It does not matter how we spin it and define it, economic growth is about production and consumption chasing each’s other tail in a circle. We can argue what comes first but reality is that we need both.

A few years ago, Noah Smith wrote a blog post with a similar sounding title but focusing on consumption.

Nowadays, it seems fashionable to talk about innovation in technology and increasing productivity so the latest epiphany when it comes to ways to boost economic growth is to focus on investment (with the buzz words of driverless cars, AI, blockchain, etc.).

In other words, we have given up on trying to do anything about the demand side of the economy (purchasing power down because wages pressured by automation and globalization) so let’s go back to trying to increase the supply (and hope that it will create its own demand?). Sadly, Say’s Law does not work in the modern fiat-based economy (maybe it did work in a barter economy).

So, increasing investments, will it push up GDP growth?

Yes, of course. GDP(Y) = investment(I) + consumption(C) + government spending(G) + net exports(NX). If we increase I, Y will go up.

But aren’t we already operating way below capacity in the developed world? What’s the point of creating even more capacity. The point is that at t(0), if I goes up, Y goes up (and inflation probably goes down, but who cares, right?).

But let’s say we weren’t operating below capacity. Doesn’t this investment at some point need to be ‘consumed’? How is it going to be consumed if there is no purchasing power?

Or maybe the plan is to ‘export our investment’ so that some other country can consume it. Well, I guess it is possible, but the stuff we are good at (financial services, defense, education) we are already exporting. There are a lot more things we are good at but they are either in the digital sphere where the marginal cost of production and, especially distribution, is zero and there is not much value-added, or we do not want to export it (really high-tech stuff).

I think the sad reality is:

We have exhausted all other options in the above equation.

C: Not that consumption-led growth does not work per se, but that it does not work with borrowed money. It does work, however, if people have the income to consume.

G: No one has the appetite for more government spending (even though some people, when they talk about investment-led growth, do include the government there)

NX: It’s not like there are many other countries out there that are eager/have the means to consume.

So, yes, increasing I is the next logical step. And it could work as long as that is accompanied by a rise in purchasing power which eventually gets transformed to a rise in aggregate demand which leads to increased consumption. Or something like this: I rises in t(0) -> Y rises in t(0) which leads to a rise in C(t+1) and a corresponding rise in Y(t+1). A virtuous cycle we could create indeed.

But if I does not result in a rise in purchasing power, i.e. if we invest in increasing production through automation, then it is a dead end. Which is why all these corporates are sitting on their cash and buying back their share and not investing.

In an environment when inflation is close to zero and we are operating way below capacity, it sounds strange to me that we are going to focus on investment which will only increase capacity, instead of figuring out how to prop up consumption without incurring more personal debt.

It is a totally different argument whether we need consumption at all, or rather whether even if we give people money to consume they will (I bet the millennials are much less likely to consume regardless of their income). Which raises the issue of whether we really need additional GDP, whether that should be our focus etc.

My answer is as long as we have a debt-based economy, we are hooked on GDP. All this talk about fancy other stuff to measure our wellbeing is great but it does not cut it that somebody has to service that debt. Of course, there are alternatives but they must be accompanied by some sort of a debt jubilee.