It is time to stop quivering in our boots in pointless fear of the future and just roll up our sleeves and build it.
- Ray Pierrehumbert

Thursday, August 4, 2011

Growth and Contraction

When talking about "growth", you do have to understand what it is that is growing, as Eli points out on a recent thread. What economists and politicians want to grow is the velocity of money exchanges. This is primarily because that is where all three good things, public revenue, profit and employment, come from. This is called the "gross product", the total of all financial transactions.

Many of the transactions are destructive, but there is enormous pressure to continue. Without being on the selling side of transactions, you are not allowed to be on the buying side. And without being on the buying side, you are essentially not allowed any resources at all, except marginal castoffs.

We have paid very little attention to encouraging that such exchanges actually tend to have a net positive value.

Kindle replaces books at lower capital cost. The paper industry loses jobs. The economy shrinks. The environment benefits. We are better off if we aren't in the paper or ink business. It counts as negative growth.

Craig's list replaces a key profit center of newspapers. Reporters lose jobs, but the rest of us find buyers and sellers of used furniture. New furniture manufacturers face a shrinking market. Negative growth for newspapers, for furniture, for hardwood, for softwood. Consumers are better off for it. It counts as negative growth, contraction.

State and federal taxes are cut, reducing police services in a neighborhood. The neighborhood declines. People who can afford to do so move out at the cost of expense and disruption. Buildings are abandoned and fall into ruin, while new buildings are constructed in the new neighborhood. This is growth.

When this happens you are likely to get a job. When you get a job, you are selling something (your efforts). When you sell things you get to buy things. If you don't get to buy things you are not entitled to them. Therefore you demand policies that create jobs. But nobody checks to see if these jobs are actually a good idea.

The more we successfully replace material goods with ethereal goods, the more jobs will be lost. Thus the more demand there will be to construct conditions where there are more jobs. If we are not careful (and apparently we are not careful) the new jobs are as destructive as the old ones or more so.

The idea that we are in poverty in America is ridiculous. Demand is declining because people have the stuff they want. The problems we are seeing are because we live in a system designed to cope with scarcity encountering surplus. Yet almost everybody wants to restimulate demand.

I'm sorry. I'm still not getting it.

25 comments:

Dan Olner said...

"Kindle replaces books at lower capital cost. The paper industry loses jobs. The economy shrinks. The environment benefits. We are better off if we aren't in the paper or ink business. It counts as negative growth."

So why does most technological innovation lead to growth in the long term, even if the short-term effect is those gales of creative destruction?

TC83 said...

I think you meant to link to this, but there's a typo in your HTML tag. Other than that, great post.

William T said...

There is a large number of people even in the US who DON'T have enough. Despite the relatively high "per-capita GDP".

jstults said...

Kindle replaces books at lower capital cost. The paper industry loses jobs. The economy shrinks. The environment benefits. We are better off if we aren't in the paper or ink business. It counts as negative growth.

This is surprisingly similar to the criticism some libertarian economists have of deflators for GDP and wages.

susan said...

as William T said, there are a large number of people who do not have enough. You've really got a tiger by the tail here, and there are so many different elements to this it's hard to figure out which to highlight, even if one knew all about it.

Years ago Barbara Ehrenreich wrote "Nickeled and Dimed in America" which touches on it. Circumstances force me to work with a lot of Home Health Aides, who are severely underpaid. Their housing, food, and family situations are toxically at odds with our culture, which is saturated in advertising. It is hard to deny children the supposed "riches" of our culture, and that alone can spend all their salaries (as far as I can tell, they range around $10 per hour). Increasingly we are required to have computers, and who can afford that on $250-350 a week take home pay? What about health care - a wing and a prayer?

Here's another example; in the 80s we switched from typing to word processing, and began to use 10-200 times as much paper. "But we recycle" I heard (2 or 3 times if we're lucky?). I know because I worked in production. Yes, since then some of the paper has switched to electronic, but who considers the materials involved?

