Roger Farmer:
I do not know why growth is low. There are a number of promising candidate theories. My own favorite explanation is that the Fed has lost control of inflation and that firms are not creating new technologies, at a pace that is fast enough to generate high growth, because uncertainty has increased. But I do not have a good economic model that links that idea in a coherent way with economic data. When it comes to economic growth; I have very little to say about why growth is currently slow. I am not unusual in that regard...
If secular stagnation means that unemployment can be permanently high if we don’t do something about it: I see secular stagnation. If secular stagnation means that we will be in trouble when the next recession hits because the Fed will not be able to lower interest rates further: I see secular stagnation. But if secular stagnation means that a massive bout of government investment in roads and infrastructure will cause firms to start producing better blueprints, I say; show me the theory and the evidence that leads you to believe that that is so.
If secular stagnation means that unemployment can be permanently high if we don’t do something about it: I see secular stagnation. If secular stagnation means that we will be in trouble when the next recession hits because the Fed will not be able to lower interest rates further: I see secular stagnation. But if secular stagnation means that a massive bout of government investment in roads and infrastructure will cause firms to start producing better blueprints, I say; show me the theory and the evidence that leads you to believe that that is so.
Well, before you start gathering theory and evidence for Roger Farmer, I want to talk about analyzing problems. I want to say that we don't need "a massive bout of government investment in roads and infrastructure". Or, we probably do need it, but not because it will give us "better blueprints". We need it because we need it; this, however, is terribly far from the point.
If you say a massive bout of government investment will solve the problem of slow growth, then you are saying that government underinvestment is what caused the slow growth. And I don't think that's right.
We don't need a massive bout of government investment to solve the problem. That's because slow growth is not the problem. Slow growth is a consequence of the problem. The thing that's causing slow growth is the problem.
The first task is to understand what the problem is. Most people see a consequence and identify the consequence as the problem: slow growth, inequality, trade imbalance among others. These are consequences of the problem.
Or, maybe not. But this is always the first question that must be answered. The first task is to understand what the problem is. The second task is to understand the problem. The third task is to elevate the cause of that problem, and follow the chain of causality to its root.
Don't be surprised if you end up at policy.
2 comments:
Ok. So what is the problem?
Oh, my!
At various times, most people fret that either labor or capital is gaining on the other -- and that either profits or wages are losing out. Other people bemoan the growth of government for essentially the same reason: labor and capital are losing out to government. These are "cost category" issues, an outgrowth of Adam Smith's Of the Component Parts of the Price of Commodities.
My complaint is similar. I fret about excessive finance. Just as a rising government-to-GDP ratio may compete with the private sector for income, so also may the financial sector compete with the nonfinancial sector for income. Trouble is, the nonfinancial sector is the productive sector.
I say the problem is excessive debt, or excessive reliance on credit, or excessive finance. However, this problem is a consequence.
Excessive private debt is a consequence of policy. Half or more of the Fed's job is to keep inflation low. And most of the job of Congress for as long as I can remember has been to find ways to promote growth. Much of what Congress does is legislate new encouragements to use credit.
The policies of Congress and of the Fed, in my view, are contradictory. The Fed restricts money; Congress encourages the use of credit. In the best of times, these policies are contradictory. Over the long haul, they create the problem of excessive private sector debt.
If we have policies that encourage the use of credit, then surely we need policies that accelerate the repayment of debt. Otherwise, policy is responsible for the growing accumulation of private debt.
If we need policies that limit inflation, we should not use policies that undermine growth by raising interest rates. We should instead use policies that accelerate the repayment of debt, which will reduce the growth of money and reduce the growth of debt at the same time.
I propose tax policy that encourages taxpayers to borrow when their debts are low, and encourages accelerated repayment when the debts are high. Sort of like raising or lowering interest rates, but on a taxpayer-by-taxpayer basis. The tax rate will vary with the level of indebtedness.
For example, we could replace the tax deduction for mortgage interest with a tax credit for making, say, up to two extra mortgage payments over the course of a year.
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I'm not sure how all this connects to productivity. I think reducing financial cost is good for economic growth. The "Goldilocks" years of the 1990s are an example. This sequence of four graphs tells the story.
Thank you, sir.
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