Sunday, July 3, 2016

Disentangling the Components of Growth Potential

What "kills" growth potential? What encourages it? In some of my earliest blog posts, I emphasized the importance of getting monetary policy right as an initial step, before other courses of action can provide reliable long term gains. Once again, economic stagnation is tempting policy makers to downplay the central role of monetary policy. In much of the twentieth century, central bankers provided nominal stability by closely adhering to aggregate spending capacity. Since the Great Recession, however, they are gradually pulling back on the nominal spending which could maintain present marketplace conditions for the near future - let alone generate new growth. Recently Scott Sumner concluded a post by saying, "The world has forgotten how to grow".

When policy makers become disenchanted with long term growth potential, monetary policy is sometimes allowed to suffer the consequences. Central bankers are reluctant to commit to a level target, and indeed doing so would effectively create a regime change. Hence monetary policy advocates may be relegated to "fair weather friend" status, when policy discretion substitutes for the stable anchor of a nominal target. Worse, the growing focus on financial factors - alongside an inexplicable desire to downplay supply and demand in economic discourse - continue to weaken growth potential. When central bankers take a non monetary approach, people and the economies they attempt to uphold, suffer the consequence.

Does it matter that policy makers are beginning to experience populist resistance? Unfortunately, resistance as it exists now, is quite ill defined. Too much confusion exists all around, as to how faulty fiscal and monetary policy contribute to existing problems. Few citizens can scarcely discern the importance of accurate monetary representation. It doesn't help that some publicly argue that money is not even "real", even as money is required for the most central aspects of our lives. Where to begin? I decided to do a quick review of some common reference points, and compare them. The FT Lexicon describes the real economy as:
The part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets.
First, note that even though the above description of a real economy includes both public and private enterprise, it is incomplete in the sense of measured real GDP (RGDP), which includes the ongoing activity of financial markets. That's quite a difference in interpretation, regarding what is real. When I next googled RGDP, Investopedia redirected me to GDP, as " a broad measurement of a nation's overall economic activity."

In all of this, it's not hard to see how the uninitiated could get a headache, trying to decipher a story line as to existing wealth and activity which could be considered the domain of governments, Main Street, or Wall Street. Even if the underlying stories existed in picture form, finance would act as a thick layer of paint which coats each canvas.

Among these already confusing components, one finds the supply side economics which previously held such promise for long term growth. While the term is used by advocates of private sector activity such as myself, plenty of government engagement is involved, nonetheless. From Wikipedia:
Supply side economics is a macroeconomic theory which argues that economic growth can be most effectively created by investing in capital and by lowering the barriers on the production of goods and services.
This opening sentence sounds quite promising. However, how long has it been since society elected to invest in human capital so as to lower barriers for services production? I'm reminded of a recent comment from Arnold Kling:
One of my fantasies is of a classroom in which a tenured professor at an accredited institution of higher learning says "We must have free trade", and a few students leap out of their chairs and shout "You first!"
Too many supply side policies support pro business (both public and private) intentions, instead of assisting pro market growth. Consequently, citizens are now less trusting of an approach which could have created positive results for all concerned. Even though I identify as a supply sider, I find myself frustrated by supply side policies which mostly rearrange already existing wealth, instead of creating a more accessible marketplace.

Last but certainly not least for this post, are structural concerns, which were addressed by Wikipedia with structural change.
In economics, structural change is a shift or change in the basic ways a market or economy functions or operates...Historically, structural change has not always been strictly for the better.
Regular readers are quite familiar with my attention to structural factors, which pose substantial challenges in terms of long term growth potential. Still, it would be easier to develop a simple story line about the present inadequacies of asymmetric compensation, were it not for the fact that central bankers are still compounding the economic pressures which nations already face. It's time for a regime change.

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