Growth in the GDP: Investment versus spending

Discussion in 'Business & Economics' started by Ivan Seeking, Jan 24, 2012.

  1. Ivan Seeking Registered Senior Member

    Messages:
    957
    The justification for reducing taxes on the rich is the claim that lower taxes result in greater investment, which leads to expansion and growth. But it is known that the primary driver of the economy is consumer spending.

    We all know that government spending needs to be reduced so as to bend the curve for future debt projections. But we also know that the debt, and especially the deficit, cannot be managed solely through spending cuts. As the economy recovers, we must raise tax rates in addition to reducing spending.

    Given [assuming, if you prefer] that we must raise taxes, it would be nice to know how investments compare to spending in terms of growth in the GDP? For every dollar in tax breaks for the wealthy, especially in regards to the top marginal tax rate, how much growth does this create, as opposed to every dollar in tax breaks for the middle and lower classes, who would spend that money as consumers?
     
    Last edited: Jan 25, 2012
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  3. Ivan Seeking Registered Senior Member

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    Logic would seem to dictate that investment follows consumer spending. Without the consumer, no amount of investement would matter. So if forced to choose, and given the historically low rates that we see for the top marginal rate and capital gains, it would seem that tax increases on the wealthy makes the most sense first.
     
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  5. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    That is a good question, but has a hidden and frequently false assumption: I.e. you are assuming that the US rich, given more tax relief, will invest in the US, but in fact they tend to invest where the risk adjusted return is the greatest. That has clearly been China by at least four times the return as investing in the US. Just building your new factory there cost less than half as much - I.e. for same production capacity the capital is less than half. Then there are the opperational costs (salaries, mainly) less than one fourth, not to mention the lower costs of polution controls.

    These more modern, more efficient, much more productive Chinese factories have forced many US factories (trying to compete with them) to close. Thus from the US perspective, the effect on the US of dollars going to Asia to build factories has been a strongly NEGATIVE expansion and growth.

    So clearly better for stimulation of the US economy´s, "expansion and growth" would have been just firing up helicopteer Ben´s flying machine and simply throwing the money out over poor neighborhoods (where little would be saved and ~100% spent in a week). That would have made a rapid and big postive "expansion and growth" spurt in the US instead of the negative growth and loss of jobs etc. US economy suffered from as the investors sought the highest rates of return they could get.
     
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  7. quadraphonics Bloodthirsty Barbarian Valued Senior Member

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    It's unclear that the advantages are as great as they used to be, what with the ongoing appreciation of the renminbi, agitation for better pollution controls, and changing labor market in China - to say nothing of the growing appreciation of the downside costs of technology dissemination and rising energy costs eating into the far-flung supply chains. I've lately been hearing many mutterings that the two countries are close to parity in terms of desirability for manufacturing investments (at least, for non-Chinese investors - story is very different if you stand to be the beneficiary of China's generous industrial policies). Although, Mexico is predicted to be the big winner in all this - basically, a return to how NAFTA was supposed to play out before all those Mexican factories up and went to China.

    Assuming that by "expansion and growth" you mean "building more factories," that is. The fact of the matter is that real per-capita GDP in the USA is much higher now than it was before the whole production-in-China thing took off. Giving people access to cheaper goods can do just as much for their purchasing power as does giving them higher-paying jobs.

    Meanwhile, US manufactured output has kept pace with GDP growth the whole time, and the USA remains the country with the world's largest manufacturing output. So it's unclear that the USA really needs more manufacturing located here. The decline in manufacturing jobs has everything to do with automation, and very little to do with China - there's more manufacturing done in the USA than ever before. It just gets done by robots, and so doesn't provide the numbers of jobs it used to.

    Why would that lead to "expansion and growth?" That's defined, by you, as "building factories in the USA," right? So, why wouldn't the poor recipients of that money also seek the highest rate of return on the purchases they make with it, and so buy cheap goods imported from China? Unless you somehow ensure that American goods are the cheapest/best ones, the money still ends up in the Chinese factories. Well, some of it would be absorbed by the retailers selling the goods here, along with the supply chain, and many of those "Chinese" factories are owned by Americans, but the upshot is that it doesn't show up as extra demand for factories located in the USA.

