Our Photon Controls Are Damaged

Lord Keynes was once asked what his policies would do in the long run. He famously said, “In the long run we are all dead.” While I have mocked this answer in the past, there is an element of truth to it. When in a tough situation one might do things that otherwise would not be done. But the idea is that when things are better one could repair the damage in better times. This was actually what Keynes advocated. He wanted to have a balanced budget over the length of a business cycle. This has never been done. Instead the debt just gets higher and higher. The potential effects of this when, not if, interest rates rise is the proverbial elephant in the room no one talks about. Keynes is dead, and has no worries. We the Living have to deal with the bad economic decisions of the past. 

As I mentioned in my earlier post 3 to 7 Years, I still have hopes we can muddle through in spite of a lack of evidence that either party actually understands the mess we are in. We must take action immediately to avoid a worse crisis later. 

A lot rides on the ability of the US economy to grow. While I think the growth assumptions of the Congressional Budget Office are overly optimistic, and Ryan’s are even worse (I have not looked closely at Romney’s growth assumptions), I do expect growth.

But what if this is untrue? The last 250 years of growth may be unique in history and may not continue. The economic law of diminishing returns says this:

The law of diminishing returns (also law of diminishing marginal returns or law of increasing relative cost) states that in all productive processes, adding more of one factor of production, while holding all others constant (“ceteris paribus”), will at some point yield lower per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.  

Have we reached that point? Martin Wolfe always makes you think and his article in The Financial Times is getting some buzz. 

Prof Gordon notes further obstacles to rising standards of living for ordinary Americans. These include: the reversal of the demographic dividend that came from the baby boomers and movement of women into the labour force; the levelling-off of educational attainment; and obstacles to the living standards of the bottom 99 per cent. These hurdles include globalisation, rising resource costs and high fiscal deficits and private debts. In brief, he expects the rise in the real disposable incomes of those outside the elite to slow to a crawl. Indeed, it appears to have already done so. Similar developments are occurring in other high-income countries.

The whole article is well worth reading. (You will have to register to read it.) 

While I expect growth to continue, it cannot do so forever. The advances in Nanotechnology might continue this growth spurt for a while, and then into a sustainable society. Maybe I can ask my son for a guest post on this issue as this is his area of expertise. 

But in the meantime we need to reorganize, tighten our collective and individual belts, and prepare for bad weather. In other words our photon controls are damaged and we must withdraw. 

If you do not like my clichés, use your own, but act.