What will drive future growth?

Simon Johnson asks:

…if finance doesn’t drive growth, what will…?

You'll
also read many commentators breaking national income into its components of C,
I, G, and X-M (consumption, investment, government spending, and net exports) and asking where the growth will "come from" to "drive"
the recovery.  Of course national income accounting is an identity, so this cannot be a nonsensical question.  Yet when the word "drive" is used, we are smuggling in a causal category.  There is no guarantee that any particular decomposition of the national income identities the relevant causal components for what will "drive" recovery.  How would it sound if you aggregated national income by zip code or county (or household) and asked where the boost to drive recovery would come from?  Such an approach might not be on the right conceptual track.

You'll also see discussions of how exports or real estate construction usually precede a more general recovery.  There is then a fear of when or how those trends will come about.  But again, are those the causal factors for thinking about economic recovery?  It was Chinese demand for exports which pulled Japan out of its lost decade but overall I am less convinced of the causal role of exports per se.  Healthy exports are often a symptom of good outcomes, not a cause.

Slipping back and forth between national income identities and causal relationships was one of the big problems in Keynes's General Theory.  I worry that we still see this tendency in macroeconomic thinking.

There are two key questions I ask in a downturn: what will boost aggregate demand? and what will cause a better matching of the particular components of C and I?

The answer to the first is usually "nominal money."  The answer to the second is trickier and harder to encapsulate in a few letters (C, I, G, X-M) or in the mention of an economic sector or two.

A third question might be: which factors are hindering confidence and thus recovery?  Sometimes the answer to this question works through the channel of monetary velocity and the relaxation of "wait and see" investment strategies.

None of these questions deny the relevance of aggregate demand macroeconomics.  But also none of these questions focus our attention on the C, I, G and X-M aggregates per se, except of course for nominal money.

These questions offer a framework for thinking about fiscal policy.  By mobilizing new M into a more rapid V, fiscal policy can boost aggregate demand.  And maybe you like how the money is being spent by the public sector (that's a separate debate).  But unless the new flow of spending is permanent, or can be turned off in a very smooth fashion, it creates temporary bubbly-like conditions in the recipient sectors and that is cause for concern.  You get a better matching of C and I in the short run, but maybe not a better matching for the longer run.