I have nothing but praise for the effort to chew on this knotty topic. We are so culturally isolated that we don't "see" the vast underbelly of the underpaid and the way the likes of American Idol teaches them to "vote" against their real interests. Hope seems to trump reality.

I don't think our culture is ready for a complete makeover, one focused on real value rather than commercial products, but I don't think we can survive on anything less.

Yesterday I was remembering my Zen training and thinking that is really what we all need - to focus on community, local support systems, local help, local entertainment, simplicity. The ever increasing glamour and glitz of infotainment (accompanied by scream track) is encouraging an entirely artificial view of what it is to be human and a narrow view of the world (Syria and the Horn of Africa - who knows about them other than pointy-headed types?).

Recently I was discouraged from posting these opinions by someone I respect. It's not politically correct to say we all need to do more with less. It's dangerous because the fake skeptic industry will exploit this to say we are "communists" bent on world takeover.

Well, there's something that is taking over a neighborhood near them, and that is the consequences of turning our finite planet into a trash dump of toxic waste.

Andy F said...

Part of the problem with your position I think is inverting the fallacy of GDP growth as an unalloyed good. You present the examples of where it is not, and conclude that what we want is the opposite. It's like you've internalized the fixation on that number.

Your position on unemployment is similar. Consider some of the rational for France's limits on hours worked. The idea isn't simply to slack, it's also so that more people have jobs with the same amount of labor. Employment isn't a bad thing if it's evenly distributed and societally useful. I feel weird having to write that sentence.

And be careful what that "we" averages over. I'm guessing you mean the US in the aggregate, and yeah, here we are, perhaps the most wealthy society in history, and we're laying off teachers. (That will lower GDP, too.) But the way you put it makes it sound like some attorney saying "but they're fat and have Xboxes!" Meanwhile food pantries right here in the US have all the demand in the world.

Andy F said...

Think of this way: you're thinking about GDP the way some people think about global mean surface temp, and concluding that what we need is sulfate aerosol injection.

Michael Tobis said...

No, Andy, that misunderstands me.

I am not saying growth in GDP is necessarily bad. I am saying it is a bad metric.

I am not saying all exchanges do net damage via externalities. I am saying some do. Even the economic mainstream admits that much.

Not that global mean surface temperature is a great metric, but it makes more sense than GDP.

Michael Tobis said...

To be fair, on the other hand, I do wonder whether growth at the margin is actually counterproductive in the net.

It's a subtle point. I don't care what GDP is and I am sure most of the transactions are benign. But I suspect that forced growth in GDP under present circumstances leads to the type of transaction that does damage.

If you look at the types of new jobs coming on line they are dominated by unconventional fossil fuel sources. (see link) Not very encouraging at all.

Andy F said...

The past couple of posts you've been saying something hard to distinguish from "stimulus is bad, Krugman the Keynesian is wrong" without noticing the dominant political context of who else is saying that, and why. You can probably imagine your own analogy to climate. And I don't sense that Krugman thinks resource extraction is the direction to expand. Why don't you aim at instead at somebody who thinks that's a good idea? It appears to be a target-rich environment.

Michael Tobis said...

Andy, you mistake my purpose. This conversation is not about politics.

First you figure out what needs to get done. Then you figure out how to get it done. As far as I can tell, there's a lot of confusion on the first point these days.

Grypo said...

A better way to look at an economy, in respect to what Micheal discusses on this blog, is the Gini coefficient.

manuel "moe" g said...

MT:

> Yet almost everybody wants to restimulate demand.

It is more hopeful than this. It isn't everyone, it is only those given a microphone in sanctioned broadcast media who is saying the most important thing is to re-stimulate demand.

It is encouraging that the media that cannot imagine an alternative is exactly the media that is in decline.

ScruffyDan said...

In a similar vein Jeff Jarvis talks about a jobless future over at BuzzMachine

Pangolin said...

"I am not saying growth in GDP is necessarily bad. I am saying it is a bad metric."_MT

It's not a bad metric; it's an _ing useless metric.

