Tuesday, May 20, 2014

Economic Bicycle

Growth, and the sustainability of said is very important to [modern] economics and economies.  But "sustainable growth" is an oxymoron.  Growth is inherently unstable, primarily due to scarcity concerns.  Now, economists, so far as I can tell, generally consider this argument irrelevant because either the time-frame over which it becomes a problem is considered too long to be of consequence or because they assume that the economy is dynamic enough to have growth move through other channels, bypassing whatever current scarcity is limiting.

I don't disagree with that--well with the latter argument--but it seems to me that if growth is required, and that growth can come through changing dynamics rather than brute force, then population growth is unnecessary. That isn't, however, how things seem to work.
To have more or less full employment, we need sufficient spending to make use of the economy’s potential. But one important component of spending, investment, is subject to the accelerator effect: the demand for new capital depends on the economy’s rate of growth, rather than the current level of output. So if growth slows due to a falloff in population growth, investment demand falls — potentially pushing the economy into a semi-permanent slump.
I recognize that Dr. Krugman is making a rather nuanced point seem much simpler than it is, but it seems to me that this is yet another indictment of our financial system and its influence and effect on the broader economy. Population growth shouldn't matter this much.  The economy should be able to grow with plenty of speed to keep upright.

If the population is the terrain over which the proverbial bicycle rides then population growth is like moving downhill, slowing growth is leveling off.  The bicycle can still run on level ground, and even uphill, it just requires more work and the titans of finance just don't want to pedal.

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