22 April, 2013


Those who know me well know that I am an advocate for the precise use of language, and that I have on more than one occasion claimed that there are no such things as true synonyms, as each word has behind it context and symbolism and understood meaning which is different from all others. I am steadfast in the belief that we ought to carefully choose our words and phrases to convey the precise shade of meaning we wish to impart to our listeners and our readers. This is unless, of course, we wish to follow in true hipster fashion and simply use words which had their zenith 50 years ago, simply because their zenith was 50 years ago, or else in the fashion of most television flapping heads and use euphemistic and unimaginative language devoid of any analogies or- in many cases- proper context. 

There has been a general devolution in the precision of language as English becomes increasingly Newspeakified as Orwellian neologisms with broad and inclusive definitions win out over more precise, more judgmental phrases (e.g. 'terrorism' being used to define such disparate acts as renegade ideological psychopathy and coldly calculated, internationally organized guerrilla warfare), but one change in definition stands out as being particularly insidious and indicative of troubling changes in our culture. 

The word 'critique' (and its derivatives, 'criticism,' 'critic,' et al) has seen its definition subtly shifted. To critique (the verb form) was once understood to mean to carefully analyze both the merits and faults of something or somebody; it meant to rationally contextualize and interpret the subject, and to form an argument about it. In common vernacular, it is now taken to mean a purely negative, superficial undressing for the purpose of drawing attention away from attributes and directing it toward flaws. 

More importantly, critiques and criticisms are increasingly being taken perceived as at best needless negativisms, and at worst outright affronts to our modern paradigm of sensitive understanding. In a culture where absurd ideas, such as the notion that all ideas are of equal merit and all opinions are equally justified, are held as dogmatic absolutes, it is easy to see how any scrutiny would be taken as a detriment. Why call attention to flaws if everyone is equally flawed? Why 'tear things down' with analysis when we can 'build them up' with eulogistic flattery (or, increasingly, commercial advertising copy)? Such is the mantra of the Feel Good Patrol, bent on marginalizing and ridiculing those opinions which express any discontent, disapproval, pessimism, cynicism, or contempt. 

We live in a society where it is increasingly unacceptable to call attention to shortcomings. There is a teetering balance between (unthinking, automatic) contrarianism on one hand and (unthinking, automatic) universal praise on the other. This balancing point is called criticism- fairly evaluating both the positives and the negatives of the subject and generating either a specific or comprehensive argument detailing the successes and failures thereof. This sort of objective analysis is absolutely necessary for any real progress. Without it, there can be no innovation, no growth, no improvement. Criticism is necessary, yet we are increasingly being denied this opportunity because an ever-weaker-willed population is given to less and less tolerance of it. 

When one goes looking for the consequences of this growing unwillingness to withstand criticism, one finds them abundant. The degeneration of pop culture from a slightly watered down artistic expression to a mass-media crapstravaganza (as Louis Kronenberger once said, "the trouble with us in America isn't that the poetry of life has turned to prose, but that it has turned to advertising copy,") can be directly contributed to it. 

There was a time (was it really so long ago?) when one could go to a cinema and see a film destined to be regarded as a landmark in filmmaking. The Kubricks and Hitchcocks, Lynches and Coppolas produced epic works of both aesthetic, artistic, and popular merit. Today, the Abramses, Nolans, and Apatows slap together barely coherent rip-offs of tired themes, laden with product placements and special effects which try and fail to cover the woefull chasms in the storytelling, all wrapped up with merchandisnig tie-ins and ready-made, predictable sequels. Since those who dissent are seen as anacrhonistic, or negativistic, the people at large stand unprotected from and unprepared for the onslaught of summer blockbusters. Devoid of true criticism, and in pursuit of box-office receipts from an uncritical population, cinema has descended from an art museum to a theme park. 

A dodging of criticism is responsible for the emergence of the phenomenon where anyone with a warbly voice and a guitar is being referred to as a 'singer-songwriter' as well. Bob Dylan's incredible legacy has been devolved into Taylor Swift's pathetic tunes about teenaged break-ups. Seeking 'authenticity,' these pseudohipsters instead produce a mutually indistinguishable series of strummed campfire songs with uninspiring lyrics. Not being a 15 year old female, I cannot say whether hearing hundreds of songs with almost identical chord progressions (though sometimes, in an act of rare novelty, in a different key) with similar sounding singers mewling repetitively about the same 2 or 3 themes is authentic or not, but I do know that it has very little artistic validity. If we didn't live in such a criticism-averse society, perhaps somebody would have told these people, and spared us all. 

