Why economic stagnation?

One of the major attributes of the social order we call - Capitalism is fair competition. Such competition for a market place should be independent from an ability of any participating firm to lobby a government for favors. If the ability to compete fairly is not in place, a society could be truly capitalist only in the name and not in the character or function.

There is one strange thing I have noticed about LA this year. I could bet that every intersection that has a bank, for it to be ether Chase, BoA or WFC and almost always my bet would be right. Few years back, betting on those three wouldn't be the winning bet. So what have those three done right compared to their smaller competition? Do they have the best customer service? Do the have the best rates on their saving accounts or other products? Do they have a business strategy so innovative that it obliterates their competition? The answers would be no. The only advantages that those three do have are government regulations that favor large institutions and access to cheap federal monetary resources. This kids is not the Capitalism. 

So why are we experiencing the economic stagnation? The answers are obvious for those that do not limit their views by fundamental economic ideas sponsored by big businesses -  there is no fair competition in the financial sector, which is the economic blood line of a country; there is no competition in most of the other business sectors because our government sponsored tax code and trade policies favor  large businesses; there is no competition in politics so those harmful to competition policies will continue and probably will only get worse. 

Economical ideas sponsored by big businesses, Houston we have got another conspiracy nut will scream some. Well, there is no conspiracy just corporate and government sponsorship of convenient beliefs and ideas. It is rather simple, if you are a business sponsor of a well known economic meeting or a conference you do you best to invite those speakers that will promote beliefs most beneficial to you. And most of those speakers will promote the current status quo - business subsidies, asymmetrically biased towards large players and complicated tax code, acceptance of unfair trade policies, embracement of large debt and artificially low interest rates (artificially re- distributing economic surplus away from responsible savers to corporations and governments with high debt load near you since 1991) and the list of similar views just goes on. If you are an economic or finance  professional the only coverage you could get on an information channel deemed 'serious' is for you to embrace those ideas. 

Is everything that grave? Well, there is always hope. And in our case hope does not come from an articular guy proclaiming there is hope. Hope comes from the fact that any unsustainable system is eventually collapses onto itself. The hope comes from the facts that by our individual actions we might create an incentive for a bad behavior or an incentive for a good behavior. What incentive could we create? Well, are you still invested in a blue chip faceless corporation following the same old business strategy of relying on government indirect or direct support for most of its profits?  Are you still banking with a financial institution that relies on its connections with regulators and the size of its marketing budget rather on excellent customer service and competitive fees for its profits? Are you still relying on experts from the 'box' to dictate what economic views one should and should not have? Do you still believe that financial independence could be achieved by any means but saving enough and avoiding high debt? Are you still hoping for a miracle to occur and everything to go back to 1998 without all of us enduring some serious financial hardship or pain? 

Well we could ether do nothing and wait for generations or try to create by our individual decisions incentives that promote competition. In any case, I call for you to embrace our new AA rating because while it is not the cause, it is surely a sign that all shell change one day. One of those days, efficiency shell prevail and fair competition shell win. It would be nice though, if we all helped by our financial decisions to make such a day come sooner. 

  

The chicken or egg debate (supply or demand.)

In order to figure out the main contributor to the long term economic growth and prosperity, one at least partially has to focus on answering a simple question, what comes first supply or demand. And unlike claims by some well known experts that stimulating the demand is the key to all answers in the economics ( Keynesians are so going to hate me ) the answer is possibly NEITHER.

In order to illustrate that neither comes first, let us step back a little and think with the regards of historic perspective. In the XIV century the three Italian city states have become the greatest merchant outposts and maritime powers. Surely, they would dream to have ships capable of approaching or exceeding those powered by sail when no wind is present. One could articulate that given those states had access to an applicable technology, there would be a huge demand and monetary means available to implement it (steam engine.) However no matter the  resources and money those ships weren't available and no degree of demand could inspire the production of those, only innovation could. Absolutely the same argument could be applied towards the supply.
And almost everywhere in the history the coming of the age of technology that lead to increase in prosperity and LONG TERM economic development starts with innovation rather artificial attempts to boost ether supply or demand.

