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Comment by Despegar | Hacker News Reader

>Instead it’s subsidies mostly tax breaks and consumption for little long term return.

There's nothing wrong with consumption. Consumption is what drives the US economy and makes it the powerhouse that it is. The American consumer is what is keeping the US out of a recession while export-driven economies like Germany are heading into recession.

The problem with our fiscal policy was that the tax cuts passed by Trump almost exclusively went to the richest people who have a low MPC (marginal propensity to consume). There's nothing wrong with expanding the deficits, the US doesn't need to worry about debt and the falling bond yields confirms that. But that fiscal spending should have been targeted at the poorest people in America. It should have been to give them universal health care or free higher education, not cutting corporate taxes.

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Why has this idea that consumption is wealth-generating caught on so thoroughly? Consuming, consuming, consuming seems like it's just burning the stored wealth of the country, by selling off our valuable productive assets in exchange for trinkets (really, we're selling dollars, but those come back looking to buy up real estate, companies, etc).

What's really wealth generating is investing in things that fuel long term productivity growth at a higher rate than the cost - education, automation, useful infrastructure (here's looking at you, Chinese ghost cities), tools/machinery, and R&D. Everyone buying TVs is the complete opposite, yet it would show up as a short term boost to the GDP.

The problem is that you're under the impression that "consumption" is somehow less virtuous than "investment".

You mentioned China, but that's a perfect example of an economy that isn't driven by consumption. And they desperately want it to be. China is extremely reliant on exports and state-driven infrastructure spending. If there was actual domestic demand for everything they produce they'd be in a much better spot and that infrastructure would actually be utilized.

I'm under the impression that the main driver of long-term wealth is increases in productivity. Hence why "investment" in productive assets (including a well educated populace) is a larger driver of long-term wealth than "consumption".

They're reliant on exports and state-driven infrastructure spending because they're not yet wealthy, per capita. It's the stored wealth that allows a consumption-driven economy, not the other way around.

Most Americans are in debt and have no stored wealth. I know that intuitively it seems like stored wealth should be good for an economy but it’s not the case. Spending more money than you have (debt) is actually better for the economy because it results in more movement of goods and services. Leveraged consumption grows businesses which hire more people which creates wealth. I do think that education is important, but you also need consumption to drive demand for educated professionals in growing businesses. In short you need both for the economic cycle to work.

I'm not arguing against debt. I understand that debt can grow the economy, increase asset values, increase incomes, etc etc, but debt only helps the long term wealth of a country if it's used toward productive ends. It helps GDP/incomes in the short term if it's spent on consumption, but spending the credit on unproductive investments doesn't increase the amount of debt that people/businesses can service long term. When an economy can no longer service more debt, that's when you see debt crises and contractions begin.

EDIT: Here's a pretty good overview of debt cycles, and when debt helps/doesn't: https://www.youtube.com/watch?v=PHe0bXAIuk0 Or if you have more time to devote to the subject: https://www.amazon.com/Big-Debt-Crises-Ray-Dalio-ebook/dp/B0...

EDIT 2: When I say "stored wealth", I don't mean the amounts in normal peoples' savings accounts, but the productive capital of the country - land, businesses, infrastructure.

There is a huge amount of stored wealth locked up in homes that will be sold in the next 10-15 years from boomers dying or downsizing.

Homes are largely proxies for other wealth. Individuals don’t own subway systems or good schools, but access to such things are extremely valuable. Aka, location, location, location. This is why the home prices are so unstable they are propped up by demand for such access not the structures themselves.

Counter intuitively this creates huge downward pressures on property values as boomers move or die off.

Debt-financed consumption won't help the long term debt cycle, but increasing consumption seems like it could still be an element of economic growth.

For example investments have two sides the saver (who loans the money) and the borrower for the building, infrastructure, factory, etc. Normally the interest rate can be raised to encourage saving and discourage investment, or lowered to discourage saving and encourage investment.

