Economics Lesson

John Robb and Elizabeth Warren may ignore it, but all real growth comes from growth in productivity.

The debate about the “stimulus” is bizarre, because it does not matter. Or more precisely, it lessons economic growth slightly while making people slightly happier about it. If you want economic growth, then invest in capital improvements, such as better communications, better machines, and better people. The stimulus does two things: it borrows money that would otherwise be invested to spend, and it makes peopel feel a bit better, so they are less likely to support some even crazier law. Fortunately, it looks like much of the stimulus/rebate checks will be used to pay-down debt, minimizing the displaced investment and hopefully keeping the opium-like mood benefits “free money” provides.

If you want economic growth, import high-skill workers. Currently, the Congress limits the number of high-skill workers who can help our economy.

If you want economic growth, trade more with other countries. Currently, the Congress is refusing to vote on a free trade deal with Columbia.

If you want economic growth, make it tax-free to invest. Currently, Barack Obama and Hillary Clinton support raising the capital gains tax.

10 thoughts on “Economics Lesson”

  1. You are right in the long term – once enough capital stock has been accumulated, growth per capita comes only from technological advances (aka productivity increases) and new exploitation of natural resources.
    Well, in simpler theories it’s simply about technology once stuff like unemployment and demographic changes are ruled out.

    But in my opinion today – in the USA – it’s not about technological advances or productivity.
    It’s all about re-industrialization. The services-based society does not work. More goods imports than good production is a disaster.

    And you need to establish new factories first, then increase the productivity. An increase of the productivity of present businesses won#t suffice.

    And don’t use the “import high-skilled workers” card; that’s parasitic. Remember Kant’s morale imperative.

    And trade will actually not help much if there’s not enough production to increase export. Cutting down imports would be fine – but it won’t suffice. The domestic goods production is too small and the service sector trade balance is good, but not good enough.

    Cheap investments might stimulate, but if it costs state income (look at the budget deficit!), it should be limited to industrial production or at least to sectors with strong foreign customers.

    Finally; the economic stimulus package is a huge joke. What do these people think where the money comes from? Do they think nobody would have spent it if they hadn’t taken it away from wherever they got it? The Japanese tried huge stimulus packages and it didn’t get them out of their long 90’s crisis.

  2. Being a patriotic American, I will contribute to the economy any way I can. Therefore, MY stimulus check will be spent on (American) hookers and (American) booze!

    America!!! $#%@ yeah!!!

  3. Sven,

    Thank you for your comment.

    You are right in the long term – once enough capital stock has been accumulated, growth per capita comes only from technological advances (aka productivity increases) and new exploitation of natural resources.

    Remember that capital investment itself can increase productivity, by increasing output per worker / output per worker-hour.

    Well, in simpler theories it’s simply about technology once stuff like unemployment and demographic changes are ruled out.

    As productivity increase refers to greater output per worker or worker-hour, there’s no need to rule out unemployment or demographic changes.

    But in my opinion today – in the USA – it’s not about technological advances or productivity.
    It’s all about re-industrialization. The services-based society does not work. More goods imports than good production is a disaster.

    The fraction of the work-force in industry has declined, though industry’s share of the economy has remained constant. Do you therefore suggest

    a) increasing the indusrial share of the economy, in order to restore the industrialized share of the work-force to its historic norm
    b) concentrate on the share of the industrial work force, even if the industrial share of the economy does not increase
    c) something else

    Either way, I don’t see the point.

    And you need to establish new factories first, then increase the productivity. An increase of the productivity of present businesses won#t suffice.

    Why not?

    And don’t use the “import high-skilled workers” card; that’s parasitic.

    Why not, and why?

    Remember Kant’s morale imperative.

    Wouldn’t that imply we allow unlimited immigration?

    And trade will actually not help much if there’s not enough production to increase export. Cutting down imports would be fine – but it won’t suffice. The domestic goods production is too small and the service sector trade balance is good, but not good enough.

    I assume therefore you view the ideal economic situation as one of large exports but no imports?

    Cheap investments might stimulate, but if it costs state income (look at the budget deficit!), it should be limited to industrial production or at least to sectors with strong foreign customers.

    I assume you view Japan’s economic policy over the past 2 decades as illustrative of pro-growth policy?