Take my bicycle; I ride it about 60 miles a week on various errands denying the oil industry about $6 dollars in sales and various governments $1.40 in taxes. I'm also cheating the medical care industry, the auto insurance industry, and the diet industry of possible sales. There are various other expenses avoid due to reduced need for parking, vehicle maintenance etc. but they are probably offset by the $150 or so I spend yearly on bike stuff.

Judging by GNP bicycle riding is an unmitigated disaster. Just like solar panel installation or white roofing. I paid a one-time charge followed by years of avoided economic activity.

OTOH if we judged economics by health, fitness, quality-of-life and improved community relationships bicycling is possibly the fastest, cheapest way to advance.

Can anybody find me the school of economics that use health, fitness and quality-of-life as its primary metrics? Anybody?

Eric L said...

I find a lot more to agree with in this post than the last one. I'm still not sure why we wouldn't want to employ as many people as possible to be teachers or to build carbon-free infrastructure right now.

Pangolin, look up "Happiness Economics," it's the farthest along of alternatives that I'm aware of.

http://blogs.hbr.org/haque/2011/06/seven_problems_a_recovery_wont.html

Michael Tobis said...

Eric L, yes, we ought to tax the rich and dramatically increase the services provided by the state. I think so too.

Scaling it up to being universal is a prospect I hadn't considered. This is an approach that might do the least damage to existing assumptions.

Should we guarantee (or demand) some modest employment to everyone along with the modest income floor I am advocating? Maybe it would be easier to sell that way.

But even so I do not think we should let people who are for some reason incapable of work starve or die of treatable diseases. However, you might arrange things so those were rare marginal cases.

I guess this all makes some kind of sense, but I am suspicious of it. What distinguishes this from good old-fashioned sclerotic state socialism? Don't corruption and cynicism follow?

Paul Kelly said...

Kudos for trying to find an economic answer.

The sentences: "Therefore you demand policies that create jobs. But nobody checks to see if these jobs are actually a good idea" stood out.

Are there any monographs about the velocity of money exchanges?

Dan Olner said...

Pangolin's bicycle example reminded me: in my undergrad degree many years ago (well, 1990...) I looked at World Bank policy theory related to sub-Saharan Africa. They wrote that institutions (which includes 'behavioural norms') can be categorised into `market functional' and 'market dysfunctional', and that the latter should be 'supplanted or amended'.

Pangolin's biking places definitely sounds 'market dysfunctional' to me. We need to find some way of internalising the cost for you Pangolin. You want to be market functional, don't you?

Pangolin said...

Dan_ What's clear is that the World Bank, IMF and similar institutions have an agenda that does not coincide with the best interests of your average global citizen.

What they want is trade even where that trade displaces lower-energy economic solutions in various locales. If the local solution does not provide an opportunity for globalized institutions to skim a percentage it's classified as "market dysfunctional." Even where the local solution provides better service(s) to the locals.

Energy economics needs to look at the service required and apply the least-energy input solution that works. That could mean investing in a cableway to get goods and passengers over a ridge instead of endlessly repairing a winding mountain road. It could mean wind turbines in one place and geothermal wells in another.

What we can't do is continue to apply any particular application (cars, asphalt roadways, jet aircraft) to all situations. We simply can't afford it.

Franz said...

Michael,
my take on the story would be, that the economists like Krugman have the right tools, just that their emphasis is not necessarily the same as ours. Therefore we should educate ourselves in understanding and applying it correctly.
To the problems that you stated in your last few posts I would answer: As essantial tasks could be done with less labor, the bargaining position of workers decreased, and an increasing share of national income went to the very top. This could be compensated for some time by increasing work load on more and more senseless tasks. Now that does not work any more. Maybe we should think about thinks we really need to do first, and worry about leisure later.
Krugman is aware of climate change, but I have never read him write about peak oil. The stimulus he proposes would work in his terms, but maybe they would drive up energy prices so high that we fall off the cliff again. However, when stimulus would be concentrated in making us more efficient, and there is a HUGE amount of work to do, this would keep us on top. If we put a large effort in making homes energy efficient renewable energy, railways and so on. For the Keynesians this would be just nice, whereas for us these measures would be essential for our target.
Combined with another issue: I watch falling sub sea surface temperatures in the pacific and the NCEP-CFS-with increasing alarm. Do we face the terrifying prospect of a double dip depression and a double dip La Nina? Should we start to think of TVA like projects for Texas, along the lines of http://www.treehugger.com/files/2008/09/sahara-forest-project.php
?