Most alarmingly, our government is more and more often seen as beyond any (legitimate) criticism. Now, it is a well known phenomenon that partisans are always detractors of the status quo when their opponents are in power and jingoistic when their own party controls the table, but that isn't what I am talking about here. When the purported 'news and analysis' consists of openly biased reporting and opinion discussions, it serves only to reinforce preconceived prejudices. Should a Tea-Partier stumble upon MSNBC (and even more incredibly, should MSNBC put together an intelligent criticism of anything) and see some criticism of his or her opinions that might be objectively valid, he or she will nevertheless dismiss it as being biased because it comes from a biased source. This is true for a socialist and Fox News, et al, as well. Conspicuously absent is any real, objective critiques, and the result is that we are subjected to pulpit-pounding pundits increasing greenhouse gas emissions and depleting worldwide oxygen levels screaming about trumped up stories (does anybody else remember spending weeks on relative non-issues like 'The War on Christmas,' or is that just me?) while massive government power grabs and civil liberties violations (USA PATRIOT act, CISPA, etc) go by almost unnoticed. 

It is important that rational discourse and discussion again become a feature of American life. This cannot happen when any disagreement or criticism is seen as antagonistic and mean-spirited. This battle is being fought in our everyday attitudes, and our everyday use of language. Therefore, the best way to move forward is for each of us to consciously seek out criticism and purposefully open ourselves up to both introspection and retrospection. 

Language is a tool, and words matter. So long as we continue to use 'critique' and 'criticism' in a pejorative sense to mean contrarian nitpicking rather than intellectual evaluation, people will continue to resist criticism and critiques in popular discourse. We must, to butcher the term, 'take the words back,' and use them in a manner consistent with what they really mean. 

We have to be willing to object when we see something objectionable, and feel free to withhold praise when it has not been deserved. Cultural relativism is cultural death; we must be courageous enough to fairly compare the pros and cons of every side, all the while being aware of our own prejudices and defects of reasoning, seeking to correct them as we go. We cannot allow ourselves to fall into the 'gregariousness trap.' We all have a right to be different and to have our own opinions, but this does not mean that everyone (or even most people) are right. This is a distinction which must be made. 

How do we determine what 'right' is, you may ask? How can we be sure that we ourselves are not the ones who are wrong?

Funny you should ask. The answer is true criticism. 

