Sunday, 5 September 2010

The move to agriculture and economic stimulus and away from savings

Let us investigate a centralized push to "export agriculture and industrial products , reverting to tangible goods production" as is suggested from time to time.

Most of the growth in the last 25 plus years has been focused on the knowledge sectors. Far from being "tangible". The simple answer is to look at what people want. This of course is far more complex and dynamical response systems and chaotic feedback makes models from a static equilibrium fail (in all cases).

What do we central push. As this is the only answer to this model. A centralized non-market distribution. Markets drive agriculture. If this is centralized (more than it is), decisions are driven from the place of most knowledge to that of the least (the central planner).

Lest look at this in a simple model. Govt moves the economy towards a tangible agricultural focus on wheat production. Let us say that the aim and goal is to double US national production.

This will require subsidization and taxation. The international response as a negative feedback is opposing trade tariffs (everyone loses here already).

To achieve this goal of doubling food production in the short term will require moving people from more productive sectors of the economy to agriculture - a less productive sector. If this was more productive, it would not require central intervention to make people move towards it (in place of moving out of this sector as is the case).

There are a few ways to double the amount of wheat, some of these are:

  1. Double the area of productive area in land needed to double the output using existing technologies
  2. Increase Mono cultural GM based cropping on all existing land and also expand the productive area
  3. Replace land used to produce other crops (ie Soy, Sorghum, ...) with Wheat

First, #2. This is problematic as it does cause decreased sales in the EU and many other areas. People who object to GM foods have to be forced to eat GM wheat - like it or not.

Next #3. Again, we have to move people from a choice of what they actually wanted to have as a food source to what we have decided they will have. This will also reduce demand and hence the results will not be achieved without importing other foods - ones which where once grown less expensively within one's own borders.

Then #1. Doubling productive output is not the same as simply doubling land. All productive land that has the ability to produce at the given price is already being used. An additional unit of output of wheat requires a greater amount of input then all existing inputs.

That is, doubling output in wheat can only be achieved using either FAR more than double the land required to make the marginal returns on the initial parcel as well as requiring far more input of other sources. This includes increased labour (less productive land is more labour intense). The use of oil resources (fertilizer, equipment fuelling etc) all increase significantly over each marginally productive point that could produce efficiently before.

This still requires a market for our now more expensive wheat.

With a doubling of US wheat supply, the international price of wheat diminishes (wheat is fungible as are most agricultural and industrial products). International markets cannot be forced to accept US wheat at exaggerated (or even pre-incremental marginal demand prices). Hence, the supply increase leads to a significant decrease in prices.

To sell at this reduced rate, Government can either buy up the surplus (that is all additional grain or the entire excess) or can create subsidies for the farmers (which have an additional negative feedback from international political sources leading to increased instability and increased risk of war or other conflict).

Subsidies come from tax and debt. Govt has to increase both to maintain the subsidies needed to increase investment in a formerly unwanted sector (more wheat). These taxes come from the more innovative sections of the economy. This drives down investment in these sectors as rent seekers move to agriculture.

The overall net effect is an increase in tax rates with a diminished national productivity when measured across all sectors.

As this continues, the level of taxation increases over time in order to maintain the existing subsidies. This leads to a larger collection function. That is, Federal government departments increase in size to maintain the enforcement activities. As a higher tax rate is extracted from the diminishing base, more enforcement activities are required as more people and companies pass a threshold risk level where it becomes more profitable to attempt to avoid tax (evasion). This is a negative feedback effect with more evasion leading to increase requirements for tax and government sector growth. This in term leads to an increased propensity to evade...

As the requirements to subsidize are maintained, the impact of the increased taxation move into progressively less innovative areas and cause these to become unprofitable. Investment moves from these towards those which still maintain some level of marginal productivity. As investment flows away from these industries, they close. This continues to diminish the tax intake requiring additional tax increases to be enforced to maintain the subsidies.

This process continues as the economy withers, the tax base decreases and we have ultimately exaggerated the problem that we sought to fix.

Hence the problem with central planning. Knowledge is not simply expertise. It is the sum total of all people invoiced within the economy and to think that any central plan can match this is insane. Socialism does not work and central planning is the foundation of such.

The economy is self repairing when others do not expect to help it by poking here and cutting there to see what may occur.

"Moreover, stimulus packages, if they are big enough, will also stave off recession inasmuch as they replace the money withdrawn from the economy through the deleveraging process is replaced by government."

All stimulus increases central planning. It takes from all to provide for a few. The track record here for any government is dismal. I still do not know of a single case of a stimulus resulting in creating anything more than rent seeking.

They reduce productivity in the pursuit of building pyramids. As for replacing money, this only occurs in selective sectors, others actually decline. The overall result in all instances is a lower overall level of productive returns. This view is one that Keynes promoted and Samuelson took up to promote heavily. Both ignored or forgot Frédéric Bastiat's parable of the broken window (1850).

This is the fallacy with the attack on savings. (This is espoused heavily by Paul Krugman in his neo-Keynesian view that tax cuts only result in more savings by the rich and hence result in no additional benefit to the economy forgetting that savings are NOT placed under the bed but are re-invested into the economy...)

Government stimulus crowds out investment. It replaces a stream of net investment with a level of productivity (taking all sectors of the economy - those losing money and those gaining) with one that is not productive.

It creates uncertainty as short term political policy (and thee will never be a long term policy in a democratic country as this seem s to the voter as doing nothing) fluctuates and moves from one policy of the moment to another. The result, lower investment and less productivity.

This view is one that Keynes promoted and Samuelson took up to promote heavily. Both ignored or forgot Frédéric Bastiat's parable of the broken window (1850).

Again, as with other posts, the fallacy with the attack on savings. (This is espoused heavily by Paul Krugman in his neo-Keynesian view that tax cuts only result in more savings by the rich and hence result in no additional benefit to the economy forgetting that savings are NOT placed under the bed but are re-invested into the economy...)

Savings are not simply put under the bed. They are the investment base that drives the economy. The fallacy in the US view of savings is to ignore the input from international sources. US savings have been able to remain low in the past due to an inflow of international investment into the US.

This is, the US was living off the savings of Japan, China, ...

Savings are a good input into any valid economic model. More savings is more capital and more capital investment increase productivity. More productivity increase wealth. The size of the pie increases and even the poorest members of society and the economy live as if they are rich (when compared to prior generations).

The Keynesian and neo-Keynesian consumption fallacy needs to be put to rest. The productivity of an economy is not measured by how many useless plastic goods we distribute in the holidays, but the level of productivity and capital investment. Both productivity and capital investment.are boosted through increased savings.

Productivity and capital investment.lead to increasing wealth, employment and growth. Savings are a boon, not an evil to be driven out of society.

1 comment:

Andrew said...

Excellent article.

One thing I'd like to add as a difference between capital investment from private savings as opposed to government spending is that projects from the investors are accountable for their own investment. If the project fails, it usually stops there and any mal-investment ceases relatively quickly.
In the world of government, however, politicians who started a project cannot be seen to have failed. Government projects that go sour usually end up receiving evermore funding in order to be seen as successful.