    If you want to use government spending to increase investment in American factories, then no general tax cut/money give-away is going to do it. You'd have to spend the money on an actual industrial policy, not just hand it out to individuals who will still face the exact same set of incentives as before they get the free money. Instead you'd have to spend it on tax breaks for actual investments in actual American factories, or on tarriff/subsidy protections for American manufacturers, or to subsidize bank lending for manufacturing, or to devalue the dollar, etc.

    All of which, of course, assumes that the proper goal of policy should be to encourage the proliferation of more factories in the USA. It is unclear to me that this is a good idea, and I do not see where such has even been argued. Rather, it is taken as a given at the outset that more factories = better America. It is also noteable that you argue, on the one hand, that the USA needs more manufacturing (and exports), while asserting on the other hand that dollar devaluation will represent the end of the USA as a viable economy. Those two positions are inconsistent with one another.
     
  8. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    To Quadraphonics

    I agree with youalmost entirely. At least once I did say Asia, instead of China, but the China I was referring to was the old one grossly exploiting the sweat shop workers. Now the smart money is flowing into Vienam, etc. even the Chinese can no longer compete with other Asian nations on low value added goods. My post was worded to make the point clearly understood, not to be precise, so I used the common false image of China as a low cost labor land.

    Certainly some of the money from heaven those living in poor neighborhoods would find its way back to the makers of products in Asian, but as their cost of food and rent is most of their income that fraction would be less than if every American got the same amount - this is the main argument I would have with your post.

    I did not define "expansion and growth" only used the OP term. Certainly the US does not need MORE factories - just to replace those 20 or more years old with more modern ones, etc. I am not sure even that would work to keep jobs in the US. Asian nations are leading in automation too. For example Foxcomm already has 10,000 production line robots, but is buying 1 million more!
     
    Last edited by a moderator: Jan 27, 2012
  9. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    Not quite what I have said. I have said dollar collapse would end the US way of life and that US needs to REPLACE its old high cost factories. Yes dollar devaluation, according the economics 101, should boost exports, but in the real world the facts are it has not done so.

    Part of this is due to everyone (except China) forcing the value of their currency down with printing presses. What economics 101 should have been talking about is how dollar devaluation has "exported inflation" to emerging markets, even those like Brazil where government has kept double digit interest rates to limit domesting buying by the many who are now no longer poor, wanting their first car or even first refrigerator, etc.

    BTW, if you have time, read this short post and comment on my strange idea there. http://www.sciforums.com/showpost.php?p=2895528&postcount=119
     
    Last edited by a moderator: Jan 27, 2012
  10. quadraphonics Bloodthirsty Barbarian Valued Senior Member

    Messages:
    9,391
    The OP discussed "investment" leading to "expansion and growth." It said nothing about factories or manufacturing. That segue from "investment" to "manufacturing" was introduced by you.

    It is, in point of fact, perfectly possible to invest in things other than manufacturing, and for that to result in expansion and growth. You could invest in food production, or in services, or in finance, etc.

    I remain unconvinced that American factories are out of date. Most of those older ones have been refurbished with modern automated machinery - otherwise, there'd still be a ton of blue-collar jobs at them! US production is far more automated than is Chinese production, so while it may be the case that the factory buildings themselves are newer over in China, that does not imply that they are more efficient.

    But, feel free to provide a source for your (frequent) assertion that US factories are technologically outdated. I strongly doubt you can find one, but I am willing to be convinced.

    As I've just mentioned, automation is the main driver of the disappearance of factory jobs. Manufacturing is going the way of agriculture, where ever-increasing outputs can be realized with every-decreasing workforces.

    Japan and Korea are leaders in automation. China (and Vietnam, India, Phililpines, etc.) is a different story entirely.

    Differences in automation are one of the big drivers of the divergence in factory workers salaries - one reason (non-Japanese, non-Korean) Asian factory workers are so cheap is that they are doing un/semi-skilled manual labor, whereas US/European/Japanese/Korean factory workers are actually highly specialized workers trained to monitor and maintain advanced automated systems.