    Finally; the economic stimulus package is a huge joke. What do these people think where the money comes from? Do they think nobody would have spent it if they hadn’t taken it away from wherever they got it? The Japanese tried huge stimulus packages and it didn’t get them out of their long 90’s crisis.

    Adrian,

    Investment would do more good.

  4. I’ve got a Dipl-Ök. degree, that’s like macro -economics MA (I specialized on growth/distribution, public finance and economic policy).
    When I wrote about productivity gains I meant technological progress (Technologischer Fortschritt, not 100% sure on translation) as defined in economic theory.
    This variable is what explains what growth is left after quantifiable changes in work and capital input were considered.
    Typical rate is close to 2%/p.a. in industrialized countries.

    About the industry thing; more goods imports than goods production in a big economy leaves no choice than to change that. Less imports doesn’t fix it, so you need more production = more industry. A country like Iceland might have a trade deficit forever, but the USA are too big.
    There’s no reason to export into the USA if foreigners don’t expect to get back enough anymore; that’s why the Dollar is losing value.

    To import high-skilled workers is parasitic as rich countries take away talents and often even education investments away from poorer countries. Imagine every country would do that – it wouldn’t work; Now remember Kant’s morale imperative.

    Productivity gains (technological advances) are on the order of very few per cents per year. That won’t fix the problem in time. This is why I meant that many new factories are necessary (and success in buying their input and selling their output).

    The ideal economic situation is one of (in average over time) zero trade balance (I meant the balance that includes services, not only goods). That’s sustainable and fair.
    To export more than to import is in the long run like working for no wage, whereas to import more than to export is in the long run like to get wage without work.
    (Actually it’s like underpaid/overpaid, but a look at the net value alone is more descriptive).

  5. One way the government could, in theory, spend money and improve the economy, is spend it on infrastructure that will enhance economic performance down the road. Alexander Hamilton wanted to do that kind of thing. During the Depression, Harold Ickes and Jesse Jones made sure that money was spent or loaned for some tangible public benefit. Eisenhower, faced with a congress demanding some “stimulus” spending, built the interstate highway system. If we absolutely must spend money as a “stimulus” our roads and bridges and harbors and other avenues of commerce could use some investment, and at least we would get something real for our money.

  6. edit:
    I didn’t want to boast on the degree – I mentioned it to clarify that I think along the lines of the economic theory.

  7. A long term solution would be to create more productive schools. Obviously the best way to do this would be to privatize education. Since this will probably not happen, we can start by spending more money on the gifted and potential gifted and start separating the “underachieving” students from the others.

    This won’t happen either, as its much easier for politicians to appease the “underachieving” lobby with more programs while at the same time, giving away more h1b visas.

  8. “To import high-skilled workers is parasitic as rich countries take away talents and often even education investments away from poorer countries. Imagine every country would do that – it wouldn’t work; Now remember Kant’s morale imperative.”

    The problem is many of the smartest and most highly skilled workers will not reach their full potential in poorer countries.

    Imagine that we found out for certain that the single smartest person that has ever lived is currently 18 and living in Zimbabwe. Would this genius or anyone else be better off if he remained in Zimbabwe or would both the individual and the world as a whole (assuming the world bennefits from new discoveries and new knowledge) be better off if the U.S. grants him a Visa to study at Harvard?

  9. Sven,

    When I wrote about productivity gains I meant technological progress (Technologischer Fortschritt, not 100% sure on translation) as defined in economic theory.
    This variable is what explains what growth is left after quantifiable changes in work and capital input were considered.
    Typical rate is close to 2%/p.a. in industrialized countries.

    I don’t think we are disagreeing here.

    I am arguing that all real growth comes from increases in productivity. You seem to be arguing that technological progress is a source of increase in productivity. We seem to be on the same page.

    Seerov,

    A very good point.

    Importing foreigners can be politically cheaper than improving existing Americans. (Not these methods are necessarily contradictory.)

    Brent,

    The problem is many of the smartest and most highly skilled workers will not reach their full potential in poorer countries.

    Exactly. And this is why it is not “parasitism” to move out of your hometown, or county, or state, or country. Rather, labor mobility is a source of growth.

  10. Missing from the discussions is the role of institutions (create negative and positive incentives) and entrepreneurs (change making actors).

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