Much To The Chagrin Of Many, I'm Back!
I'm back in town and will try to get a post up this weekend. Until then I thought I'd post one of the comments from my capital equipment post that is both interesting and thoughtful. Enjoy.
JKW's Post:
It all comes back to consumer spending. Businesses will only invest in themselves when they expect consumer spending to grow. The economy will only grow if consumer spending grows. The business cycle is caused by consumer spending.
There is an inherent instability in pure capitalism because consumer spending can't be larger than consumer income for very long, but middle class income is driven down by productivity enhancements and competition. As productivity increases, unemployment will rise unless consumption increases by an equal amount. The upper class doesn't tend to spend all their income, so high corporate profits lead to low growth (since most corporate profits won't be spent and they reduce the middle class's share of income). The worst-case scenario is when productivity is rising while consumption falls, which can lead to a positive feedback cycle (positive in a control sense, not a value judgement). Every year, less is being produced and what is being produced requires fewer people working, so unemployment rises. This was the scenario for the great depression.
The only way out once you get into the positive feedback cycle is confiscatory taxes with wealth redistribution to the middle and lower classes. A wealth tax is ideal, because it tells people that if they won't spend their money, it will be taken away and given to someone who will. WWII provided the only acceptable spending program that the upper class were willing to accept such high taxes for. The generous veteran benefits (high pay, good home loans, etc.) and the tight employment during the war provided enough strength to the middle class for about 2 decades of growth (building the national highway system helped too). After that, people weren't pushing hard enough for higher standards of living, so growth slowed.
The 70's were a continuation of the depression, but with very loose monetary policy. The result was high inflation during a recessionary period. It sort of worked, in that it didn't quite get into the positive feedback cycle of ever increasing unemployment leading to reduced spending leading to reduced employment. Businesses could borrow money easily at below inflation levels, so they still hired people.
What finally led to growth again was another major infrastructure change: computerization of everything. Millions of new jobs were created for people to install and maintain computer systems. That started in the 80's and really took off in the 90's. There is little question that the growth in the 90's was almost entirely due to the expansion of computers and the internet. But that infrastructure change has been finished now, so it won't produce any more significant growth.
We are now back in a recessionary phase. The reason it has been mild is that easy money has allowed consumer spending to continue with falling incomes. The housing bubble has provided sufficient money in the form of mortgage equity withdrawals to keep everything from falling apart for the past 5-7 years. That is coming to an end, but credit cards are still offering interest free loans, so money is still available.
In order to have growth going forward, we need to either have another major infrastructure development or some form of wealth redistribution. The most likely infrastructure development we could have right now would be clean energy. If we started a major program to completely replace all of our power plants with zero emissions plants, it would provide enough spending to cause growth for probably at least 20 years. The next most likely area would be something from biotech (I don't know much about biology, so I have no idea what could be coming out of the field). Or it could be something that is so small right now that most people haven't even heard of it (how many people had heard of personal computers in 1978?).
Growth will never come from investment. It is the other way around. Where there is growth, people will invest. To the extent that government policies favor investors over spenders, they are anti-growth. The most pro-growth policy you can have would be one that guarantees a minimum income somewhat above the poverty line and has roughly equal spending and revenues averaged over the business cycle. Beyond that, you want to provide as much freedom as you can to people (not necessarily businesses) and let consumer spending dictate where growth will be. The only time the government should interfere in the marketplace is when people are making decisions which are good for themselves, but are causing problems on a larger scale (such as preventing pollution/forcing cleanups, safety regulations, and anti-fraud laws). In other words, the government should primarily intervene in markets to prevent people and companies from externalizing costs. There is also some argument that the government should ensure that the country is self-sufficient in certain ways, so that if we go to war we won't have critical supplies cut off.
JKW's Post:
It all comes back to consumer spending. Businesses will only invest in themselves when they expect consumer spending to grow. The economy will only grow if consumer spending grows. The business cycle is caused by consumer spending.
There is an inherent instability in pure capitalism because consumer spending can't be larger than consumer income for very long, but middle class income is driven down by productivity enhancements and competition. As productivity increases, unemployment will rise unless consumption increases by an equal amount. The upper class doesn't tend to spend all their income, so high corporate profits lead to low growth (since most corporate profits won't be spent and they reduce the middle class's share of income). The worst-case scenario is when productivity is rising while consumption falls, which can lead to a positive feedback cycle (positive in a control sense, not a value judgement). Every year, less is being produced and what is being produced requires fewer people working, so unemployment rises. This was the scenario for the great depression.
The only way out once you get into the positive feedback cycle is confiscatory taxes with wealth redistribution to the middle and lower classes. A wealth tax is ideal, because it tells people that if they won't spend their money, it will be taken away and given to someone who will. WWII provided the only acceptable spending program that the upper class were willing to accept such high taxes for. The generous veteran benefits (high pay, good home loans, etc.) and the tight employment during the war provided enough strength to the middle class for about 2 decades of growth (building the national highway system helped too). After that, people weren't pushing hard enough for higher standards of living, so growth slowed.
The 70's were a continuation of the depression, but with very loose monetary policy. The result was high inflation during a recessionary period. It sort of worked, in that it didn't quite get into the positive feedback cycle of ever increasing unemployment leading to reduced spending leading to reduced employment. Businesses could borrow money easily at below inflation levels, so they still hired people.
What finally led to growth again was another major infrastructure change: computerization of everything. Millions of new jobs were created for people to install and maintain computer systems. That started in the 80's and really took off in the 90's. There is little question that the growth in the 90's was almost entirely due to the expansion of computers and the internet. But that infrastructure change has been finished now, so it won't produce any more significant growth.
We are now back in a recessionary phase. The reason it has been mild is that easy money has allowed consumer spending to continue with falling incomes. The housing bubble has provided sufficient money in the form of mortgage equity withdrawals to keep everything from falling apart for the past 5-7 years. That is coming to an end, but credit cards are still offering interest free loans, so money is still available.
In order to have growth going forward, we need to either have another major infrastructure development or some form of wealth redistribution. The most likely infrastructure development we could have right now would be clean energy. If we started a major program to completely replace all of our power plants with zero emissions plants, it would provide enough spending to cause growth for probably at least 20 years. The next most likely area would be something from biotech (I don't know much about biology, so I have no idea what could be coming out of the field). Or it could be something that is so small right now that most people haven't even heard of it (how many people had heard of personal computers in 1978?).
Growth will never come from investment. It is the other way around. Where there is growth, people will invest. To the extent that government policies favor investors over spenders, they are anti-growth. The most pro-growth policy you can have would be one that guarantees a minimum income somewhat above the poverty line and has roughly equal spending and revenues averaged over the business cycle. Beyond that, you want to provide as much freedom as you can to people (not necessarily businesses) and let consumer spending dictate where growth will be. The only time the government should interfere in the marketplace is when people are making decisions which are good for themselves, but are causing problems on a larger scale (such as preventing pollution/forcing cleanups, safety regulations, and anti-fraud laws). In other words, the government should primarily intervene in markets to prevent people and companies from externalizing costs. There is also some argument that the government should ensure that the country is self-sufficient in certain ways, so that if we go to war we won't have critical supplies cut off.
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