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April 04, 2012


Luis Enrique

I never did figure out what the conclusion was to that debate about potential output recently initiated by Bullard, but it would be interesting to apply those arguments to the financial sector-led UK economy.

(see here http://www.themoneyillusion.com/?p=13117 ... why oh why can't we use html in these comments)

is there any evidence that there are meaningful positive-return investment opportunities out there that the financial sector is failing to finance? And aren't corporations net cash anyway?

I know I'm always crapping on about the implications of having an (increasingly) service-sector economy, but don't we expect the rate of tech progress to be slower in the service sector? Unless maybe we have some organizational revolution which could be see as a large positive technology shock.


Could the slowdown reflect a move to a more normal unemployment level from the 1980s or something else like that, perhaps immigration? Eg is you imposed GDP growth on that chart does it change the picture much?

Jason Rave

With regards to your penultimate point Christ about the increased inefficiency of banking in allocating funds to uses that lead to productivity gains, am I right in thinking your referring to some sort of Bernanke-Gertler Black Box hypothesis?

With many banks sitting on non-performing loans (especially in Europe) would it be best to use fiscal policy to kick start the housing market, so that other house prices start to moderate, wealth increases and other non-performing loans appreciate as a result? Essentially what the government could do is take on the role of the "first mover" which banks are not willing to do. Just an idea (not mine though, Joseph Stiglitz outlines it as one of his policy recommendations in "Freefall")


@ Luis - yes, there's been a shift to services from manufacturing, and this would reduce productivity growth. But the collapse in productivity growth is surely much larger than this alone predicts.
Yes, corporations have built up cash, but it doesn't follow that all have done so, and that none are deprived of finance.
@ Matthew - sorry, I don't see that. If anything, the process should work the opposite way; with near-full employment, there are lots of low-productivity workers in work. As these lose their jobs, average productivity should rise.
@ Jason - I have in mind the problem of bad loans and the desire to recapitalise, not just Bernanke-Gertler effects.
I suspect there are differences between the UK and US in the desirability of raising demand for housing; in the US, where prices have fallen much more, there might be something to be said for it. In the UK, there's more case for raising the supply of housing.


I'm sorry, but I just struggle with the idea that there aren't monetizable investments. I've seen a quote from Keynes about investing in times of low demand requiring more than average skill or luck. But does that apply to govt investment? Could govts stimulate demand so that there are monetizable investments? I don't know. Help.


I think Jason rave has inadvertently raised chris' status! I knew going to oxford raised your status in life but not to that degree. But Easter is on the way so who knows? Lets invoke HIS blessing.

Raising house prices by greater bank lending would not effect productivity growth as houses create no marketable output. Just as they are not net wealth for most householders. More firm specific lending or capital might but who knows? Productivity growth is a complex thing and many factors affect it so it is a bit speculative. Increasing demand helps reduce problems caused by inadequate demand and so may be a good idea on its own. There is no simple way to increase productivity. I assume Keynes would try to maximise demand on the grounds that the state can do that if it tries hard enough. So do what you can do. But as a person the actual Keynes seems to have been very open to innovation in methods. So any reasonable way of making the economy perform better for the majority of citizens would be fine, public or private. only Just don't sit about accepting human suffering do something to reduce it.


Can Chris or someone please explain to me where I misunderstand the supply side/demand side debate?
It seems childish on first inspection.

Sustainable demand can only be generated by production of wealth.
Sustainable supply can only be supported by long term demand.

So where is the asymmetry? It its found in the fact that almost all productivity growth since the hand axe has been caused by appropriate adoption of technology. If I invented a source of cheap abundant energy, I would spike productivity and demand would follow. However if I artificially simulated demand with cheap money a new productive technology would not necessarily follow.

How can macro people even begin to discuss demand or productivity without considering the causes of productivity?

Workers working harder is almost irrelevant. Cheap or expensive money is only overlaid noise.

Surely sustainable demand can only ever derive from a well organised society using technology to suitably satisfy human desires, with the consequent confidence amongst consumers that implies?

Is there any good evidence that poking demand with a policy stick has ever led to long term net gains?

Given Chris's scepticism of the ability of managers to significantly improve organisational performance, what is the argument that macro policy can help productivity?


Andre - it's a good question.
The argument that a fiscal stimulus would improve productivity would say something like:
1. It would encourage firms to invest, and new capital should be more productive than old - and might be associated with more efficient working practices too.
2. An improvement in "confidence" might encourage new and efficient firms to enter the market that otherwise would not do so for fear of lack of demand.
3. Such confidence might also encourage banks to lend to such enterprises.
It is, however, controversial as to how powerful mechanisms like these are.


