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Economic growth is a much bemoaned topic, but what this tweet nicely illustrates is that the type of growth economists often talk about differs from the type of growth that concerns a number of people. Here we’ll briefly consider how we can understand this tweet.

For an economist there is some set of resources, and they can be combined to create output. This suggests that output = function of inputs.

Technological growth, or growth in productivity is when this function changes. Specifically imagine that we can write the equation the following way:

Where Y is the output produced, f is the “production function”, L, K, and N are labour, capital, and natural resources while A is some technology scaling factor.

Economists will tend to think about growth in terms of an increase in A – namely we can make more output with the same inputs. This mirrors the Productivity Commissions discussion of productivity, and what Arthur Grimes was expressing here.

Many “non-economists” will instead see growth as the product of using more inputs – often with a concern towards non-renewable natural resources.

Both frames are valid, and we do need a conception of the physical limits of our ability to use natural resources. As the blog has argued in the past an economist will often state that there will be innovation as some forms of scarce resources (that are non-renewable) are used up.

Ultimately, this suggests that understanding technology and innovation matter for both growth, and the way we vary the utilisation of resources. When economists state that “growth, innovation, and incentives are what is necessary to ensure sustainability” this is what they mean.

There are areas of market failure – common pool resources, hyperbolic discounting and/or a failure to value future generations. However, an economist would argue that these are the areas that require policy intervention – not an intermediate heuristic like growth. [Update: The original tweet published a post that shows they were singing from the same song-sheet – give it a read over here.]

In the same way that we shouldn’t “target growth for growths sake” we shouldn’t “limit growth for the sake of it” – as many of the sources of growth and increases in the technological frontier may be associated with finding new ways to do things which help to promote sustainability!

The one warning I would give economists when they say this is the following. If there is a better sustainable way of doing things with different inputs, that we can discover through innovation, which would then increase GDP – why aren’t we already doing it? Yes a relative price change incentivises change, but I’m not sure it follows that it generates growth.

In the end I think there is one thing we can all agree on – we want a world that our children and grandchildren can love, one that is no worse than the world we inherited. Lets ask where there may be failures that are preventing us from doing that, rather than fixating on either increasing or decreasing some arbitrary “production” or “growth” measure

I hope that I didn’t give the impression in my last post that Mankiw actually likes philosophy.  If anything, he sounds rather negative.  Economists drawing on philosophy when making policy advice is apparently a “dirty little secret”.  The point seems to be that making a case for a policy will involve value judgements, often on disputed value judgements about distribution. 

Hey, I get it.  Just about any substantive policy would help some people but harm others.  So how does Mankiw propose to avoid the need to call in some philosophy?  His proposed principle is, …. hang on, I had it a minute ago … “[f]irst do no harm”.  Eh?  Didn’t he just say that government policies pretty much always harm someone?

I guess I must be getting the wrong end of the stick.  Perhaps I am failing to distinguish tasty and sweet-smelling type 1 harms from those nasty type 2 harms.  Or something.  He does give us a couple of hints about what it is all supposed to mean.  But I really think we could ask for some more clarity about the normative foundations of his perspective.  You know, like doing a bit of philosophy.

Greg Mankiw has an article in the New York Times.  It is notable for making explicit reference to literature in normative philosophy.  Does this mean that he has been doing some homework?  Some of his earlier forays into philosophical territory didn’t show much evidence that he was aware of work in that discipline.  Some philosophically literate readers weren’t very charitable about the sophistication of what he came up with.  “Low quality freelance philosophy done by people with PhDs in economics” according to Matt Yglegias.  A “laughably sophomoric attempt at political philosophy” according to Chris Bertram.

After he finishes his homework, perhaps we can look forward to some better freelance philosophy.

Matt hasn’t read it yet – that would be cheating.  He’ll read it when it is on the internet.

I have no doubt Matt will respond to this saying why he fundamentally disagrees or agrees with points – from the bits he has spotted he already wants to respond.  But he will have to wait until July as he has too many urgent deadlines and planned posts between now and then

Feel free to discuss in the comments.

Matt

Thank you for your response above to my housing article. Much of my work is available from the Sustento.org.nz website. The latest versions of all that work is available from my brother’s website www.integrateddevelopment.org 

 Those files are presented in html so they can easily be read by anyone around the world with basic computer technology.

I’d first like to address the most basic point you raise (issue 3.5), that of causality, before briefly touching on the other matters.

