The Covid-19 pandemic is forcing a rethink in macroeconomics

https://www.economist.com/briefing/2020/07/25/the-covid-19-pandemic-is-forcing-a-rethink-in-macroeconomics

by ml_basics • 6 years ago

154 204 6 years ago

economist.com

thedudeabides5• 6 years ago

Just as inequality creates a need for stimulus, they argue, stimulus eventually creates more inequality.

Particularly when your predominant stimulus tool is 'print money to buy assets rich people have.'

duaoebg• 6 years ago

If rich people sold the assets they wouldn’t have them anymore. The mechanism is more that rich have access to lower interest rates. The proportional difference of interest rates between the rich and poor increases as the risk free interest rate decrease.

jamesboehmer• 6 years ago

If rich people sold the assets they wouldn’t have them anymore.

But they’d have more money, presumably more than what they paid for the assets. Not that money and goods are exactly fungible, but buying assets from the wealthy makes them wealthier, not poorer or status quo.

pa7x12• 6 years ago

I think we will look back into economic history to our times in surprising disbelief at how simplistic our central bank policy is. A bit like how we laugh at how doctors used leeches to treat various ailments.

From 1929, central bankers learnt that liquidity can be a terrifying disease in an economy, 2008 showed that printing helps and here they go with their newly learned tool trying to fix all problems. Now they have to figure out that if you only inject that liquidity from the top, the inflation appears in certain kind of assets (mostly financial) and has a hard time reaching the rest of the economy, causing ever-rising inequality.

I think a more refined approach will be developed at some point, where they will start using two levers to steer the function of the economy. Money printing from below via UBI and regulating the inflation of day-to-day assets and money-printing from above and regulating the inflation of financial assets. This could allow finer control balancing target inflation rates of different assets and preventing rising inequality to tear down society.

gallegojaime2• 6 years ago

UBI as a macroeconomic lever to pull is an intriguing idea - hadn't thought of that consequence. Although it figures changing the amounts would get extremely political.

dredmorbius5• 6 years ago

Tax assets directly.

marcell2• 6 years ago

It’s interesting that there’s an unstated assumption behind your comment: we need a central authority to plan some, maybe many, aspects of the economy.

paulpauper2• 6 years ago

1.2 trillion of the CARES act went to households and small biz. It is not like the rich were the primary beneficiaries of this stimulus.

caiobegotti2• 6 years ago

I believe it's not really "rethink" as if we had once figured it out correctly in the past already. We are still actually thinking it for the first time, specially if you consider economists and policy makers were yet looking for "something new" (mentioned in the article) in macroeconomics during the last, what, 50 years? It's all pretty new, which suggests to me that it is all in a pretty extremist and radicalized state: it doesn't have to be 100% trickle down reaganomics or 100% state interventionism exclusively. I'm very confident a major crisis like this one will make key people finally realize that a mix of free global markets + welfare states focused on reducing inequality + democratic institutions will be the answer to many macroeconomics problems. Very few countries have realized this, the rest of the world meanwhile will keep shouting at each other doubling down on stupid policies not based in good examples and will keep blaming keynesianism or whatever neoliberal approach they can't understand.

thewarrior• 6 years ago

There are powerful forces whose giant profits would be threatened by such a consensus. It’s hard to say if it will actually happen.

Retric4• 6 years ago

A great deal of political thought and practice is centered around promoting personal benefit. While it might look dumb for someone promoting free markets to also support farm subsidies etc, the spoken justifications have little to do with the actual decision making process. Convincing people who don’t benefit from your policies to still support them is simply how the game is won.

nickff6• 6 years ago

Farm subsidies are wildly popular with voters, both in farm states and non-farm states, and there is not much advertising/public lobbying for them. They are an example of a voter-driven policy, not a special interest group's successful lobby.[1]

[1] https://en.wikipedia.org/wiki/The_Myth_of_the_Rational_Voter

voisin3• 6 years ago

I'm very confident a major crisis like this one will make key people finally realize that a mix of free global markets + welfare states focused on reducing inequality + democratic institutions will be the answer to many macroeconomics problems.

Like the Scandinavian countries, which also have the highest reported rates of happiness in the world. Why, at the government level, do we not look at best practices worldwide?

