The idea of the day appears to be investment. Writing in the New York Times economist Edmund S. Phelps writes on the need for a different strategy for boosting economic growth:
The steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is “constrained” by a deficiency of aggregate demand, the total demand for American goods and services. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall.
The prescription will fail because the diagnosis is wrong. There are no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address — our skater has broken some bones and needs real attention.
His prescription? Increased long-term investment:
The worst effect of focusing on supposedly deficient demand is that it lulls us into failing to “think structural” in dealing with long-term problems. To achieve a full recovery, we have to understand the framework on which our broad prosperity has always been based.
First, high employment depends on a high level of investment activity — business expenditures on tangibles like offices and equipment, and also training for new or existing employees, and development of new products.
Sustained business investment, in turn, rests on innovation. Business cannot wait for discoveries in science or the rare successes in state-run labs. Without cutting-edge products and business methods, rates of return on a great many investments will sag. Furthermore, innovation creates jobs across the economy, for entrepreneurs, marketers and buyers. State-led technology projects do not.
High business investment also depends on companies having confidence in the future. A company might be afraid to invest in research or product lines if it fears the rest of the economy is not doing the same — or if it fears the government might become hostile to its goals. During the Depression, John Maynard Keynes warned President Franklin D. Roosevelt not to damage business confidence with anti-profit rhetoric — to treat titans of business “not as wolves or tigers, but as domestic animals by nature.”
He follows this with several policy prescriptions, all of which I’m afraid are likely to fail for a variety of different reasons.
Arnold Kling fleshes out his view that we’re in the process of what he terms a recalculation:
Much of today’s American workforce is engaged in roundabout production [ed. roundabout production refers to processes which don’t make end products, e.g. corn, but make products which are ultimately used to make end products, e.g. tractors, weather reports], which Böhm-Bawerk equated with capital. There is no longer a meaningful distinction between labor and capital. Labor is capital.
Arnold continues by explaining how the policy approaches that have been deployed to date in responding to the current (or past, depending) recession have been rooted in supporting an economy that doesn’t exist any more.
If any of the above sounds at all familiar, the lack of long-term business investment as a source of our economic woes has been a theme at this blog since its inception and something I’ve been articulating in other fora long before. My interpretation, for example, of the legitimate technology boom of the middle Clinton years, succeeded by the unsustainable dot com bubble of the later Clinton years, is that it was the result of decades of capital investment which had finally borne fruit. This contrasts with the competing theories (the tax increases of the early Clinton years were responsible for the growth; the fiscal prudence of the later Clinton years was responsible for the growth) in being founded on things that actually happened and supported by actual theories of economics. I know of no theory of economics under which tax increases lead to increased growth. It is certainly not a Keynesian view—tax reductions are fiscal stimulus and should result in reduced growth. Further, pro-cyclical tax increases were recommended by Keynes for reasons of sustainability not to stimulate growth. And federal spending never decreased during the Clinton years. The balanced budgets were a consequence of increased revenue not its cause.
To some degree whether long-term capital investment is the cause of economic expansion or a result of economic expansion is a chicken or the egg proposition. However, the pro-egg factions of both political parties, differing only in whether we should spend beyond our means to produce growth or reduce taxes below our needs to produce growth, have had their sway for a very long time—at least six decades by my count. It might be worth giving a pro-chicken policy a chance for a change.