Population Growth As Coordination Mechanism

A blog about business and economics.
Dec. 26 2011 10:47 AM

Population Growth As Coordination Mechanism

Steve Randy Waldmann attemtps to explain the opacity and complexity of a modern financial system in part by reformulating Keynes' (not to be found in the ISLM model from the intro macro textbook!) points about the state of long-term expectations. The way this goes is that if I think that John and Jim and Jane and everyone else thinks that economic growth is likely to be strong over the next ten years thanks to a high level of investment, then it's rational for me to think that economic growth will in fact be strong over the next ten years thanks to a high level of investment, in which case it's rational for me to in fact undertake a high level of investment which in turn will vindicate the John/Jim/Jane forecast. Even in an investment boom lots of people go bust, but on average we all do much better in an investment boom than during a bout of sustained pessimism.

So one question is where do these expectations come from? Keynes' answer seemed insufficiently modelable so it tends to get left out of "Keynesian" models. Waldmann's answer is that a well-functioning banking system perpetrates a kind of systematic fraud to trick people onto hopping aboard the high-investment equilibrium.

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But here in Kerrville, TX I think it's pretty clear that population growth trends can provide a coordination mechanism. If it becomes clear that a combination of proximity to Mexico and relaxed building regulations are leaving a given state primed for population growth, then you don't need any particularly optimistic beliefs to see that the state is primed for certain kinds of investment. We're going to need new houses for these new people in the short-run, and we'll need new schools & hospitals, new car dealerships, and new highways for them in the medium run. So we're investing. And with that investment happening we need new Whataburger franchises and new H-E-Bs and probably new power plants as well. And now suddenly we're on the high equilibrium. We need more accountants and more wedding planners, we're going to need some fancy restaurants, we'll need hotels, we'll need more of everything. And since we'll need more of everything and the price of new homes will remain moderate, we'll expect the population to keep growing as people from around the country tend to move here in search of work. None of this guarantees that we become especially rich on a per capita basis -- it doesn't amount to brand new TFP-raising technology, but it does ensure that we remain on the high investment equilibrium.

I think this helps explain why Japan's economic funk, driven by rapid population aging and an extaordinarily immigrant-unfriendly policy paradigm, is so hard to unshake. It also helps us understand that the sharp U.S. political turn against immigration that occurred in 2007-2008 and has continued since has been extremely counterproductive in current conditions.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.