One question that is reverberating across the 2020 election cycle is of how to stimulate investment in today’s extended low-growth economic cycle. The answers given are a panoply of over-complicated prescriptions ranging from forcing large corporations to include labor representation on their boards to, incredibly, carrying out a trade war. The correct answer, however, is much simpler: we must increase consumer demand. A variety of tools exist to tackle the problem of underwhelming demand, but we’ll focus on two: one domestic and one international. Domestically, we must increase working class income and the number of people in the middle class. Internationally, we can drastically raise foreign investment and aid.
Demand is the engine of the car that drives the economy. Without some certainty of demand for a product, no business or entrepreneur will invest in producing it and capacity will go unutilized. Labor will go unspent. Laborers, in turn, lacking steady income, do not spend. No amount of cajoling or provision of cheap capital (ie low interest rates) is going to change that. In our car analogy, we can compare cheap money to fuel. Without enough of it, we aren’t going anywhere, but without a working engine that fuel is useless. Our current situation, globally, is of enormous tanks of gasoline standing ready for a little Vespa engine. We need to think about ways to add some cylinders.
With a slightly better grasp of the ailment, we can start to see how some popular prescriptions are a bit like giving a cancer patient some opioids. We may feel a bit better, but we’ve done nothing to fix the underlying issue. Lower interest rates, in spite of what the Cheeto-in-Chief may believe, can only weakly stimulate demand through the wealth effect (e.g. stocks go up, you feel richer and thus spend a bit more). A trade war, meanwhile, dramatically raises uncertainty, lowering both availability of supply and existence of demand. Even upon a full capitulation from all opponents, effects on demand would be modest at best and dependent on the dubious hypothesis that Chinese consumers would suddenly start consuming more, which would require a redistribution of income from the government and the wealthy to the poor and middle class. This is because those in lower income brackets spend more as a portion of their income. Meanwhile, proposals on regulation for employment create disincentives for hiring, so regardless of the effects on those who retain their jobs, people are worse off in aggregate.
A domestic policy with shorter odds for actually sparking rapid growth, then, would go directly at the timid consumer spending.growth. Specifically, it must put money directly into the hands of working class citizens. Andrew Yang’s “Freedom Dividend” would accomplish that, but so would spending money on labor-intensive projects. When creating such projects, if it creates an asset of greater value than its cost, debt can even be offset. Finding productive investment in an environment awash in cheap capital could be difficult, but our roads and bridges are badly in need of maintenance and we lack any of the high-speed rails prevalently connecting European and Asian cities.
Additionally, domestic demand can be stimulated with more domestic workers. As the average American gets older, productivity gains will become more difficult to come by. We can offset that by importing more skilled workers, which also provides an immediate boost to demand via a greater population.
Demand, however, does not merely exist domestically for products manufactured here. In the same way American demand benefits other nations, boosting international demand benefits the US. Drawing any comparison to the Marshall plan that followed World War II is problematic as Europe had the skilled workers and simply lacked the capital to rebuild. While, like then, we could accomplish numerous foreign policy objectives, the human capital simply does not exist in many of the places where US dollars could be effectively deployed. Nor do robust institutions preventing misuse of that capital. Many Latin American countries in particular would benefit from an injection of dollar assets, but many are notably corrupt and few have high levels of skilled labor. A program of investment would have to be tightly managed while including the sorts of jobs by which people could learn new skills in addition to the qualification to the qualification that it be productive. Buying foreign assets with dollars has the supplemental boon of of strengthening foreign currencies relative to the dollar which makes American exports that much more competitive.
At the same time, there are two major economies with consistently and abnormally high exports: China and Germany. China’s surplus comes from excessive governmental capital investment, which, through some rather opaque use of financing, encourages extreme inequality and reduces consumption as a portion of GDP. The German problem comes from the combination a government-negotiated agreement between the unions and the industrialists that capped pay while nearly guaranteeing continued employment and an artificially weak currency in the Euro relative to the other countries in the currency bloc. In a mechanism beyond the scope of this essay, both instances act as regressive transfers of wealth which then raises “savings rates” and encourages exports of capital. Since capital accounts and current accounts must balance, this means they both have enormous deficits of demand and thus place a strain on aggregate global demand. Both of them would greatly stimulate the global economy by simply redistributing wealth downward. While there is nothing the US can do to directly force this action, encouraging it via collaborative negotiation is well within the realm of possibility, especially in the shadow of an increased role for foreign aid.
Demand, then, is the engine for economic growth. Building it is a process that simply takes a little bit of redistribution. At the end of the day, there is no commerce without the customer. Broadening that base can only help not only the poor, but businesses everywhere.