17 March, 2013

Where the EU Leads, the US Seems Poised to Follow

One can hardly pay any attention to international news recently without hearing the baying calls of the two equally ferocious and vociferous camps: on the one hand, those who call for austerity and restructuring in order to put flagging EU economies back on the path to growth,and those who decry such measures as too harsh (at best) or ineffective (at worst), and instead fight to retain what might rationally be called the status-quo of welfare-statism and government spending to push demand up.
The EU leader most closely associated with the push for austerity measures (or, as she would undoubtedly call it, fiscal discipline) is German Chancellor Angela Merkel. Though she has been vilified by many of Southern Europe’s unemployed youth (Czuczka & Donahue, 2013), Merkel insists that cutting spending; in some cases, drastically; is the way for each constituent nation to reach their target of having annual budget deficits at a level no greater than 3% of GDP. The EU requires, as part of its ‘convergence criteria’ to be permitted to adopt the Euro currency, this 3%-or-lower ratio as well as a sovereign debt-to-GDP ratio of no more than 60%.
Those who place an emphasis on austerity do so because they think that in order for the EU to recover, each nation’s finances must be in order. They believe that you cannot spend your way out of a recession, because attempting to do so increases inflation and also increases the total amount of debt which must eventually be repaid. Both of these effects serve to drive up borrowing costs. They also feel that these ‘austerity’ reforms were changes which would need to have happened at some time anyhow. To quote Peter Praet, the Belgian chief economist of the European Central Bank:
“It is something that was long due. Unfortunately, it comes in a very harsh way – but you must remember that even before the crisis there were concerns. At that time, decision makers thought they had ten years to prepare for an aging population. Now, with the economic slowdown because of the crisis, we have lost, in many countries, those ten years. Reforms have to be pushed faster than what was planned. It had to happen anyway, but now it has to happen faster.” (Austerity Versus Growth?)
Merkel has some evidence backing her calls for austerity; after 2000, Germany focused on reducing labor costs in order to become more competitive overseas and has largely succeeded in doing so. According to an index compiled by the European Central Bank in 2012, Germany increased its foreign competitiveness by 22.5% since 1999, compared with only 1.2% for France (and 1.4 percent in Italy). (Czuczka & Donahue, 2013)
All of that having been said, the European Commissioner for Economic and Monetary Affairs, Olli Rehn, has officially forecast that the Euro-area economy would, as a whole, shrink for the second year in a row, the first time since 1999 that such a back-to-back contraction has happened. Rehn is quoted as saying that the prospects for growth among many regions in the EU were, “very disappointing,” and that, “the ongoing rebalancing of the European economy is continuing to weigh on growth in the short term.” (Kanter, 2013) All said, there is some variation among the nations in the EU; France is set to just barely manage to grow 0.1%; some nations will grow more, and some will grow less. Rehn did forecast one bit of good news, however: he predicted that the European Union’s economies would resume growth in 2014, with the Eurozone nations growing 1.4% (Kanter, 2013).
Paul Krugman, to the surprise of no one, is an opponent of austerity measures. Despite Olli Rehn’s (rather astute, in my opinion) observation that the EU, “won’t solve [their] growth problems by piling new debt on top of [their] old debt,” Krugman rather briefly dismisses any such fiscal belt-tightening as a ‘cockroach idea.’ French President Francois Hollande agrees in sprit with Krugman; he too opposes austerity measures, preferring instead to focus on what he calls ‘growth’ (that both sides seek growth, and only differ in the road which they think leads to it, goes unsaid).  In a recent press conference, Hollande has said, “do we only have to reduce our public deficits? No… we also have to boost growth.” (Czuczka & Donahue, 2013)
Another key factor in the austerity discussion is the unrest fermenting among the unemployed in Southern Europe. As the election in Italy- where an ex-comedian’s protest party gained 25% of the vote- shows, there are large and vocal portions of the population unwilling to accept the reductions in the welfare state that austerity measures almost universally entail. (Neuger & O'Donnell, 2013)
Despite their differences, France and Germany, the Eurozone’s largest economies, have pledged to jointly produce a blueprint for recovery which they plan to present to the annual summit in June. (Czuczka & Donahue, 2013)
In my opinion, neither strict and sever austerity nor expansions in government spending to promote growth are the right way to go. While there is an obvious need for governments to accept reality and realize that they cannot spend more than they take in ad infinitum, simply pulling the plug all at once may not be the best way to transition into more responsible fiscal policy. On the other hand, ratcheting up spending at a time when the levels of sovereign debt are already in a crisis seems absurd as well. It seems to me that a policy of targeted investment, rather than profligate and indiscretionary spending, is more likely to produce economic growth in the medium to long run.
Simply dumping money into the economy won’t do it, but perhaps generating an institutional framework wherein private investment is less taxed and more rewarded, and where economic infrastructures are renewed and improved, might be just the right measures to get stagnant economies in Southern Europe going. Spain, Portugal, Italy, Greece… they have the resources, and they have the labor. What is lacking is not government spending, it is genuine entrepreneurship based in a regime of stable expectations and available credit. The Euro can provide that stability and that credit, but only if each constituent nation- including those presently wracked by debt crises- upholds their agreement to maintain it.
It is clear to me that adjustments of some kind must come eventually. The longer they are put off, the farther off the path the economies get, and the more severe the adjustment must be. Doing something now, cutting some spending now, is clearly preferable to making sudden, massive changes in structure and eliminating most spending at some point in the future. Harsh though austerity measures may be, they would need to be worse if we waited longer to implement them.
The Unite States would do well to take heed with what is going on in Europe. Without any supranational body governing our finances, and without any obligations through treaty to maintain our currency or to control our deficit spending and total debt, which are, at present, at about 7.3% and 93.4% respectively, the United States is headed down the same path as nations like Spain, Italy, and France. The only thing that has saved us so far is the immensity of our economy and the vastness of our resources. Make no mistake- our present course, even after the so-called 'sequestration' and the 'cuts' that have gone on so far, is ultimately unsustainable. 
The reckoning cometh soon...