SaltyLemonZest• 6 years ago

It's hard to identify which practices are responsible for which outcomes. Suppose you wanted to combine the high happiness rate of Denmark with the low crime rate of Japan; how would you figure out which are the policies you need to accomplish that?

throwaway_USD• 6 years ago

Why, at the government level, do we not look at best practices worldwide?

Because there is a ruling class and for the rulers it is not about best practices or happiness, it is about maximizing wealth and maintaining power.

Education and healthcare (which should be considered human rights not industries) are very helpful in seeing some of the tools the ruling class uses to maintain power. Both education and healthcare are standardized enough they are rated by Country and while the US spends more on both than any other country the US is not even close to being rated number 1 in either category.

Yet, to your point, when one points to other countries as evidence how well other systems work (with less funding) that person will be demonized as Anti-American. Even in the current pandemic where the numbers speak for themselves, we are subjected to having to hear the ruling class get on TV and tell us how we are #1 and doing better than every other Country and even worse in many cases this ruling class refers to the pandemic in the past tense and proclaim how they defeated it. It is Machiavellianism incarnate.

hogFeast2• 6 years ago

The US has lots of people with a superficial understanding of Scandinavia telling everyone that their idea of Scandinavia is brilliant, easy, etc. (and btw, this is a function of generally poor policy education in the US, the US produces probably the best policy studies research...very little of this is taught in courses that people who go on to be politicians study).

If you go to Scandinavia or study comparative politics, the answer is simple: Scandinavia is Scandinavia, the US is the US. They are different places with outcomes that reflect different values and choices.

What people ignore about Scandinavia: mono-cultural society (if you tried some of the integration stuff that these countries do in the US, you would have people loading guns), huge tax burden on middle class (in the US people who currently pay no tax will have to hand over 40%+ of their income), small population, heavily monopolistic economy, significant exposure to trade/reliance on individual companies, significant natural resources (Norway has 20% of the US oil reserves, their population is smaller than almost every state in the US). Saying they are happier is very woolly, particularly as most countries in that region are societies that place significant social pressure on individuals to conform and be happy (their rates of depression and suicide are high, indeed when Sweden was the socialist paradise their rate of suicide was highest in the world).

Also, you ignore that most Scandinavian countries have moved towards the US model after decades of underperformance and then financial crisis. Even Denmark which has huge trade union membership has the most flexible labour anywhere...again, what people understand about Scandinavia is usually based on their preconceptions about America and their belief in a perfect, easy ideal that confirms their views about the world.

The US gets things far more right than wrong. It is, by far, the most successful economy that has existed to this point. No other large country has replicated that success (all the East Asian economies used Germany as their model, which has resulted in significant baggage). You can say that some stuff needs to be changed...okay, but it isn't as simple as just copying Scandinavia. That will never happen, and won't work if it did. It just makes no sense. The solution to an American problem is American, not Swedish.

JSavageOne3• 6 years ago

Why, at the government level, do we not look at best practices worldwide?

I've seriously been wondering why there isn't a field of study dedicated to comparing government policies across countries. I'm sure such a field of study exists, but I have no idea what the name of that field is - does that fall under public policy? Comparative politics? The fact that I can't put a name on it is the very problem as it shows the field (if it even exists) has very little influence on public policy (unlike say economics, which has the Council of Economic Advisors, CBO, BLS, Fed, U.S. treasury, etc).

ericmcer• 6 years ago

They have already tried your strategy. Economists thought free global markets would lead to liberalization in other governments. That has proved to be utterly untrue with China and as a result they have become the worlds manufacturing hub, while becoming more and more totalitarian.

Production wise, an economy that is not concerned with democratic institutions or reducing inequality will outperform one that is. With that in mind, globalization is basically a race to the bottom human rights wise.

claudeganon• 6 years ago

I’m not sure how much economists believed this as they were materially incentivized to parrot this logic. Most of economics is just laundering the interests of the ruling class with spurious math and heuristics that are unmoored from political and social realities.

nickff6• 6 years ago

Your first point is correct, but your second point is not. Bruce Bueno de Mesquita demonstrated this in "The Logic of Political Survival", and others have come to similar findings.

Briefly, rising incomes under a non-democratic regime lead to a local maximum of growth, as totalitarianism is inextricably linked with economically inefficient institutions. As an autocrat, your top priority is to compensate those who keep you in power, which requires wealth extraction from the productive; this disincentivises efficient production. Unfortunately, nothing about rising wealth will necessarily lead to regime liberalization.

