Niklas says I should call this series “stream of consciousness”.
However, to be clear this is not meant to suggest that anyone I happen to mention is making an unsubstantiated claim but that this is just some things I have been thinking about but haven’t had the time to wrestle with so that I can be even reasonably confident that I am correct.
Nonetheless, I think it can be interesting/useful just to put ideas out there.
Lots of my Austrian Business Cycle Friends (as opposed to more political economy Austrians) I think are confused by believing that Mainstream Business Cycle Macro and Keynesianism in particular are theories about how an economy “prospers”. That’s a much more general concept than what Mainstream Business Cycle Theory is trying to explain which is the general glut and particular the cyclical glut in unemployment. One could believe that Keynesianism is correct and still believe that policy wise we should not reduce unemployment because the cost to prosperity – whatever we mean by that – are too high.
The Near Term US
I continue to see the fundamentals for the near term US is being good. Indeed, the only negative I see is the overhang of household debt. However, that need not stop an expansion driven by business spending.
Inflation and Business
If you really think household debt is the problem then inflation is the solution in more ways than one. First it erodes the debt – yes.
But more fundamentally it has the potential to raise the cost of consumption, by lowering the purchasing power of the dollar. This is actually what you want!
You want consumers to buy less crap yet work more. That is the solution to “over-consumption” and a weaker dollar facilitates that.
How Inflation Works Through the Economy
For some of my journalist friends struggling with this. Think about it this way. If we have universal 6% inflation then a Cheeseburger from the McDonalds $1 menu now costs $1.06.
Where does that extra 6 cents go?
If we trace it through the economy it winds up in one of three places basically. It could be higher wages for the workers at McDonalds. It could be higher prices for the material inputs to making a Cheeseburger. Or, it could be higher profit margins for McDonalds.
In the first case we have normal price-wage inflation. Debt burdens for households fall and the standard way economists talk about the world applies.
In the second case we have inflation in material costs. This can be very painful for everyone but the owners of raw materials. Its this type of effect that generates “stagflation”
The question we have to ask ourselves is how realistic is this?
Will the demand for material be that high without a corresponding increase in sales volume? As material prices rise will firms be able to economize of materials by using “relatively” cheap labor.
In the case of energy this can be difficult, but to generate sustained 6% inflation we either need a severe energy shortage or a shortage in other materials.
In the last case of profit margins we will see exploding equity values. We can work out the math but I hope its clear that profit margin have to rise much faster than inflation if they are absorbing inflation. (because they are not 100% of the cost base)
So we get much higher equity values which spurs business investment.
The basic way this can go “bad” is if inflation is absorbed by materials and those materials cannot be produced with or substituted for labor.
I am not sure if anything other than precious metals and oil fit this mold.
The Business Investment Story
I am dismayed by the fact that so little of the blogosphere seem even interested in dissecting what’s going on with Business Investment. I talked to one guy from Investment Business Daily who seems interested in the subject.
This is a big part of the recovery and will be important if growth is to continue.
When I have looked through the data it basically looks like this.
When the recession came businesses cut way back on industrial machinery and transportation. Now it turns out that – sadly or not – industrial machinery is not a big part of the US economy.
However, transportation equipment – cars, trucks, planes, ships – are a huge part of the US economy. These dropped like a rock.
However, investment in computers and software barely took a dent and has actually continued its accelerating pace. Indeed, looking at the data you have to be very careful about how you do the price indexes here because the quantity of investment in *computer power* and *software packages* are exploding through the roof. However, the cost is also collapsing, so netting out the “real investment” can be difficult.
Even still businesses are spending more raw cash on software and computing.
What’s happening now is that transportation spending is recovering. That’s driving the really big numbers. However, total fleets are still older than average so this could potentially last a few more quarter even by just coming back to normal.
The decline in the government sector has been a bigger deal than people realize. Especially since government grew so strongly during the 2000s.
Lots of people think about the Federal government. However, government as an economic producer happens at the State and Local level. That’s where the action is.