Works Cited/Further Reading:

Austerity Versus Growth? (n.d.). Retrieved from Debating Europe: http://www.debatingeurope.eu/growth/austerity-versus-growth/
Czuczka, T., & Donahue, P. (2013, March 6). Merkel Looks East for Austerity Allies in Hollande Talks. Retrieved from Bloomberg: http://www.bloomberg.com/news/2013-03-05/merkel-looks-east-for-austerity-allies-in-talks-with-hollande.html
Kanter, J. (2013, February 13). EU’s Olli Rehn Forecasts Shrinkage of Euro-area Economy for 2d Year in a Row. Retrieved from The Boston Globe: http://www.bostonglobe.com/business/2013/02/23/olli-rehn-forecasts-shrinkage-euro-area-economy-for-year-row/usJn5SacMgjinmmRcbrcfO/story.html
Krugman, P. (2013, March 4). Cockroaches at the European Commission . Retrieved from The New York Times: http://krugman.blogs.nytimes.com/2013/03/04/cockroaches-at-the-european-commission/
Neuger, J., & O'Donnell, S. (2013, March 5). EU Opens Way for Easier Budgets After Austerity Backlash. Retrieved from Bloomberg: http://www.bloomberg.com/news/2013-03-04/eu-opens-way-for-easier-budgets-after-italian-austerity-backlash.html
Spiegel, P., & Carnegy, H. (2013, February 21). EU Chief Urges Shift Away From Deficits. Financial Times.

20 February, 2013

Raising Federal Minimum Wage May Hurt Growth

I was induced to write this article by several factors. In decreasing order of importance, they are my annoyance with the POTUS' State of the Union address (which fell prey to the usual bane of good rhetoric- politics), some macroeconomic studying that I have been doing, and the fact that I am myself a doubly-minimum-wage laborer (I am, at present, holding two minimum wage jobs while I am in school). Let me up-front and clear from the start:
I am opposed to a minimum wage on principle, yet my opposition to raising it does not in totality stem from this fundamental opposition to the existence of a minimum wage in the first place. 
I hope that, in this somewhat brief and informal format, I am able to at least arm you with another side to this issue you may not have considered, or to at best convince you that raising the federal minimum wage might be an economically poor decision, regardless of how politically savvy it may be.

Minimum Wage? You mean 'Price Floor'

As somebody who has studied economics to no small degree, I think of minimum wages differently than the way in which I imagine most people think of them. To me, wages represent a price for labor; more specifically, it is the price which I command for my labor, and the cost a business must pay to have my labor. When thought of this way, our thinking about wages becomes much easier to objectively analyze.
Just like any producer, I wish to sell my product (my labor) at the highest rate that I can. I cannot, however, force people to accept my price. I must sell my labor at a price with entices buyers. Conversely, firms who purchase labor cannot arbitrarily assign a price which I must accept, low though it may be. They must offer a price that I am willing to sell at, or I reserve the right to refuse to sell. These ideas, working in tandem, create both a supply for labor (on my side) and a demand for labor (on their side) at any give price (wage). Where these two factors intersect represents the equilibrium price for labor in a given market- they will go no higher, and I will go no lower. We meet in the middle.
If any of this sounds pedantic and familiar, it is because you've heard it before in any intro to economics course you've ever taken. The supply and demand of labor functions nearly identically to the supply and demand of price, because wages are simply a price for labor!
This means that, just as how price floors set above the equilibrium price cause a surplus of a good, or more prosaically a shortage of demand for a good, so does a price floor above the equilibrium wage. A minimum wage is just like a minimum price- it is a price floor. When set above the equilibrium, a price floor like minimum wages means that there will be, ceteris paribus, less demand for labor, which in turn means that there will be either fewer labor hours offered to existing employees, or fewer jobs available for new employees.
But who does this principally affect? It doesn't affect those who currently work above the minimum wage; in other words, it doesn't affect those whose careers or job markets have an equilibrium wage already above the minimum wage. Doctors, in short, are not effected by minimum wage. Nor are construction workers, fior that matter, who I know for a fact already receive compensation well above the minimum wage in most areas. Changing the minimum wage upwards principally affects those at the bottom of the pyramid, so to speak: unskilled or inexperienced workers in jobs where there is an almost perfect substitution for labor.
Raising the minimum wage causes increased costs for those businesses who employ unskilled or inexperienced workers, which means that in order to remain in business at all, they must either reduce their labor costs by giving each employee fewer hours or laying off some employees, or they must increase their income by raising prices. Either way, those at the bottom of the heap are the most impacted, since a 1% change in goods prices means more to you if you make $15,000/year than if you make $150,000/year, and since they are the ones who stand the greatest chance of losing hours or even their jobs.
There may also be another effect of minimum wages: preventing good wage negotiation. Think about jobs you commonly perceive as being 'minimum wage' jobs. Burger flipping comes to mind. Perhaps the minimum wage prevents those businesses from paying more than the minimum wage, simply because they perceive that job as being a 'minimum wage job!' If they had to negotiate wages with their employees more freely, the wage demanded by those skilled and/or experienced with burger flipping may well be above the minimum wage, but as it stands, there is little incentive to pay these employees more than the minimum wage, given that they're doing a 'minimum wage job.'

