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A Brawny Recovery Instead of Unsustainable Consumption-Led Growth

by BruceMcF Tue Jun 16th, 2009 at 12:45:45 PM EST

Standard apologies for US-centricity ... the ultimate destination for an EU economy that hopes to survive as a civilization is, of course, the same, but starting from a slightly different starting position, the path to the destination will naturally have some different twists and turns.


Burning the Midnight Oil for a Brawny Recovery

On Agent Orange, bonddad writes:

Among the most important of the rules Rosie laid down, in my opinion, is #12: Get the US consumer right and everything else will take care of itself.  The reason is fairly simple:  The U.S. consumer has the biggest balance sheet on the planet.  The U.S. consumer represents 70 percent of our GDP and about 18 percent of global GDP.

This is, however, following the entrenched habits of thought that got us into this mess in the first place. My reply, below the fold.


In a comment in reply, I write:

The problem with the 70% figure ...
... is that only a portion of that is free-standing spending, that is not financed out of income. Sustainable growth in aggregate demand occurs when there is a sustainable increase in spending that is not financed by income ... because the portion that is financed by income follows growth in incomes, it cannot lead growth in income.

If we are importing roughly 1/5 of our GDP, 15% of that consumption is imports and 55% is domestic.

If our income-expenditure multiplier is around 1.5, that implies about 2/3 leakages, 1/3 income financed consumption of domestic goods and services. So 55%-33%= about 22% debt-financed consumption of US goods and services that acts as a domestic growth driver. The rest of the 70% figure is domestic recirculation of income and income spill-over to the rest of the world.

Now, that is still a big chunk of change, and under Bushonomics, with the anti-export and anti-real-investment policies that were in place, was the main growth driver we were counting on.

However, it is clearly a growth driver that we can replace if we pursue an aggressive plan of government investment in energy efficiency and infrastructure in support of sustainable energy independence, combined with government policies that ensure ongoing growth in private investment in energy efficiency and production of energy for sustainable energy independence.

And unlike the growth regime founded on unsustainable increase in degree of leverage, its a growth regime founded on the real increase in both the quantity of domestic resources and the efficiency with which they are used.

Certainly, as our economy has evolved in the past three decades, debt-financed consumption has become the largest of the four sources of new injections into Aggregate Demand:

  • Government spending, which creates new fiat-currency
  • Real investment in new productive capacity, which is based on newly created credit-money
  • Debt-financed consumption, which is based on newly created credit-money
  • Exports, which is based on either kind of newly created money, depending on the source of the domestic currency flows into the foreign exchange market that were the ultimate source of the domestic currency paid for the exported products

The Brawny Recovery strategy shifts the focus, toward the transitional economy in which investment in the foundations of a sustainable economy are the source of new aggregate demand.


Display:
... here's hoping it will grow into discussion.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jun 16th, 2009 at 12:47:22 PM EST
I came back from Europe agog at the superior structure and was talking to my Dad about it.  He's in his late 70's and pretty right-wing.  His take was that we were so young as a country and had always had the option of just moving on, that we didn't build much to last, yet.  I think this is a large part of the problem, we need to show that living better doesn't mean just using more stuff, it means getting the most out of stuff and making things that last a long time and are elegant and functional.  Even driving through San Francisco was embarassing after Paris, and I'd always thought of SF as very beautiful.

"I said, 'Wait a minute, Chester, You know I'm a peaceful man...'" Robbie Robertson
by NearlyNormal on Tue Jun 16th, 2009 at 12:56:29 PM EST
[ Parent ]
This is part of what I was alluding to in the prelude/apology ... the challenges in Europe may be more in building the Union-level institutions capable of meeting the economy wide challenge of putting the economy on a sustainable footing ... the challenges in the US more wresting control of the existing institutions from the suicidal tendencies of the MIC and weening our economy from the faux-frontier of sprawl development that we developed when the actual frontier of territory to be stolen from the First Nations and incorporated into our economy had started to close.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jun 16th, 2009 at 01:18:41 PM EST
[ Parent ]
any incremental demand by government today is going to be debt-financed, it is especially important that such spending be investment (and socially usaful investment, additionally) rather than consumption, in order to not make the debt problem worse than it already is.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jun 16th, 2009 at 01:43:59 PM EST
at W*est'rn rates is unsustainable, in any case.

The challenges are investments in worldwide education and welfare. And neither of these are one-size-fits-all. The 'investments' we have seen in rescuing the thousands of super-rich could have changed the lives of billions of people for the better. And given them the dignity of life that the super-rich will never understand.

You can't be me, I'm taken

by Sven Triloqvist on Tue Jun 16th, 2009 at 02:15:14 PM EST
[ Parent ]
Or it could have, after deducting the cost for cleaning up the financial carnage resulting from not hosing $Trillions at the financial sector, paid for a new, fully renewable power infrastructure and upgraded rail system.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 16th, 2009 at 03:10:31 PM EST
[ Parent ]
... and western impacts are unsustainable ... but there is a massive difference in impact between different nations. The global footprint network estimates that the US, EU and Japan all have a footprint in excess of our capacity ... but the per capita footprint of the US is nearly twice the per capita footprint of the EU.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jun 16th, 2009 at 05:06:24 PM EST
[ Parent ]
This is the worrying part about the US stimulus ... not the size of the deficit, but the relatively small portion that is useful real investment in improved national productivity. The US government could easily investment in excess of $1T in efficiency improvements and support for increased harvest of domestic resources such as wind that are presently allowed to go to waste ...

... but only a small fraction of the $750b was directed along those lines.

The cyclical effects of the recession are themselves masking the problem ... the reduction in consumer spending has led to a reduction in imports that push the trade account toward balance. However, if there were a recovery strong enough to start reducing broad unemployment, the structural current account deficit would once more dominate.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 16th, 2009 at 05:04:18 PM EST
[ Parent ]
There is a good argument to be made that, given the policy response to the crisis, it is not safe for there to be a substantial recovery until and unless we have dealt significantly with our national account deficit, especially with regard to energy, but also with regard to environmental impacts.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jun 17th, 2009 at 09:30:11 AM EST
[ Parent ]
Given that it is in part unsafe for financial wealth denominated in US$, it may be that the US won't see substantial recovery until the external finance constraint is addressed. Of course, it would not be covered in those terms.

The confluence of the two is not as dramatic for the Eurozone, which does not have the same structural deficit as a unit.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Jun 17th, 2009 at 01:05:36 PM EST
[ Parent ]


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