Tuesday, August 23, 2011

Can we Grow the Economy Any More?

Kevin Drum had an interesting post yesterday in which he collected a list of theories for why it's difficult to grow the economy any more:
  1. The basic Rogoff/Reinhart observation that financial collapses due to asset bubbles just take a long time to work through. Given the size of the 2008 collapse, historical evidence suggests that it's going to take five or six years to recover, and that's that.
  2. The Tyler Cowen "Great Stagnation" hypothesis. We've picked through all the low-hanging economic fruit over the past century, and like it or not, we're now entering an extended period of low productivity growth because we're not inventing lots of cool new stuff.
  3. The related (I think) investment drought hypothesis. Ben Bernanke famously ascribed the housing bubble partly to a "savings glut" from overseas, and the flip side of that is an investment drought. The reason financial assets became so popular is that, even with all that money sloshing around the system, there simply weren't very many high-quality investment opportunities available in firms that make real-world goods and services, and that hasn't changed.
  4. The peak oil theory. Production of oil has pretty much maxed out, which means that every time the economy gets moving it will create a spike in oil prices, which will send the global economy back into recession. We're now in a continual oil-fueled boom/bust cycle that limits our long-term growth rate.
  5. The Michael Mandel contention that increased consumption simply leaks out of the economy to China and other countries. Stimulating consumption in the U.S. just won't do much for the American economy if all those extra dollars mostly get spent on overseas goods and services.
  6. Various structural explanations that suggest the United States has an increasing number of workers who flatly don't have the skills to do anything useful in the modern economy — a problem that was temporarily masked by the housing bubble and was only fully exposed when the economy collapsed. This takes various forms, both weak (workers can be retrained but it will take a while) and strong (forget it, they're simply useless).
  7. The self-serving group of partisan hack theories: regulatory uncertainty is the real problem, taxes are too high, the EPA is strangling America, hyperinflation is just around the corner, markets are cowering in fear of future deficits, etc. etc.
Of these, I subscribe to versions of 1, 4, 5, and 6.  But let me comment first on the ones I don't agree with.

As a working inventor for Silicon Valley I think 2) doesn't pass the sniff test - inventors and entrepreneurs are all manically dreaming up robots, speech and vision processing algorithms, automated driving systems, information retrieval and processing systems, etc, etc: all of which will eventually be sold to corporations with an ROI calculation that basically looks at how many people would be paid how much to do the job now and then demonstrates that paying the startup for the new technology will involve a lower ultimate cost (and probably higher reliability too).  Silicon Valley is currently in flat-out sprint mode - hardly a sign of nothing worth inventing or commercializing.

I think 3) is a symptom not a cause.  Interest rates are low in developed countries because it's hard to grow, not the other way around.  And like Kevin I see 7) as partisan rationalizations rather than genuine theories.

1) I completely agree with - historically we've seen that major leveraged booms (like the 1920s in the US or the 1980s in Japan) tend to end in tears and take a long time to recover from.  Still, if that was our main problem it would be soluble by massive government borrowing and stimulus.  This is roughly the Paul Krugman view of the world - that 1) is the overwhelming problem and that it could be solved if only the intransigent political system would get with the program.

However, I also subscribe to 4) - the view that energy supply is a short-term-indispensible input to economic activity and that the liquid fuel component of the energy supply is currently constrained enough that significant bursts of economic growth will quickly run into this constraint and trigger oil price shocks.  We've had two of those now in the last few years (2005-2008 and 2010-2011) and I've no doubt we'll see more.  These have a strong tendency to be triggers for recessions or slowdowns.  To Krugmanites this is an inconvenient fact to be more-or-less ignored but to me it's a central fact of our times.

If 1) and 4) were our only problems the solution would be "Green Stimulus": a massive program of investment in alternative energy and energy efficiency measures.  By having the government borrow a bunch of money and use it to subsidize plugin-hybrids, electric cars, windmills, solar panels, etc, etc we could create a bunch of jobs now in the short term while setting ourselves on course to remove our oil dependence over the course of a couple of decades.  Things would probably still be very tricky in the short term: we have huge sunk investments in buildings, infrastructure, and vehicles that are organized for cheap oil and those can only be changed out slowly.  In the meantime, create too much economic activity and it will still trigger an oil shock.  But we'd be moving in a better direction.  Not, of course, that there's any chance of the current political system delivering this, but let's keep going with what we could do if we were smarter.

So then we have the problem of 5) too.  The Chinese have cheap labor, cheap capital, cheap coal, and are buying US assets to keep their currency cheap too.  This causes multiple problems for the "Green Stimulus" plan - one is that because US manufacturing is struggling to compete with Chinese manufacturing, a lot of the jobs would undoubtedly leak to China.  Secondly, a large scale Green Stimulus would leave the US with an even bigger sovereign debt than it would otherwise have and it's unclear to me how safe it is for an economically uncompetitive US to try to navigate coming decades with a huge public debt.

