Octavo Dia

Wednesday, November 28, 2012

It's not the Aggregate Demand

Formal insurance, i.e., insurance policies and contracts, makes up only a small portion of the total insurance in the economy.  The vast majority of insurance is informal: it is the claim to goods and services produced by others, as represented by money.  Besides present consumption value, money represents insurance that goods and services will be available should you need them in the future.  Consequently, what Keynes depicted as a shortfall of aggregate demand is only a "shortfall" in that we were not measuring it properly.  What Keynes saw as a shortfall of aggregate demand was actually an increased demand for insurance.  The increased demand for insurance is precisely why expansionary monetary and fiscal policies work.  To make the market clear, the supply and demand curves have to move.

The supply curve is the domain of fiscal policy: an insurance claim on future goods and services is wholly dependent on the productive capacity of the economy.  Investments in infrastructure, education (human capital), and other capital goods increase the future productive capacity of the economy, and thus the supply of insurance available for purchase increases.  By contrast, history has shown that pork barrel projects, despite Keynes hole-digging proclivities, do not produce any change because they do not increase future productivity (unless they're funded by expansionary monetary policy, but more on that later).  This is also why austerity can work--if the level of government spending is truly a significant drag on the economy, a reduction in government spending can also increase future productivity.  (As a side note, a dysfunctional government, because of its impact on the economy, can weigh down a recovery regardless of the policy direction it chooses.  Also, dysfunctional governments are a primary thing that people are insuring against.)

The demand curve is the domain of monetary policy: the price of insurance is raised by decreasing the value of insurance claims.  If the value of your insurance is worth less than the value of present consumption, you'll naturally switch into present consumption.  (Though as I've argued before, this depends on where you are on the saving preference curve.)  The switch into present consumption restores "aggregate demand," as defined by Keynes, but it merely changes the overall demand structure from more to less insurance.

In short, when people want insurance, they sell goods and services in the present to buy goods and services in the future.  To clear the market for insurance, you can either provide them with more goods and services in the future, or make future consumption less desirable.  In neither case is a shortfall of aggregate demand the problem.

Monday, November 19, 2012

Cheap: The Cause of Economic Growth

I've read several articles, like this one from Matt Yglesias, arguing that we don't really know what causes economic growth.

Mr. Yglesias is being too smart by half.

It's obvious what causes economic growth.  First, and obviously, you utilize all your resources.  China has had a great deal of growth by moving underemployed peasants into factories.  However, once that's accomplished, the rest of economic growth is the result of doing more with less: you improve efficiency to do the same task with less wasted or idled inputs, or you substitute expensive inputs with cheaper inputs.

You substitute skilled labor with unskilled labor (deskilling, e.g., the assembly line).
You substitute expensive human labor with cheap mechanical labor (e.g., the shovel for the digging stick).
You substitute expensive energy (e.g., animal muscle power) with cheap energy (e.g., coal).
You substitute expensive land (e.g., urban areas) with cheap buildings (e.g. apartment buildings).

This process of substitution frees up resources for other activities, to the extent that the impossible becomes possible.  Two hundred years ago, no one would have thought that we could carry the greatest musicians in our pocket and have them perform on command.  Compared to a portable orchestra, an mp3 player is ridiculously cheap.  In that case, our economic growth just led us to consume more and more of an ever cheaper format.

Rather than Cheap: the High Cost of a Discount Culture, Cheap is the foundation of economic growth.

Saturday, November 17, 2012

Parents should be able to vote on behalf of their children.

Representative governments, quite rightly, do not allow children to vote.  This is not because they are not members of society, or because they do not have an interest in how society is formed, but because they lack the knowledge, experience, and judgment to make decisions that accurately express their interests, e.g., a great number of children would reject compulsory education.  However, just because a child cannot express their interests, does not mean that their interests should be wholly disregarded, as they are now.

You might argue that the parents' express their children's interest.  However, a parent and a childless adult have exactly the same electoral impact; as the saying goes, "one man, one vote."  It doesn't matter if that adult is representing the interests of no children or ten children, only a single ballot is cast.  Thus the electorate is skewed to over-represent the interests of those who have already achieved adulthood.

What if children were given the vote by proxy?  What if the vote of a child was divided among the parent(s)/legal guardian(s) to cast?  What if my wife and I were to cast five ballots between us, one for each member of the family?

Here is how I predict society would change:

1.  Economically, the country would move slightly to the left.  Parents with minor children are younger, poorer, and more ethnically diverse than the United States as a whole.  Redistributive policies, for obvious reasons, would be immensely more popular.  However, they also have a long-term interest in a functioning society, so that would temper the more radical proposals.

2.  The social safety net would shift dramatically younger.  Rather than older voters defending Social Security and Medicare, redistributive programs would focus more on schools, daycare, flexible work schedules, paid leave, etc.  (I argue that this would produce a better economy, as a retiree is not economically productive, and is not going to be, so providing them with additional resources is comparatively  wasteful.)

3.  Socially, the country would move slightly to the right.  Only slightly, because though parents tend to be far more in favor of law and order (see: the zero tolerance policies at schools), and though socially conservative people tend to have more children, young adults are far more likely to end up in prison.  You may end up with increased enforcement all around, but shorter prison terms--they want "them" punished, but they want their's back.

And remember, the children of parents pay the Social Security benefits for the childless, so quit whining.