I agree with this post by Nathan Lewis at Forbes. Automation isn’t our real problem. Low savings and investment rates are:
Thus, an economy needs a high level of capital investment, to create new, high-productivity, high-wage jobs. This high productivity is practically in the math of capital itself. If you invest a million dollars of capital per person, for example some kind of business that has 100 employees and $100 million of investment, then each person must generate perhaps $100,000 of profit per year to justify the investment. This can only happen with high productivity per person.
Among emerging markets, this was often called a “bicycle economy:†you had to keep pedaling or it would fall over. Mechanization of agriculture and transport would generate millions of rural unemployed migrating to cities in search of a new way of life. Without a high level of capital investment and job creation, the situation could become politically explosive. Asia’s leaders knew they had to keep on pedaling. During their best growth years, Asian countries often had savings rates and capital investment in excess of 20%–sometimes, in excess of 30%.
China, however, beat them all, with sustained rates of savings and investment on the order of 50%, an astonishing result not only because of the high number, but that it was achieved on such a gigantic scale, with a population 300 times larger than Singapore. With such a tsunami of capital, it was probably inevitable that much of it would be squandered and stolen. But, it didn’t matter – China could piffle away 10% of GDP, a figure the U.S. hasn’t seen in generations, and the remaining 40% would still have been better than anyone else had ever achieved.
Our low rates of saving and business investment don’t just produce the stagnation in productivity we’re seeing. They also exacerbate our balance of trade and are a factor in increasing income inequality.
Rather than perseverating on “robots stealing our jobs”, a problem which, while we may have it some day we don’t have now, we should focus much more attention on the problems we actually have now especially since the solutions are so obvious.
Savings and business investment is anathama to the culture we’ve been promoting – live today, don’t plan for tomorrow, as the government will be there to take care of you at the expense of “someone else,” aka, the anonymous taxpayer.
In an asset backed monetary system, money is either spent or saved, and if it is saved in a financial institution, it is invested. Nobody will pay interest on money sitting in a vault, and therefore, it is literally or figuratively stuffed in a mattress.
In a credit backed monetary system, money is spent, saved, or leveraged into more money, and if it is saved in a financial institution, it can be leveraged or invested. Somebody can leverage money sitting on a ledger, and therefore, it is never able to be stuffed into a mattress.
In asset backed money financial system, investment must produce a more productive use of the capital. Building additional production capacity that is no more efficient than the existing capacity is money that cannot be spent on the additional products.
(This is not entirely true. New goods and/or services can replace existing ones, but if the same productive capability is utilized, there is no overall benefit. Additionally, an asset backed monetary system causes money to become more valuable as more as the population increases. The result is asset backed money being able to purchase more goods and/or services at a cheaper price.)
In an asset backed monetary system, increasing the population without a corresponding increase of the asset will cause a decrease in the the per capita money supply. Similarly, increasing the population without a corresponding increase of the efficiency will cause a decrease in the per capita production capacity. Mostly, the economy is expanded by increasing the efficiency of production capacity.
In a credit backed monetary system, increasing the credit supply can cause the per capita money supply to remain unchanged, increased, or decreased. Similarly, increasing the population without a corresponding increase of the efficiency will not necessarily cause a decrease in the per capita production capacity. Mostly, the economy is expanded by increasing the size of the credit supply.
In a credit backed monetary system, increasing the credit supply does not necessarily increase spending or production capacity. Since credit can be used to produce more credit, investing will not necessarily increase the production capacity. The per capita money supply can be increased without any corresponding increase in per capita production capacity or efficiency.
The purpose of regulating the financial industry is to limit using financial products to increase the credit supply, and in turn, investments are more apt to increase production capacity and/or efficiency.
A further problem is allowing foreign countries to hold US Treasuries. This increases the US credit supply without any corresponding increase in production capacity and/or efficiency in the US. Trading deficits allow the corresponding increase in production capacity and/or efficiency to occur in the foreign country.
An outcome of this is that the owners of credit instruments increase their wealth while the non-owners decrease their wealth. Hence, the most progressive President cannot slow, reverse, or eliminate income inequality.
(Debt is not credit, and it is not an asset.)
@Jan
The “goodies” can only be created with credit backed money. With asset backed money, the system becomes constrained because the ability to increase the credit supply is substantially decreased – ‘hidebound’.
Hard money would result in the result you, Republicans, conservatives, and libertarians desire, but few of this group would support decreasing the financial industry’s ability to create credit. In fact, any mention of constraining this ability is apt to cause heart palpitations.
Interestingly, Democrats, liberals, and progressives decry income inequality and disproportionate wealth distribution, but few of this group would support decreasing the financial industry’s ability to create credit. In fact, the gnashing of teeth, tearing of hair, and rending of garments are unlikely to constrain this ability.
Simply, there is not enough asset or credit backed money to reconcile the desired results of either side. If it were not so comedic, it would be tragic. (A snake eating its tail is tragic but funny.)
I would point out (again), and Tasty touches upon this, that capex comes in two flavors: expansion and productivity. Citation of aggregate statistics showing reduced business investment does not necessarily imply the degree of starvation in productivity assumed. It can simply reflect low growth and low desire to invest in capacity expansion.
I found this very interesting: that incentives are encouraging “bad” entrepreneurship and discouraging productive.
In a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,†Baumol argued that the level of entrepreneurial ambition in a country is essentially fixed over time, and that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive†and “unproductive†endeavors.
Most people think of entrepreneurship as being the “productive†kind, as Baumol referred to it, where the companies that founders launch commercialize something new or better, benefiting society and themselves in the process. A sizable body of research establishes that these “Schumpeterian†entrepreneurs, those that are “creatively destroying†the old in favor of the new, are critical for breakthrough innovations and rapid advances in productivity and standards of living.
Baumol was worried, however, by a very different sort of entrepreneur: the “unproductive†ones, who exploit special relationships with the government to construct regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, in the process stifling competition to create advantage for their firms. Economists call this rent-seeking behavior. As Baumol wrote:
” …entrepreneurs are always with us and always play some substantial role. But there are a variety of roles among which the entrepreneur’s efforts can be reallocated, and some of those roles do not follow the constructive and innovative script that is conventionally attributed to that person. Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy. How the entrepreneur acts at a given time and place depends heavily on the rules of the game—the reward structure in the economy—that happen to prevail.”
https://hbr.org/2017/06/is-america-encouraging-the-wrong-kind-of-entrepreneurship
Newspaper here had an article about population growth here in Lincoln, Ne, 300,000 now up 5 to 7 thousand per year. Contractors can,t build homes fast enough to keep up with demand. Lots sell as soon as they hit the market, and they even mentioned a shortage of land to build on. LAND? IN NEBRASKA?
So the property valuations, normally done every 3 years, were redone after one year, everyone is pissed except me, mine went down 20%. Maybe they felt sorry for me. Anyways, I drive delivery and see the whole town every day. Mom and Dad both work,kids to day care, PETS to day care. While people are at work the neighborhoods are saturated with lawn service, tree service, window washers, deck builders, concrete workers. In other words, almost everyone hires every chore done because they are to busy making money to do them.
And the missing land? Lots of new car dealerships eating that up.
I guess rising home equity explains all those new cars every home has two or three of.
It’s gotten to the point where homes under 100,000 are not available, or if they are, you don’t want them.
So things aren’t falling apart everywhere.