Warning: Silicon Valley is fighting a no-win battle against six
fatal headwinds — cultural, political and ideological trends that have
become hard wired within America’s collective brain, psyche, soul.
These headwinds are making it virtually impossible for our best
’n’ brightest innovation and technology geniuses to save America from
becoming a second-rate superpower trapped in a no-growth economy.
OK, so you don’t believe it? You’re a Silicon Valley
superoptimist? Got lots of tech stocks? Believe technology is already
building a new world? Saving the future? You’re convinced our best ’n’
brightest innovators, entrepreneurs and capitalists will save us, the
whole world, civilization, the planet?
Wrong. High-tech solutions cannot and will not prevent
America’s economic growth’s collapsing from an average of greater than
2% GDP growth beginning in 1750, with the Industrial Revolution, but
ending a generation ago. America’s GDP is already collapsing. Now,
growth is a weak 1.8% on average. Worse, America’s GDP is predicted to
sink much further — down near the no-growth 0.2% GDP common on the
planet for the years and centuries prior to 1750.
New Silicon Valley innovations can’t stop a collapsing economy
The clear message in economist Robert Gordon’s
must-read National
Bureau of Economic Research paper, “Is U.S. Economic Growth over?” is
that Silicon Valley can’t maintain the economy on its own. His paper is
guaranteed to make investors lapse into denial if not cardiac arrest,
especially hard-core high-tech fans convinced that technology is indeed
the miracle worker that can solve all problems and will save the world.
Until we all wake up, the Gordon deniers are good company: Federal Reserve Chairman
Ben Bernanke,
in fact, recently dismissed Gordon, saying, according to Bloomberg
News: “Pessimists may be paying too little attention to the strength of
the underlying economic and social forces that generate innovation in
the modern world.
“Trade and globalization increase the size of the potential
market for new products, the possible economic rewards for being first
with an innovative product or process are growing rapidly.”
Yes, Bernanke believes in the eternal-growth myth.
Old-school economists sinking America’s future
Bernanke is trapped in old-school classical economics; it works
in theory, fails in practice. Gordon opens with a direct challenge to
that core classical principle of perpetual growth: His paper “questions
the assumption, nearly universal since Solow’s seminal contributions of
the 1950s, that economic growth is a continuous process that will
persist forever.” For that Robert Merton Solow won the 1987 Nobel Prize
in economics. Gordon deserves one, too.
Gordon’s challenge: “There was virtually no growth before 1750,
and thus there is no guarantee that growth will continue indefinitely.”
Rather, he says, “the rapid progress made over the past 250
years could well turn out to be a unique episode in human history,” a
collection of “one-time-only inventions” that Silicon Valley cannot and
will not repeat.
Warning: Collapsing economic growth ahead
Early this year, in a Bloomberg Markets report, Gordon delivered his downbeat message to the upbeat Davos
World Economic Forum.
Jeremy Kahn wrote: Gordon “doesn’t mean ‘over’ in some
happy-days-aren’t-quite-here-again-yet-just-wait-another-quarter kind of
way. He means ‘over’ as in finished, finito, happy days ain’t never
coming back.”
“Never”? Why so brutal? Gordon said: “Future growth in real GDP
per capita will be slower than in any extended period since the late
19th century. … The inevitable decline in future growth required by the
need to reduce government and consumer debt will guarantee a contentious
political landscape not just over the next year but over the next
several decades.”
Bloomberg Markets asked for bond king Bill Gross’s reaction to
Gordon’s challenge: “A 1% differential means a lot in terms of
unemployment. … Corporate profits grow more after overall economic
growth hits 2%. Below that, they stall out.” Translation: America is
heading into a “new, new normal” of low corporate profits and a downhill
slide of gross domestic product into a growth cycle so anemic that
investors will lose interest and stocks will just keep sinking.
Economist Tyler Cowen also “shares Gordon’s belief in a
technological plateau,” adds Kahn. In his book “The Great Stagnation,”
Cowen refers to the work of Pentagon physicist Jonathan Huebner, who
looked at innovations per capita throughout history: “Huebner found that
the rate peaked around 1873, in the early years of the Second
Industrial Revolution. Declining innovation slows per capita
productivity gains and, in turn, economic expansion.”