But What About Falling Real Wages?

We've all heard (okay, so maybe we haven't all heard) about the declining real wages in the United States recently. What is less often understood is just what real wages mean. Real wages are simply inflation-adjusted wages, which means that they are a more accurate measure of purchasing power than nominal (non-inflation-adjusted) wages. Why? Because if you make 5% more, but the price of goods has gone up 5%, you can't buy more. Your real wage has stayed the same. If, as has been the case lately, inflation is rising higher than nominal wages are, real wage will decline, and one can purchase fewer goods.
On the face of it, raising minimum wage might seem to address the problem. In fact, it makes it worse. By raising the minimum wage, one feeds into a cost-push inflation which drives consumer prices up (because the cost of labor, one of the factors of production in consumer goods, goes up), erasing any benefits to the real wage.
In fact, if one accepts anecdotal evidence (and I don't), minimum wage was last increased in 2009 (to the current value of $7.25/hr) and since then, median real wage has declined.
One might argue that increasing the minimum wage redistributes real wealth downward toward those making minimum wage and away from those at the very top. Even if this were desirable (something I'm not going to get into here), there seems to me to be little evidence that minimum wage does so.

Minimum Wage and Growth

In order to discuss, very briefly, the effects I believe an increase in the minimum wage would have on growth, we must first, even more briefly, discuss what economic growth actually is, and what causes it to occur.
Economic growth is not caused by increased consumer spending, or my increased government spending. While each of these may increase GDP in the short run (they can hardly avoid doing so, as GDP counts them as inputs), in the long run neither of them tends to represent meaningful growth.
What matters in economic growth is the improvement of productivity (being able to make more stuff). This can only occur in two ways:
1. we get better at making stuff more efficiently out of the resources we have, and/or
2. we find more resources to use in making stuff
What matters, then, in generating economic growth is investment spending, not consumption spending. Investment, of course, being spending on more or better factors of production (including improving the quality of our labor through education/training), spending on finding new sources of a resource, or spending money on research and development to invent new ways to put resources together.
So, to return to minimum wages: even if an increase in minimum wage represents an increase in the real wage, that means that (all else held equal) there will be less investment spending, simply because there is less to be spent! Slowing our investment spending at a time when our economy is in critical need of greater capital accumulation seems, to me, to be absurd.
Besides, even if wages stay the same, the rising tide lifts all boats: a more efficient, growing economy means that all things will be relatively cheaper. For proof, look at how improvements in manufacturing and technology have made computers vastly less expensive and vastly more available than they once were. The standard of living enjoyed by those on the brink of poverty today is much higher than it was only 50 years ago. The access to luxuries is higher now that it has ever been. Improving the economy as a whole does more for the poor than a minimum wage ever could.

Alternative to a Minimum Wage

Some might argue, and I might be in some cases inclined to agree, that something still needs to be done to address income disparity between the very poor and the middle or upper classes. As I have argued above, minimum wage doesn't help; at least, not enough. So, then, what should we do?
I personally support the idea of setting the Earned Income Tax Credit at the poverty level. If we deduct from taxable income all income up to what is considered the poverty line, then there will be more income available for essential purchases for those at or near that line. This would help to ensure that every family received a minimum level of income to purchase their basic needs (food, housing, etc) without needless interference in the job market.
I also support tax reductions aimed at invigorating economic investment, such as eliminating taxes on the purchases of capital stock, education or training expenses, and providing greater incentive for innovation into more efficient production methods by eliminating any taxes associated with expenditures on legitimate research and development. By growing the economy and making it more efficient, we can provide more goods and services at a lower cost, meaning those on the brink of poverty, or in it, can purchase more and enjoy a higher standard of living than they do today (even if they are still, relatively, poorer than their contemporaries).

