Only 2 Ways to Save the Economy: Innovation or Inflation

I have a new piece on the Atlantic website. It starts this way:

We have only two ways out of our current global economic mess: innovation and inflation. And as the saying goes, we should hope for the best (more innovation) and prepare for the worst (higher inflation).

Looking across the world, the underlying problem is that borrowers–households and governments–have taken on debt that they can’t afford to pay back, given the current rate of income and economic growth. In the U.S, too many homeowners are struggling with mortgages that far exceed the value of their homes and cannot be repaid from their current incomes. In Europe, Greece and perhaps other countries have issued bonds that they cannot pay back unless growth unexpectedly skyrockets.

Down the road the same principle of matching growth to debt allows us to perceive potential financial crises to come. Young male college graduates, for example, have seen their real earnings plunge by 19% since 2000, with young female college grads experiencing a similar decline. Meanwhile education borrowing has soared, suggesting that we are on the verge of a student loan crisis, where young grads simply cannot pay back their mountain of debt.

And goes on from there.  Take a look.

Comments

  1. Michael, GDP growth cannot pay down existing debts – only base money growth can. Debts are denominated in and are claims on currency units, not widgets.

    I’ll grant you that the propensity to roll and expand existing debts is most likely correlated to real GDP growth via some animal spirits driven transmission mechanism. Nonethless, GDP growth does not create the only medium which can extinguish unreserved credit/debt – that is base money.

    Central banks alone can satisfy these debts. In their absence, debt deflation driven markdowns are the only other form of reconciliation. Pick your poison. There is no easy way to reconcile the sins of the past.

  2. Stephen McCracken says:

    Krugman says the only way to create inflation is by changing expectations, which is not as easy as just holding rates low. Most recently: http://krugman.blogs.nytimes.com/2011/10/19/getting-nominal/

  3. Mike, sad to see you too jumping on the inflation bandwagon, good thing Bernanke is not dumb enough to listen to you. Inflation is merely a silent tax on lenders and those who live off such income, like all the seniors currently living on a fixed income. All you’re doing is taxing those people and distributing it to net borrowers, because the borrowers are presumably better connected politically to demand such favors. I know that people like you are delusional enough to think you are merely screwing over China or some big bank, but, as you yourself admit, the Chinese are much poorer and the banks are either investing middle class people’s money or owned by them. All you’re doing by inflating away debt is forcing a writedown on the Chinese and the banks, a writedown you admit they wouldn’t otherwise accept. Worse, you are also stealing money from a whole host of other groups in the process, all to benefit the entitled borrowers who spent too much. Nobody credible thinks inflation is the way out of this mess, which is perfectly highlighted by Stephen pointing out that that moron Krugman is now coming around to it.

    Lee, wtf are you talking about? Base money is merely a medium of exchange for people to exchange the services and goods that come with GDP growth. Yes, the debts are denominated in base money but the reason borrowers can’t pay them back right now is because they’re not producing enough GDP to trade for base money to help pay down those debts. The fact that you put base money before all else and think central banks can solve anything speaks to a great ignorance on your part about these matters.

  4. The problem with the (here and elsewhere) bemoaned “innovation shortfall” is not an actual shortfall in innovation, but a lack of monetization potential for the innovation due to social/fiscal policy. If you cut off the “99%” who would pay good money for innovative products, how will you collect on the fruits of your innovation? Of course, because of forward looking planning and businesspeople generally not being stupid, a good deal of innovation is probably stopped dead in its tracks or not taken to productization because there is no “visibility” into market growth and sales. At all times, innovation is based on either a desperate need (so funds will be made available to pay for it), or available funds creating the demand pull and “visibility” for businesses to bring available innovation to market, by getting ideas out of the drawer, funding startups, etc.

    I recently had a discussion with somebody about people being concerned about a scarcity of projects. I said I cannot see a scarcity of projects and useful work that needs to be done, in some cases pretty urgently. The other guy said, I mean projects with credible “ROI”. Oh, OK.

