Lack of Growth Economics

Various individuals have been writing about ‘no growth’ or ‘negative growth’ economics in recent years: Richard Heinberg of the Post Carbon Institute springs to mind; or for those who like to ski off piste, James Kunstler at Clusterfuck Nation or Nicole Foss at Automatic Earth. But don’t expect to find any hypertext links to Heinberg et al’s writings at Economist’s Viewthe highest profile aggregator of economic commentary collated by economics professor Mark Thoma—since the CVs of all three can best be described as lacking gravitas in the area of formal economics.

Then something strange happened back in September 2012. Heinberg, Foss and Kunstler unknowingly recruited the most unlikely of allies.

The doyen of growth economists Robert Gordon wrote a short commentary for the Centre for Economic Policy Research suggesting that the glory days of economic growth in the U.S. were gone for good. Gordon’s “Is US Economic Growth Over? Faltering Innovation Confronts the Six Head Winds” is still an important read and can be found here. In the paper, Gordon  suggested that the last 250 years of high growth could be considered an exception rather than the rule:

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.

The unique nature of recent growth can be put in perspective by looking at the following chart from Gordon’s paper that splices together a times series from the U.S. and England (obviously data doesn’t go as far back as 1300 for the U.S.):

Growth in Real GDP per Capita jpeg

Gordon then went on to make what he calls a “fantasy forecast”, under which growth in GDP per head declines to the rate of 0.2% per annum by the end of the century.

Real GDP Fantasy Forecast jpeg

By fantasy, he meant a hypothetical growth rate that would be consistent with the six headwinds to growth that he identified, albeit accepting a degree of uncertainty in the chosen variables. The six head winds are as follows:

  1. Poor demographics
  2. Faltering educational attainment
  3. Rising inequality
  4. Globalisation
  5. Energy depletion and environmental degradation
  6. The burden of household and government debt

Each headwind is given a rough value that subtracts from the 1.8% average GDP per head growth rate that was sustained for the two decades up until the credit crisis of 2007.

Growth Subtraction Gordon jpeg

For some additional colour on his thinking, you can find a TED talk of Gordon’s here.

Eighteen months on and Gordon is back with a paper for the National Bureau of Economic Research (NBER) called “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections”. It’s behind a paywall (here), although you can buy a copy for $5, but I will pluck out a few charts and the main points. First, this critical chart:

Disposable Real Income Growth jpeg

At first glance, it looks similar to Figure 6 from the original commentary that I reproduced above, but actually there are some substantive differences.

First, our starting point is the average GDP growth rate from 1891 until 2007, encompassing the entire Second Industrial Revolution (to use Gordon’s terminology) and its aftermath;  the growth figure (GDP per head) he gives for this period is 2.0% per annum. We then subtract bad demographics (-0.3%), the stagnation in education attainment (-0.2%), rising inequality for the bottom 99% of the income distribution (-0.5%) and debt transfers (-0.2%).

The last bar is critical since it captures faltering innovation (-0.6%), which Gordon sees as a central concern for all advanced economies. He contrasts the three general purpose technologies—electricity, the internal combustion engine and remote communications by telegraph and then telephone—developed during the Second Industrial Revolution with the lesser value information technologies of the so called Third Industrial Revolution currently taking place.

Gordon is lukewarm with respect to the degree to which the current information and communication technology revolution have contributed to human welfare. Here are the main fruits of the so called IR3 as he sees them (click for larger image):

Third Industrial Revolution

Yet, despite these innovations, productivity has already slowed substantially:

Annualised Growth Rates of Output per Hour jpeg

Gordon is at pains to stress that he is not forecasting a new slowdown in productivity, just extrapolating one that has already taken place:

There is no need to predict any faltering or slowdown in the rate of innovation over the next 40 years. My baseline productivity growth forecast (for the total economy) of 1.30 percent per year starts from the realised growth rate over 1972-2012 of 1.59% and subtracts Jorgenson’s 0.27% precent for the likely effect of the slower advance of education attainment.

He is also highly skeptical of those techno-optimists like Brynjolfsson and McAfee who see a technical nirvana.

They remind us Moore’s Law that predicts endless exponential growth of the performance capability of computer chips, without recognising that the translation from Moore’s Law to the performance-price behaviour of ICT equipment peaked in 1998 and has declined ever since.

Moreover, all those new technologies beloved by newspaper columnists receive short shrift including small robots, AI, 3-D printing, gene-based medicine, Big Data and driverless cars. In Gordon’s view, most of these are merely refinements of existing technologies that date back decades. Further, although there was a short-lived jump in technology led productivity during the tech boom of 1996-2004, such gains have since slumped. So why should the future be any different?

Lastly, and critically, the new paper leaves out two head winds to growth from his older analysis: globalisation and energy/environment. If you add these into the new new forecast, then it is easy to take future growth into negative territory.

Factor in some geopolitical instability, and a low level class war as the 99% bite back, and things could get even worse. And this is without any consideration of Joseph Tainter-style fragilities. Our complex societies have been built on the assumption of ever-lasting growth. Reverse growth and our socio-economic institutions look weak—just look at the challenges facing health provision and pensions in the West.

In total, it may not all add up to Kunstler’s dystopian vision of the future chronicled in his “Made by Hand” series of novels, where society cannot even maintain the necessary technology to sustain transport by bicycle, but it could certainly be a very different world from the one which we inhabit today.

2 responses to “Lack of Growth Economics

  1. Gordon’s article is fascinating, particularly his history of the three industrial revolutions, but I think he still misses the big picture, which is resource depletion. Gordon does talk about energy, but only in the context of increasing taxes to help combat climate change, not even mentioning the possibility that available net energy could ever decline significantly. Of all the possible ordinary “headwinds” to growth (nuclear war or global pandemic not included), I believe lack of energy is the most important. How could it not be? Energy drives all the technologies used by human society. With it, economies can grow, without it they must shrink.

    I think Gordon’s “frightening” projection of 0.2% growth as a baseline for the end of this century is far too optimistic. I expect that growth will soon become negative, as available net energy declines, and that it will remain negative until rebounding after population stabilizes at a much lower level.

    The burden is on optimists to demonstrate where the energy will come from to replace what we now get from fossil fuels. Most economists, like Gordon, don’t even bother with that problem.

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