Sunday, April 5, 2015

Explaining secular stagnation using the Smurfs

The Long and Short - dude, like... imagine the Smurfs. Here's a highly recommended explanation of "secular stagnation" using the Smurfs.

Here's an excerpt:

There was an awkward silence, and then Hefty Smurf spoke up. “Actually ...”, he said, rather diffidently, “I don’t see why all the money seems to end up with Papa Smurf. In the olden days, we all had a little bit and we all spent it. But as time has gone on, it seems like a bigger and bigger share of the smurf fortune has ended up in Papa Smurf’s bank account. He’s got richer much faster than the rest of us. Papa doesn’t spend the money at the same rate we do, so if he doesn’t invest it in new projects, it just sits there and doesn’t circulate.”

Hefty Smurf has raised the ‘inequality explanation’ here (perhaps he’s been reading Thomas Piketty’s book, Capital in the Twenty-First Century, or Inequality and Instability by James Galbraith, which makes the point more explicitly). The interest rate is one thing every businessman looks at when deciding whether to invest, but it’s not the only – or even the most important – thing.

The most important factor in the investment decision is the fundamental question every business asks every day: are there enough potential customers to buy the product? Poorer people spend a higher proportion of their income than richer people. This is true all along the income distribution scale, right up to the very richest, who spend proportionally the least of all. Thinking in terms of consumer goods, it’s easy to see why a concentration of wealth and income in the top one per cent might break the investment-demand relationship: if the customers of Samsonite luggage get a payrise, Samsonite can expand production and increase its sales. Louis Vuitton, on the other hand, has limited supplies of skilled labour and high-quality leather – all it can do is raise its prices, or watch the queues form for its latest handbag.

However much an economist might prefer the "investment goods deflation" argument, you have to admit that the above still must be a contributing factor. How the fuck can you expect growth after decades of contraction in worker incomes? Who exactly is supposed to buy things? At the ultimate end of every model, isn't there supposed to be a consumer?

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