Paul Baer said...

Michael asked me weeks ago to comment on his economics threads, since it is an area of quasi-expertise of mine. I apologize for coming late to the game.

I will start with one observation that is easy: Pangolin's bicycle problem. It is irrelevant to the economy as a whole (that is, to GDP) whether he rides his bike or not. What matters is whether he spends the money he saves on some other sector of the domestic economy. Yes, all good. No - if he decides that because his expenses are 90% lower for transportation he doesn't need a second job (or any job), then there's a problem.

The kindle example is actually similar. Cheaper reading, loss of paper jobs, but more leftover money for spending on something else - and on average, people don't spend less because certain things they enjoy or depend on become cheaper.

Pangolin said...

Paul_ I haven't had a payroll job since 2006. Most of that is due to an injury that makes my former employment impossible however with sufficient groveling I could probably find something.

The ultimate problem is that economic conditions can be (are?) so difficult or complicated that a clear path to a win is not perceivable by a sufficient fraction of the populace.

If you can't possibly win' why play the game.

Michael Tobis said...

Paul, you're missing what Henry Ford noticed.

Producing model T's also produces people who can afford model T's.

Conversely, reducing the prices on goods by reducing the resources needed to produce them also reduces the person-hours needed to produce them, which reduces the resources available to contribute to demand.

As long as distribution (to the less fortunate 75% in the US, a larger proportion elsewhere) is related to employment, reducing the price on the demanded item doesn't grow the economy unless new demand arises sufficient to employ those displaced in the previous enterprise.

Now, that demand is causing problems: Neven's "crisis cocktail" is a nice word for it. So it's not clear that we WANT that demand to rise to fill the void. But until now it HAS done so, and the powers that be have set themselves the goal that it do so again.

However, if efficiency is real, do we not reach the point where such demand is totally illusory, where the net result of each demand increasingly tends, tobacco-like, toward negative net utility?

Anyway, historical evidence in economics is of little value in discussing a deep change in the system dynamics. ("Regime change", as fluid dynamicists used to put it before the words got stolen by something else entirely.)

I say demand is bottoming out in America and that this is a hopeful sign, except that Obama, whom I admire more than most do, is committed to reversing it. Indeed it's one of the last things the parties agree to and it's wrong. What a tangle.

Paul Baer said...

Michael -

So: if, historically (in the capitalist/industrial period, anyway), demand has on average increased enough to keep unemployment steady in spite of huge productivity increases, then there are plausibly some fairly strong mechanisms driving this. Broadly speaking it has to do with the availability of credit for investment and spending, and the fact that layoffs due to technology-driven productivity increases are relatively gradual and significantly uncorrelated across sectors.

It may of course be the case that we have reached a point where the negative impacts of production and consumption (the two sides of "demand") are larger than the marginal benefits. One problem of course is that the benefits are private and the costs are social (externalities) - a standard commons problem.

For better or worse, what Obama and others actually want to increase is profits (and/or interest on savings, which is related to, but not identical, to profits) - at least until unemployment leads to rebellion (c.f.: London, 2011). If they actually cared about demand as such they'd be increasing, not slashing, government spending.

I don't disagree with your basic points, though. Regime change" is pretty clearly necessary, and at such points, history is not a great guide.

The obvious solution, of course, is that total demand can be reduced and average welfare increased with a little (or a lot) of redistribution. Politically that's a challenge, but one that has been addressed before.