 My simple debt model derived from the Fisher Equation of Exchange satisfies the basic accounting equation. Perhaps the best of my theoretical papers to start with are “The DNA -f the Debt-Based Economy” and “Capital is Debt”.  I think the double helix of the financial DNA will surprise you and maybe shock you.

 The present interest-based debt system grows endogenously. The debt “monster” has to be fed before any economic “growth” can take place. No new debt, no new growth. Insufficient debt to feed the beast, the economy will go into recession. Too much debt to both feed the beast and growth within economic resource constraints will produce a debt bubble leading to debt default and collapse. Having been through the US housing bubble, the world is being forced to the other extreme euphemistically called “austerity” with obvious outcomes. 

This happens because current orthodox economics depends on rationalising the irrational. It is based on faulty assumptions instead of working from first principles.

I try to work from first principles. I will just provide one example here. ORTHODOX ECONOMICS DOES NOT SATISFY THE BASIC ACCOUNTING EQUATION.

  Economic policy in recent decades has been founded on the Friedman Money Rule (monetarism) and Taylor type inflation targeting rules (neo-liberalism). Neither of these satisfies the basic accounting equation. (I have almost finished an article concentrating on this point – though I have discussed it exhaustively in the theoretical material, including my response to the recent IMF working paper by Benes and Kumhof on “The Chicago Plan Revisited”). 

The world economy has been wrecked for decades because orthodox economics has failed to add simple numbers and has overlooked the endogenous nature of interest-bearing debt growth. 

So, yes, of course there must be willing lenders and willing borrowers. If they are not willing they have to be enticed literally by hook, or as we have seen in recent years, by crook. Demand must be created (advertising and the like) but demand can only be created when incomes are sufficient to purchase the goods and services the economy creates. Hence Keynesianism/neo-Keynesianism styled economic stimulation. Incomes have not risen in real terms for the vast bulk of the population because of the endogenous transfer of income and wealth from income earners to deposit holders in the debt system.

It used to be that income redistribution “levelled” the playing field, but in recent decades the “trickle down” myth has intensified income and wealth inequality instead of reversing it. 

 My work demonstrates the underlying mechanisms at work in this process and quantifies their effects through a debt model that satisfies basic accounting rules. Steve Keen, in a recent post, seems to now realise how critical basic accounting is to macroeconomic modelling. Hopefully others will follow quickly.

 The present system is amoral (probably immoral) because it “force fits” economic decision making to arbitrary assumptions. To do so it requires all the concepts we read so much about …..profit, economic “growth” at all cost, self-interest, greed, “externalities”, enclosure of the commons, and all the rest. In respect of the housing article I am saying the present debt system is incompatible with affordable housing.

Here are a few very brief notes on the other points.

1. My work, unlike orthodox economics, gives the “why”.

Unfortunately that was a bit much to cover in a short article. I agree the “why” is not a balance sheet, but the explanations must satisfy the accounting equation (it’s even implied in the reconciliation at RBNZ Table C3 current as the paper I am working clearly demonstrates)

2. I agree with you about relationships, but I do invite you to reconsider the whole issue of causation.

3. Yes, agreed

4. The way I see it, orthodox economics has created unimaginable world-wide misery. It is incompatible with human happiness and wellbeing and even with the survival of the planet! It worked for a while when debt levels were small, productivity increases large and when economic activity could be easily monetised. But you can’t “take lower output to meet some social needs” in the present system. You can only redistribute output, and we as well as others are spectacularly failing to do that …. think education, health, housing, child poverty and the like.

Next note: Foreigners must invest here if we have a negative NIIP even if, in the limit, it is just lending to our banks on an arbitrage basis. Foreign debt = foreign ownership, pure and simple. You are asking too much of my article to cover all of the issues relating to foreign debt and “the prices of non-housing goods” but I can offer simple responses to the issues you raise.

Issue one Relative Price

Figure 1 and the text below it very briefly acknowledges the point you are making. Most of M3 makes up the investment pool. There are several ways to invest that money. The largest single segment is (I think) passive hoarding in interest-bearing bank accounts. The next largest is the property sector.  One reason the property sector is so large is that NZ has (no thanks too recent governments that have all failed to tackle the persistent exchange rate/current account problem)  a very low industrial base and therefore a relatively small equities sector.  There is always a balance among investment options that varies somewhat according to the financial settings and regulatory provisions. Figure 1 in the article reflects that clearly.

Issue two Building Costs.