In conclusion,

I do not support an increase in the federal minimum wage because it further distorts the labor market unnecessarily, fails to help those who need it most, and may stifle economic growth.

06 February, 2013

Musings On Growth

Lately, I've been doing quite a lot of economic data analysis; in particular, I have sifted through figures gathered from around the word for real GDP over the last three decades, and capital accumulation, production efficiency changes, and regional factors over the same period. Much of this data suggests a convergence of economies toward the most-developed economies. In other words, smaller, less developed economies grow (often exponentially) faster than more developed, larger economies. This produces a trend over time that would seem to indicate two factors which I would like to casually explore with this post:
a) economic growth over the long run seems to behave quasi-asymptotically 
b) convergence of economies implies that rapid growth might be inherently unsustainable
Before I begin discussing these ideas, I would like to point out that these thought are, unlike many of my other posts, not yet tested empirically, at least not so far as I was able to dig up with a cursory search. I am likewise not in the possession of enough relevant data to make such an empirical analysis myself. This is just, as the title suggests, a simple musing, rather than a rigorous analysis.
That having been said, there are some data which support these arguments. Growth rates, as measured in real GDP and real GDP per capita, over the past several decades, while showing great variability, seem to bear out the general conclusion that if a country started big, it grew more slowly in terms of percent change per annum; if it started smaller, it grew more rapidly in terms of percent change per annum. This means that large economies may have grown more in terms of absolute addition to real GDP, but their rate of growth was, on the whole, smaller than those of developing economies (especially the 'Tiger' economies of Asia and OPEC nations).
Given this, and given other observable indicators of economic growth (industrial development, capital accumulation, etc), it seems that there is some sort of marginal cost to continued growth. Economists and economically minded people are used to thinking in terms of margins, but for the relatively uninitiated reader, I will now go on a slight digression of margins (that those familiar therewith can skip by moving forward to the paragraph after next).
'Marginal' analysis is simply the analysis of the change that occurs in a given dependent variable when the independent variable is changed by 1 unit. For instance, Suppose that you are purchasing cans of soda. Each can costs $0.75. This means that the marginal cost of purchasing each additional can of soda is $0.75 - in other words, the additional cost you bear for each additional soda is $0.75. This is an example of a constant marginal cost. Now, suppose you are purchasing labor from a friend (you're paying him or her for their work). They might be willing to work 8 hours at a rate of $10/hour, but if you want them to work a 9th hour, they wish to be paid overtime ($15/hour). This means that the marginal cost of that 9th hour is not $10, but is $15- an example of increasing marginal costs.
It is commonly noted in microeconomics that marginal costs increase over time and marginal benefits decrease over time. Given the fundamental economic assumption of scarcity, this is inevitable- the more of a good is consumed, the more precious the remaining quantity of that good will necessarily become. Conversely, the marginal utility or marginal benefit goes down over time- a convenient way of imagining why is to think about how much pleasure you get from drinking a 6 pack versus drinking a case of beer. Once you drink too much, you puke; a clear example of a decreased marginal benefit from one additional can of beer.
This sort of thinking is what I wish to apply to economic growth. I am coming to the conclusion that increased economic growth in real terms has an increasing marginal cost and a decreasing marginal benefit over the long run. This implies that there is perhaps a steady state at which it would be most rational NOT to grow the economy, and perhaps it is this steady state toward which most economies seem to be converging.
There seems to be some logical basis for these thoughts. In the broad scope, it is commonly recognized that the pace of technological innovation and development is increasing at a rapid rate. One common measurement of the efficiency of technology, the doubling time for computer memory that can be produced at a given cost, has been increasing for the past 40 years. New innovations are being produced at a breakneck rate. Given most macroeconomic growth formulas (in which output is generally a function of capital, labor, investment, and technology), this would seem to imply that, ceteris paribus (all else being held equal), we should see increasing growth rates.
We do not.
Growth rates for most developed economies- the places where most of this innovation happens and where the benefits of those innovations are most strongly and immediately felt- have remained the same or even slowed, and they are certainly growing more slowly than less developed economies. It is my argument here that perhaps there is a decreasing marginal return for each unit of technological innovation; inversely, there is an increasing marginal cost for each little bit of growth that technological change adds to output. Cursorily, this seems to hold up to scrutiny. The jump in production efficiency gained from having no computers to having basic computers was large; the jump in production efficiency from the earliest computers to the ubiquitous desktop was large but smaller; the jump from desktops to faster and more powerful desktops modest, and smaller still. Yet the amount of resources spent on development of computers, and the rate at which new computing technology increases, has grown all the while. In real terms, the cost in resources (time, energy, etc) which must be spent for each additional 'unit' of technological innovation is rising over time!
The other factors of production are similarly limited. There is only so much capital to go around- it cannot increase forever. There are only so many natural resources to go around- they cannot increase forever. Historically, and in some cases currently, if there is a shortage of resources, more can be found somewhere at some cost. Think of today's situation with oil and fracking as representative. This process cannot go on forever- even if we eventually reach such a peak of efficiency that we are able to run an entire economy using only renewable resources like solar and wind power, there is only so much sun and so much wind! No matter how you think about it, the inputs which go into output are inherently limited and finite in nature, whether we have reach those limits or not.
All of this taken together supports the idea that economic growth over the long-run (and in this particular case, I'm talking about perhaps a century or more into the future) is going to slow asymptotically as it reaches this limit, whatever it is. This will be true for the world economy collectively, but it will be noticed most drastically by highly developed economies who will find that their present rates of growth are increasingly difficult to maintain, until they can't maintain them at all.
Eventually, this seems to imply that economics will become something that it has not been at any other time in human history: a zero-sum game. At this end-state when we have reached or are approaching the limits of resources and when further technological gains become massively costly, economic gains by smaller economies may begin to come at the cost of growth or even absolute size, in larger economies. This would promote a cutthroat growth expansion by all economies who seek to increase their share of the pie before the pie stops growing (or begins growing so slowly that the growth is negligible) which will only hasten the coming of a 0-development steady-state world economy.
This end-state need not be bleak; presumably, since all economies would have grown from today's size, quality of life and material wealth would have increased as well. No further growth does not mean  that there will be negative growth, nor does it mean that economies will collapse. There need not be a dystopia; this argument, if true, simply means that we may have to abandon our hopes of an ever-increasing utopia.
In conclusion, I reiterate that these are musings and speculations based upon no thorough or rigorous empirical or statistical analysis. These arguments are, however, interesting and have weighed on my mind for several weeks now. It will be interesting to see if any research is done into this area; perhaps even a model built for long-run growth which includes some of these conjectures.

