Wednesday, March 14, 2018

Debt as a Factor in Output and Productivity

When does debt serve as an actual point of wealth origin, whereby it contributes to output, productivity gains, and long term growth? The answer often depends on whether debt instruments function by shifting (redistributing) wealth, or as direct means to increase output. For example, tradable sector activity provides more debt assisted wealth origin, than non tradable sector activity. Presently, debt as financial intermediation tends to inhibit long term growth, as much of it is utilized to shift ownership patterns instead of generating additional aggregate output.

In a recent Econtalk with Russ Roberts, Arnold Kling stresses the importance of financial intermediation in the economy, yet downplays the significance of macroeconomic theory (he describes financial intermediation as any institution which issues debt). While my readers won't be surprised that I consider macroeconomic theory the more important factor, Kling's argument provides an apt reminder of the importance of financial intermediation for macroeconomic outcomes. However, just as the complexities of finance don't negate macroeconomic theory, neither do intangible production factors (which he frequently highlights) negate the reality of aggregate supply and aggregate demand.

Financial intermediation serves as a point of wealth origin, only insofar as it increases aggregate output, rather than simply shifting the ownership of resource capacity. Indeed, one might have a more instinctive feel for aggregate supply and demand realities, if they could more readily discern when and where financial intermediation stalls aggregate output. Wealth claims are a non linear process, in which secondary markets can create a "nesting" effect which blurs the correlation between price levels and seemingly apparent productivity gains. Could this have some bearing on the fact that Arnold Kling has his doubts about the validity of aggregate supply and aggregate demand? Productivity can be deceptive, for - like inflation - while its particulars are discerned at the microeconomic level, its totality is measured at the macroeconomic level.

The processes by which financial intermediation rearrange wealth, are closely aligned with secondary market activity. Financial intermediation - while it is still capable of generating real progress - is too frequently utilized instead as claims on already existing output. Wikipedia notes other secondary market processes besides the resale of initial financial offerings, such as markets for used goods and assets. Ethanol production, for instance, is a useful way to think about secondary market goods or services which function as "nested" claims on already existing output. Also I've stressed how today's time based services function as secondary markets, since they make asymmetric claims on circulating revenue.

I should apologize if I've caused my readers any confusion re my description of government financial intermediation as secondary market activity, since the initial activity for government bonds is described as a primary market. That said, I can't help but feel the official description of a government bond as a primary market is misleading, for it encourages observers to envision government bonds as a point of wealth origin. Alas: Like other secondary market activity, government bonds more often shift resource capacity, instead of generating new output which is reciprocated at the outset. In terms of initial offerings as primary markets, I believe the primary market designation is accurate when financial intermediation applies to equity for output gains in tradable sector activity, or the one time output gains of new home mortgages.

Perhaps the most important question to ask re financial intermediation from a productivity perspective is this: Do debt instruments increase output, or do they make output claims which shift ownership patterns? While the latter circumstance is often benign, it still tells an important story about measurable economic progress - or not, of course. Presently, some official financial designations for primary market activity are confusing, for they encourage many observers to believe new wealth is being generated, when existing wealth is actually being shifted. It's too easy to forget that new government securities in particular, don't directly contribute to additional output gains in a real market capacity.

Why does it matter, whether financial intermediation serves to advance wealth, or to redistribute wealth? By discerning the difference, we gain important clues about changes in aggregate supply and demand, and more clarity re output and potential productivity gains. While redistribution of wealth is relatively benign up to a point, once economic stagnation sets in, prosperity could be lost, should redistribution take precedence over wealth creation. Ultimately, we need a better understanding whether - at a macroeconomic level - we are actively advancing wealth, or merely circulating already existing wealth.

No comments:

Post a Comment