    It is true that growth in industrial robot sales has been strong in Asian countries lately, but the USA is still buying about as many industrial robots each year as China is. Of course, that shows up as a huge bump in the growth rate of sales for China (since they haven't historically bought very many), but not for the USA - but leading in growth in new purchases isn't the same as leading in new purchases, let alone leading in actual automation.

    http://www.ifr.org/industrial-robots/statistics/

    There are, apparently, only about 60,000 industrial robots deployed in China - the USA has more than double that number, despite having 1/4 the population. I.e., the robot-to-worker ratio in the USA is something like 10 times that of China. China is expected to climb to the top of the robot sales numbers over the next few years, but that's exactly because they're playing a game of catch-up with Japan, Korea, North America and Europe. Note that sales of new industrial robots to Japan, Korea, the Americas and Europe in 2010 ran to about 150% of the total number of deployed industrial robots in China!
     
  11. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    To Quad:
    Again I agree with most of your post. I was mostly thinking of the heavy industries - especially steel.
    I focused on iron & steel production as I knew US came out of WWII as the world leader, but rest of the world re-built with more modern production. Thus US lost it leadership position with peak production in 1953 (as I recall reading). Also I think China is now world leader in steel production by a significant single digit factor over the US.
    I don´t search well, but did note that the US began to modernize too a decade or more after other countries´ modern plants nearly eliminated the US as a producer of steel. It is not easy for the US to recover it´s position as production near the demand centers is more economical and as noted below these other countries are investing more than the US is.

    Here is link to many currently planned capital investment by country: http://www.steelonthenet.com/investment_2011.html Note the US has only one production unit – a blast furnace. Others are storage and distribution centers.

    Here are locations, values and number of iron & steel projects with most capital investment planed (or done) in period 2001 to 1015: From www.steelonthenet.com > files > top-5-investment-locations.html
    Top Locations for Capital Investment 2001-2015
    Rank Location Country Value US$ billion
    1 Karnataka India $32.4
    2 Jamshedpur India $25.5
    3 Zhanjiang China $12.5
    4 Vitoria Brazil $11.7
    5 Paradip India $10.8
    Note: Analysis as at mid-2011. All values are in end-2010 USD. Source: MCI capex cost database. Popularity of Zhanjiang is somewhat is distorted by plans for a single 20 mt/year investment by Baosteel in integrated steelmaking, planned for 2012.


    Rank Location Country No of Projects
    1 Novolipetsk Russia 20
    2 Chattisgarh India 10
    3 Karnataka India 9
    4= Cherepovets Russia 8
    4= Jamshedpur India 8
    4= Maharashtra India 8
    Source: MCI analysis, mid-2011. Further information: steel capex costs report. Readers should note that popularity rankings are influenced not just by the commercial attractiveness of the various locations shown. Indeed, the transparency of the steel industry investors making investment disclosures also has a significant bearing on the assessments shown.
     
    Last edited by a moderator: Jan 29, 2012
  12. Fraggle Rocker Staff Member

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    24,690
    This has been the case since the 1890s (in the USA; it happened at different times in various countries), when our economy toggled from scarcity-driven to surplus-driven. Food, other necessities and capital goods for industry are no longer the mainstays of the economy.

    But the post-industrial economy has a new sector: virtual goods and services. We can look forward to the day, probably within this century, when this sector eclipses the traditional sectors of the old industrial-era economy. One of the effects will be a damping of the power of large corporations, since virtual goods and services do not require the tremendous investment in capital that launched the corporate economy. As I've mentioned before, my friend's son and his wife emigrated to Estonia and started a software house that is now highly successful--by investing nothing more than their life savings.
    There is by no means universal agreement on that. As the birth rate falls below replacement level in country after country--so that eventually immigration will no longer be able to prop up the Ponzi schemes we call "social security"--medical care for retirees will consume an ever-greater portion of every nation's GDP. Since young people rationally choose not to purchase health insurance in such a market, the ballooning health-care sector of the economy will of necessity become nationalized--and therefore markedly less efficient as bureaucrats come to vastly outnumber actual service providers and other value-adders, just as they now do in our outrageously inefficient already-nationalized charity and education sectors.

    The U.S. government has already been characterized as "the world's largest insurance company protected by the world's largest standing army." It will only get worse as our generation gives way to an even larger generation of retirees, with fewer children and grandchildren to support them. One thing has always been true about us old people: we vote. Young people will be working to keep us on ventilators.

    Please Register or Log in to view the hidden image!

