Growth alchemy

Ed West, the journalist with the biggest balls in Europe at this moment, left this piece of wisdom in a recent article of his: The life of a man can be broken up in three stages: Worrying about sex, worrying about money, and worrying about health. It's really a brilliant way of putting it. Well it happens that I just got into the second stage, so I've been thinking.

I am no economist, although I have a fair knowledge of economic theory and the various schools. I don't really know whether Uncle Bernanke will produce hyperinflation, (I think he doesn't even know himself), nor do I know if NGDP targeting is sound or not; as I said I'm no economist. I don't really understand all the graphs and concepts and mechanisms that people talk about in Bloomberg et al., but beyond that I can see a pattern. I'm good at that.

Now we're in the middle of a global recession, with ungodly amounts of debt to be serviced. All economist agree that we need 'growth' to pay for the debt. The disagreements seem to be about how to achieve that 'growth', whether to make structural reforms that allow for more productivity, or to just inflate the currency and pay the debt with the resulting nominal 'growth'. There are merits to both positions. There is also a huge problem to both.

Growth is dead. Everybody knows the Ehrlich-Simon wager, where the smug Ehrlich said that population growth was outstripping available resources, and Julian Simon the humanist hero said: No! You forgot the Ultimate Resource: human ingenuity. Simon was right, as we indeed did find better ways to dig and use resources. But Simon was wrong in one point: the Ultimate Resource is by no means infinite. In fact it's not human ingenuity, in abstract, that drives progress. It's particular smart humans. And those are decreasing in number.

See, people in the US get freaked out because in 20 years or so they will be less than 50% of the population. Well that's happening all over.  The population of whites and NE Asians is decreasing all over the world. And those are the ones who develop new technologies and management techniques. Of course reforming government and reducing the 'crud' that Quod Libeta wrote about in a recent post would help to grow the economy, but the inherent dynamics of democratic government means that nobody will close down entire government departments, simplify the tax code, eliminate quotas, etc. It can't happen.

So we're left with getting by with the existing political framework, and for that we need more smart people to invent new and better stuff. See how all countries can't shut up about attracting imaginary "skilled immigrants" to fill a very real skill shortage. We can suck up all the high IQ engineers of China and India, but that's a zero-sum game. You can't be expecting China to grow, yet at the same time bring all Chinese talent abroad. And anyway the supply of high IQ Chinese and Indians is also decreasing; the college educated are having less kids than their respective proles: we are in a world of dysgenics. Read this article on the Weekly Standard about how Singapore, THE efficient state, was utterly unable to raise the fertility rate of college graduates.

So somebody tell me where are we going to get that growth again? Well we might suddenly develop working Fusion energy, which would solve a lot of problems. But the demographic reality shows that growth is increasingly unlikely. I remember reading about how the stock market has no future, because the Boomers will retire soon, and once they retire they'll take their money from the stock market and actually spend it. Well that makes sense. And once the Boomers die? Well then the economy will have to shrink. As it is shrinking in Japan. So there's no growth to be expected. Which means the debt can't be paid.

Now, the modern economy is addicted to growth because, besides having a Social Security Ponzi scheme working in every country, the ruling class happens to be the Financial Establishment. They are investors, and investors need yield, yield that comes mostly from GDP growth. And old style landed aristocracy didn't care much for economic growth; they didn't like having peasants starve, but it didn't affect their lifestyles much.  But we have what we have, a gigantic pile of debt in every economy on the planet, and a ruling class that needs good investments. While they go desperate opening up the last medieval countries they find, the only way they can sustain the system is by inflation. Inflation has the advantage of being asymmetrical, and they'll make sure to get the dough first. But we'll have decades of high inflation and there's nothing anyone can do about it.

However, the stupid people are breeding because welfare states are feeding them. Welfare states require the geek squad to keep the machines running. The geek squad is shrinking. When the geek squad shrinks past some threshold, the welfare states will not be able to feed the stupid people, and the stupid people will starve. Some of them might try to invade and raid richer communities. Soros recently predicted die-off, but maybe he was speaking from hope rather than a realistic estimate.

Your article sums up a lot that is going on. However, "...the only way they can sustain the system is by inflation. " is a sort of Ponzi scheme, where one day the currency is no longer accepted; there are no more chairs, and those left holding the remaining scrip are deep and truly screwed.

That assumes there will be better alternatives to the currency.

That's the big question. The geek squad shrinkage will be uneven depending on where you are. I expect it will be lower where you are now, so count yourself safe, for the moment.