In recent years challenges paralleling Gordon’s were raised in
many journals, including Foreign Policy and Foreign Affairs, and in an
American Interest feature, “The Ends of Growth.” A new consensus
emerges: Solow’s economic principle of “perpetual growth” is absurd. But
until the next global catastrophe exposes its absurdity, it will be
revered by old-school economists, bankers, CEOs, Big Oil, climate-change
deniers and capitalist ideologues everywhere because it supports their
short-term-profits strategies and lobbying efforts in Washington.
Death of Silicon Valley’s high-tech magic
“Whatever the future of innovation,” says Gordon, “the U.S.
economy still faces six daunting headwinds that will limit future
potential growth and hold it below the pace which innovation would
otherwise make possible.”
Despite the limits of his data, spanning eight centuries and
multiple continents, Gordon’s work is rock-solid, an aggressive
challenge to the misleading economic principle of “perpetual growth,”
whose origins began in with the Industrial Revolution. Problem: “The
fact that so many fundamental one-time-only inventions have already
occurred limits the potential for a continuing stream of equally basic
inventions,” including those past achievements “conversion from rural to
urban life, the speed of travel, the temperature of rooms, and the
near-elimination of brute-force manual labor.”
What about some new “one-time-only inventions?” Unlikely.
Last week in James Glanz’s New York Times column, headlined “Is
Big Data an Economic Big Dud?” Gordon compared Big Data to Big Oil:
Gasoline “made possible a transportation revolution as cars replaced
horses and as commercial air transportation replaced railroads. … If
anybody thinks that personal data are comparable to real oil and real
vehicles, they don’t appreciate the realities of the last century.”
Seriously, if you could only one chooses one, which would you pick:
Facebook and Twitter or
General Motors and Boeing?
Six fatal ‘headwinds’
In his NBER forecast of America’s future GDP growth, Gordon
admits starting with a couple of biases favoring an optimistic outcome:
First, he admits “pretending that the financial crisis did not happen”
and, secondly, he allows that he is making a “heroic assumption that
another invention with the same productivity impact of the Internet
revolution is about to appear on the near-term horizon. Thus our
starting point is quite optimistic.”
Gordon’s forecast begins with America’s average GDP growth rate
of 1.8% from 1987-2007. From there, Gordon’s forecast is an “exercise
in subtraction” with each of the following six headwinds reducing
America’s future GDP growth by a percentage point, ultimately driving
America’s future GDP down to 0.2%. Yes, that’s right back to where
America’s economic growth rate was before 1750 and the Industrial
Revolution.
Gordon’s NBER paper is a
must-read, but here’s a summary of the six headwinds, as distilled by Bloomberg Markets:
1. Demographics: “As more and more U.S. baby
boomers retire, the number of hours worked per person declines, and so
does the growth in GDP per capita.” (Down goes GDP to 1.6%.)
2. Stagnant educational attainment: “The U.S lags behind other advanced industrial economies in reading, math and science.” (GDP growth drops to 1.4%.)
3. Rising income inequality: “From 1993 to 2008, the wealthiest 1% captured 52% of inflation-adjusted income gains.” (GDP falls to 0.9%.)
4. Globalization and information technology: “More and more skilled jobs in the U.S. are being automated or are shifting to low-wage countries. (Down further to 0.7% GDP.)
5. Energy and environment: “Possible U.S.
efforts to combat global warming, such as a carbon tax, act as a drag on
economic growth.” (GDP reduced to 0.5%.)
6. Massive household and government debt: “Spending money on debt repayments in the U.S. reduces funds available for productive economic activity. (GDP crashes at 0.2%.)
Gordon closes his NBER challenge on a lighter note: “There are
more than enough provocative ideas in this article, but I conclude with
another. My guess is that a Canadian or Swedish economist looking at the
past and future of his or her country would not be nearly so alarmed.
Why not? What are the differences in environment, resources, legacy
history, policies, and culture that create their relative optimism?
Experts [in other countries] are welcome to contribute their own
reactions to this diagnosis of the successful ‘American century’ and the
possibility that future economic growth may gradually sputter out.”