    "Reducing spending" is absolutely not going to happen as the median age of the population continues to rise and the percentage in their 90s and 100s balloons while the workforce shrinks. Tax rates will rise to the point that the USA becomes a socialist gerontocracy.
    It creates growth on paper, as corporate wealth increases. But that wealth represents investments in countries like China and Malaysia, with low wages. Meanwhile unemployment in our own country remains intractable.

    The salvation is supposed to be the post-industrial economy, with entrepreneurs creating their own engines for the production of virtual goods and services. Unfortunately, the transition from a post-industrial economy to an information-based economy features the same heartbreaking inequities and dislocations that the last transition from an agricultural economy to an industrial economy did. Maybe we will give birth to our own Charles Dickens, who will chronicle these inequities and dislocations--perhaps in a blog, as he did in a newspaper, the new mass-medium of his era.
    It's difficult for us to transcend the paradigms of the Industrial Era, even as we watch it collapse with corporations changing from producers into scavengers who buy up each other's rotting corpses.

    The models of everyone from Smith to Hayek will need to be overhauled, as the manufacturing sector becomes increasingly automated and therefore not a wage-generator, just like the agricultural sector which dominated the pre-industrial economy for twelve thousand years. These models will also have to accommodate a shrinking population of producers and consumers, a phenomenon that our species has not experienced since back in the distant mists of the Paleolithic Era. Every economic model we have--even communism--implicitly relies on an ever-growing population of producers and consumers as its engine of prosperity-creation.
    • Food production is already heavily mechanized (and now automated) and employs a tiny percentage of the workforce in the developed nations. Investment in that sector will not create a lot of individual wealth.
    • Services is indeed a growing sector, although as the work week continues to shorten people will have more time to perform their own services. (The de facto 50-hour week in the USA is an anomaly that will be normalized once a new generation of business leaders accepts the fact that "knowledge workers" reach their optimum quality and productivity levels at about 32 hours, just as Henry Ford discovered that assembly-line workers do at 40 hours.)
    • Finance... well who knows. That segment of the economy will undergo a revolution. It is currently built around the corporate-industrial model. We'll have to see what the entrepreneur-virtual model looks like.
    • As I noted, the virtual sector will come to dominate the economy, just as the industrial sector did in the last century. This will be characterized by what Toffler calls prosumers, people who make things for their own use. Every time you create a new database or music library, build a doghouse or other DIY project, organize your YouTube bookmarks, plant an herb garden on your veranda, or write a blog that you and your twenty best friends read... you're a prosumer.
    I often go to karaoke on Thursday nights. The club is no longer a hangout for people who used to sing in the shower, but for rather good singers who just don't have the inclination to join a band (although a few of us are in D-List bar bands). We're prosumers.
    China, and now Malaysia and Vietnam, and after them Bangladesh and Egypt. are just taking advantage of a population who are so happy to have an increasing standard of living that they don't complain about it being two orders of magnitude lower than ours. They still use labor-intensive manufacturing techniques. As their per-capita GDP increases, they too will have to automate to remain competitive.

    When the last little island finally has fully automated factories and its people sit at home doing knowledge work for two or three days every week, the Industrial Revolution will be over.
    Before the Industrial Revolution, 99% of the human race were doomed to "careers" in the food production and distribution industry--jobs which often required 100 hours of work per week during the peak season. By the end of the 19th century industrial technology had increased the productivity of farm workers so much that a significant percentage of the population had jobs no one could have dreamed of in the 17th century. Today, in the Developed World, something like three percent of the population feed the rest of us, and they work 40-hour weeks like we do.
     
  13. Asguard Kiss my dark side Valued Senior Member

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    23,049
    I love the assumption constantly sprouted by people such as FR that goverment is ineficent wheb it comes to health care. You never put evidence because the evidence is the other way. The cost per person is higher the greater percentage of expenditure comes from other than goverment. The US has the highest costs in the world and doesn't provide universal care yet everother country provides better care cheeper to everyone. Im not going to try to find employment rates in health because i dont care, if more people are employed cheeper and providing better care then that isn't a down.side but i will say that what do you concider everyone employed by the health insurance companies if not beurocrats?
     
  14. joepistole Deacon Blues Valued Senior Member

    Messages:
    22,910
    I have no idea what you are trying to say here. Markets are always demand driven. If there is no demand, there is no market regardless of the supply.
    So you are saying that our military healthcare is inefficient as it is totally government run? And you are saying our system of VA care is inefficient?