I'm postulating that there is some sort of exit...barter? Reform the people under new elites and a new currency? Don't trade -- just be self-sufficient?

Fine idea if you live in rural Texas. Not for of us city dwellers. I'm sure the banking establishment intends to keep inflation in a constant low-ish level, 10% or so, so the costs of forsaking the currency are higher than suffering the currency attrition.

Good post. You are correct regarding your emphasis on the financial establishment's position as a de facto ruling class and central planners of the economy. We don't have the extreme of communist style central planning, but planning and investment decision making is highly centralized in the financial establishment.

Now, the modern economy is addicted to growth because, besides having a Social Security Ponzi scheme working in every country, the ruling class happens to be the Financial Establishment. They are investors, and investors need yield, yield that comes mostly from GDP growth.

Undergrad econ majors and MBA students learn about evaluating all potential investments against the "risk-free interest rate. This rate is generally the return on short-term Treasury bonds. This return is backed by the taxing authority of the state. An investment is considered good if its risk-adjusted rate of return is expected to be greater than this risk-free rate. Public debt turns the tax revenue of the state into a basic return on wealth for the establishment. There is a cost to holding wealth i.e. property. In a more primitive or decentralized society, the cost of holding wealth is more directly incurred by the property holder, by devoting personal resources to defend property and risking one's life and personally fighting to defend property. With larger states or great wealth/property, this cost tends to be passed on to others. The state provides the property rights to great wealth, but the cost of the state tends to be paid for by taxes on everything else (income, sales, capital gains, etc.) rather than holdings of wealth (net assets). And if there is a public debt providing a risk-free rate of return backed by tax revenue, not only is the cost of property rights being provided by the state for free by taxing others, but wealth is being subsidized at the risk-free rate by taxing others.

Yes, I also read that balancing the budget is a bad thing, because it dries up investment opportunities to “our guys". Hence all the cries against austerity, as real austerity would surely mean a big loss of income for the hedge funds et al. I see you mean that the state, as the guarantor of private property, should be exclusively funded by property owners? How would that work? No way it could get the current level of funding that way. The state isn't a moral agent anyway, it does whatever it can get away with, and what its neighbours kinda force him to do.

I don't think the financial establishment is uniform in its views and it can vary by situation. They are not necessarily against balancing the budget at all times. A severely unbalanced budget means the supply of public debt (which is an asset to bondholders) is very high and tax revenue is relatively low. So it can make public debt less valuable. Austerity generally involves cutting spending while raising taxes and various fees to pay back creditors i.e. the financial establishment. The higher taxes and fees generally fall on ordinary citizens via higher income, sales, VAT, etc. taxes, and higher utilities, tolls, etc.

Since the primary function of government is the protection of non-subsistence property rights, it is sensible to charge a use fee for those rights. Note, I said “non-subsistence” property rights. The point here is that house and tools of the trade are protected from confiscation under bankruptcy law precisely because they are subsistence assets. Where government does not exist, subsistence properties are typically defended by the occupant, whose life is sustained by those assets. Government brings precisely the property rights we associate with civilization—assets beyond home and tools of the trade. Given the relatively liquid nature of civilization, it makes sense to define “non-subsistence” in some dollar value of assets. Various ways of defining the dollar value are all approximately equal: * The median price of housing a person plus the median price of capitalizing a job. * The threshold used by the SEC for “qualified investor”. * The level of savings insured by the FDIC. * Or, for the historically inclined: The market price of 20 arable acres in the Confederate south, a mule, a plow and a small house on such land. Until a citizen accumulates the subsistence net asset level, they should pay no tax and then pay tax only on the net assets they own above subsistence. Assessment should be by the owner with government option to force sale and/or by the government with owner option to force sale, thereby establishing a “fair market value” for the exercise of eminent domain. Net assets only would be taxed and would be calculated by subtracting the fair market value of debts against the estate from the self-assessment of the occupant. Other forms of taxation could be eliminated in a revenue neutral way if net assets, in excess of subsistence levels, were taxed at the risk free interest rate (approximately the interest rate on the national debt). Indeed, given the centralization of asset ownership that has resulted from the subsidy of non-subsistence property, a subsidy inherent in civilization, it may be the failure to use this tax base is the ultimate cause of the repeated decay of civilizations from ancient times.

Civilisations didn't decay because of the tax base, states do. See Chinese dynasties. They always recover. Civilisation only collapses when the genepool changes. You can't fix that. Your tax idea isn't bad, but governments like all organizations want to maximize revenue. You can't decentralize asset ownership if you can't decentralize power. And we can't. Can't be done.