Its possible but seems unlikely that State and Local will continue to contract at the rate it did this past 18 months. This brightens our growth and jobs forecast.
Children and Voting
Though this seems like a silly issue to a lot of people its part and parcel of the whole: “are there a such thing as human rights” question.
People often appeal to the immature nature of children. But clearly there are mature children and immature adults. If you draw the dividing line at age then this is a line of convenience.
But, we would we tolerate that in other areas of human rights? Surveillance of Americans would be really convenient for catching criminals and terrorist and in reality few innocent people would probably be prosecuted. Perhaps, even fewer if we had lots of exculpatory data. Yet, are we ok with this?
The why are we ok with rules of convenience regarding children?
The Inequality Debate
In so many ways this entire debate looks jacked up to me. Its not clear what people are trying to prove/demonstrate. I see posts “refuting” the inequality stats that look to me like they are just providing the mechanism.
I see people jumping to all sorts of conclusions about what this means for the rich and even “tax cuts” that don’t make any sense.
Part of this is that we are confusing the fact that people are upset about the real personal issue of not be able to find the type of job they hoped with this deeper headier issue about inequality.
However, rather than focusing on supporting or refuting inequality, what we need is some sort of schema or topology of inequality. We know some household effects are occurring. How can we decompose that into various other effects. We know this is not occurring by magic. There must be some decomposition.
My Brothers Keeper
Bryan Caplan makes does some really good posts about the welfare state and our obligations to one another. I know they are great because they leave me squirming in my seat.
I obviously want to hear more of what Bryan has to say but I think in the case of the Brother’s Keepers law the key is particular disgust.
So, its unlikely that someone is not going to give significant resources to support a family member in need unless they are particularly disgusted by them.
I am thinking about my own family and large income transfers are trivially done. Indeed, the only case when someone would be unwilling is if they have particular reason to think a family member will do something “bad” with the money.
I imagine that if you said you have to give family members money then the fear is that people would not be able to avoid these bad cases.
Now, perhaps this is also the key issue in redistribution. Some folks see the behavior of the poor and are disgusted. Some are not. This is going to influence how you feel about social redistribution.
Wasn’t the 1MW energy catalyzer supposed to be demonstrated by now. What happened?
US as a Natural Resource Extractor
I think some of my progressive friends should think long and hard about whether or not this is a bad idea. I know there is a reflex against Big Oil.
However, think about the employment of low skilled Americans. Isn’t this exactly the type of work that could raise their real wage?
Also, are we really going to have a major effect on the planet by reducing the amount of resources the US produces? Maybe some agreement will be reached under which the world can agree to consume less.
However, without that you are only going to have people going after more expensive sources for the same thing and low skilled Americans finding little demand for their labor.
My general sense looking at the roadmaps is that solar is the future and is not *too* far off. I think we are talking about the one to two decade scale here. Maybe a little more, probably not a little less.
However, remember that solar replaces coal. We still have nothing with even the theoretical energy density of hydrocarbons. Hydrocarbons will play a major role for the foreseeable future.
They may be limited to large scale transportation. Particularly Air and Sea.
We normally think of the future as coming with “implants.” So for example, glasses or contacts that project an imagine into your eyes.
However, consider that when you combine motion capture with a standard 3D screen you can create a virtual image that sits anywhere you want in realtion to the viewer.
So imagine a room with three walls that are large 3D projections. Now also imagine motion capture so that imagine depends on where the viewer is looking.
At this point we can make it seem like “anything” is in that room with the viewer and that the room is as big or as small as we want. As long as the ceiling and floor are consistent with the projected image and the view does not turn around to look at the door she came through, we can make the room seem like its anywhere.
We can also put people from different rooms all into the same room virtually. Each person will see and be able to talk to the other people as if they were there.
You just can’t touch them.
This is hardware that already exists. The software probably needs to be made and the cost brought down. Also there are going to be huge bandwidth requirements. Nonetheless, we can do virtual rooms right now.
I think that is enough to really change what it means to “be somewhere”