So then it's tempting to say capital controls and import restrictions (at least with respect to China).  Of course the Chinese would retaliate but since they already have capital controls and they are the ones running the big surplus perhaps we stand more to gain than to lose here at present.

But then there's 6) in which I also strongly believe.  In Silicon Valley, currently, it's extremely hard to hire good people because the demand for them is so strong.  Decent engineers, product managers, finance people, salespeople, etc, etc are absolutely guaranteed a job.  There's no question the lack of more such people is a constraint on the growth of many firms in the valley.  Meanwhile the national employment/population ratio for male high-school dropouts ages 25-54 is down to 50%.  The only roles I can imagine for such folks in a high-tech company is as the janitors or the guys that cut the lawn outside.  There's just a very limited number of those positions (and iRobot is doing its best to eliminate the ones that remain).

So even if we could transition to a bright green economy of the future, and neutralize the Chinese threat, I'm still really struggling to see how it could provide employment, and thus meaning, to the lives of the lower percentiles of the education/intellect distribution.  But without being able to do that, I struggle to see how we can have a decent society (or even a stable one).


buck smith said...

Regarding number 7 I think there is some opportunities there. Look at what has happened in the Gulf since BP spill


And the government could by leasing more of the land it owns for drilling (the Rockies and the West, ANWR, offshore east coast) cause a significant amount of jobs and investment activity to occur.

Glenn said...

This post seems to considerably reduce the self confessed gap between your view and the Archdruid's

Anonymous said...

"The Chinese have cheap labor, cheap capital, cheap coal, and are buying US assets to keep their currency cheap too."

Inflation in China is pushing them rapidly toward cost parity with the US. By 2014, the US will have a cost advantage compared to China, especially if you consider the cost of transporting goods from China to the US.

"By having the government borrow a bunch of money and use it to subsidize plugin-hybrids, electric cars, windmills, solar panels, etc, etc we could create a bunch of jobs now in the short term while setting ourselves on course to remove our oil dependence over the course of a couple of decades."

It's not necessary for the government to borrow money. They can loan it into existence just as they've done for the banks. A National Infrastructure and Entrepreneurial Bank would issue loans to inventors at 0% rates with a long term payback period.

There are solutions to our problems. Those solutions threaten the current holders of wealth and will not be implemented until the weathholders feel there is no other solution.

Burk said...

Frankly, I disagree with every one of your points, at least as far as they apply to unemployment. Economic growth is subject to input constraints like fuel shortages, (4), but employment is not. Everyone can be put to work doing useful things if we want to- there is purely a lack of will, not of resources.

1: Financial collapse only affects wider economic growth due to bad policy. If loss of credit and confidence is not made up by state capital and spending, then it is our own fault for shooting ourselves in the feet. This damage is entirely self-inflicted, both on the front end from lack of regulation of the industry, and on the back end from insufficient cleanup policy.

3: As above. The world is absolutely awash with money. The problem is motivating people to invest it productively. It is a solve-able problem.

5: The dollars we send overseas are free money. We print it, they stockpile it. And they send us goods in return. We should enjoy it while we can, (and not let them export their unemployment), by printing whatever is needed for our own growth plus our trade deficits. Someday, when China decides to actually use their dollars, we will get them back in the form of trade, and export more and gain that employment.

6: Have you seen all the trash on the streets? How are we doing on global warming and green enegy? How are we doing on habitat restoration and parks maintenance? We have plenty of work for all skill levels, if we wish to employ people. This is entirely a political matter, not one of economics.

kjmclark said...

Krugman has said he thinks the energy constraint is real. He later said that it isn't an inconvenient fact to be ignored, but rather something that will help prod us in the right direction. That's been a fairly consistent point of free-market economists for quite a while. If peak oil is a problem (and many of them agree that it is), the solution is to have oil prices rise and let markets work through the problem. For them, it's not an existential crisis, it's a resource problem that should be resolved just like other resource problems - through higher prices.

Krugman thinks we're in a liquidity trap right now, and anything that gives monetary policy traction - including inflation through energy prices - is not, at the moment, a bad thing. And in the next paragraph, you point out the solution Krugman has suggested too. He was pretty irate for a week or two about the NJ Governor's decision to cancel a long-planned rail bridge.

Where you differ is that Krugman would just as soon see more stimulus spending even if it weren't intended to deal with peak oil and climate change. I think you would see that as wasted money. OTOH, there are a lot of conservatives who think that peak oil is the liberal apocalypse myth, and climate change is a socialistic plot. So Krugman is probably right that we'd have to take the pointless stimulus with the valuable stimulus to make any progress.

