Growth vs. Population

Economists believe increasing population increases growth. It does increase gdp, but it does not generally increase gdp per capita. It can create larger markets and more specialization over time, but before it does so it also increases the supply of labor, lowers its income share, and diminishes the incentive for most technological advancement, labor saving rather than material saving. Population growth did not contribute to gdp per capita growth during the Malthusian Era. Only technology did that and population is better considered the result of growth than the cause of it.

The UK has had a stable population for over 30 years and has grown gdp per capita at rates greater than the US over that period. When population lags, investment in human capital becomes more attractive and takes up some of the slack. An aging population does slow demand growth, but still increases demand relative to supply of labor. They still need product even if they no longer need jobs. Growth slows but steadies. Transfers will rise, but government less transfers should steady or even fall with productivity as expansion is no longer necessary but sustainment still is. It does tend to be deflationary, but labor will do better than capital in such an environment. Nothing to fear, but something to expect. Need I say, deflation is (almost) always and everywhere a monetary phenomena?

In a world of more or less free trade, the question of whether population growth here is good is an anachronism. The real question lurking beneath the surface is if it were, why wouldn't population be growing on its own as a result? I am sure economists can come up with some excuses, but they fall flat in the face of evidence.

Welcome to the Antipodes

There is an argument that follows from the standard New Keynesian monetary model in cutting the payroll tax one should favor the employer over the employee. The reason being that current real wages are too high, so by lowering them to the employer, the employer will be encouraged to expand hiring, while increasing real after tax incomes of employees will just make them more high. Normally this would be correct, but not during a depression. The key element of a depression is the demand for money and its preference to the demand for goods. Cutting employer costs will increase their profits but their demand for money will override their demand for goods, investment or otherwise. They will not invest it unless they see demand increase which this won't do. Cutting employee costs will increase their take home cash and their demand for money would override their demand for goods, but they are frequently credit constrained. As they are more likely to be credit constrained, increasing their cash flow will lead to more demand for goods to which employers will respond. This is a demand, not supply problem, the demand for money. Giving money to those that need it most is most stimulative of demand. Given the regressiveness of the payroll tax, and the greater credit constraints of the employees, giving money to the employees is most effective. This would not be the case if demand were growing sufficiently, but will be until the demand for money is satisfied.

Employment for a Day

The problem as I see it, is unemployment. There are two approaches, blame the unemployed for their unemployment, saying what they produce is no longer desired and they must accept whatever they can find or go without resulting in deflation, or blame the employed, saying their wages are now too high and allow inflation to lower them and raise employment. The former attempts to preserve the value of debt but erodes the amount through default while the latter erodes the value of debt but preserves its amount. What do the employed owe the unemployed? What is the moral position and what will produce the best outcomes? Will real growth increase before inflation as well?

Deflation can work to a point, generally to the extent of productivity growth so nominal wages don't have to be reduced. Beyond that it doesn't. Deflation increases real debt faster than default can eliminate it. It is not effective in the face of high unemployment. Inflation can work to a point. That point is where most resources, or at least critical resources, are in use and it is anticipated. It is effective in the face of abundant unused resources. More inflation is warranted here and now.

Ideally, there is a middle ground that lets the most heavily indebted default, the burdened have their loads lightened, and promotes sufficient growth to ease unemployment. The same level of unemployment may not be reachable if the real output potential of the economy has fallen, but the only way high unemployment can be sustained is through both market failure and monetary failure.

Why is America Great?

While there are many measures of greatness, let us take one of the simplest, income. America does have one of the highest median household incomes in the world. It may not look as good if you consider income distribution, hours worked, benefits provided, or other security or quality of life issues, but it would still be very high. So why do Americans have such high incomes?

Culture and institutions undoubtedly have an effect. Immigration was proposed as an answer, but immigration is really an effect rather than a cause. People want to move to where they can earn higher incomes. One of the reasons they have higher incomes here is because there are fewer people for the available productive resources, natural and otherwise, relative to those elsewhere in the world. Immigration can be beneficial in bringing in resources, but only if it brings in more than it consumes or competes with others already here. Immigration is beneficial to immigrants or they would not chose to come, but is only beneficial to existing inhabitants if the immigrants are above the average inhabitant, whether in achievement, skills, or resources. Unlimited immigration would be a negative as population would rise to equalize endowments and incomes would fall towards average, until no one more would want to immigrate here. For some, all that matters is whether the immigrant is better off, but most will consider whether they are better off as well, both individually and collectively. Some, especially those above average, may be better off as there will be more below them, but they may not be if social cohesion disintegrates, neighborhoods deteriorate, and the country declines to third world status. What even will the immigrant have gained if they no longer have anywhere they would want to immigrate to or would not want to do so again? Immigration can be good, but there can be too much a good thing. The downside can be in the stagnation and lack of progress of country left behind.