"Reducing inequality" is very different from democracy, and would probably lead to reduced economic efficiency, as it necessarily reduces the incentives for efficient production.

Gravityloss• 6 years ago

996 in the west. I think many people who operate their own service businesses already run like this. At least over here, immigrants are heavily represented there.

Aunche2• 6 years ago

China was more totalitarian before globalization. Without it, they would be more like North Korea. You don't need technology to send people to labor camp or burn books.

Globalization is why extreme poverty has plummeted in the last few decades. Hundreds of millions of people chose to leave their subsidence farm to work long hours in a factory because it's still an improvement for the quality of life of themselves and their families. Sure it would be better if an Indonesia factory worker got paid $20 a day instead of $10, but nobody is offering them $20 and you can't force anyone to.

ralala• 6 years ago

Production wise, an economy that is not concerned with democratic institutions or reducing inequality will outperform one that is.

The question is: How can the market be adapted to create a fair, innovative and sustainable society, globally?

How can a single government force any rules with these goals without lowering the welfare of its inhabitants and thus threaten its reelection?

paulpauper2• 6 years ago

The US is going down the route of mixed socialism--more stimulus and bailout programs, plus private ownership and massive wealth creation. You have tens of millions of Americans getting a soft form of UBI, which benefits privately massive companies such as Walmart and Amazon. it is a form of the government picking winners and losers, the losers being small and medium-sized businesses and the winners being these huge big box and tech companies.

chillacy• 6 years ago

I've always thought that in the absence of regulation, pure market forces will always favor power conglomerating into few large entities just due to efficiency at scale. Is the absence of enforced regulation (anti-trust, different tax treatments) still the same as actively picking winners and losers?

eli_gottlieb4• 6 years ago

free global markets + welfare states focused on reducing inequality + democratic institutions

The first of these is incompatible with the latter two.

nly• 6 years ago

Financial repression[0], 0% interest rates and higher inflation, to inflate away trillions of $$ of national debt and drive up nominal GDP, is the order of the next decade.

We've reached the limits of what central banks can do, from here on out it's direct government intervention in the commercial credit sector, and driving up demand through fiscal policy.

[0] https://en.wikipedia.org/wiki/Financial_repression

beamatronic• 6 years ago

Is there anywhere that explains why governments in the US don’t build infrastructure, as a long-term investment?

walleeee• 6 years ago

Just a wad of totally unscientific, interwoven armchair theories: political cycles are much shorter than the relevant timescales for long-term infrastructure investment; attention spans today are shorter than they used to be; the long slide of most of the "middle class" into financial insecurity means fewer people have the means and free time to educate themselves about and advance civic concerns; some political leaders in the U.S. have for decades undermined public support for public works, as well as public faith in government; American culture is now far more fractured and heterogeneous than it used to be, making coalitions between interest groups more difficult to form and maintain (recent trends in political and social thought, according to which individual and group identities are rendered increasingly explicit - along with the ability, courtesy of electronic communication, to associate almost exclusively with those who identify similarly - may exacerbate this)

tonyedgecombe• 6 years ago

My guess is infrastructure doesn't required hordes of unskilled people anymore. I've been watching our water authority put a new water main in outside my house and I didn't see a single person swinging a pick. Instead there was a lot of technology being used and put in the ground. People aren't going to hop from barista to this sort of work any time soon.

amanaplanacanal• 6 years ago

My sense is that states and localities don’t have the money for infrastructure projects. They mostly can’t even afford maintenance on the infrastructure they have. Anything that gets built has to come from the feds somehow, so it’s up to Congress.

The democratically controlled house would have to come up with a bill, then the republican controlled senate would have to agree to it, then the president would have to sign it. I don’t think there is that much coordination happening at the federal level right now.

ls6123• 6 years ago

In addition to the other responses, a lot of the low hanging fruit from infrastructure in the US has already been claimed, the Interstate system for instance was a massive investment but once it is built the benefits from further transportation infrastructure are more marginal and much of the spending goes towards maintenance which is extremely unsexy.

To give a more tech focused example: building infrastructure to give everyone in the US 50 mbps internet would be expensive and quite valuable. Improving that infrastructure from 50 to a gig would also be expensive but (for now) far less valuable.

marcell2• 6 years ago

One example, in California the high speed rail project is bogged down due to land acquisition problems and lack of funding.

torrance• 6 years ago

Given that this is precisely what it’s spent the last 30 years coming to understand, it’s baffling that there is only a single paragraph in this article about Modern Monetary Theory. And one at that certainly doesn’t convey the nuance of the theory at all.

