Seasons of the Economy

Thinking in terms of Patterns of Sustainable Specialization and Trade, one could say that the economy develops such patterns over time but these patterns are subject to instability and collapse which then have to be rebuilt, usually in a new and different manner. One can consider it seasons of growth and decay. In spring, growth and production is low but improving, over summer strengthens and becomes vigorous, bearing the bounty and fruit of fall, in winter decaying and collapsing to a low level from which new growth develops. In summer, production and profits are high with high levels of specialization and trade, but winter comes, production and profits fall, and specialization and trade collapses. The economy itself is less productive until new patterns can be found to support growth. Meanwhile, people are left with time on their hands and find it cheaper to learn to do it themselves or do without than hire. One can argue this occurs continually so what is it that causes this to overwhelm the entire system and result in a recession? Just a matter of size and scope of the change required or errors and mistakes in trying to compensate for them, or in suddenness and rapidity with which it strikes?

This brings to mind the various kinds of specialization available to those of differing productivity and wealth, such as creator or owner that capitalizes on his creations or assets to extract rents if they can obtain and sustain them, performer that relies on his unique knowledge and talents to produce for the few or the many, and servant that relies on his general knowledge and specific spatial and temporal presence to produce. Creators and owners earn incomes without effort or with past effort and are not dependent on their efforts for their current incomes. Performers rely on their efforts and can work in conjunction with other performers to produce for many. Servants have little specialization to trade other than their general knowledge, effort, and specific presence. Servants lack the specialization to make it worthwhile to trade with each other. The best they can hope for is to work for one of the former or become one. If it becomes more difficult for creators and owners to sustain their rents and performers find it more difficult to sustain their advantage due to offshoring, greater numbers of servants will have difficulty as well. Sustaining incomes monetarily would still help through lowered exchange rates or inflation in countries with pegged currencies.

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.