Of course we agree building costs have changed but they are not driving property “values”.  Your point about “real terms” is stretching the point, though, because most property transactions occur in the TA’s where prices have risen. Naturally there are resource constraints affecting building prices … perhaps you might like to consider why  it is that all existing property prices rise in sympathy?  That’s all about “expectations” and ability to service loans, isn’t it? The bottom line is the available investment pool choices. People choose to invest in property when they think they can get more “profit” there than from other forms of investment.

Issue three  M3

The main drivers of M3 are the CA and the systemic inflation of the debt system.  The productive sector itself uses only a small part of M3 (about 5.5% of GDP in NZ on my preliminary figures).  Of course some of that M3 growth is represented by net capital investment in the first instance.  The shocks to the system arise largely from misdirected monetary policy … like a 1% increase in interest rates will collapse nominal GDP growth by around 1.5% in NZ.  So interest rates are no longer a useful tool for monetary policy as can easily be seen in US, Japan and Germany where the central bank rates are already zero.   I’ve touched on inflation targeting above.

Issue 3.5   is already dealt with above.

Issue 4 regression

Yes, one has to be careful with the regressions, but I chose to use the scatter diagram (figure 2) to demonstrate the correlation. Then I have used Figure 3 to show how the correlation arises and why the exponentials are different.  I think that’s fair enough.

Issue 5  Non-productive is not a nice term

The stream of “housing services” are like heaps of other things. They are not measured in GDP.  I agree that GDP is a terrible measure of economic performance because it lumps in heaps of “bads” as goods, while leaving out (apparently more than half of all) goods and services like unpaid work, use of the commons, non-monetised resource consumption and a host of other items).  Orthodox economics forces us to watch just the cash register ticking over and I don’t think it is appropriate to say housing provides uncounted goods and services unless you also consider the much broader perspective as well.

So let’s change the change the measurement methodology and the financial system so it serves us instead of enslaving us?

Issue 6  Foreign Ownership is not the source of the bubble

Yes it is in substantial measure.  Every dollar of money used to fund the accumulated current account deficit (use NIIP if you like) must be created domestically. It is included in domestic credit. It is then “spent” to buy trinkets from China and fund foreign interest and profit repatriation.  Since nobody wants to hold NZ dollars (Stephen Hulme is right of course in his comments on my article, but I was  trying  there to keep the issue easily understandable)  that flow offshore is offset by “return capital flows”, that is, (mainly) foreign ownership of NZ productive capacity and resources.  A little is invested in new production and a little in land. Having given away our productive capacity for trinkets the foreign owners get their pound of flesh by repatriating interest and profits offshore. It’s a self reinforcing nightmare. As others like Preston have said, the bulk of today’s CA deficit is the funding cost of  foreign ownership.  If we do not deal with this immediately we will be approaching financial collapse within the next decade or two …. owned by the foreign company store, as it were.

When foreign investors buy up NZ inc, the sellers are left holding NZ$.  Those dollars are part of the investment pool and therefore available to purchase existing assets in NZ, pushing up their prices.  I think you are very seriously underestimating the impact of the CA and find that a little strange given the compassion and concern you express elsewhere for community and the public good. That foreign ownership has to be satisfied in terms of profit … it’s a first mortgage over our economic output!

Issue seven  Conclusion

Just a little on the Foreign Transactions Surcharge (FTS) that you seem to have misunderstood.  The FTS paper is available at both the websites I listed at the start of this post.  It is unidirectional. It applies to ALL outward transactions across the Forex interface, not incoming ones.  The revenue collected from the levy is ring-fenced to reduce domestic taxation (so it is tax neutral) other than for any amount set aside to repurchase alienated assets.

Yes, there will be some losers (mainly importers) but nearly everyone else will be a winner because the current subsidy of foreign exchange users by foreign exchange savers (read largely lower income groups) will be corrected.   There is far too much to the proposal to go into here… I suggest we take the matter up again after you have found time to read the paper.  The FTS will change the SHAPE of the NZ economy as well as correcting the CA and the exchange rate.

Lowell Manning

As a note, this post is focused exclusively on the situation in the United States – the trends in other countries (such as New Zealand) have been significantly different.

The sluggish job market has forced Americans to reexamine their financial priorities. As a result, prospective graduate students must decide if earning (i.e., paying for) a master’s degree constitutes a sound investment. The good news is that research shows that students who do opt to get degrees in areas like business or accounting are generally able to make a return on their investment within a few years.  To receive an even greater return, students may want to explore getting their education at one of the colleges found on this site featuring online MBA courses since online schools are often much cheaper than their brick-and-mortar counterparts. Whatever option students choose, many experts agree that 2012 is a great time to be a grad student.