Burk said...

Incidentally, here is a discussion of what more aggressive #1 policy would look like.

BS said...

The current administration proposal is to invest in roads and bridges. This is counterproductive to decreasing reliance on foreign oil. Investing in rail and renewable energy seems like a wiser choice.

It is time to implement a buy american policy (tariffs?). ESLR just went bankrupt and ENER is not far behind. Lots of potential US made panels going away. How stupid is that?

rks said...

I had a eureka moment the other day when I worked out that it is the change in the cost of oil production, not the change in the price of oil, that kills the world economy. The argument is here: http://grampsgrumps.blogspot.com/2011/08/how-peak-oil-destroys-world-economy.html.

Stuart Staniford said...


Krugman has acknowleged resource constraints to varying degrees at different times. However, this seems to be a fair summary of his recent views:

Technology continues to advance; resource shortages are not severe enough to pose a major constraint; climate change is terrifying in its long-run implications, but hasn’t inflicted much damage yet. The only major problem we have right now is the one that was supposed to be easy to solve: a simple lack of adequate demand. And we’re totally failing in our response.

I take "the only major problem" as evidence for my view that "This is roughly the Paul Krugman view of the world - that 1) is the overwhelming problem and that it could be solved if only the intransigent political system would get with the program. "

James said...

I think you really nail it, Stuart.

I'm a big fan of Krugman but I think that Stuart is right to criticism him on 4). I can only argue that Krugman is at least better than the average economist in appreciating the danger of peak oil.

No doubt 5) is something of a problem - and I think it is worth noting that every econ 101 textbook uses this as an explanation of why greater government spending on infrastructure does more to stimulate the economy out of recession than do tax cuts.

As for 6), it reminds me that I was more strongly in favour of "red in tooth and nail" capitalism until I watched the documentary "Manda Bala", which convinced me that the successful cannot afford to ignore the plight of the unsuccessful.

Michael Cain said...

2) I read Tyler as being focused on consumer things that (a) changed people's lives and (b) employed large numbers of people in production and support. When I walk around my house, the things that satisfy those conditions that wouldn't be conceptually recognized by someone from the mid-1960s are personal computers and the associated software. And even many of the things that computers do would be recognizable: word processing, spreadsheets, e-mail are all analogs of things that had already been invented. The insides of things have changed dramatically, thanks to large scale integrated circuits, and the way things are made has changed drastically, but much of it is still the "same" stuff; an iPod and a transistor radio fulfill the same function. Whether SV is currently creating a revolution depends on the perspective you take; is a car that can drive itself something new, or just a cheaper chauffeur?

4) Energy transitions will be the defining issue of the first quarter of this century. Looking back, people will ask, "Were you blind? All that bickering about Social Security and Medicare and gay marriage while you ignored the whole deal about keeping the lights on for your kids and grandkids?"

6) This one, particularly if the strong form holds, will be the most interesting. In the US since WWII, the basic social contract has been "Business will be relatively lightly regulated and taxed (relative to the standards of the rest of the developed world), and in exchange will provide everyone who needs a job with one that pays at least a marginally living wage." The strong form of (6) implies that the agreement is no longer workable. Historically, restructuring of social contracts has usually been a remarkably messy affair.

kjmclark said...

Not exactly fair. He left off one word and you took off four. He clarifies climate change with "yet", and "major problem" with "right now", but didn't say "yet" WRT resource shortages. And as I said, a lot of economists think resource constraints could be a problem but rising prices will generally deal with it.

But you left off "we have right now". He's not talking about ten or even five years from now. From his perspective, solve the jobs problem now and let energy prices rise. The energy constraints aren't bad enough "right now" to bring things crashing down, and isn't that pretty much what we're seeing? High gas prices are encouraging higher fuel economy, as you yourself said they would several years ago.

He discussed his views in more depth in a column a few years ago. The point I took from that is that he thinks of it as an economic challenge, and not an immediate one. The immediate problem is the jobs situation, and I'd add (as I always do, living less than 40 miles from downtown Detroit), the potential for civil unrest.

Greg said...

What Burk said. (I'm getting repetitive!) Additions:

I'd like to add number 8, concentration of income, to the list. Demand is weak because real income is not growing noticeably for 60% - 75% of the population. It's that simple, really.

Actually, make that number 0, not 8.

On no. 2: you had it right with the word "eventually". Not now.

But the things that Silicon Valley is inventing are, by and large, substitutes for labour, not complements. They don't enable large numbers of people to do qualitatively new things, or lower the cost of existing services with high price elasticity. And they're not doing it this year, either.

