01-01-2017, 07:21 PM
(01-01-2017, 08:52 AM)Mikebert Wrote:(12-30-2016, 07:13 PM)Warren Dew Wrote:(12-30-2016, 05:33 PM)Mikebert Wrote: And recall if costs are down then it doesn't grow the economy.
If costs are down for the same products and services, that does grow the real, inflation adjusted, economy, because you still get the same thing and also have money left over to buy more.
I was referring to GDP. It doesn't grow the GDP. If a real reduction in cost is achieved for an economic sector, the size of the sector falls, and GDP with it. If the extra money freed up by it is deployed into other existing sectors then GDP rises back up to where it was.
If a real reduction in cost is achieved with the same production, then the nominal GDP may fall but the real, inflation adjusted, GDP remains constant, since production remains the same. If the extra money is spent - "deployed into other existing sectors" as you put it - then the nominal GDP may only rise back to where it was, but the real, inflation adjusted, GDP goes up, because everything that was being produced before is still being produced, plus some more. The average person ends up better off.
Quote:But you don't get growth unless there is some new category of demand that can serve as a leading sector. Then those extra dollars will accelerate the growth of that new sector. Its what Schumpeter called creative destruction. For example as the size of the personal transportation sector rose in the 1920's, the mass-transportation sector (railroads) fell. Spending that used to go to rails went to cars and trucks. But also the income that was generated by workers in the personal transportation sector created more dollars to be spent so that all the other sectors were fully funded, with extra money to grow the leading sectors. What makes Schumperterian growth work is the existence of leading sectors.
Today we have no big market-driven leading sectors.* Education and healthcare are subsidized. But so is a lot of tech, which is subsidized by advertising paid by old-economy businesses. Tech is involved in a lot of cost-reduction stuff (the destructive side of the process) but its creative side (the exciting new stuff--and there's a lot of it--wikipedia, google, FB, communication apps, etc) is often free. The natural economic growth process cannot happen as well as it once did when the biggest growth sectors are subsidized.
Eliminating the subsidy won't work since it will crash the economy and produce a permanent depression. I believe there is a way around it (or at least I did in 2004) but it is as pointless to discuss it now and then because the primary problem on of the political economy.
*operationally, leading sectors are collections of industries whose growth is faster than that of GDP.
You're essentially arguing that for the cost savings to be spent, there have to be new categories in the economy for it to be spent on. That's not necessarily true; people could just spend it in existing categories, buying BMWs instead of Toyotas for example.
The real problem is that much of the money isn't being spent at all. It's just sitting around on balance sheets doing nothing.