To me it seems evident that the mechanism that leads to recessions is the decisions that businesses make when they start to see good times. Our over-confident and over-incentivized planners all try to increase market share. They cannot all succeed, but in the attempt, they increase investment and hire more people which increases demand. This looks like success, so incentives don’t change, but it is unsustainable.
I don’t pretend that knowing the mechanism for bubble growth allows any prediction of when the bubble pops.
At the same time, I hear that one person’s spending is another person’s income. If that is true, then why is the growth not sustainable? Even spending on waste, fraud, and abuse, is someone’s income. There must be a mechanism that turns someone’s spending into something other than income. To say that excessive rents is that mechanism seems like an ideological result.
As an engineer I distrust models where I don’t understand the mechanisms. Can some of you economists help me?
spencer
January 8, 2019 12:12 pm
The are two keys to understanding the things you are observing.
One is productivity. Is strong productivity driving the increase in wages?
If so it is sustainable.
The second is distribution. Is the higher income widespread? If it is concentrated among the top few in the economy it probably is not sustainable.
Typically as the cycle matures, productivity weakens and wages outpace productivity growth which leads to inflation and higher interest rates.
Of course it is more complex, but these are the two main drivers of
problems
spencer
January 8, 2019 12:17 pm
Typically, in a late cycle environment labor’s share of the pie increases
and the Fed reacts by raising rates.
To me it seems evident that the mechanism that leads to recessions is the decisions that businesses make when they start to see good times. Our over-confident and over-incentivized planners all try to increase market share. They cannot all succeed, but in the attempt, they increase investment and hire more people which increases demand. This looks like success, so incentives don’t change, but it is unsustainable.
I don’t pretend that knowing the mechanism for bubble growth allows any prediction of when the bubble pops.
At the same time, I hear that one person’s spending is another person’s income. If that is true, then why is the growth not sustainable? Even spending on waste, fraud, and abuse, is someone’s income. There must be a mechanism that turns someone’s spending into something other than income. To say that excessive rents is that mechanism seems like an ideological result.
As an engineer I distrust models where I don’t understand the mechanisms. Can some of you economists help me?
The are two keys to understanding the things you are observing.
One is productivity. Is strong productivity driving the increase in wages?
If so it is sustainable.
The second is distribution. Is the higher income widespread? If it is concentrated among the top few in the economy it probably is not sustainable.
Typically as the cycle matures, productivity weakens and wages outpace productivity growth which leads to inflation and higher interest rates.
Of course it is more complex, but these are the two main drivers of
problems
Typically, in a late cycle environment labor’s share of the pie increases
Post Commentand the Fed reacts by raising rates.