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Build It and They Will Come


This may work in the movies, but I doubt it does in real life and that is why I have doubts about economic growth: it is based on a lot of hope and not very sound policy. Let's review that policy.

The government's prescription for our economic problems can be summed up as follows:

1) Provide high amounts of liquidity (to review the process of how liquidity gets into the hands of the consumer, see the archives). This lowers interest rates and spurs spending and investment.

2) This liquidity, not finding productive resources, will bid up asset prices like stocks, creating a wealth effect: higher asset prices used as collateral allows lending to occur where it normally would not. Higher asset prices also encourage consumers to spend more as they "feel" wealthier.

3) Reduce taxes for higher income earners, inducing them to spend more. This eventually spills over to lower income earners who are "hired" as a result.

4) Coordinate global central bank policy to allow interest rates to stay artificially low and stem any negative reaction from economic participants.

Most readers will look at this list and think that the first three actions seem pretty much standard policy, at least for monetists (which we have been since Volker left office, and were becoming before him) and number 4 stands out as "unconventional".

To that I would say that they are correct, unfortunately, for policy cannot be viewed as good or bad or effective or non-effective independent of circumstances; item number 4 shows that the policy is ineffective. I do not reject the first three items per se, but only per accidents: when used appropriately to nudge and adjust a sound economy, these actions are totally appropriate. But to depend on printing money as economic policy in-of-itself is no ends to a means. We have simply gone back to this convenient well too many times. We have arrested the economic process of capitalism.

I base this conclusion on the results so far of these four actions. If we look around we certainly see an incredible number of new homes, new condominiums, new strip malls, and new office buildings. This is why new hiring is concentrated in government and construction hiring. But we have to ask has this economic expansion actually created any new technologies or even new businesses?

It is new businesses that create most of the new process that advance an economy, not old businesses that grow more and more inefficient every day. Sure old businesses can say they are getting more productive, and in the short run they can actually seem to be. But I don't call having one check out clerk instead of three, so that I have to stand in line for twenty minutes, productive.

And I think that is where we find ourselves: building more capacity on top of over capacity (the capacity utilization rate is for all the hoop-la still hovering at only 76%). Our government is only concerned with short term fixes in order to get short term results so that they can get re-elected. For example, it should be encouraging consumers to save their money, not spend it. This would reduce our dependence on foreign capital when we urgently need to do so. It should also cut its purse strings to big business, which is always desperate to protect its turf, and institute policy to encourage entrepreneurism. For all its flag-waving, the bureacratic hurdles and taxes for new businesses are far too high (while 63% of large corporations through tax loopholes don't even pay taxes).

Our government seems to believe, to hope, that if we keep building, they will come. But if interest rates rise because Japan tires of buying our debt, no one will be able to afford to come.
No positions in stocks mentioned.

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