31 January, 2013

Real GDP Down 0.1%, According To B.E.A.

The Bureau of Economic Analysis has released, in a press statement, the data for the 4th quarter GDP from last year (the full text of which is available on their website, http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). According to this advance report, real GDP declined at an annual rate of 0.1% in the fourth quarter (in other words, from the third to the fourth quarter) of last year. While these numbers are considered to be a preliminary, and are pending further review to come over the next few months, this estimate does contain some specific data pertaining to the causes of the very slight decline in real GDP.
Consumer spending increased slightly from the third to fourth quarters last year. Real consumer consumption spending increased at a rate of 2.2% from the third quarter. Of particular note was the increase in equipment and software purchases, increasing 12.4% over the third quarter levels. Investment declined overall, despite an increase (15.3%) in residential fixed investment. Government spending declined a total of 15.0%, with large declines in national defense spending (down 22.2%), which more than offset for small increases in non-defense spending (1.4%) and state and local spending (0.4%). Net exports also declined. Real exports decreased 5.7% and real imports decreased 3.2%. This results in the net exports also declining, since the drop in exports exceeded the drop in imports, widening the trade deficit. Clearly, international trade had, overall, a deleterious effect on real GDP this quarter (and over 2012 as a whole) given that the trade deficit represents a net subtraction from real GDP calculations. The effect of trade, however, may not have been the largest contributor to the decline in real GDP, given that there were also declines in government spending and in investment which, when combined with net exports, served to offset gains in private consumption spending.
My assessment of the economy over the next several months is tenuous. I think that, once put into context by looking at the events which took place in the fourth quarter and the numbers for 2012 as a year, the fourth quarter slump in domestic output might not be as foreboding as it might at first seem.
For instance, the real GDP rose more in 2012 than it did in 2011, increasing from 1.8% to 2.2%. According to Forbes.com (http://www.forbes.com/sites/abrambrown/2013/01/30/u-s-economy-stumbled-at-the-end-of-2012-q4-gdp-down-0-1/), the 15% total decrease in government spending and the decrease in business inventories and investment managed to wipe out 1.6% of the total GDP, befuddling some predictions of a 1% increase in real GDP in the fourth quarter. The decline in business investment and in inventories might reflect any of a number of phenomena which took place late last year, included among them significant hesitation in anticipation of and uncertainty about government fiscal policy with the threat of the ‘fiscal cliff’ looming overhead and the effects of Superstorm Sandy on the Eastern Seaboard.
However, the main bright spot in this report is the one which, upon further review, gives me concern over the first quarter of 2013. Consumer consumption spending increase a further 2.2%, above and beyond the 1.6% gained in the third quarter. This (relative) spike in consumption spending is one which I think will not hold into the first half of 2013, given that personal outlays increased $95.0 billion (3.3 percent) in the fourth quarter, compared to 3.1% in the third quarter. I suspect that much of the recent gains in consumption spending have not reflected lasting gains, but instead transitory effects of the holiday shopping season (among others).
In the end, I am concerned about the economy over the first part of 2013. I would not be surprised to see another decline in real GDP or, at best, an anemic growth of less than 1%, after the first quarter. I think that consumption spending will decline, but will partially be offset by increase in business investment and government spending. In particular, I certainly do not think that government spending will decline another 15%. I also expect the trade deficit to narrow slightly, as is often the case during recessions. I would not be surprised to see net imports falling again, while I do expect net exports to rebound slightly.

