued a new World Economic Forecast.

Relative to last year, the recovery in advanced economies is expected to pick up slightly, while activity in emerging market and developing economies is projected to slow for the fifth year in a row, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies…

the persistently modest pace of recovery in advanced economies and the fifth consecutive year of growth declines in emerging markets suggest that medium-term and long-term common forces are also importantly at play. These include low productivity growth since the crisis, crisis legacies in some advanced economies (high public and private debt, financial sector weakness, low investment), demographic transitions, ongoing adjustment in many emerging markets following the postcrisis credit and investment boom, a growth realignment in China—with important cross-border repercussions—and a downturn in commodity prices triggered by weaker demand as well as higher production capacity.

September 2015 in Review

What did I learn in September? Let’s start with the bad and then go to the good.

Negative stories (-11):

  • The Environmental Kuznets Curve is the idea that a developing country will go through a period of environmental degradation caused by economic growth, but then the environment will improve in the long run. Sounds okay but the evidence for it is weak. (-1)
  • The Inca are an example of a very advanced civilization that was wiped out. (-1)
  • Consumerism and the pursuit of wealth are not sufficient cultural glue to hold a nation together. (-1)
  • Climate may be playing a role in the current refugee crisis, and the future may hold much more of this. (-1)
  • North and South America would have enormous herds of large mammals if humans had never come along.  (-1)
  • The U.S. clearly has lower average life expectancy than other advanced countries. Developing countries in Asia and Latin America are catching up, but life expectancy in Africa is still tragically low. (-1)
  • People get away with criminally violent behavior behind the wheel because police do not see it as on par with other types of crime. (-2)
  • People are still suggesting a false choice between critical and creative thinking. This is not how the problems are tomorrow will be solved. (-2)
  • This just in – an extreme form of central planning does not work. (-1)

Positive stories (+9):

    • Pneumatic chutes for garbage collection have been used successfully on an island in New York City for decades. This technology has some potential to move us closer to a closed loop world where resources are recovered rather than wasted. (+1)
    • Scientists and engineers could learn some lessons from marketing on how to communicate better with the rest of humanity. (+1)
    • There is new evidence from New Zealand on economic benefits of cycling and cycling infrastructure. (+1)
    • There has been some progress on New York City’s “lowline“, which is what a park in space might look like. The only problem is, it looks to me like a mall. I’ve said it before and I’ll say it again, the exciting science fiction future may look a lot like malls in space. (+0)
    • The U.S. Surgeon General thinks walkable communities may be a good idea. The End of Traffic may actually be a possibility. (+3)
    • Peter Singer advocates “effective altruism”. A version of his Princeton ethics course is available for free online. (+1)
    • Edward Tufte does not like Infographics. (+0)
    • The unpronounceable Mihaly Csikszentmihalyi believes he has found the key to happiness. (+1)
    • The right mix of variety and repetition might be the key to learning. (+1)