But what if the interest rate is already low, and companies still don't want to invest? Then you are limited by the amount of credit-worthy investment opportunities and not the savings. You could lower real interest rates to be negative, but do you really want to pursue investments with a negative yield?

In that case, turning some of those excess savings into consumption would help things move along. There already was more than enough savings, so that wasn't limiting investment. And the increased demand will stimulate the need for more buildings, factories, etc, and provide more opportunities for companies to invest (borrow) again.

China has wanted to lower its saving rate somewhat - they've used the government to build out infrastructure and real estate at a tremendous rate, but it's unlikely that they will be able to find enough infrastructure investments (that are actually good investments, with positive returns) to keep going at the same pace forever.

Interest rates are pretty low right now, and companies are accumulating huge cash balances (rather than investing) so the idea for more consumption to increase investment opportunities doesn't seem too crazy. But if such a thing were to be attempted maybe it would be better to use tax policy or other means rather than increasing the debt indefinitely.

https://en.wikipedia.org/wiki/Global_saving_glut

Divide total American wealth by it’s population and you find the average American has an extreme amount of wealth relative to the rest of the world. American private debt seems like a huge deal, but it’s largely owned by other Americans.

This is a red herring. It's about consumption now vs consumption later. The whole point of investment is for more future consumption. If growth is below capacity, consumption now is rather less virtuous than investment for the future.

And this is the vicious cycle how we got stagflation. You don't stop deflation by cutting your spending and investing more. There is nothing to invest into because no one is buying the services and products you have invested in.

Fiscal policy and the private sector have not done enough to ensure long term growth -- as mentioned asset inequality has lead to a lot of capital in the hands of actors that do not spend money. Advancement in technology is deflationary by nature and so a lot of growth is only realized by the top.

In times like this the public sector must intervene to frame the future for it's citizens and economy: focus on the health and education of your citizens, mitigate future risk by funding solutions to climate change, secure safety by spending on military and providing equal opportunity to quell internal social unrest.

If you have strong instutions and control the currency that your debt is in (US, UK, Japan, China -- as long as the communist party maintains its current strength) this is the way to go, globalization will take a hit but will cycle back in the future.

Blindly investing money into “the poor” is a foolish endeavor that yields little strength to a country. Herd immunity and preventative health is a quantifiable thing and so I support universal healthcare. But we have to stop this disasterous assumption that the only reason people are poor is their circumstances.

The best way to help poor people is to lower the minimum wage so they can get jobs.

Subsidizing the poor increases consumption which is bad not only for the first order effect (throwing away money)... but also for the little thought of second order effect: it incentivizes people to build businesses that cater to consumption that was in the first place unsustainable. Smart people that could have been doing something else instead facilitate the creation of businesses that are only funded by inflation and cheap credit.

This is the story of the US economy in the past 30 years. The two largest disasters in recent history: the student loan bubble and the housing bubble, were both founded upon the notion that we should “give money away” without any real measurement of whether or not there would be a return on capital.

Our government should invest the majority of capital in basic research, healthcare, education and infrastructure... not the creation of a consumption driven bloated welfare state.

We should force the poor into indentured servitude or slavery as a proper solution, as the South was better off when workers were all unpaid and uncared for. Giving everyone's tax money to wealthy people will result in a better world for everyone. /s

Libertarian fantasy must be a pretty dull medium. Always the same story.

This wasnt a very substantive comment...

People go to HN to avoid discourse like this :(

A serious and frequently permanent loss of productivity occurs when people live on a financial cliff where minor unfortunes can propel even smart individuals into unemployment and homelssness, and their children into poorer education outcomes, while minor investments and more equitible distributions of wealth in a society create robust sustainable growth.

In the case of student loans, they should have come with restrictions on increases in admin costs at the college as tuition has inordinately increased. In terms of the housing crisis, do not discount the role of predatory lending by institutions that used to engender trust. I find your position to ignore context and subtelty, and to propogate myths about poverty and the impoverished as primarily being the result of a meritocracy.