  5. cm, the top 5% account for 37% of consumer spending, almost as much as the bottom 80%, so they are the ones paying good money for innovative products, as they are the early adopters who buy cutting-edge stuff. Tax them more and the economy kicks further downward, just like it did when FDR tried the same dumb policies and made the depression worse. As for ROI, the problem is that a lot of businesspeople herd together, so in a bad time like now, they get overly risk-averse, and in the booms we just saw, they throw money at many dumb ideas. But that stupidity gives more incentives to contrarians like Buffett or Bezos to buck the trends, as their returns are even greater for the greater risks they take, so it all works out in the end. :)

    • Of course, the people with the most disposable income will carry most of the consumer economy. Duh!
      If your bottom 80% had more money to spend, they would buy more stuff. Duh again!
      Your taxation is a strawman. That’s not the major issue. The major issue is social policy frameworks that allow a relatively small elite monopolizing control of most money flows, and as a consequence most consumption patterns and other economic decision elements. Then would-be innovators will not carry their ideas through to products as there is too little paying demand to compensate for the risk. Or rather not the innovators, but their would-be financial backers. That can either be a bank or a VC who won’t put money on a line for an unclear business plan, or a corporate planning board that will not fund an R&D project or follow-on productization for lack of a “business case”.

    • cm, funny how you argue against yourself. You first ask that if the bottom 99% doesn’t buy new products, who will? Then you say it’s obvious that the top 5%, who I pointed out to you already buy disproportionately more, carry the consumer economy. Funny how you see no contradiction between your countervailing claims. :) If the bottom 80% want more money to spend, maybe they should earn it. Duh! Since you don’t lay out what your vague claim of “social policy frameworks that allow a relatively small elite monopolizing control of most money flows, and as a consequence most consumption patterns and other economic decision elements” actually refers to, I’ll leave that for the nonsensical socialist piffle that it is and move on. Why should banks or VCs put money on the line for unclear business plans or where there’s a lack of a business case? I would actually agree that these banks and VCs usually don’t have a clue what they’re doing, but when presented worthless business plans by clueless engineers, no wonder we still need them to filter out the crap.

    • There is no contradiction. The consumer economy is always carried by whoever is in a position to be a consumer. But there is a limit to how much a single person/household will (directly) consume in each product/service category. For example, even the richest of the rich will only eat so much, own so many phones, sets of clothing, TVs, etc. They can be 10X as wealthy or make 10X as much income, but their consumption will not be 10X. The concept is called “propensity to spend/consume”. If you spread the money between more people, they will collectively pay more for consumer goods and services. If the money really circulates back, they will each have enough in the next round too. If you are vacuuming the money away, the consumer economy will be starved, and products and services will maintain pricing power to the extent they cannot/will not be easily trimmed from the budget.

      After the corporate bailouts and tax breaks we have seen, nobody needs to tell me that working people should work harder to “earn” something.

      Regarding office/home separation, it is mostly a matter of individual discipline, but as part of that it’s also a matter of saying “no” not only to oneself but also others. As in, can you quickly log in and do this, it shouldn’t take a lot of time. And tomorrow also, after all it wasn’t a problem today and everybody else does it too, right?

    • cm, your repeated claims that unless “you spread the money” around the rich cannot buy as much stuff is directly contradicted by my previous stat that the top 5% already account for about as much consumer spending as the bottom 80%. In fact, since the well-off are the ones buying the higher-priced, innovative products that you first referred to, if anything they are subsidizing innovation much more. I have no idea what “products and services will maintain pricing power to the extent they cannot/will not be easily trimmed from the budget” is supposed to mean. You really need to reread what you write once in a while, because simply choosing sentence fragments out of your jumble of thoughts and slapping them up here is not going to mean much to the rest of us.

      I agree, after “the corporate bailouts and tax breaks we have seen” for your beloved “working people,” who pay little to no income taxes yet demand ever more goodies from everybody else, somebody does need to tell them that they should work harder to earn something. Those bailouts were not about helping the small group of creditors who got them, but about keeping the working and middle class in their homes by avoiding a bigger financial crisis that would end up with many more of them getting foreclosed on. The fact that you think the bailouts were for the benefit of some shadowy “corporations” instead just goes to show how ignorant you and most people are about the bailouts.

      You seem to be talking about a completely different issue of office/home separation, ie setting aside time where you are clearly off the clock, as opposed to our discussion of telecommuting from home, so your point is irrelevant.

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  1. […] Mandel linked to from his blog: We have only two ways out of our current global economic mess: innovation and inflation. And as […]

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