Growth
In 1956 Robert Solow and Trevor Swan published a model for economic growth that is both simple and fits real world data fairly well. Economic growth is the sum of three terms: 1) growth in the skills-adjusted labor supply; 2) growth in capital invested; and 3) growth in productivity due to technological advancement.
In today's world (unlike the future world of robots), the availability of skilled labor is the most important factor. A proxy for that is population growth, especially of the working-age population. In the US our population growth is less than 1%. During the first 60 years of the last century it was closer to 2 or 3%. Obviously fewer workers will result in a lower GDP, so it should be no surprise that our growth rates have declined from 3-4% historically to about 2% today. Absent a new baby boom or a sharp increase in immigration, our economy will not grow as fast as it did before.
Japan's workforce has been in absolute decline for several decades. So it should be no shock that their economy is barely growing at all. This has nothing to do with a "crisis" of capitalism or malfeasance by Mr. Abe, but is a matter of simple demographics.
Note that we Trumpkins will be disappointed with our president's stated immigration policy. Economically we are much better off with more immigrants rather than fewer.
Capital behaves differently, obeying the law of diminishing returns. When a company with 1000 employees buys their first computer, there is a huge jump in productivity. But after they buy the 1000th computer, productivity will barely budge. That is, initial investment in a new technology is highly profitable, but as more and more money is invested the returns diminish. Eventually the maintenance and upkeep on all those computers costs more than any profit, at which point the firm is fully capitalized. There is no point in investing more money in more computers.
It's roughly the same for national economies. In my opinion the United States is fully capitalized--there are relatively few places where investing new money makes sense. That means we have a savings glut, which implies that interest rates are low and will remain low for a very long time. This is why asset prices are being bid up--houses, art, antique cars, bitcoin, stocks & bonds, etc.--as there are no other good places to put money.
Note that we Trumpkins will be disappointed with tax reform. The stated goal is to repatriate trillions of offshore dollars and thus recapitalize and dramatically grow our economy. Sorry--it won't work. We've already got too much capital sloshing around. But it will secure very low interest rates for even longer, and people who own real estate or bitcoin will do very well. (I am generally in favor of the tax reform proposals, but not for that reason.)
Finally, productivity growth is the implementation of new technology, e.g., replacing the horse with the internal combustion engine, or the abacus with a computer. For whatever reason (there's no agreement on why) productivity growth has declined since about 1970. Robert Gordon wrote a whole book on that subject, which I reviewed here.
That our economy is growing faster than demographics is likely due entirely to productivity growth.
Trade
Money is earned only by trade and in no other way. I can buy something from you only if I have money. And the only way I can get money is by selling something to you or somebody else. Or put another way, only people with something to sell are able to buy the things I sell. A homeless, unemployed bum has no marketable skill or product to sell, and therefore has no money to buy anything from me or anybody else.
It's the same with countries. We buy toys from China, paying them in dollars. That only works if China can buy airplanes from us, also paid for in dollars. If we didn't manufacture airplanes then China would not sell us their toys since we'd have no money. (A trade deficit just means China doesn't need an airplane today, but will buy one in the future. Meanwhile it keeps its dollars invested in US Treasury bills.)
China is America's largest trading partner. That means China manufactures things that we want to buy, which perforce means that we manufacture things that they want to buy (today or in the future). So Marxists are wrong (and specifically H&B are wrong): we do not benefit from manufacturing all products in the United States. We should only manufacture those items for which we have a comparative advantage. Everything else we should buy from other countries.
This explains why our biggest trading partners are mostly rich countries. Rich countries produce things we want to buy, which means they have money to buy the things we have to sell. A country with nothing to sell also can't buy anything, and therefore is not a market for our products. Our trade with Haiti is next to zero--they've got nothing to sell to us. So Marxists have it precisely wrong: we do not want to impoverish the world. Quite the opposite--we only trade with countries that can produce valuable goods and so can afford our products.
The Marshall Plan and OBOR
The Marshall Plan was a program of loans to war-ravaged Europe after World War II. The purpose was to rebuild the European economy so that Europeans could sell into the US market, enabling them to buy things from the United States. That trade was hugely profitable to both sides of the Atlantic, generating way more than enough to pay back all the loans.
Had the Plan been a failure then US taxpayers would have been on the hook for all the loan defaults, and Europe would never have become a major trading partner to the US. As it is our total trade to European Union countries combined is larger than our trade with China.
OBOR (One Belt, One Road) is--according to H&B--a Chinese version of the Marshall Plan. That means China is lending to other countries in the hopes that they can produce something that China wants to buy, which will enable those countries to pay back the loans. So compare and contrast: during the Marshall Plan we lent money to Germany, Holland, the UK, France, etc. China is lending money to Kyrgyzstan, Uzbekistan, Azerbaijan, Greece, and Venezuela. Let me know how promising you think Chinese investments are likely to be. Hint: they've already written off Venezuela.
There are certainly geopolitical calculations in China's OBOR project, but as an economic effort it's doomed to fail. H&B, for example, point to the Greek port of Piraeus, which they claim is now the largest port in the Eastern Mediterranean. But it's a lost cause--Piraeus has no industrial or agricultural hinterland, and transport to/from the more productive parts of Europe is hopelessly difficult and expensive.
China
Henderson & Burke's letter is mostly about China. I will have more to say about that in a future post.
Further Reading:
No comments:
Post a Comment