For anybody seriously interested in the subject I would recommend the 2019 textbook ‘Macroeconomics’ by Mitchell, Wray & Watts.

trthomps• 6 years ago

I just finished the book "The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy" by Stephanie Kelton. Highly recommend to anyone who hasn't heard of MMT and wants a good intro with examples of how MMT could help today.

RobertoG7• 6 years ago

A good lecture by her (video):

https://www.youtube.com/watch?v=WS9nP-BKa3M

mdorazio3• 6 years ago

I encourage you to at least read some criticism of her thinking as well and form your own conclusions. She definitely has an agenda to push and tends to ignore some legitimate concerns. [1] is a decent summary.

[1] https://www.wsj.com/articles/the-deficit-myth-review-years-o...

wz10002• 6 years ago

Talking about a revolution
Many economists want precisely this state intervention, but it presents clear risks. Governments which already carry heavy debts could decide that worrying about deficits is for wimps and that central-bank independence does not matter. That could at last unleash high inflation and provide a painful reminder of the benefits of the old regime.

Sounds more like a plea than a warning, coming from The Economist. Prophecies of inflation seem like a joke in a time of record low inflation with high government deficits. Just look at the case of Japan for one.

derg4• 6 years ago

Yep. There's a concerted effort to keep bringing up high inflation as a means of forcing more austerity. The mythical "high inflation" hasn't materialized but the cries continue to happen.

take_a_breath3• 6 years ago

There is a reasonable argument that we do have inflation, it’s just being shown in assets prices, not commodity prices. Things like education, housing, stocks, art, startup valuations, and more have signs of inflation even if oil and food prices don’t.

antisthenes• 6 years ago

I've come to consider the official inflation figures as absolute nonsense. It's a shame, really, because the BLS does a lot of good work, and outdated metric calculation methods really put a tarnish on an otherwise great agency. I'm not sure how much of that is being held hostage to political goals.

Things that are in actual demand [1], like health care, education and housing (in desirable areas) have absolutely been outpacing inflation.

Sure, if you measure the absolute basics needed to not die in a society, the figures might make sense (as it would be mostly food and clothing, both of which are dirt cheap. So cheap in fact that most of the time they can be had for free! Thrift stores and food banks are your friend)

But if we're talking about a thriving society and population, surely our aims should be set higher than the very first step on Maslow's hierarchy of needs?

[1](it's not Smart TVs and Smartphones, although even flagship smartphones have recently ballooned in price far outstripping any sort of inflation figures)

staplers4• 6 years ago

I find myself waiting and hoping for a complete and utter financial crash just for the opportunity to be able to afford a home. My income is several times above the poverty line.

It makes me feel sad and guilty but that is the reality. Inflation is real when you look for it.

martin_bech• 6 years ago

Well it has in Venezuela, with the printing of money. But maybe you need a measure of scarcity to trigger high inflation.

nostrademons• 6 years ago

There's a tangent on this in Carlota Perez's Technological Revolutions and Financial Capital. Basically you get this phenomena of "two moneys" - rather than the economy acting as a monolithic entity, a new socioeconomic system grows up around the new fundamental technologies, and then goods/services/assets that are connected to the new economy (tech companies, programmer & data scientist salaries, Silicon Valley real estate, SV daycare prices) inflate rapidly while everything connected to the old economy remains stagnant. This sucks if you're trying to manage daily life in the new economy - you may be making $600K/year, but a crappy house is now $3M. It's pretty awesome if you're in the new economy but buying something from the old economy though. A new TV is about an hour of compensation for a mid-level Googler; a cruise to Antarctica is about a month's worth.

The usual outcome of this situation is something far worse than high inflation. Instead, you typically get a financial crisis, then war and conquest as the new technologies are applied to weaponry.

taneq• 6 years ago

Inflation is a consequence of 'the average consumer' having more money to spend and thence becoming less price sensitive. The reason we haven't seen inflation is that the stupendous amounts of money printed recently have all gone to people who already have more than enough cash to spend.

danenania3• 6 years ago

I'm not going to pretend I know the right answer here. It's an amazingly complex issue. But I find this to be a poor argument.

