The article’s title suggested reference to the usual culprit for lack of growth – damp consumer spending, whereas Mr. El-Erian appears to make the case for capital formation and investment as key to growth. To the extent, this is so in the author’s opinion, the macro prescription is sound.



In a recent presentation on how economies really function from the POV of the underlying thrust of this argument, David Ranson, Wainwright Economics, summarizes the investment environment we live in vs. the one we’re told we live in, that is, an economy organized around capital vs. spending that fuels and thrusts the growth engine forward.



Ranson begins by positing just about the only point we’ll all likely agree on - that no one should believe everything they hear from Washington and the media, especially when it comes to the way the economy works. Apart from this, it’s an argumentative slugfest – among gentlemen of course.



Journalists depend on the economics profession to explain it all to them, and economists in turn tend to depend on the consensus of their colleagues rather than do their own homework.



The disadvantage of doing one’s own homework is that the results may be inconvenient. Economics is a politically contentious field, and different interpretations suggested by those who challenge the consensus get an inadequate hearing.



According to Dr. Ranson, the world we’re told that we live in goes like this:



Employment is increasing, unemployment is falling, and inflation is very low. The economy is driven by spending, and since businesses and consumers cannot always be relied on to do their part, government spending is all the more important.



Deficit spending causes government debt to grow, but that can be paid for by increasing tax rates. If government spending is insufficient, monetary stimulus may also be necessary with the help of Federal Reserve control of interest rates and the money supply. Extremely low interest rates make it easier for people to get credit so as to boost their spending.



When the Fed buys back the government’s bonds it’s called quantitative easing. This helps the economy in two ways; it reduces federal debt and puts money into circulation, and that further encourages the private sector to spend.



In a nutshell, it’s all about spending.



Ranson submits that the world we actually do live in is much more this way:



Employment should be judged relative to the working-age population, and in that sense, it has not recovered at all from the great recession despite five years of economic growth (using ratio of employment to working-age population, full-time equivalent employment is down from a 2007 58% high to 53%). If you include all those who have left the labor force, unemployment is static at best – and actually rising among young people.



Inflation has been high for more than a decade, although it has decelerated in the last year or two.



Spending does not drive the economy. Spending would be impossible without income, there can be no income without the employment of labor and other resources, employment cannot be sustained unless it results in output, and there will be no output unless producers know that they can sell it. What this means is that spending, income, employment and output are all just features of a functioning economy, and the relationship among them is circular.



What drives the economy is capital, including both financial capital and human capital. Government spending merely subtracts from private spending, dollar for dollar. Washington cannot sustainably gain revenue by raising tax rates. That’s because the ratio of revenue to GDP is almost constant regardless of marginal tax rates on the highest incomes. Higher marginal tax rates mean a smaller GDP, and therefore less rather than more federal revenue. Artificially low interest rates inhibit saving, banking and lending, leaving borrowers no better off than they were before.



The Fed can print money and buy bonds, but it’s banks that control the money supply. The only way to boost the economy is to boost the willingness of capital to put itself to work.



In a nutshell, it’s all about capital.



Luis de Agustin

