PARADIGM CHANGES, 19 Sep 2016
Fossil fuels provided a one-time-only quantum leap in growth. Coming up with a new economic model should be on everyone’s bucket list.
14 Sep 2016 – The economy, we have been taught, is a cat with considerably more than nine lives. The bottom might drop out of the stock market, but it will rebound — again and again. The Chinese were on top of the world, economically, for a thousand years or more, but then the colonial powers cut the country down to size — and now China has regained its former glory. Laptops, which once boosted productivity, no longer do so, but don’t worry: another innovation will soon come along to revolutionize the workplace.
Growth is the sine qua non of every modern economy, from North Dakota to North Korea. Not everyone agrees, of course. Even before global warming appeared on the horizon, environmentalists came up with a persuasive argument about the limits of growth. The earth only has so many resources. There’s just not enough for everybody to own multiple SUVs, indulge in all-you-can-eat sushi buffets, and go on back-to-back cruise vacations. Climate change is just the final warning for a voracious race that ignored all previous recommendations of restraint.
For the last couple decades, however, growth in the industrialized world has slowed down. Europe and Japan have entered a long period of stagnation. The United States has seen various ups and downs, but the purchasing power of your wages really hasn’t budged since 1973. On top of that, U.S. productivity has slumped since 2010, with the most recent decline being the longest since 1979. Where growth has occurred, it has been unevenly distributed. Between 1947 and 1970, the bottom fifth of the U.S. population enjoyed a 3 percent growth increase in real personal disposable income. From 2000 to 2015, it was only .1 percent. The top 1 percent, meanwhile saw a 1.4 percent increase between 1947 and 1970 that swelled to 2.3 percent between 2000 and 2015.
Don’t worry, the optimists coo. Growth will return. It always does.
So, for instance, in data released by the Census Bureau that made headlines this week, the incomes of middle-class Americans rose by a little over 5 percent in 2015, the kind of increase not seen since the 1960s. “There, you see, we told you so!” trumpet the optimists. The economy has finally recovered from the economic crisis of the late 2000s.
Ah, but if you read the fine print, you find out that, adjusted for inflation, median incomes have not yet recovered to the levels of just before the recent recession. Nor have they returned to the levels of 1999. Our paychecks are bigger, but they don’t go any farther.
The forecast is even gloomier. Economic growth, when it does return, has been anemic, doesn’t create a lot of jobs, and has increased rather than reduced inequality. That’s the argument of economist Robert Gordon’s compelling new book, The Rise and Fall of American Growth, which builds on a lifetime of research into technology and productivity. Say goodbye to the American dream, Gordon tells us. If you think it’s possible to make America great again — to re-experience the growth rates of the 1950s and 1960s — think again. The enormous growth the United States enjoyed after World War II will never recur. It was a one-time-only occurrence.
This is not anti-Americanism. This is not pessimism or Malthusianism or neo-Marxist millenarianism. It is, simply, data.
And it’s not just a problem for the United States.
In an era of the “next big thing,” it’s hard to swallow the idea that we are no longer living in an exceptional period of economic prosperity.
I have an amazing computer in my pocket that can tell me the best Chinese restaurant nearby, record and edit a video, and produce a veritable library of e-books and audio books at a touch of the finger. Oh, and I can use it to make calls and send emails and post updates to thousands of friends and colleagues around the globe. My father would have been amazed by this phone; my grandfather would have been freaked out; go back any further and the owner of such an object would probably have been burned at the stake. How can we not be living in the best of all possible worlds?
In his review of Robert Gordon’s new book, William Nordhaus provides the following startling statistics:
For most of human history, economic progress moved at a crawl. According to the economic historian Bradford DeLong, from the first rock tools used by humanoids three million years ago, to the earliest cities ten thousand years ago, through the Middle Ages, to the beginning of the Industrial Revolution around 1800, living standards doubled (with a growth of 0.00002 percent per year). Another doubling took place over the subsequent period to 1870. Then, according to standard calculations, the world economy took off.
Yes, you read that correctly. For a stretch of three million years, humans experienced a growth rate of .00002 percent per year. That includes the first four decades or so of the Industrial Revolution, which started around 1760. In other words, the contemporaries of Mozart enjoyed an average standard of living virtually indistinguishable from those laboring at the time of King Solomon.
The hundred years between 1870 and 1970, however, was truly a time of miracles. “Manual outdoor jobs were replaced by work in air-conditioned environments, housework was increasingly performed by electric appliances, darkness was replaced by light, and isolation was replaced not just by travel, but also by color television images bringing the world into the living room,” writes Gordon. “The economic revolution of 1870 to 1970 was unique in human history, unrepeatable because so many of its achievements could happen only once.”
Very few people dispute that that was a very special century of human progress, particularly since it lifted an enormous tide of people out of poverty and into a swelling middle class. Much more controversial are Gordon’s assertions that the revolution ended in 1970 and will never be repeated.
Gordon’s argument revolves around the relationship between innovation and productivity. There were, of course, inventions before 1870. But they didn’t prove transformative in terms of human productivity, not like the telegraph, running water, the light bulb or the automobile. These inventions enabled us to make more things, make them more efficiently, and get them into the hands of more people. The information revolution was the latest in this series of transformations. “As the impact of the late-19th-century inventions faded away around 1970, the computer revolution took over and allowed the economy to remain on our historic path of 2% annual growth,” Gordon writes.
Eventually, however, the IT revolution stopped boosting productivity so dramatically and, arguably, started to detract from it through such time sucks as Facebook and Angry Birds. Gordon estimates that the productivity turning point came around 2004 (coincidentally when Facebook was launched) and the real slowdown began in 2010 (shortly after Angry Birds launched).
