A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Sunday, December 23, 2007

The curse of growth

It’s time to examine the benefits of Growth.
First a couple of notes. I see that many of the faithful thirty-nine have been forwarding the piece on income-based farm support for farmers as an alternative to the current price-based supports for farm commodities. That was a particularly esoteric (although well-timed, considering the Farm Bill was up) issue. We were surprised at the interest. So we’re going to put together an extended treatment of that. It originally aired on December 5 as Market Failure III right after Market Failure II: Immigration. The two are corollaries. If you have specific questions or points of view, you can e-mail us at blog@demandside.net. Be nice.

Also, on the last Saturday Special of the year we will hear from Chuck Schumer – Senator Charles Schumer of New York, speaking at the same Brookings event as Larry Summers, noted later in this podcast.
Schumer is right on top of the subprime meltdown and banking and financial sector mess. If we could plug in his ideas today, we’d eliminate a lot of suffering and error over the next several years. Schumer will be ticking off the problems and the real solutions available as well as revealing in a straightforward manner the dangerous incompetence currently running the show in the Administration and at the Fed.

And we’ll have an extra podcast this week. The fourth Friday of the month is Forecast Friday. Well see how we’re doing and whether we need to make any adjustments to our calls, such as introduce the ambiguity and equivocation we’ve heard from the cattle who comprise the consensus. The answer is No.

Now. The Curse of Growth

It is entirely appropriate to blame Alan Greenspan for the housing bubble. His fiercely low interest rates and complete absence from the scene in terms of structuring and regulating the mortgage market make him the proximate cause of untenable housing price increases. His total disinterest in overseeing or even knowing anything about the Enron-style off balance sheet SIVs or the peculiar securities called collateralized debt obligations and exponential leveraging schemes make him the chief enabler of the binge that has left most banks badly overextended.

But if you’re going to blame him for the bust, you’ve got to credit him for the boom. It was the boom that remade Greenspan’s reputation after his mishandling of the dot.com bust. Not that it was much of a boom. But it was growth and we love our growth.

Similarly, the immense growth of China that is the toast of the free market world has come at an enormous cost. The economies of competitors have suffered and trading partners have been at a disadvantage with the exchange rate manipulation, but far more worrisome than any economic impact on competitors or partners is the environmental impact on the common environment.

The massive use of coal and the employment of worst practices mining and extraction at home and abroad have exported pollution and environmental degradation along with the cheap manufactured goods. Inside the borders of China, the situation is even worse. We have called China the first environmentally failed state because its own tipping points have been passed and the wholesale degradation of its water, its atmosphere and its arable land are now assured.

Growth and slavish adoration of growth as measured by GDP in these two instances have been the sugar for poisonous events. GDP, you will remember, is no measure of well-being, but a measure of monetized activity. GDP-wise, wars are better than peace, prisons the equal of Ivy League campuses, and the depletion or destruction of resources are invisible.

What we need is a good recession.


At least in the great avalanche of consumer goods.

We need a recession that reduces frivolous discretionaries, forces us to tightly structure financial institutions and markets, and compels investment in public works and public goods such as energy-saving infrastructure and health care.

I was listening to Tom Keene interviewing a retail analyst the other day. It was with some shock and awe that I heard her repeat over and over again redundantly that the keys to retail success with respect to fashion was awareness and exclusivity. Awareness and exclusivity. Perhaps it could be said awareness of exclusivity. But awareness of a product seems to me to be somewhat exclusive of exclusivity.

But no! By the magic of marketing, Chan4el hangs its handbag on an actress in a magazine and tens of thousands of target-aged women make the purchase for $185, or probably more, for all I know. Manipulation of consumer demand by the supplier is one of the most egregious sins in the co-called free market.

Enough said about that.

To achieve planetary survival, consumption has to be reduced. That means growth has to be negative. Yes?

No. Of course, we can grow rail transport, green energy, education, health care, third world survival, and so on. Just not SUVs, ATVs or RIPs.

Let’s look at it from the perspective of the current argument of what to do about impending recession. Former Clinton economic adviser and Treasury Secretary Larry Summers made a presentation at the Brookings Institute on Wednesday calling for strong early action that includes fiscal stimulus, by which he meant across the board tax cuts that were “targeted, timely, and temporary.” He also called on the Fed to move more aggressively on interest rates, while admitting that interest rates at best have a one-year lag to effectiveness.

Underlying both tax cuts and interest rates are more private goods, more discretionary spending that may or may not build American jobs. Better stimulus came from the Congress last week with its spending bill complete with lots of earmarks.

The mechanics of stimulus are not difficult. There is a reason the Bush tax cuts were not useful stimulus. The techniques of lowering short-term rates, fiscal deficits to finance tax cuts, fiscal deficits to finance public works, and fiscal deficits to finance other sorts of strategies will be the subject of tomorrow’s post

But this will come down to a battle between public goods and private goods. On Thursday we will look at public goods directly, why they need to be financed through government, and why they are in themselves stimulative, irrespective of whether they are revenue or deficit financed. We will end that podcast with the absurd suggestion that effective stimulus need not increase deficits, and no, not on account of the well-named Laffer Curve.

Today, however, we are talking about the God of Growth of GDP. GDP measures monetized activity, as we said. Well-being be damned. Perhaps a consumer recession is not such a bad idea.