Absent central bank intervention, a productive economy should naturally undergo significant price deflation year after year as efficiency improves, causing more goods and services to be produced with the same inputs. This is why consumer technology prices trend continually downward.

So if the default, absent any intervention, would be for prices to go down every year across the board, pointing to "low inflation" numbers is a red herring. The question shouldn't be how far inflation numbers are above zero, but how far they are above the negative rate of inflation we'd see otherwise. That differential is what tells us how much wealth is really extracted from the economy via what is effectively a highly regressive tax.

wz10002• 6 years ago

Two things:

1. It isn't clear that the (real) cost of essentials like food, shelter, clothing, healthcare, education is actually going down significantly.

2. Even if what you say is 100% correct, this "extraction of wealth due to inflation" seems to be a somewhat stable scenario, and certainly hasn't lead to the apocalyptic visions of collapse that inflation hawks perennially create a ruckus about. So even if you think we are living through a hyper-inflationary doomsday scenario, certainly this is a very different doomsday than what one is usually led to imagine (Zimbabwe, Wiemar Republic, Venezuela etc.). Maybe inflationary Armageddon isn't so bad after all!

littlestymaar3• 6 years ago

Absent central bank intervention, a productive economy should naturally undergo significant price deflation year after year as efficiency improves, causing more goods and services to be produced with the same inputs

This comment assumes that central banks create money and that's what drives inflation but this isn't the case: commercial banks are the ones which create money (through credit).

Also, you can't sustain an economy under deflation, because deflation would just make the whole economy collapse. In a market driven industrial economy the limiting factor for the economy isn't the output, but the demand, and deflation is the ultimate demand killer (which is why basically nobody buy things in bitcoin: realizing the pizza you bought five years ago is now worth a few thousand dollars doesn't sound cool).

nerfhammer• 6 years ago

That's only true if people don't want better stuff over time, only larger quantities of exactly the same stuff

dredmorbius5• 6 years ago

For those of us who've read The Economist for two or three or four decades, perhaps more, "rethinking economics" is a reliably recurring evergreen which gets trotted out at times of crisis. When the paper is feeling merely foreward, a possibility that Keynes may not have been completely wrong is broached. In periods of sheer desperation, a hesitant suggestion that subscribers might read (but never follow) Marx is hauled from the deepest rhetorical powder magazines.

But that's about the limit of it.

The one change I have noted is that where the tactic was invoked only once or twice a decade, its use now seems far more frequent, every few years in the aughts, now only months apart. A search of the paper's archives, or external Web search, largely confirms this:

https://duckduckgo.com/?q=rethinking+(macroeconomics%7Cmicro...

Whilst I'm strongly convinced that economic orthodoxy is sharply flawed, monetarism a stunted model like its progenitor, Keynes was insightful, and that Marx's class-consciousness has merits, full understanding and remedy for present concerns must look further afield.

MMT, W. Brian Arthur's complexity economics, and Steve Keen's work unifying capital, labour, class, and energy would be a good start.

gallegojaime2• 6 years ago

I subscribe to some of aspects of classical liberalism, and the Economist was a must read for me during years.

It explains good ideas, but I would notice a strange formulaic structure they often used. Many poor-quality articles were subtitled "A [paradigm/company/event] brings [boon], but [caveat]".

dredmorbius5• 6 years ago

Hence the old joke about the desire for a one-armed economist: they won't be always saying "on the other hand..."

Though this does bring to mind Robert K. Merton's unintended consequences and overt/covert functions.

easymovet• 6 years ago

"a monetary policy that is not constrained by the presence of physical cash", that is like saying a democratic government that is not constrained by the need for voting.

wl• 6 years ago

Democracy doesn't require elections. Sortition is the classical example, but there are others.

2038AD• 6 years ago

You know central banks aren't mining operations, right?

hypertexthero• 6 years ago

Thomas Piketty, in [Capital in the Twenty-First Century][money]:

Yet it seems to me that all social scientists, all journalists and commentators, all activists in the unions and in politics of whatever stripe, and especially all citizens should take a serious interest in money, its measurement, the facts surrounding it, and its history. Those who have a lot of it never fail to defend their interests. Refusing to deal with numbers rarely serves the interests of the least well-off.

[Rutger Bregman][ubi]:

Poverty isn’t a lack of character; it’s a lack of cash.

[money]:https://www.tbray.org/ongoing/When/201x/2014/05/01/Piketty-C...

