At a gathering at a friend's home last week, we had a fascinating discussion on how our consumption-based model keeps America's economy alive on the one hand; while on the other hand this is perpetuated by the dollar supremacy that seems destined to reign for the foreseeable future.
We all agreed that innovation in the future is the big bet we are placing on in order to enable the debt repayments on domestic and foreign holdings, not to mention the currency itself which is debt in its pure form. To be able to print more currency, we assume that innovation will continue forever. I asked my friend if that were the case, then if there was any place for contentment in our economy. He replied there wasn't.
We also talked about the apparently unfair trade advantage that China has over us, as well as the outsourcing in blue collar work (I would add white collar work as well), as to how this will impact our economy. We discussed the notion of unending innovation as being the answer to these issues as the following chart illustrates. A new product X is created, and this creates jobs in the American economy. Eventually parts of its lifecycle are outsourced, so America does not benefit from "full employment" to the extent this product could offer. However a new product Y (or X + 1) is created through innovation, and it continues this cycle of peaks and troughs in employment.
My friend, though, made the point that innovation will mean less blue collar work, and less opportunities for those with less relevant education. This seems true, even as large innovative companies like Facebook and Google employ less and less people than such a corporation would formerly have, given their revenues and share in the economy.
So we agreed that even as America as a country will continue to prosper, we cannot" (a) prevent shocks such as a the recent housing bubble and the resulting financial meltdown; and (b) ensure reasonably egalitarian growth. In short the domestic economy suffers from both inconsistency and inequality. These are related. The richest will recover faster and more spectacularly from such recessions, and inequality will continue to increase. The richest benefit in this way because the government's currency regime, hinging on its ability to print currency to repay debt and bail out the largest players in the economy, will ensure this. The poorest will continue to get scraps from the table in terms of loan modifications, tax cuts, etc.
This creates challenges for: (a) people below a certain income level measured over a few years, who cannot create enough personal income and wealth to hedge against contingencies or to remain competitive in the face of a highly educated elite class with new toys that help them compete; and (b) countries other than the US which are forced to use the US Dollar as their currency.
In the first case, that of individuals, their 'basic needs' as defined by economists a century ago, namely, food, shelter and clothing, may be met, but the definition of basic needs as I mentioned in another post keeps changing. The above chart also illustrates this. An innovative product will either become irrelevant as soon as new technology replaces it; or it will go through a period in which it becomes a 'basic need'. For instance, a smartphone today is not a basic need, but it may soon become one even as it supports digital payments instead of credit cards,serves as a tool to prevent home break-ins, controls access to cars, serves as a GPS device or as a tool to access repositories for documents, media, financial information and control. If traditional mechanisms for transacting merchandise and services make way for digital or virtual mechanisms via such devices, then a person who does not carry such a device becomes noncompetitive and therefore dangerously close to dire circumstances, the equivalent of a person who today does not know how to pay cash for food. This is why all innovations, such as in healthcare, communications, education and so on, eventually become human rights as economies progress, because though human rights are absolute in nature, they are dispensed via interactions and therefore relational (not relative). The need for a smart phone may not be a human right now, but the need for a certain level of education is- and this may call for a device such as a smartphone in the future. In other words, if human beings build up infrastructure for community, such as nations and economies, then each human being who has any part in such community (as a member, partner, beneficiary or an unrelated stakeholder) has levels of needs which must be considered basic human rights for that community, in that time and age.
In the second case, that of countries other than the US, it gets tricky. They cannot inflate the economy as wantonly and elaborately as the US does, because they will need to repay the debt that arises from it. Unfortunately for them, their debt is not denominated in US Dollars. So while economists like Paul Krugman who argue against austerity are right in that European countries which suffer from their levels of unemployment, low growth, low productivity, etc, should spend in order to recover, they need to be much more cautious (than the US) to ensure their debt does not get out of hand. These countries are also tied at the hip to the US via trade. This can help them immensely, as it has in the case of China, which has seen remarkable levels of growth and the redemption of millions of people out of poverty. While they have this benefit, they also are vested in the growth of the US as they hold US government debt which could be repaid only if the US grows enough to keep up. In the case of countries like Russia, we see that this economic relationship is a Faustian bargain which will turn on them if they misbehave, never mind that the US itself is guilty of similar behavior. Russia's options are limited in the face of the current gas price war and limited sanctions in the wake of their attack on Ukraine. Is this a good thing? Americans would say it is, but the price for such punishment is always borne not by leaders but by workaday human beings just like them in Cuba, Russia, Iran and other countries.
Years ago, John Maynard Keynes coined the term 'Animal Spirits' in economics to describe public mood or consumer confidence which drives consumption and therefore investment. People today believe, as my friend did, that the desire to "have", or the "wants", or as Gordon Gecko would put it, "greed", drives innovation. In other words, necessity is the mother of innovation. I think this is only one third of the story. If this were indeed true, why is it that human technological progress increased rapidly from the industrial revolution, and not in the previous centuries? Were human beings less intelligent prior to that time in history? It doesn't seem that way at all. The ancients did produce great works of mathematics, philosophy and literature. We tend to blame our institutions, such as religious or governmental, for stymieing progress. Maybe there is some truth to this. But I believe innovation stems from (a) our need; (b) our desire for truth; and (c) God's sovereign provision. All of these, I believe, are designed and given to us, which means that at some point, they could slow down as they did prior to the Industrial Revolution, or even stop altogether. Betting on unlimited innovation, simply because we seem to have unlimited greed, seems to be betting on fool's gold. Innovation stems first and foremost from a creative God who has blessed us with creativity.