Last September, The New York Times reported that enrollment in U.S. graduate programs decreased between 2009 and 2010, despite 5.5 percent growth the previous year. According to the Council of Graduate Schools (CGS), this marked the first decline in seven years and the drop-off is likely a byproduct of the thin job market. The council’s president, Dr. Debra W. Stewart, said that, historically, the economy and master’s enrollment had an “inverse relationship,” but this is currently not the case. “They’re both down,” she noted, “so the question is, why?”

Stewart warned that fewer grad students would ultimately hurt the economy. She explained that higher education, specifically, graduate education, is a boon to the job market. If degrees are only attainable to the wealthy, then national prosperity will be detrimentally affected. However, she conceded that dubious job availability and high cost of college fees are keeping grad students out of classrooms. Stewart said that “with this recession going on for so long, people who have a job are less likely to want to leave it to go back to school, because it’s not at all clear that there will be a job for them at the other end.”

USA Today Education columnist, Jon Frank, sympathizes with students who face this dilemma but reassures them that graduate education is always advisable, especially now. Contrary to the notion that enrollment is a waste of time during such a messy recession; he reasons that grad schools provide career opportunities that are unavailable elsewhere. Students have an entire campus, in which to network with fellow students, professors and guest lecturers about their prospective career path. He also notes that a master’s degree ultimately makes a candidate more hirable in the eyes of potential employers, which will be useful in the coming years. “One thing that the past 200 years of economic history has taught us is that bad times are followed by good times,” he writes. “We are in a down phase now. Most likely, things will be better in two, three or four years (read: by the time you finish your program).”

In regard to grad school costs, Frank admits the sheer amount can be initially daunting. However, he advises students to view the degree as a long-term investment. Though students may work as long as four or five years before making a return on said investment, this period is relatively brief compared to a 30- or 40-year career. He adds that many students, such as MBA recipients, can make a return in as little as two years.

In addition to the poor job market and college fees, some students are apprehensive about enrolling in a master’s program because they do not see its worth. However, a 2009 study by the Georgetown University Center on Education and the Workforce debunks the myth that bachelor’s degrees are just as valuable as graduate degrees. In many of the most popular areas of study, the difference in median annual earnings between bachelor’s and master’s degree holders was quite significant. In many areas of study, such as business, computers and mathematics, agriculture and natural resources, master’s degree holders out-waged their undergraduate counterparts by as much as $20,000 per year. Most significantly, graduate students who earned degrees in biology and life science made $35,000 more than those who held a bachelor’s degree in the same field.

Graduate degrees are a sound investment, regardless of the economy. In fact, students are encouraged to enroll in master’s programs during times of great financial duress. The economy will eventually improve—and when it does, employers will seek out bright, well-educated men and women to lead the work force toward prosperity.

Bio:

Kate Manning didn’t expect to find herself at the intersection of business, marketing, and the Internet, but with sound writing and editing skills, she makes the most of it. She’s worked under others’ supervision and on her own for herself.

“Have you read the PREFU yet?” bellowed one of my colleagues as he sauntered down the corridor at Otago University last week. “Of course not – why would anyone do that,” was my glib response.

The answer, of course, is that the PREFU is one of the great components of New Zealand’s modern democratic process. It requires that the Government provides an internally consistent set of projections about the likely state of the fiscal position over the next four or five years. Internal consistency is a marvelous thing. It means if the government announces a tax cut, the direct and indirect implications of this cut for growth, tax revenues, and the government deficit are properly calculated.

It means if the Government projects a surplus, the assumptions on the evolution of different classes of government spending are clearly portrayed. In short, it provides transparency.

Internal consistency is hard work, and we should be genuinely grateful to the Treasury analysts who do this work. All the assumptions are clearly laid out for anyone and everyone to see. If the Government is going to balance the books by imposing significant real cuts on health and education expenditure, then it will be reported and no-one has any excuse for not being provided with the information or for not having a model able to do the complex arithmetic.

Actually, it does appear that the Government is claiming the books will be balanced because of significant real cuts in the health and education sectors. This is not directly mentioned in the Executive Summary, where the focus is on the predicted growth rate (2.9 percent per annum from 2012 to 2016) and the return to surplus in the operating balance in the year to June 2015. (Mind you, the summary does mention that core Crown expenses will decline as a percentage of GDP.)

