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An Amateur Economist's Quibbles

by DoDo Fri Jul 1st, 2005 at 05:36:22 AM EST

(promoted from the comments of the "Rebuilding confidence in our economy" thread)

The two points below, which could be unortodox, I make as an amateur economist, so a professional (Jerome?) might correct me where I got it wrong.

Point 1: I think the Clinton-era new economy bubble was the main part of a larger, global economic bubble, which boosted the US economy at the expense of the European (and Asian) economies in real terms, not just in perceptions (of which we wrote in that thread).

The new economic bubble went like this: a lot of naive investors invested into companies with only promises, thus their stock price went up, the higher stock price made them even more popular, later the higher stock price was also recycled in the company balance sheets and quarterly profit reports due to the new accounting preferences, which in turn made these stocks even sexier, so there was a positive loopback - further enhanced by companies actively tricking to boost their stock prices further with false reports.

This alone drew away a lot of capital from the rest of the world in an unjustified way. But the differences in US and rest-of-the-world (especially European) methods of measuring economic performance (GDP and productivity mentioned in the comments of the original thread), details ignored by most, led through the false perception of the US outperforming the rest to further capital streams into the USA - I primarily mean the securities market. And this was the meta-bubble: the FED's combined statistical tricksery and laissez-faire attitude towards the practises on the stock market (not to mention accounting) created a positive feedback for investment into the USA. The more money went in, the more superior the US economy seemed.

Point 2: This is only tangentially a US vs European economy issue. It is about the supposed demographic effect. It is commonly argued that low child numbers in a country lead to an exploding retirement budget.

I don't see how. I think, first, this calculation leaves unemployment blatantly out of consideration. For, if the problem would be a shortage of workforce, there is a simple solution: raising the retirement age. But actual policy (either officially or inofficially) is often the opposite: older people look for but aren't given jobs, and companies often 'rationalise' by sending workers into early retirement.

Which leads to the thought: if retirement funds were to be decreased by raising retirement age, jobless numbers would soar - and so would jobless benefits paid out. Which leads to the idea that retirement funds and funds for jobless benefit should be treated together, as money paid by workers for non-workers.

If we are here, one could take this one step further. Children are also inactive economically, and tough much of the money spent on them is not paid by the state, it is a cost to the overall economy nevertheless. So it would be best to treat all non-workers who 'live off' active workers together.

And this is my point. The number of children is not the problem - change that, you only shift some percentage of the money flowing from active workers to non-workers from the elderly to the children. So unless I made a fatal error above*, there is no demographic problem, there is a deeper job shortage problem. (I have my ideas on that, but that would be another post.)

* Higher productivity of young people could be an argument - however, (a) I don't think higher productivity is specially needed in that many jobs, (b) I'm not even convinced that there is such a big difference between old and young people - much of it could be a Jugendwahn, one of the many currently fashionable mores managers catch on with a herd instict, (c) older people can have their productivity advantages too: experience, (d) productivity itself is over-hyped: in the end, for a company, what matters is total value produced vs. money spent on paychecks and taxes, that is two half as productive people working for half the pay is just as good.

It's fun to be an amateur economist. I would quibble about your first point, because when you get right down to it, most economic activity is part of an ongoing bubble. There is a base level of goods and services that is needed for people to survive; that's the subsistence level economy. Everything beyond that is based on people's wants and desires, hope for comfort, and attempts at gaining security. And the way you do it is by taking risk and getting a profit from that risk. As long as everybody agrees that the dollar, for example, is the right currency to hold, then it's the right currency to hold. Or that big houses are valuable, or that long August holidays are the right way to spend time.

That's why it's hard to get out of a big depression: You have to build up people's confidence so that they will take out loans to buy stuff so that others will have work to do.

by asdf on Fri Jul 1st, 2005 at 05:52:59 AM EST
Or that gas-guzzling SUVs are the right thing to ride around in?
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jul 1st, 2005 at 08:12:46 AM EST
[ Parent ]
Interesting perspective.

I have a couple quick comments:

  • Europe did pretty well in the late 90s, economically wise. Productivity, employment and other metrics grew as much, if not more than in the US (France created more jobs than the US in 1997-2000), for instance, on a % basis

  • an unexplored item is that I think that the Europeans were caught with the bag in 2000 when the bubble burst. Germany's investments in the US in 1999-2000 were at record levels (100+ billion dollars), and I think a hidden cause of the diverging performances of Germany and the US after that was that it was Germans that lost a lot of money in the bursting of the bubble (and the devaluation of the dollar against the euro), while enough Americans managed to cash out at the top.

  • on your other items, the important indicator is of course workers to non workers, and population ageing does have the effect of reducing the number of young non-workers, as a proportion. But don't fall for the "lump of labor" fallacy. There is not a fixed quantity of work. If more people (presumably older) work, this will generate more activity and in turn more work.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Jul 1st, 2005 at 07:02:55 AM EST
Question: is technology advancing?

Answer: Yes.

The economy will therefor continue to grow. The only thing that could derail the system is political chaos a la 20th century Europe. They had it too good, so they indulged in fantasies of Fascism and Communism. We need to protect the middle way.

by Coriolanus on Sun Jul 3rd, 2005 at 09:13:45 PM EST

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