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Nick Hanauer Is Wrong: It's Investment, Not Demand, That Creates Jobs

This article is more than 8 years old.

Many of us will have seen the various pronouncements by Nick Hanauer, the self-made billionaire who attempts to entirely upend conventional economics. At the core of his beliefs is this idea that it is demand which creates both jobs and economic growth rather than investment. The implication of this, to him, is that there's no cost to taxing either the rich or the returns to capital in order to provide more income for the workers. In fact, far from there being a cost this would be a net benefit to the economy. Now, my opinion is that he's simply a rich man with a new toy: unfortunately that toy is the economy that we all live in. If he's wrong then we get to bear the costs of his amusement.

And the thing is that, in anything other than the most short term sense, he is wrong. We're all absolutely fine with the basics of Keynesian economics around here, that in a period of deficient demand then boosting that demand will indeed grow the economy, produce more jobs and so on. But that's not the same at all as Hanauer's insistence. He's stating that this is a permanent condition: by moving money from those who would invest it to those who will consume with it we boost the economy over the long run.

This idea rather meets a brick wall when we start discussing actual economies. Consider this about China for example:

The key issue for China today is the slowdown of GDP growth since 2013 (e.g. Economist 2009, Wildau et al. 2009). What causes such a growth slowdown? The data indicate that much of the slowdown comes from a slowdown of investment, which has been the driving force of China’s growth since 1997. To understand why investment in China has recently slowed, we must understand what has sustained investment growth in the past.

China has been having growth that a mature economy like that of the US can only dream of. And China's had savings rates of up to 50% (compared to the US one of perhaps 5%) and investment rates comparable, as much as 50% of GDP each year. The net result of this is that growth as been at the 7 and 8% per annum level for nearly two decades now.

And that is a fairly bald statement that is being made in that quote. China's growth has been driven by investment. A slow down in investment has slowed the growth rate. This is not, to put it mildly, consistent with a declaration that it is demand that drives growth, not investment.

And thus is conventional economics not over turned. Perhaps Mr. Hanauer would like to find a new toy?

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