Nor is it mentioned in the Economic Outlook, although it is again noted that there will be a falling share of government consumption in GDP. However, this section does forecast an increase in nominal wages of 16 percent between 2012 and 2016, in part because the consumer price index will increase by 10 percent over this period.

It is not even mentioned in the “Fiscal Outlook”, where it is noted that real government expenditure will decline from 34.2 percent of GDP in the year ending in June 2011 to 30.3 percent by June 2016. While this section notes that health, education, justice, and other core Crown expense classes will have growth that comes from projected allowances for new operating spending, it is a little coy on the size of these projected allowances. Mind you, it does note that total expenditure will increase in nominal terms, from $74.5 billion in 2012 to $78 billion in 2016, and that New Zealand Superannuation expenses will increase by $3.6 billion over the period due to the increase in the number of recipients and the effect of wage and price indexation.

No, to find out the change in health and education expenditure, one needs to look in the Core Crown Expense Tables, pages 107 –112. There it is revealed that in nominal terms health expenditure will rise from $13.75 billion in 2011 to $14.35 billion in 2012 (a 4.3% nominal increase) and remain at this level until 2016 – despite a forecast 10% increase in inflation between 2012 and 2016. Similarly, while there is a 5.3 percent increase in nominal education expenses between 2011 and 2012, from $11.65billion to $12.27 billion, thereafter nominal expenses are flat. (Overall there is a modest increase in primary, secondary and tertiary enrolment over this period, led by a primary school role increase from 480477 to 505442 ). The same story applies to law and order expenses (Police, Ministry of Justice, Department of Corrections etc): a 1.4% increase from 2011 to 2012, to $3.15 billion, and then no further increase in nominal terms. In each of these sectors, therefore, the PREFU projects a real expenditure decline of 10 percent between 2012 and 2016.

There, of course, lies the beauty of the PREFU process. All the information is provided, and anyone can analyse the numbers in a few minutes. It is clear, transparent, fantastic. One cannot praise this process too much.

I must admit a little skepticism that these projected reductions in real expenditure on health, education, and law and order are going to be achieved. They are of course valid projections: they outline expenditure patterns given announced policy, and announced policy doesn’t appear to make allowances for any wage increase in these sectors between 2012 and 2016 despite 10 percent forecast inflation and 16 percent forecast wage increases. And it is true that wages in the health and education sector increased faster than in almost any other sector during the last decade, so that average wages in these sectors aren’t low by New Zealand standards. (Indeed, the data indicate that the 32 percent of the female workforce that work in these two sectors had real wage increases 10 percent higher than those achieved in Australia between 2002 and 2009, which is in its own way remarkable) Nonetheless…..no increase in aggregate expenditure over a four year period despite 10 percent inflation is a little difficult to swallow. Either there are going to be some grumpy lecturers, teachers, doctors, and nurses, or a whole lot of layoffs, or…..well maybe the operating surplus won’t quite get balanced.

So Paul, I now have read the PREFU (and graded 312 first year exams). Thanks for the suggestion. It was great reading. (Also thanks to M for the hints.)

http://vuvuzelaventing.wordpress.com/

On the blog they go through their views on the different World Cup groups, and who they think will end up taking out the cup.  All very interesting.  I suggest you go along and have a look – they currently have posts up for groups A, B, and C.

Go the All Whites

Everyone at TVHE is very excited that the All Whites have qualified for the World Cup, and also pumped for the match against the Aussies tonight.  So pumped that Nolan put down $5 on NZ to win (at 10:1).

So good luck boys, we are looking forward to watching you get amongst.

Update:  Feel free to go into comments and discuss your fantasy squad for today .  Also Yellow Fever discussion is here (pg 21 is where we get more into game day).

Update:  All Whites lost 2-1.  Up 1-0 at half-time.  Great performance boys.  And seriously, our first team looks pretty good – its going to be a great World Cup

Furthermore, the film has grossed over $800 million more than Hollywood’s previous blockbuster, 2008’s The Dark Knight.

Given that the themes and story quality of both films was equally awful, the only explanation (in my opinion at least) is that the piracy level of Avatar must be significantly lower than that of The Dark Night. The explanation for this I believe lies in that fact that one film was presented in 3D, while the other was not.

Thus, as the lay pirater is without 3D technology, has Hollywood inadvertently found a (short-term) solution to it’s declining revenue problem: making films in 3D?