The exception is cell phones. They are helping to lift hundreds of millions of Asians and Africans out of abject poverty. This will eventually (that word again!) create demand for things that Americans do... but not for a decade or so.

On 4, it's not just oil. As Krugman has pointed out, and Jeremy Grantham breathlessly hyped to the max, we're in another commodity super-cycle such as we had in the 1970s. Food, textiles and various minerals have also risen in price. Will the price rise eventually lead to a price crash, as in the 80s and 90s? I don't know. But the rise has helped reduce real incomes.

On 6, it may be hard to hire software engineers, etc., in Silicon Valley because people have memories.

Everyone remembers the dot-com bubble and crash, and everyone can see another bubble forming. Yes, you can get a job ... but for how long? The "social contract" is well and truly dead in SV. Better to find work in a more stable industry, like health care.

William T said...

I think that #3 is quite relevant - in effect, capital is "sticky" and tends to accumulate to the few who already have it. We're now at a point where a few have far too much capital to effectively utilize, while a large number of people (global, even national) have literally not enough to participate in the economy (hence #6 and perhaps #1). As you say, there are trillions sloshing around the world, being used to buy loans or other financial products - rather than doing anything "useful".

dr2chase said...

I thought someone had studied #5, even at the state level, and concluded that there was enough local stickiness to make it worthwhile even on a state-by-state level (i.e., enough Massachusetts stimulus stays in Massachusetts, to make it worthwhile, even though it is also good for New Hampshire and other neighboring states).

I'm a little skeptical of "green stimulus", at least in the form that you describe it. Cars are inherently wasteful because of their size; better to work on why people aren't comfortable in/on much smaller vehicles (everything from bicycles, to e-scooters, to motorcycles and golf carts). My understanding is that the #1 problem is overwhelmingly (perceived) safety. You can fix that with stimulus, but it is different. Whether this is a net stimulus is hard to tell, because if you are riding around on a vehicle 1/10th size of an automobile, it's little surprise that it takes less employed-person input to produce it. On the other hand, reduced oil consumption will help soften any oil shocks -- so which item is more important?

Christopher Minson said...

Great post. Very accurate IMO.

I also spent a career in the valley, but left it three years ago. Relocated my family overseas to a (hopefully) somewhat safer place. The writing is on the wall, but few want to admit it.

The equation isn't solvable and the US - and the rest of the world in varying degrees - is looking at a hard fall. I think this will severely test our political system. It simply isn't constructed to correctly analyze and deal with interlocking issues of this magnitude. Worse, the leadership is partisan and almost entirely composed of lawyers. I can't think of a worse group to deal with these issues.

I suggest silicon valley won't look so nice in a few years ti e. Reality will eventually intrude.

yvesT said...

Good summary of Krugman view with the extract you put Stuart, also noticed that one and was quite amazed I must say.

To me overall if the US doesn't reinvent its cities shapes and concept, not much chance to survive ...

dcomerf said...

Krugman's correct in his prescriptions. If we're to have a solution to resource constraints then we need prices to go in the 'right' way. Demand frictions and liquidity traps mean the prices go in the 'wrong' way c.f. oil price at $30 in 2009.

yvesT said...

"If we're to have a solution to resource constraints then we need prices to go in the 'right' way."

And best way to accelerate the move is to put taxes on raw materials closest to these constraints, typically oil right now : and the US keeping its ridiculously low level of gas taxation, if anything, shows its level of commitment towards total economic suicide.
Make part of these "taxes" revenues directly redistributed if necessary like in (2) below :

gregory said...

"lower percentile of the education/intellect distribution"...WOW! that is ignorant. i am in that male demographic you cite. i gotta say you have no clue what you are talking about. i was workin at 12. i was a drop out at 16. that is real. seriously...high school is so irrelevant to the real world--experts say as much--and only serves to pattern thought and action. and i realized it and acted on that at 16. seriously. smoke weed everyday.

if you took a random sampling of "future expectations" among silicon valley professionals and the "lower percentile of the education/intellect distribution" which do you imagine would reflect your own view--perhaps stated differently--or that of the cargo cultist? Which would be better prepared for your future? if you wanna know how we will live in a future without money,ask someone who lives without money. technology is not the solution, technique is. the current arrangements blow. why would one want to perpetuate them?

Stuart Staniford said...


What would be your preferred way of referring to your demographic?

Also: I can certainly understand why you would think current arrangements blow - what are your thoughts on what should happen instead?

ulfat said...

It is a good summary, which has culminated in an unstated conclusion that the system has come to the end of its life. The only solution is for the system to incorporate welfare as a necessity to allow it to function, but is rejected politically. China that should expand domestic consumption is not doing so and is relying on the US consumer for its growth, which again accelerates the failure of the system.