Monday, September 7, 2009

Macro Economic Instablity

Is the macroeconomy inherently unstable? Is it only through monetary and fiscal policies that it is stabilized? This is the intriguing question of a post of Nick Rowe. As much as I believe there should be, I cannot think of any reason to be so. My first thought was assets, debt, and equity, through cash flow, give mass to the body of income, and this could at least limit swings in income, on the negative side by assets providing positive cash flow and on the positive side by assets appreciating faster than increases in cash flow. Asset values swing, debt defaults rise and fall, equity shifts, and cash flow with them though. While they may swing differently from other income sources, it does not seem it would provide much if any stabilization.

There seems to be a finite amount of useful work at any given time, and this amount may fall sharply should a significant amount of it be found unuseful. Useful is in the sense of covering costs and profits. Cutting wages doesn't make more useful work any more than cutting prices does if costs and profits cannot be covered. One could redistribute the remaining work among more workers, but this would not increase overall income without other changes. What is needed is the creation of new useful work generating new income, but this is a slow difficult process. The economy may range from a deluge of innovation with an abundance of new useful work to be done to a dearth of innovation with a lack of new useful work, or from innovation that creates new useful work to innovation that destroys existing useful work. There is no assurance of a balance of work and workers in the short or even long term because there is no assurance of a balance in the occurence of innovation.