Thursday, August 4, 2016

This turned out to be a good day

Via Reddit, The big puzzle in economics today: why is the economy growing so slowly? by Timothy B. Lee at Vox. (The article quotes Josh Mason on productivity, by the way.)

Theory #4 on the Vox list of possible reasons for slow growth is my own personal favorite, The economy is weighed down with debt. Mr. Lee writes

This seems like a plausible explanation for the early years of the post-2008 recovery. But at this point, it’s been almost eight years since the financial crisis. That should be more than enough time for households and businesses to get their debts down to manageable levels. So the longer growth remains sluggish, the less plausible this theory becomes.

My response:
That's what I've been saying. Not "more than enough" time, no, but just about exactly enough time.

Household debt service fell quickly since 2007Q4, then slowed and bottomed out. Now it is starting to go up again. Increasing debt service implies growing debt, which means growing spending, which means improved GDP growth.

Likewise, total credit to the private sector fell quickly relative to circulating money, then slowed, then bottomed out. It is now ready to start going up again, and this too means improved GDP growth.

So if the economy surprises us over the next couple years by starting to grow surprisingly fast, don't be surprised.

Also... if economic growth improves in the coming years it will be evidence that Theory #4 was correct. At that point, we are going to have to create some tax incentives to accelerate the repayment of debt, which will fight inflation, reduce debt, and with luck prevent the next financial crisis.

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