So why there are so many economists emphasizing the ability of government to push the demand as the best and main tool to enhance economic growth? Why even those economic models that were acknowledged by Noble prize as to highlight the role of innovation as the main source of sustainable economic growth (Solow's Model *) are not accepted or mentioned widely in public?
The answer is simple and could be predicted by the Game Theory - lack of social & financial incentives.  It is rather inconvenient for a government to proclaim, it's quite possible there is nothing we can do. It is much more practical for political reasons to highlight the leadership and proclaim that step that were undertaken are the result of economic improvement and proclaim the victory. So there is a political incentive to reward those in economics that rationalized that certain tools should be used by the government to battle the recessions. As the result those practicing similar views are invited to conferences, government sponsored events and get much wider circulation than those in opposition. Eventually such believes become dogmatic and despite their limited success when all costs are calculated they are deemed as practical and workable. And finally since  economy usually eventually recovers,  those mainstream (Keynesian) practitioners are only too happy to take credit without any admission that costs of the government intervention (not too mention their inefficiency) might be problematic down the road.

So what is the best government policy to implement the LONG TERM economic growth? Well, it surely isn't the demand masturbation. The best policy is probably to be aware of the nature of business cycle, government limitations and flexibility when considering any economic model. Since our society is constantly changing, it only makes sense for our economic models to be flexible and not to be taken as absolute truth. Besides a honest and serious cost benefit analysis of any policy and taking into account a historic perspective could never hurt.

Finally, it is time to acknowledge the role of innovation in the economic progress and study factors that could contribute to innovation rather than omitting the subject because of its subjective nature. Ironically, the main driver for innovation might be a view within the society that innovators and entrepreneurs are cool. Promoting the view that innovation is cool could be rather cheap and damn, those people more than most well deserve our attention and respect.

* Solow's Model of Economic Growth
http://en.wikipedia.org/wiki/Exogenous_growth_model

Unfortunately, most do not focus on the obvious conclusion, that when it comes to economic growth, the innovations runs the show.

Market vs Government.

Due to the severity of the latest credit crisis, there will be plenty of soul searching in the coming years. As usual the process of learning from crisis will be hijacked and sacrificed for personal agendas. Those popularity contests might end up in pointing into the direction of Mr/Ms Market and rise of the populism.   Hence the simple truth has got to be addressed - why market and what is the role of government?

While the main battlefield will be debate regarding how rational the market is, it will be missing the man point. It does not matter how rational market is in the short term, what matters is the efficiency of the system and its long term rationality. So in the end the market had prevailed and will prevail in the future for two simple reasons.

First, a market represents the choice of many. And any government entity while claiming to be working for the good of many will always represent the choice of few. And while those few might have more expertise, a better vision, clear goals,  designs for better for humanity at hearts  their means will not be able to achieve the flexibility needed to reflect most wishes of a majority in a complex system such as the human society. Neither those designs will have the flexibility to adjust in timely manner the way a market system adjusts to changes in a human society.

Second, a market has the greater capacity for self correction embedded by its somewhat anonymous nature. It's unique ability to self destruct and self correct any short term rationality comes with a great ease because the market participants carry dissolved responsibility for their actions. Hence they are more likely to self correct their actions (by selling or sheer panic) and achieve the long term rationality - efficient distribution of resources and pricing. While a government or regulator no matter good intentions
will always hesitate protecting its reputation, such is the human nature.

So what is the role of government? Ideally the first agenda would be making sure none of the market participants can influence the government (lobbying). Enforcing all applicable laws equally for all to promote competition while staying away when possible would be wise. And finally understanding the limits of few humans to oversee and appreciate the complexity of society when compared to the same job done by the whole market would be appreciated (by us, majority of humans).