Finally, at least some in academia are beginning to see that the emperor has no clothes. It should be quite plain to any discerning economist that the US economic system (and the economic systems of the rest of the developed world) faces structural problems that aren’t fixable by monetary or fiscal machinations; that, in fact, it faces impediments to growth that are perhaps not fixable at all, or at least not by government fiat or initiative. Robert J. Gordon, in a working paper published by the National Bureau of Economic Research, the outfit that pins dates on economic contractions and expansions, plaintively argues that growth in the US is gone, and not likely to return, here’s a quick summary of his views:
1. Economic growth is a relatively recent human phenomenon. Before the mid-1700’s, Gordon says, there was virtually no economic growth. (I would point out, however, that the change from hunting/gathering to sedentary agriculture, which provided for the vast increase in human population from the last ice age, and the massive accumulations of wealth in the newly civilized worlds of Egypt, Mesopotamia, the Indus Valley, China and Rome, represents enormous economic growth, just not in the tenor with which we think of it now.)
2. There have been three technological drivers of economic growth since the mid-1700’s. He calls them industrial revolutions–one, two and three. The first was steam and railroads from 1750 to 1830. The second was the development of electricity, petrochemicals, running water, the internal combustion engine, etc., lasting from about 1870 to 1900. The last was the development of information/communications technology, from about 1960 to the present.
3. There is little chance that another revolution lies over the horizon such that economic growth can return to the nearly 2% per year average of 1860 to 2007 because of six impediments–demography, education, inequality, globalization, energy/environment and already massive private and public debt. Growth of better than 0.5% a year in consumption per capita for the vast majority of Americans who don’t stand to benefit by economic globalization is unlikely going forward.
This is all eminently reasonable. It is what I’ve been saying all along–that there is no way demand can sustainably grow much, if at all, in economic systems that are already rich and growing old. To be sure, there are never any straight lines in life (except the one at the end), so growth won’t always be utterly dismal. In fact, about now the US, being the world’s “cleanest dirty shirt” (to quote Bill Gross quoting Kris Kristofferson) is experiencing a mediocre expansion. It won’t last long. The US can’t expand while the whole rest of the world either contracts outright (Europe and Japan) or slows its expansion markedly (China, India, Brazil and Russia). Economic growth in the US and Western Europe and Japan has virtually no chance of enjoying robust growth on a sustainable basis.
The expectation of low/no growth on a per capita basis should be adopted as the new normal for developed economic systems. If it were, the policies of burying economic systems under mountains of debt would surely be reexamined. Without the ability to grow the way out of debt, the onerous burdens being incurred now to protect the old paradigms and present power structures make even minimal growth harder to achieve, which, ironically, will serve to more quickly destroy the paradigms and power structures trying to be saved. Keep printing money and running massive fiscal deficits to save economic systems in their present state, and the result will be a hastening of their destruction.
But what of technological innovations that might propel growth? Growth is demand, not technology, driven. And demand is driven by human wants and needs, with a little fudging around the edges about what is really needed and wanted. What human need is not being by and large met in the developed world? How many more wants can be transformed to needs (who knew they would one day “need” an iPhone or iPad)? And if all the wants and needs are more or less being met, the only vehicle for growth is expanding populations, hardly likely in a developed world that is growing older and is facing a demographic implosion.
At some level of wealth, a level that seems well below where the developed world now exists, the law of diminishing marginal returns operates to quench the burning desires of the masses. At some point, enough is enough, and the possibility of real, sustainable growth on an aggregate basis is all but foreclosed, unless the population is robustly and sustainably growing. With the developed world’s demographics, only a sustained period of impoverishment might return the paradigm to one of human wants and needs fueling growth in demand.
Alas, the feckless policies of the world’s central bankers and politicians might return the developed world to a state of pre-18th century poverty more quickly than natural forces ever could, yielding a quick return to the possibility of sustainable, robust growth. Gordon’s hypothesis would be proved incorrect, but only because he didn’t account for the dangers to sustainable decline posed by activist governments and central bankers.