[ubi]:https://www.ted.com/talks/rutger_bregman_poverty_isn_t_a_lac...

notJim5• 6 years ago

http://archive.is/15nqg

notJim5• 6 years ago

I'm a real dummy when it comes to economics, so I have a question. What is the theory that buying assets like stocks boosts the economy? Doesn't this just create incentives to hold on to those stocks, so that you can reap the growth? Given that most stocks by far are held by wealthy people, it's hard to see how this stimulates demand, since they already are able to buy what they want. Theoretically, they might eventually sell the assets and then start a new business or something, but this seems very indirect. Isn't it easier to just hold the stocks/real estate? I don't really understand why holding a stock is considering investing, since the company (where the actual employment and production happens) doesn't see a benefit.

lisper3• 6 years ago

Holding stocks doesn't stimulate demand, it produces capital. In order to start a business you have to spend money to procure the means of production before you can open your doors. You can put up your own money, you can borrow it (debt financing) or you can raise it by selling an ownership interest in the business (stocks/equity financing). It's true that after the stock is issued, lots of financial games get played that don't actually help the economy, but most businesses would never have been started in the first place if not for the ability to issue stock.

notJim5• 6 years ago

This is the clearest response so far. Thinking about the tech world, we have all this VC money, but all of that is based on the idea that eventually the company will IPO and the VCs will get huge returns.

However, given that both VC valuations, and stock market valuations (like P/E ratios, IIRC) are arguably in bubble territory (many have argued this), it doesn't seem like the Fed buying more of these assets is very efficient.

kaycebasques• 6 years ago

Given that most stocks by far are held by wealthy people

I also won't pretend to be an expert here, but I think this is where your thinking may be going astray. There are lots of retirement-age people who are counting on their pension funds to fund their retirement. Pension fund managers assume steady growth in stocks, something like 7-10% per year. If stocks don't meet that threshold, major parts of the pension system run into big trouble. Pension plans have trillions of USD in assets. This article [1] estimates ~$9T. Retirement-age people in general are a powerful constituent.

[1] https://www.investopedia.com/articles/credit-loans-mortgages...

notJim5• 6 years ago

I always keep this paper from NBER handy https://www.nber.org/papers/w24085, especially this chart: https://imgur.com/h8Fo8yx. Stocks are in fact held primarily by the wealthy.

This is a separate question though than whether they are also very important for retirement accounts. You are 100% right about that, even though middle-class retirement accounts represent a small share of the overall market.

charwalker• 6 years ago

Although many regular people have stocks held until retirement, they don't make up a majority of stock owners: https://finance.yahoo.com/news/the-richest-1-own-50-of-stock...

And according to Wikipedia data, in 2016 84% of stock was owned by the top 10%. That leaves 16% of the market to everyone else, a very small %.

https://money.com/stock-ownership-10-percent-richest/

ry_co• 6 years ago

The main way speculative investors benefit the company is that they hold stocks because they believe it will be more valuable in the future, so that they can sell it for a profit. This demand for the stock drives up the price. Since stock is essentially a portion of the company, this also drives up the valuation of the company. Since the company is more valuable, they can offer equity to investors for a higher price, allowing them to invest in their own business and grow.

It's indirect, but it's a very real benefit.

Edit: Adding to this, the company's reinvestment of funds generated by issuing stock drives demand in other places of the economy. Investing in your own business means spending money on people, infrastructure, and other goods you need to offer your company's service. This necessarily drives demand for these goods. Additionally, this creates cascading demand through the keynesian multiplier effect.

notJim5• 6 years ago

Do companies routinely issue new stock to raise money? I thought it was a rare occurrence, obviously the IPO, and then occasionally afterward. Your edit is clear.

kalipsosu• 6 years ago

It suppose to work like that. But it does not apperantly. In the ideal world growth should mean more R&D. Mariana Mazzucato has several books in this topic. Check it out.

jcfrei• 6 years ago

In the US (and other countries) a lot of wealth is accumulated in 401ks or other pension like schemes. When people see that their retirement funds have a high value then they are more willing to spend money in the present. But since pensioners are spending less money on average than people in their working ages the effectiveness of stimulating demand via higher stock prices is limited.

mrep5• 6 years ago

It's to fight deflation. With people losing their jobs and holding onto cash to prepare for economic hardship, businesses tend to lower prices to sell their supply as less people are buying. This rewards people for holding onto cash as it increases their buying power if they hold onto cash and wait to buy things. This can even cause a positive feedback loop called a deflationary spiral [0] where everyone is holding onto cash causing prices to fall, causing more people to hold onto cash and so on. That's really bad. You want people spending money and businesses investing money to grow the economy. By injecting money into the economy by buying assets, they hope to counteract deflation. Also, they have not bought any equities yet. They are mainly just buying our own governments debt and mortgage backed securities [1].