So, what does Gordon mean by “only once”? After all, the automobile is still around. So are running water, the light bulb, and the computer. They continue to contribute value to the economy. But they no longer provide a quantum leap in growth. New baselines are established for productivity. Technology diffuses, and other countries or regions begin to take competitive advantage of the same improvements.
Gordon identifies six “headwinds” that make future growth less likely, at least for the United States. We’re no longer able to take advantage of the baby boomer bump or women entering the workforce in large numbers. We already benefited from the explosion of higher education, and now students face a huge debt load. Then there’s rising inequality, climate change, globalization and the erosion of the manufacturing sector, and the huge amount of debt held at both the household and governmental level. Combine these six ingredients and you have a recipe for Japanese-style stagnation.
Now let’s take a look at how this “only once” insight affects other countries and geopolitics more generally.
Western Europe experienced enormous growth in the post-World War II era, and it too took advantage of a number of “only once” boosts on top of those Gordon identified for the United States. The first, of course, was the Marshall Plan, which injected a one-time sum into the war-ravaged region that could rebuild what had been destroyed. The second was the European integration process, which created economies of scale for the region, linked supply and demand across borders, and also provided resources for economic laggards to catch up.
After 1989, East-Central Europe did not receive anything like a Marshall Plan. Indeed, the governments that emerged from the collapse of communism still had to pay the debts incurred by the previous regimes. But they did have two “only once” options they could access. The privatization of state-owned enterprises provided an enormous dividend for the new governments, which they either used to modernize their economies or lost in the swamp of corruption. The second option that nearly all the countries have pursued has been membership in the EU, which provided access to EU stabilization funds. Although East-Central Europe made important gains since it experienced its own downturn in the 1990s, the use of these “only once” options has not resulted in the closure of the economic gap with the West.
Following the lead of Japan and then South Korea, China experienced double-digit economic growth in the 1990s and into the 2000s. Virtually all of the “only once” factors converged at one time: agricultural modernization, transportation revolution, and computerization. The state was able to deploy resources in a way to encourage these transformations. It could also take advantage of another “only once” factor: cheap labor. China leveraged its enormous, literate workforce to carve out a competitive position in the global economy, and then work its way up the value chain. India is attempting to do the same now.
The challenge remains: can Europe break out of its rut and China regain its earlier growth figures? Not likely: and that will have important political ramifications.
After all, the global economy faces certain headwinds as well. The industrialized world is struggling with a debt overload, faces a demographic crunch, hasn’t figured out a way to address growing income polarization, and comes up against resource depletion and global warming. The traditional answer to these problems has been: we need to grow our way out of it. Prime the pump! Innovate!
If Robert Gordon is right, however, that option no longer exists. Some developing countries will still be able to take advantage of some “once only” options, if it doesn’t push them over their carbon allowances. But the rest of the world must come to grips with modest growth from here on out. Yes, of course, inventions on the horizon like artificial intelligence could prove to be transformative. AlphaGo recently beat the world’s best Go player with an entirely new approach called “reinforcement learning” where the computer begins to develop a form of intuition about how to play the game. But the evidence so far suggests that such innovations will produce jobless growth — think: automation — and not provide the same lift for the poor and middle class as earlier industrial revolutions.
Economic stagnation, polarization of wealth, anger at an ineffectual and/or corrupt elite: here is the prescription for the rise of Trump-style populism. The global economy has failed us because it hasn’t delivered the growth it once did between 1870 and 1970. Trump and his friends imagine that we can go backward and revive the golden age. The data says: no.
Fairy Tale Growth
Robert Gordon discusses the innovations of the late 19th-century but spends less time on the substances that made those transformations possible. Here, too, we encounter the iron rule of “only once,” and it has an almost fairytale quality to it.
Back in the 19th century, we scraped at the earth and released a magic genie from his prisonhouse. In gratitude, the genie granted humanity one wish. We asked to be rich and powerful. And voila: the genie of fossil fuels did just that, making capitalism possible on a global scale, creating a class of the super-rich, and pulling an unprecedented number of people out of poverty and into a swelling middle class.
Ah, but there’s more than one story in The Thousand and One Nights about genies granting wishes. The happier one centers around Alladin, who indeed becomes rich and powerful after rubbing the magic lamp. A perhaps more realistic tale involves a fisherman who releases an evil genie who grants only one very specific wish: the poor fisherman can specify how he wants to be killed.
It’s not yet clear which genie we released when we rubbed the earth and out came coal and natural gas and oil. All those fossil fuels certainly have made us rich and powerful. But ultimately, they may simply grant humanity a single wish: to choose the way we die.
As importantly, the genie comes out of the bottle only once. We are not currently busy burying dinosaurs and massive ferns to create another cache of fossil fuels for some future generation. What we have — whenever it does run out — is all we have. Perhaps if we use them wisely, these fossil fuels will serve as a bridge to a technology, such as solar or fusion, that can provide comparable amounts of energy. Perhaps we can curtail the use of these fuels quickly enough to prevent the earth from becoming a ball of fire.
Either way, the enormous benefits that have accrued from fossil fuels provide a one-time boost in economic growth.
In response to Gordon’s “once-only” rule, we should take develop a YOLO economics. I’m not talking about the individuals who declare that “you only live once” (YOLO) before they splurge on the latest Harley-Davidson. I’m thinking more of the environmentalist take on YOLO, interpreting the “you” collectively: we, the human race, also only live once, and therefore this generation should take care to pass on the planet to the next generation in better shape than we received it.
“Sustainable growth” just won’t cut it. We have to come up with something that redefines growth, emphasizes the importance of equity and dignity, and ensures that innovation works for us all. In the end, coming up with this new economic model should be on everyone’s bucket list.
John Feffer directs Foreign Policy in Focus at the Institute for Policy Studies.
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