What Causes Economic Growth?

Kevin Drum writes:

One way or another, there’s really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can’t spend more unless they make more. This was masked for a few years by the dotcom bubble, followed by the housing bubble, all propped on top of a continuing increase in consumer debt. None of those things are sustainable, though. The only sustainable source of consistent growth is rising median wages. The rich just don’t spend enough all by themselves.

This is a bit perplexing. Wages rise because of economic growth and productivity. It is not the other way around. Similarly, Paul Krugman chimes in:

This is a widely held view, and I’m as much in favor of a strong middle class as anyone. Nonetheless, I’d say that in terms of strict economics it’s wrong. There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do.

3 responses to “What Causes Economic Growth?

  1. “Full employment” economies where everyone is handed a shovel don’t do near as well as free economies where one man has a job operating an excavater.

    To each according to what he can produce…

  2. The political economists of the 18th and 19th centuries (particularly Henry George) understood the basis for economic growth and the reasons why wealth is distributed as it is. What economists have forgotten (or chosen to ignore) is that nature (i.e., the economic factor “land”) yields “rent” as a claim on production (i.e., on actual “wealth”). George argued that this claim was a societal claim, that rent should be collected as payment for public goods and services. Because rent has not been collected and become the basis for private fortunes, our economic problems can be traced to the fact that producers must pay non-producers for access to locations and natural resources. Thus, at the core of our economic system is an entrenched redistribution of wealth from what political economists saw as its natural distribution under a labor and capital goods theory of property. The intense concentration of income and property that has resulted fuels the speculative markets for land, natural resources, stocks, precious metals and (most recently) even commercial real estate buidings.

    Economic history tells us that the speculative markets bust every 18-20 years, with the land market cycle at the core. This time around, fraudulent and predatory credit practices, combined with Wall Street greed for transaction fees, pulled up land prices well beyond the capacity of the true economy to carry the associated debt. The result, of course, has been a rapid collapse of the economy — despite sixty years of governmental experience at fine-tuning the economy using fiscal and monetary policies.

    It is back to the drawing board for economists. If they continue to ignore the operation of land markets and taxation policies that leave rent in private hands, we will experience another devastating crash 18-20 years after we pull ourselves out of this current one. Or, rather, after those of us who survive do so.

  3. Time to Bailout Main Street

    To the surprise of very few who have been paying attention, the Wall Street bailout has had little positive effect on making credit available to businesses or individuals. The $350 trillion in TARP funds already made available, plus the almost $1 trillion in loans directly from the Federal Reserve, have only been used to replace capital already recognized as lost, or to buttress balance sheets in anticipation of the write-offs to come as the economy slides deeper into recession.

    Also to the surprise of no one, every industry, trade group, union, state government, and municipality lobbyist has formed a long line in order to get “their share” of the bailout. The federal government will continue to write checks to every interest group possible before they do what they presumably already know needs to be done: make credit available directly to the American people and small businesses via temporary government backing of basic credit facilities.

    We need to drive the economy via consumer behavior. The following plan lubricates the wheels of the economy by making available sensible, properly leveraged credit.

    An old axiom of government is that for every action, there is an equal and opposite over-reaction. This is the current situation in our credit market. Failure to regulate leverage has lead to a current environment where lenders expect to be over-regulated. Only customers with spotless credit are able to make purchases. Yet, due to the economic downturn, many people with good jobs, down payments, and the ability going forward to repay loans will have blemished credit.

    There are many who share blame that got us into this mess. But the solution is to reward good future behavior. The blame game can continue until the end of time, but we must lay a foundation to get us back to a market-based, productive economy once again.

    read more


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