Pragmatic Capitalism

Practical Views on Money, Finance & Life

What is optimal Advanced Economy policy for their secular stagnation?

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When I first learned Thermodynamics as a sophmore in high-school (mid 1970’s) I hypothesized that US income had to fall as world income began equilibrating. That has come to pass, as we should have expected. As I recall, Ricardo and others hypothesized that this wouldn’t happen because high-productivity, high-margin, production would continue to be in the advanced world while low-productivity, low-margin, production would move to the developing world. But it seems the flaw in this is that implicitly it assumes that the real capital part of production is entirely funded out of local savings of real capital. However, the developed world discovered it could move real capital (e.g. high-tech factories) to developing countries and take advantage of lower cost (and lower productivity) labor. The former (Ricardo) failed to understand Thermodynamic equilibrium, it was mostly a repartitioning of local production but assuming very little equilibration at the aggregate level, while the latter was what Thermodynamics would predict. In the Ricardo view, there is no trade deficit, in the Thermodynamic view there has to be one.

However, it seems there is a potential solution for Advanced Economies. Roughly it is that the government really prints money and directly employs people to provide real public goods and capital roughly equal to the real capital transfer to developing countries. In other words, you try and force reality closer to the Ricardo position by 1.) maintaining nearly the same real production (with growth) in the Developed Country, and/or 2.) devaluing the currency to slow the rate of equilibration.

I think this is roughly the situation the world is in, but your view may be different (although your post and graphs argue it is similar). So there are two related questions. 1.) Should we allow the equilibration to proceed while shifting fiscal policy to large scale redistribution to maintain a local structure closer to historic norms? 2.) Should we attempt to slow the equilibration through policies as noted above (or others)?

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Posted by John Daschbach
Posted on 06/22/2016 4:03 PM
Private answer

Well, the way I see it, one of two things has to happen. The newly unproductive parts of the private sector have to either become more productive or the govt has to pick up the slack. Measuring productivity is difficult, but we know that self employment seems to be falling in the USA and productivity seems to be falling. The paradox here is that the way to offset that is to have the govt become more productive. But can a larger govt become more productive? Of course, I am all for trying, but you also have to walk that fine line between the right amount of govt and the destructive amount of govt.

I don’t pretend to have the right answer….

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Cullen Roche Posted by Cullen Roche
Answered on 06/30/2016 11:04 AM
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