[0] https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral

[1] https://www.federalreserve.gov/releases/h41/current/h41.htm#...

roenxi3• 6 years ago

Buying and selling stock doesn't create any boost to the economy. But it is the engine for two very powerful positive effects:

(1) If a person can start a successful new company, they get assets (stocks) that they can sell for money. This creates an extra incentive to start new companies.

(2) Large investors (eg, Buffet-sized) have an incentive to buy significant stakes in companies and improve their management, then sell them to long-term investors. Being able to sell shares for a profit after improving the company creates an incentive to improve companies and then move on to the next one.

And there are a couple of other things like that. So stock trading doesn't in itself do anything useful for the economy but it is the point in time where past decisions that did boost the economy are realised as a profit in dollars. It also creates a barometer for measuring what people with money think about a company's chances, which is useful information and hard to get otherwise.

There is also a very helpful long-term effect where people who can accurately predict the future make money from stock trading, which means over time (in theory) company ownership becomes biased towards excellent long term planners.

Animats• 6 years ago

This used to be called "secular stagnation". There's not much forward progress, but nobody really understands why. Japan hit this first, in their 1989 housing crash. In the mid-1980s, Japan seemed poised to dominate the world economy. After the crash, Japan never came back.[1]

There was a fear that the US would hit that after the 2008 crash. But the US did come back. At least until the epidemic.

Macroeconomists think macroeconomics determines what happens. Sometimes it does, and sometimes it doesn't. When it doesn't, central bankers are totally lost about what to do.

Should a country have an industrial policy? The traditional answer in capitalist countries is "no". But it worked for Japan, S. Korea, Singapore, and China, which now make most of the world's good stuff. China's current industrial policy, set in 2015, is called "China 2025"[2][3]. The plan is to achieve dominance in the remaining sectors where China is behind - aircraft, ICs, etc. It's not talked about much outside China, but it's still the operating plan. The main items in 2015 were:

1. New advanced information technology

2. Automated machine tools & robotics

3. Aerospace and aeronautical equipment

4. Maritime equipment and high-tech shipping;

5. Modern rail transport equipment

6. New-energy vehicles and equipment

7. Power equipment

8. Agricultural equipment

9. New materials

10. Biopharma and advanced medical products

Halfway through the 10-year plan, China is doing well on at least 7 of those items.

Western countries are assuming that the knobs controlled by the financial system determine what happens. When the biggest country on the planet isn't playing that game, that approach may not be competitive.

[1] https://www.csis.org/analysis/made-china-2025

[2] https://www.pbs.org/wgbh/frontline/article/made-in-china-202...

[3] https://static.seekingalpha.com/uploads/2019/1/21/saupload_J...

barry-cotter• 6 years ago

This used to be called "secular stagnation". There's not much forward progress, but nobody really understands why. Japan hit this first, in their 1989 housing crash. In the mid-1980s, Japan seemed poised to dominate the world economy. After the crash, Japan never came back.

Scott Sumner disagrees on no one understanding this. They’re not printing enough money. Basic sketch of the market monetarist position is that Friedman was right about money being really important but very, very wrong about the appropriate target. Keep printing money until nominal GDP growth hits target, then stop. Better to target NGDP future to reduce instability. Japan’s central bank’s is up there with the Fed causing the Great Depression by contracting the money supply by a third at the beginning of a recession in terms of economic mismanagement.

deafcalculus• 6 years ago

Japan has an ageing population. So, it's not GDP or even GDP per capita, but GDP per working hour to look for, and, on that measure, Japan isn't doing too badly.

Japan's problem seems to be very low net household savings and too high savings by corporates. It would be preferable to shift income towards households instead of running up public debt to keep every one employed.

plmu• 6 years ago

The article pleads for more workers rights and bargaining power. While I think that is a noble wish, it is an illusion, and they know it. The article describes "out of the box" thinking, but it is still hopelessly trapped.

The Covid-19 pandemic is forcing a rethink in macroeconomics

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