Monday, 4 February 2013


Quick post: Through Tyler Cowen's Marginal Revolution, I got to see John Cochrane's recent discussion on why we're stuck in the mud, economic growth-wise:

And it pissed me off!

Sure, Cochrane says a lot of interesting things and the whole article is well worth reading in greater details (You can get a feel of why Keynes hated the neo-classical synthesis of his ideas and why some 'neo-keynesian' schools have not much to do with Keynes' ideas).

But what astonished me was the conclusion: To quote "The relevant choice today is between the first two alternatives. Are we in a situation where the long run is just fine, but the zero bound is forcing us to have too high interest rates, so consumption growth is too high and the level is depressed? Or are we in a situation that consumers doubt the long-run productive capacity of the economy, and are consuming little today because they expect to consume little tomorrow and little 10 years from now?"

1- The alternatives are not mutually exclusive. We can be screwed in the present and fucked in the future.

2- Do these brilliant academics even live vaguely in the real world or know anyone who does? Why don't I consume more? Well, I'll tell you why.

a- I am not spending because my prospect of earned income (salary growth) either sucks or is utterly volatile and I wouldn't bet on its shape i.e. I might earn a decent salary in the future but I am not going to spend that until I actually get it because the future is too damn uncertain. 

b- With interests nearing zero, any savings I might have  are unlikely to produce any money worth spending.

c- Most people also suffered a pretty brutal negative wealth effect with house prices tumbling fairly brutally. And the stock market being flat for nearly 10 years is not helping.

d- I am pretty sure that western states will not be able to honour their commitment to me with regards to retirement and possibly health care provision i.e. as I get old, I suspect I will be on my own.

e- I am also pretty sure that western states will keep on taxing my middle class butt to pay as best they can for the tax breaks and largesse they gifted to their very rich buddies and industrial barons.

Can you say "the consumer is facing some pretty severe headwinds?", Mr. competition sailplane pilot?

Where I differ is that, as opposed to Dr. Cochrane, I don't think "fixing the future" means  "the shocks to long-run productivity (ed. bad policies) are staring us in the face".

In the comment section, Dr Cochrane complains "Is there a country anywhere that is deregulating, lowering marginal tax rates, and liberalizing?"

Errr... All the Anglo-saxon countries in the past 30 years?!?

FFS. Fixing the future should mean 'giving back to the middle class some income growth". Do that and watch your log consumption curve rally back.

As to long term productivity being the key and 'demand' being a side-show? (Dr. JC in the comment section says "In fact, once you start thinking about long-run productivity, the whole consumption business becomes a side show. What matters is detailed understanding of long-run productivity. Once you don't care about "demand," the time path of consumption is not really that interesting"). Well, that's kinda true, you know. Except when long run productivity gains keep on being hoovered upwards.


  1. The last 10+ years have been filled with lots of bad stuff. That taints people's view. I'd say that many people have simply lost faith in the future.

    Cochrane talks about future productivity, but it doesn't matter if people think future productivity will be splendid if they're convinced none of those gains will go to them. And why should they think any of it will go to them? It hasn't translated into any sort of meaningful real wage growth in a long time.

    No one takes security from notions like a pension, a 401(k), Medicare, Social Security, or anything like that. I think most people believe there is a non-trivial chance that some or all of those things won't be there for them. No one believes their employment status to be secure over the next couple decades. Few believe productivity gains will translate to higher wages. I think there's wide-spread believe that, in some way or another, the future is going to screw you over and there's really very little you can do to stop that from happening.

    Make a spectrum where on one end, you have the ideal of the American Dream. Hard work will pay off and lead to prosperity and you spend your retirement on a beach relaxing. On the other, put the weird Mad Max fantasies of some where we're all living in a post-apocalypse world. Sure, the vast majority is a far cry away from hoarding guns, ammo, and "survival seeds," but they're a lot further away from believing that BS about the American dream than at any point I can remember.

    Yeah, sure, we may get driverless cars, but only be able to afford them via massive debt. Whatever increase in productivity that results won't translate into more income for anyone but the few who own the majority of this nation's capital.

  2. Welcome, dear Anonymous.

    Needless to say, I agree with pretty much every word you typed. I would only say that, if we reach the point of driveless cars and then beyond, something will have to give.

    19C capitalism was eventually reformed through the actions of unions to become the capitalism we've had till the 70s.

    I cannot see us going forever without some kind of similar rethinking of our present-day capitalist model & the re-integration of the idea that the middle class need to be very very wide and doing well out of technological progress/productivity gains...