Thanks Chris,

My initial thoughts on those arguments would be, respectively:

1. Why is it ever a good idea to encourage firms to invest? Are policy makers wiser than the firms about these individual decisions?

All I could think of as a response to this would be that policy makers would be seeking to avert a tragedy-of-the-commons effect, by enforcing mass action where individual investors can't.

This then raises the question as to why we might thing that all those decisions to invest might be considered a good idea in the aggregate when they are considered unwise individually.

They could only ever be a good idea in the aggregate if they resulted in a net improvement in societal organisation for productivity. There is no reason to think that a short term splurge would have this effect. Indeed one would tend to think it would be costly in the longer term, since investment decisions would be directed towards satisfying directions and quantities of demand that has been artificially generated, and will not last.

(Do macro economists recognise that demand varies in quality as well as quantity?)

2. Why would it ever be a good idea to manipulate confidence away from the level determined by the populace and their perception of the facts? An answer of "to stimulate investment" will not do. At times of higher confidence plans may rely on LOWER productivity assumptions (since more demand is anticipated). How would that stimulate productivity growth (as opposed to production?)

Again, we are driven to ask: are the policy makers wiser than the population? (Then why don't they entirely fund the budget with stock market positions?)

3. This seems an identical argument to that concerning manipulation of investment decision. A lending decision is merely an investment decision by proxy.

Finally, rather than argument as to how powerful mechanisms like these are, is there any evidence that any of them have done any long term good?

I can't even see a sound prima facie argument for them. The reasoning seems comically facile given what is at stake.

To those who respond by pointing out the difficulties of performing controlled experiments on entire economies, I would reply "then what gives you the confidence to make costly policy recommendations"?


I'd just like to ask separately (for emphasis given the length of previous ramble):

Are we sure that macro stimulus would ever increase productivity as opposed to production?

It's easy to increase production (just do more of what you are doing). It is much harder to increase the value of what you are doing.

1. Since macro stimulus relies on propping up the (short term) value of what is being done already, we would naturally expect a crash in that value (below baseline) once it is withdrawn.

2. Since macro stimulus relies on propping up the (short term) value of what is being done already, we would expect it to reduce the viable level of efficiency and eventually productivity; If a widget costs Capitalist me £50 to make and it sells at £50 I won't invest in production. If macro stimulus makes it sell at £55 I might, but it still costs me £50 then my efficiency in terms of cost per product is the same and my productivity improvement is artificial and short term.

I then might find wage demands mean it costs me £54 per widget. I can tolerate this, but my productivity has declined relative to the honeymoon period. Similarly I can tolerate lapses in organisational efficiency whilst still making a profit.

Remove the stimulus and my productivity has actually decreased from the starting point; then you have to add the opportunity costs and costs of stimulus.

Why would anyone expect artificial confidence to be a good idea?


I fully agree with most comments made by Mr Megir. The two peieequisrtrs he mentions, rule of law and liberalisation of the employment market are without question in my mind absolutely needed. However, even before them, we-Greece needs measures similar to an electroshock, to bring to life again the economy. Mr Megir argues about the situation bb when an entrepreneur plans . bb . In my view this does not happen at all in Greece now. Entrepreneurs and the private sector in general are frozen. Plans for investment opportunities are not being made. Hirings are not taking place. Companies- mainly small- are closing down. Liquidity, which will enable all the above to begin functioning-slowly is totally absent. This is the key question in my mind, to which I would kindly ask Mr Megir to give his view. How does one practically throw liquidity into the system? The answer as far as I can understand comes – if and when they decide so- only through the European Cental Bank. Together with the measures proposed by Mr Megi, at the local levelr. But we need the electoshock first, otherwise the line in the monitor is straight.


Bertrand Russell on leisure back in 1932, from the triesate In Praise of Idleness . He takes it beyond the personal and raises it to an activity of society-altering importance: In a world where no one is compelled to work more than four hours a day, every person possessed of scientific curiosity will be able to indulge it..…. The taste for war will die out Modern methods of production have given us the possibility of ease and security for all; we have chosen, instead, to have overwork for some and starvation for others. Hitherto we have continued to be as energetic as we were before there were machines; in this we have been foolish, but there is no reason to go on being foolish forever. Funny, this sort of contradicts the stay hungry stay foolish poster

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