Tuesday, August 28, 2012

A Strong Case That Economic Growth as We Know it Is Over

My first instinct is to recoil from the mere suggestion that we will have to adapt to a steady-state economy.
Then I read the paper.
This is a cogent argument that I am wrong.
From FT Alphaville:

Ahhhh! No robots!
Says this guy here with our paraphrasing, naturally (click through for the full paper):

Gordon concentrates solely on the US and ignores the separate questions of whether the recession and slow recovery have pulled down the trend growth rate, output, and the size of the “gap” between the trend path and actual real GDP. From the abstract:
It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.
Before getting all provocative:
A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.
Well, there are those who have a less pessimistic view (read herehere, here and here). Also, just because the dreams of our grandfathers didn’t quite match up to reality isn’t so much a cause for despair as a reminder of the perils of this type of forecasting.
The paper is, nonetheless, worth a read. The basic points are:
1. Since Solow’s seminal work in the 1950s, economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.
2. The frontier established by the U.S. for output per capita, and the U. K. before it, gradually began to grow more rapidly after 1750, reached its fastest growth rate in the middle of the 20th century, and has slowed down since. It is in the process of slowing down further.
3. A useful organizing principle to understand the pace of growth since 1750 is the sequence of three industrial revolutions. The first (IR #1) with its main inventions between 1750 and 1830 created steam engines, cotton spinning, and railroads. The second (IR #2) was the most important, with its three central inventions of electricity, the internal combustion engine, and running water with indoor plumbing, in the relatively short interval of 1870 to 1900…
4. The computer and Internet revolution (IR #3) began around 1960 and reached its climax in the dot.com era of the late 1990s, but its main impact on productivity has withered away in the past eight years…
5. The article suggests that it is useful to think of the innovative process as a series of discrete inventions followed by incremental improvements which ultimately tap the full potential of the initial invention. For the first two industrial revolutions, the incremental follow-up process lasted at least 100 years. For the more recent IR #3, the follow-up process was much faster. Taking the inventions and their follow-up improvements together, many of these processes could happen only once. Notable examples are speed of travel, temperature of interior space, and urbanization itself.
6. The benefits of ongoing innovation on the standard of living will not stop and will continue, albeit at a slower pace than in the past. But future growth will be held back from the potential fruits of innovation by six “headwinds” buffeting the U.S. economy, some of which are shared in common with other countries and others are uniquely American. Future growth in real GDP per capita will be slower than in any extended period since the late 19th century, and growth in real consumption per capita for the bottom 99 percent of the income distribution will be even slower than that.
Those headwinds, says Gordon, include the end of the “demographic dividend”; rising inequality; factor price equalisation stemming from the interplay between globalisation and the internet....MUCH MUCH MORE