    And how do you get more inefficient than the pre-obamacare US healthcare system? All other industrial countries cover all their citizens for less than half the cost in the US. And you think the US "privatized" system of healthcare is efficient? I guess you must be using a definition of the word efficient that is not in the dictionary.

    The clear bottom line here is that other industrial countries get more out of their healthcare system for a fraction of what it currently costs in the US and all the evidence indicates the quality of healthcare in the US lags that in other industrial nations.

    It is hard to get more bloated and more inefficient than the pre-obamacare the US healthcare system.

    You have completely ignored immigration. The US has and remains a nation of immigrants and is a source of continued economic growth.

    http://en.wikipedia.org/wiki/Immigration_to_the_United_States#Demographics

    http://en.wikipedia.org/wiki/Demographics_of_the_United_States#Median_age
    The US economy and indeed the world economy is mostly a service economy and has been for some time. I don't see that changing anytime soon. The services sector will continue to become an increasingly larger portion of our economy. And as computers and technology continue to evolve, our machines will radically change our economy and our lives in ways beyond the imagination of most individuals.

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_sector_composition

    Hayek and his crystal ball was a crackpot and has historically been ignored; held in disregard and should remain so.
     
  15. Pandaemoni Valued Senior Member

    Messages:
    3,634
    As someone who attended the Rally to Restore Sanity, I have to chime in. There is no need to denigrate the memory of Hayek like this. Hayek, as regurgitated by modern day "Austrian school" economists leaves a lot to be desired, and I wouldn't recommend his books to anyone these days, but Hayek himself was nether ignored nor held in disregard in his own time.

    He was good friends with Keynes (who nominated Hayek for admission to the British Academy) and a major influence on the Chicago School, especially Milton Friedman. In fact, modern-day "New Keynesianism" is largely Keynesianism with the addition of tweaks to deal with criticcisms levied by people like Lucas and Hayek (and Lucas was inspired by Hayek). The man won a Nobel Prize in economics for a reason, and even Paul Samuelson (who was no fan overall) said he deserved that prize, as much of Samulelson's work on capital theory was spurred in trying to debunk Hayek.

    Perhaps more interestingly, the founder of wikipedia credits Hayek as being a key player in his thinking, stating "One can't understand my ideas about Wikipedia without understanding Hayek." See: http://reason.com/archives/2007/05/30/wikipedia-and-beyond

    I would agree that Hayek's insights have largely been eclipsed or are now sufficiently accounted for in the works of others, but he was a significant and respectable (and respected) figure in 20th century economics.

    You may dislike the sort of people who like Hayek, and you may reject Hayek's work, but there's no need to suggest he was a "crackpot". Consider what the Nobel committee said of his work:

     
  16. joepistole Deacon Blues Valued Senior Member

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    22,910
    I am glad you agree Hayek's work has been eclipsed. Bleeding was an established and well respected medical treatment for virtually all illnesses too.
     
  17. Pandaemoni Valued Senior Member

    Messages:
    3,634
    As I received a PM asking me for evidence on Keynesians predicting doom at the end of WWII, as government spending was poised to rapidly decline, I figured I'd post this here:

    It's a 1946 article from Lawrence Klein (who would go on to win a Nobel Prize largely for his development of macroeconomic models in the Keynesian mold):

    http://www.jstor.org/pss/1827060

    Unless you have an account (or are at an institution that has an account) the paper itself is gated, but you can still see the quoted text on the first page. The paper as a whole is not a refutation of Keynesianism, just evidence that Keynesian theory has an odd issue in that WWII getting us out of the depression is consistent with the theory, but it also predicts that the end of WWII should have created new problems that never materialized.

    Paul Samuelson wrote, in 1943:

    "Full Employment after the War," in S.E. Harris, ed., Postwar Economic Problems, 1943. The paper is item 108 in this book. See page 1453 for the quoted text.
     
    Last edited: Feb 5, 2012
  18. joepistole Deacon Blues Valued Senior Member

    Messages:
    22,910
    What you are posting here is different from the cause Michael was trying to advance in another thread. It should not be a surprise that the issue of transition from a war time economy to a peace time economy was a topic for discussion. After all the WWI war time to peace transition did not go so well.
     

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