close to 90 percent of growth is not explained by the usual suspects, capital and labor

[phantom power]

My own work shows the utter foolishness of such a strategy. What matters is not the absolute size of debt, but what that debt consists of. Throughout history, strategic government expenditures have played a key role in spurring economic growth. Indeed, by forcing the world's weakest economies to cut public spending -- in key areas like education, research and health -- their potential for long-run growth is weakening. Spain, for instance, has cut its research spending by 40 percent since 2009. Will this help it create the kind of goods and services the world might want to buy -- and be as competitive as its Nordic neighbors? It seems wildly unlikely.

The key question is simple: what causes GDP growth? And the answer from economists is that, at the very least, spending on education, human capital, and research are tightly related to it. Indeed, Robert Solow, who won the Nobel Prize in Economics in 1987, found that close to 90 percent of growth is not explained by the usual suspects, capital and labor. They account for only 10 percent. So Solow called the unaccounted-for 90 percent the "residual." And what drove the residual? It had to be technology. And how is technology fostered? More often than not, down through history, by government investment, from the roads of ancient Rome to the Internet of modern America....

I have been pushing a very different view, as embodied in my recent book "The Entrepreneurial State: Debunking Private vs. Public Sector Myths." I argue that businesses are typically timid -- waiting to invest until they can clearly see new technological and market opportunities. And evidence shows that such opportunities come when large sums of public money are spent directly on high risk (and high cost) technological missions. This raises debt of course, but also GDP, keeping the ratio of debt-to-GDP in check.

These missions are expensive precisely because the government does much more than just solve market failures. It intervenes in both basic and applied research and even provides early stage seed finance to private companies. Indeed, Small Business Innovation Research (SBIR) grants have funded a higher percentage of early stage seed finance than private capital. This is because private finance is too risk-averse -- afraid -- to engage with industries characterized by high technological and market risk. The fear explains why we have seen venture capital entering, in industry after industry, only decades after the initial high risk has been absorbed by government.

http://www.pbs.org/newshour/businessdesk/2013/09/the-entrepreneurial-state-appl.html

[Make7]

1. You mean they weren't the nine most terrifying words in the English language? ( n/t )

[phantom power]

3. I suppose they're a bit scary if you are a plutocrat

For the other 99.999% of us, not so much.

[wercal]

2. Answer

"what causes GDP growth"

Fractional Reserve Banking.

This is validated by the timing of when we have a crisis:

In 1929 when there were runs on the banks.
In 2008 when banks were not liquid enough to continue lending.