Tuesday, May 15, 2012

Growth Pains

Economics is hard enough to talk about. It doesn’t help most of us that economists have their own jargon that sometimes uses an otherwise common word to mean something different than how we lay people might use the word.

For example, I have always had a problem with one of the most common words in any economic discussion: growth. On one hand growth is a positive word when applied to a child or personal maturity. But it can also have a negative connotation, as it can also describe an infection or a cancer.

When it comes to local planning issues, adversaries are often described as either pro-growth or anti-growth. Pro-growth people are often seen as those who want to pave over forests and generally rape the environment.

When one talks about growth in a national sense, it sounds like something that cannot go on forever. After all, the country is the size it is, and a thing cannot grow indefinitely because it will ultimately run out of room. Yet politicians and economists will tell you that, without growth, you are not going to get economic prosperity and tax revenues to fund all those government programs that are meant to make society at least a bit fairer.

Personally, I would prefer use the word “productivity” instead of “growth.” But “productivity” has already been assigned as an economic term. It refers to how much a country produces divided by how many people are employed. In other words, high productivity means getting the most done with the fewest people possible.

My personal definition for “growth,” as it is used economically, is providing the most things (goods) or services that the most people have a need or desire for. In other words, it refers to how productive (in the sense that we non-economists normally use the word) a country is. Growth means having the most people spending their time doing or making things that the most people need or want. This makes more sense if we can stop thinking about economics in terms of money and think of it purely in terms of human activity. Exchanges of money are merely a way of gauging which goods or services are valued by others in your society.

The more people engaging such activity, the better. This is something that even capitalists and communists agree on. All economic disagreements are essentially about the best way to get the most people engaging in this activity. Specifically, what can the government do to encourage this to happen?

Demand-side Keynesians think the best way is to put money in the hands of people so they will spend it, causing other people to make or do things to get some of it. Supply-side Friedmanites think the best way is to leave money in the hands of people, so they will use it to make and do things that other people will pay them for.

Both sides of this argument have their merits and can positively affect the economy. After all, supply and demand are part of a constantly ongoing circle, not a linear thing that has a start and a finish. But over many years I have come to the conclusion that the disciples of Milton Friedman have the better argument. Demand-side relies on the human impulse to want things. Supply-side, on the other hand, leans more on the human impulse to be doing something worthwhile. Critics of supply-side economics have done their best to paint it as a philosophy of greed, but it actually relies more on the human need or desire to produce rather than on the human need or desire to consume. Personally, I think this is a nobler (and more accurate) view of human beings than the Keynesian one.

Given all the generations during which various governments have favored either the philosophy of John Maynard Keynes or that of Milton Friedman, it seems as though the question of which works better should have been resolved long ago. But things are never that simple. For one thing, few governments have the discipline or political will to purely follow one or the other. For another thing, in a democracy, governments normally pass from one party to another and back again, and there will always be disagreement over whether any ongoing economic difficulties should be blamed on the current government or the previous one.

Many are quick to cite economic conditions after three and a half years of President Obama’s governance as definitive proof that Keynesian economics do not work. They have a strong case, but one could also argue that the president’s policies have not been a fair test of Keynes’s ideas. As soon as the president took office, he went on the biggest federal spending spree in history.

After scathing criticism from Republicans, he told House Democrats at a retreat in February 2009, “Well, then you get the argument, this is not a spending bill, this is a stimulus bill. What do you think a stimulus is? That’s the whole point.”

“No, seriously,” he laughed to his appreciative audience. “That’s the point.”

In other words, Obama put forth the idea that all government spending is stimulative and it doesn’t matter what the money is spent on. Lots of union workers got temporary jobs, and a lot more federal employees were hired (while states and local governments had to lay off employees because of falling tax revenues). But all the spending ignored the real definition of growth, which requires synergy between people who want to work and what society needs and wants.

And among the big winners in all this are the banks and other financial institutions that get to service the ever-growing federal debt. Among the losers, if current conditions persist, will be more state and local public employees and benefits recipients who will suffer from ever shrinking tax revenues.

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