I would argue that what we see is more a product more of Ricardo, and not Keynes. One thing I appreciated from Ricardo’s work on rent. He worked specifically on agriculture. He argued that land had different levels of productivity, which lead to differential rents - more productive land could garner a higher rent than less productive land. The relevant part of his analysis is that if prime agricultural land rose high enough, farmers would eventually start growing on more marginal land.

What I take away from this is that in any economic system, incumbent agents have an advantage. They have already claimed the low-hanging fruit. In order for new entrants to the market to compete, they will increasingly make use of more marginal investments and business strategies. The eventual result, of course, is that many new “innovations” become complete crap and fail.

Keynesianism is only a nightmare in that (1) it’s improperly implemented, (2) it has been successful in providing a safety net, and (3) moral hazard. Keynes originally envisioned government deficit spending during downturns and surpluses during boom times . But though the economic strategy is seemingly straightforward and symmetrical, the political incentives don’t quite match up. It makes perfect political sense for the government to mitigate a downturn by increasing liquidity and creating new jobs, even if the purpose is merely to keep people employed. However, in periods of economic growth, there is no political gain to be had by increasing taxes to pay off previous deficits. Coupled with the heady optimism that “the market solves all”, it becomes impossible to institute this second part of the Keynesian two-step.

I remember reading that the Fed nominally (pun intended) has an inflation target of about 2-3% in order to prevent dollar hoarding. That there has been a “great moderation” may reflect a combination of (1) greater regulation of the financial sector, (2) disappearance of a balancing superpower (USSR), and (3) productivity gains that increased profits while keeping inflation down.

I’m particularly interested in the productivity issue. Labor tends to be the largest cost for a business. How much of the gains have come about from (1) technology, (2) outsourcing of jobs? Given that the US Census predicts population growth of about 0.7 percent a year for the next 20 or so years, economic growth of 2-3% will largely be productivity driven. But I wonder how much potential there really is without serious restructuring of how we live, how we learn, and how we consume.

The infrastructure problem is an interesting one. If municipal authorities really do either get (1) comparable ratings as Wall Street firms, or (2) forego reinsurance altogether, they may save a bit of money in fees. On the other hand, if there are no willing buyers, some important and not-so-important public projects will not get financed in a timely fashion. I would like some more numbers before I make a strong judgment either way - it’s possible that increases in efficiency will help with both carbon and cash.