Economics and Growth

Economists favor trade and wider markets to promote economies of scale and higher degrees of specialization. Yet trade increased widely from the feudal period to the modern period without producing sufficient growth to lift the world out of its Mathusian state, only technology did that. They prefer to side with consumers over producers, at least when they don't have ulterior motives, and often favor lower wages to lower costs and raise productivity. Yet wages were lower in the east, but the industrial revolution occurred in the west. Lower wages reduce the incentive to develop technology. Economic policies do not give enough attention to technology and do not always promote growth.

Manufacturing has been very productive and generally still is. While some services are productive, it is generally more the exception than the rule. Services, for the most part, have not been amenable to automation that produces increasing returns to scale, nor are they scalable for the most part. That is why they are still services and not goods. The differences are significant. Only technology accomplished lifting us out of the Mathusian state and know how itself was never enough but its embedding into tools that could be used without it. Services are costs. This is not to say they aren't desirable or valuable, but by themselves they are consumption rather than production. It is only when they and the knowledge they represent become embedded in the devices and processes of the world that they really become productive. As long as we have agriculture to feed us and industry to enrich us we should prosper. We are moving to a service economy, but that is something to regret, not celebrate. It does, however, offer us the potential of many more creations and discoveries, and many more new products as fewer are necessary to produce them. Due to this, workers are increasingly a cost that only serve to reduce the wages of others, unless they can partake of that creative process.

On Uncertainty

When a downturn occurs, the anticipated fails to materialize, our expectations are dashed, and uncertainty increases. The old verities have become less true. We become less sure of our beliefs and of what to believe. Our plans are drawn in, focusing less on the future and more on the present. The good times have gone and we struggle, not knowing how bad times will get, how long they will last, or how fast good times will return. What is uncertain is the future.

With stability and time, our anxieties recede and we become more confident of what tomorrow will bring. It is difficult to believe in the end of the world forever. As our worst fears fail to be realized, we become more sure of our position and its possibilities.

Stability and time can be hard to come by though. Since we were taken by surprise by the downturn, and uncertain about the cause, condition, cure, and what will happen next, we steel ourselves for more surprises, and if they materialize our uncertainty is redoubled. People will seek out uncertainty and take note of it at times like these as justification of their uncertainty and to avoid taking actions, but the real uncertainty is always the future. The search for new truths, for reassurance of familiar patterns, will continue until a new stability and a new time is made.

On Deflation

Deflation is rare but has occurred occasionally through history. As experience with it is very limited and much of common experience fails to apply, many of its features are counterintuitive. Existing theory is heavily flawed as a result. These are critiques of it.

As inflation is a signal to flee money and seek (fixed) debt, deflation is a signal to seek money and flee debt. Commonly, decreasing the price increases demand, but under deflation demand for money is stronger and falling prices allow the conservation of money, so lowering the price reduces demand.

Sticky prices lead to unemployment, but they also lead to, that is, preserve, employment. The problem is flexible prices would not lead to equilibrium in general, but to instability and swings due to everyone trying to anticipate and exceed everyone else's expectations. The problem is not that they are sticky but that they are not uniformly sticky for if everything changed in the same proportion it would be as if they did not change at all. It is really that this is not true initially that creates deflation and the reestablishment of this feature that ends deflation.

As prices fall, real balances rise, but the expectation they will continue to fall induces delay to purchase, not advancement. If you were becoming wealthier at an increasing rate, you would be more inclined to delay, but while sellers may be willing or forced to sell inventory below cost, they are not likely to produce below cost, so eventually price declines reach a limit of wage declines and real balances cease to increase. The duration of the production cycle would throttle the rate of decline. At this point, there is no more incentive to delay. If prices fall, wages also fall, and attempts to save more fail as they do so. It is not rising real balances that turns deflation around but that they cease to rise, or equivalently, it is not that real wages rise but that they eventually cease to rise.

Falling prices do not lead to increased output. Flexible prices would not lead to equilibrium. Rising real balances are the result of deflation, not its end.