Economic growth … Is not the same as jobs for everybody
It is characterized by an improvement in the quality of life (Consumption/Work). This has already been elaborated in an earlier post Printing Vs Productivity
Digging a hole and filling it back again for $10 cannot be cannot be construed as economic growth. It may be a service that can be added to the “reported GDP” but, it has in no way improved the quality of life.
Capital formation… Is not easy
Capital formation requires the sacrifice of current consumption and profit/interest is the reward for the sacrifice. This has already been elaborated in an earlier post Printing Vs Productivity
Capital formation increases productivity and eventually provides for “real growth” (not the hole digging kind).
Below is the interview of Richard Koo, Chief economist Nomura and a highly regarded author and active speaker on the topic of Balance Sheet recessions.
Three highlights of this video that I would tend to disagree with are
- “Quantum of credit is falling due to de-leveraging of the private sector and the government has to step in”
Credit is not central to capital formation, it only accelerates it. For example let us say an entrepreneur has an idea that will improve productivity, but requires 10 days wages to implement it. There is no credit available. This entrepreneur can either save up these wages over a period to then invest it or he can sell the idea to somebody with the money to invest equity.
“Credit is a means to generate growth and not an end in itself. Bubbles are an indicator that credit was misallocated and no growth has resulted.”
The quantum of credit falling cannot be viewed as “the” problem. The problem is that credit was and is being misallocated. The question then remains, what will allow the prudent allocation of credit towards capital formation.
- Is the government/sovereign the most efficient allocator of credit?
- Can you efficiently evaluate a business idea and extend credit when the interest rate is artificially manipulated?
- “Interest rates help match the level of borrowers to the level of lenders”
Interest rates are the rewards that justify delayed gratification. When somebody saves to give credit, he is postponing consumption and has to be rewarded. When there is very few value generating ideas, we have a lower interest rate and when there are many competing ideas we have a high interest rate to ensure allocation to the best projects.
I feel that the definition of interest rate as a mechanism to match borrowers and lenders is lifeless and does not describe it as a vibrant measure of productivity.
- “Social costs of a generation that has no jobs/skills has been neglected in other debates”
My only concern regarding this statement is how one does know what skills are required in the future to allow economic growth. For example if we spend the next decade teaching our generation to build bridges and tunnels, what is the guarantee that the skills demanded in a decade will be the same? Can the funding programs predict which applied science will be in demand after a decade?
The skills demanded from a generation are an outcome of the technological changes in that period. For example The Industrial revolution, Internet era etc… have spawned their own demand for skills.
In my humble opinion, force feeding human capital and interest rate fixing are remnants of another ideology.
PS : an interesting site for data in general is http://www.gapminder.org/data/
Greg –
About your point 3 , where you have asked the question- – "what is the gaurentee that skills demanded in a decade will be the same".
This could be related to the net output a country generates, which is directly proportional to: Total Factor productivity (TFP), Labor and Capital. If we look into the growth and development of countries, they primarily go through three stages : Agriculture (lowest skills), Manufacturing (medium skills) and services (highest skills). The most advanced countries have been able to improve their TFP's and Labor skills when they moved from poor to developed status, with pretty much a constant supply of capital. Hence understanding the state of the economy at this point of time and figuring out where the TFP / labor skills stand would help policy makers to design policies.
I agree when you say – Economic growth is not same as jobs for everybody. Classic case would be Margaret Thatcher's policies. I am writing a article on this and will share it with you once done.
Hi Aju, Great to hear from you. I am surprised that I did not get a notification about your comment.
I agree with you, the maturity of the country can give pointers on where the skill base is going. However it might be more useful for developing countries. Developed countries are at the frontier of technology already.
I eagerly await to read your paper.
Greg