> The best way to help poor people is to lower the minimum wage so they can get jobs.

Raising the minimum wage can have a negative effect on jobs, but unless it's hard to find minimum wage jobs right now, I don't see what lowering the minimum wage will achieve. Also there's labor force participation to consider - if unskilled jobs are too low paying, some people at the margins will choose not to participate (for example, by living with their parents).

> Subsidizing the poor increases consumption which is bad not only for the first order effect (throwing away money)... but also for the little thought of second order effect: it incentivizes people to build businesses that cater to consumption that was in the first place unsustainable.

> Our government should invest the majority of capital in basic research, healthcare, education and infrastructure

Consumption funded by debt may be bad, but I wouldn't suggest that consumption (in other words, having a consumer-driven economy) is throwing away money. Many goods that people spend their own money on (consumer electronics, cars, clothing, etc) have competitive markets with reasonable prices and/or steady improvements. On the contrary to throwing away money, it seems pretty efficient at delivering utility. Especially when compared to recent trends in healthcare, education, and infrastructure.

I agree with some of the other comments that productivity determines the long-run living standards of a country, and that consumption is not investment and it may be a bad idea to finance it with debt. But I don't think the answer is to reduce people's ability to consume goods & services, but rather to enable doing it in a sustainable way.

The decreases in price for these consumer goods you mention came largely as a result of globalization and offshoring of production. Our economy went upmarket towards services which were largely meant to facilitate this consumption (eg advertising and mass media). The American public became lazy, conditioned to consume and entitled.

The modern American consumer is only in debt because debt is so easy to obtain, not because his wages are too low to survive.

Visit Latin America or Asia where there throngs of people much happier and healthier on far less. The welfare state makes the familial structure unnecessary in America — I won’t comment on this. But it is a third order effect even more deeply troubling than the economic ones I highlighted earlier.

Electronics manufacturing has been outsourced for a long time, but the prices still fall (and labor is not getting any cheaper in China). Both electronics and cars are designed in the US and many cars are made here. I'll give that clothing is mostly about outsourcing.

I can agree maybe broadly that there are social trends in the US that are contributing to people being unhappy, but I don't think lowering the minimum wage will put that particular cat back in that particular bag. And besides, is it really minimum wage workers, of all people, who are lazy and entitled? Most minimum wage jobs are not particularly pleasant and you just have to do the work and put up with it, and you aren't showered with free food, high salaries and other perks. Do other countries where entry-level workers have it better have more social problems?

I suppose maybe they are entitled compared to some third-world countries. What does that make a tech worker then? We complain about the free food not infrequently.

I think attempting to blanket punish people who are willing to work but don't have valuable skills in the global labor market, will only backfire politically, and probably deservedly so.

I agree it is too late to enact things like a lower minimum wage — the damage is already done.

The real problem came from cheap consumer credit... everything in our economy is built around the existence of such credit. Consumers are conditioned and targeted to consume and borrow. Full stop.

Same thing happened with education — 4 years of productive time were siphoned towards college degrees that didn’t mean much.

This is the gutting of the middle class... not fiscal conservatism.

The student loan thing (and the cost inflation) is definitely part of it.

I'd also point to globalization and technological changes - unskilled labor is less valuable when there's more supply from automation and outsourcing. And technology has enabled more consolidation even on the nation level - it's now easier for one company to service the entire market; think Amazon vs local shops, or Uber vs local taxi companies. Better communication and transport joins many local markets into one big market and creates fewer, bigger winners.

Land use policies probably have something to do with it too. Historically in the US people have moved from place to place for economic opportunities as new industries developed. But doing new urban development is more difficult than it used to be and supply is added very slowly. The areas with the most global companies and economic opportunities are mostly a handful of cities, but the cost has become prohibitive for new entrants that aren't skilled professionals (despite there being plenty of regular jobs available with higher wages). And of course the people already living there get squeezed too.

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