23 January, 2013

Increase in U.S. Trade Deficit Leads To Decreased GDP Growth Projections

The latest available figures are showing that there has been an increase in the U.S. national trade deficit, and this deficit's increase has resulted in recent reductions in forecasts for GDP growth for the first part of 2013 from multiple analysts.
The major cause for the increase in the total U.S. trade deficit was a net increase in imports of 3.8% to $231.3 billion associated with a net increase in exports of only 1% to $182.6 billion. These total figures don’t show the entire picture, however, as trade deficits with OPEC nations and with China both decreased to some degree. The trade deficit for ‘petroleum goods’ in particular narrowed to a total of $23.5 billion in November of last year from $24.6 billion last October. However, the trade deficits with Canada (our largest trading partner) and the EU increased.  In total, the trade deficit increased to a total of $47.8 billion (which is an increase of 10.4%) from last October, according to a 13 January Bloomberg.com article by Alex Kowalski (URL: http://www.bloomberg.com/news/2012-01-13/u-s-trade-deficit-widened-more-than-forecast-to-47-8-billion.html).
The same Bloomberg article acknowledges an increase in crude oil prices ($102.50/barrel from $98.84/barrel) as a potential source of increased American import costs (total crude oil imports went from $26 billion to $27.3 billion). Once crude oil prices eased in December, the rate of increase of imports eased as well; imports decreased 0.1% in December, compared to an 0.8% increase the month before. Automobile imports rose late last year, as did imports of capital goods (to $48.3 billion, a new record). On the other hand, the increases in exports to newly-developed economies and industrializing nations helped offset these import increases vis-à-vis China and the OPEC nations.
It follows that the main source for the import deficit increase is an increase in the import deficit with the EU. Despite the weakening of the dollar making U.S. goods cheaper abroad, the goods deficit with EU nations rose 21.6%. One potential source of the net decrease in demand for American goods in the EU (and thus in exports to the EU) might be the continuing credit and debt problems currently endemic to much the region, though this explanation is incomplete, as it fails to account for the increased trade deficit with Germany, which has reached a new record size. This increasing trade deficit with the EU is particularly troubling, given that foreign trade in general has been critically important to the recovery from the economic downturn from 2007-2009.
                The fact that the trade deficit has increased has led to a downgrade in the projections for GDP growth in the U.S. Given that the formula for calculating GDP factors in the addition of a term defined as (exports – imports), it follows logically that any increased trade deficit (which implies an increase in imports and/or a decrease in exports) will result in a smaller number – or even a negative number, as is the case now- being added to consumer spending, investment, and government spending, which in turn leads to a smaller GDP. On this point, the multiplier is very important, as small changes in one area can have large impacts on the economy as a whole. For instance, a decrease in exports could have a multiplied effect as it would both increase the trade deficit as well as potentially decrease investment in capital as anticipations of growing demand are diminished.
                However, this doom and gloom must be tempered with an understanding that shocks from Superstorm Sandy and port strikes might be impacting these figures. That having been said, however, the growing trade deficit is a point of some concern to me.