Economist Robert Gordon recently uploaded an NBER working paper regarding US economic growth that Mark DeWeaver recently passed to me. Gordon makes the case that there are a number of headwinds (six by his count) that will prevent the US from growing more than one percent over the foreseeable future.
While I am bearish in some respects, I do not find any of the headwinds presented convincing. In fact as I explain below, I find most of them simply non-issues and that other unmentioned policies to be much larger culprits in stymieing economic growth.
At the beginning, Gordon notes that this paper is an exercise in what-ifs. Key to his point is, what-if the financial crisis did not occur after 2007 — what is the best-in-case growth trajectory for the US sans the financial correction?
With that said, if Gordon is going to do a little hand waving regarding “what if the 2007-8 financial crisis didn’t happen” I am sure there are a number of other economists who could pen some papers on “what if the federal budget was $0 in the past five years?” or if there “had been no war in Iraq or Afghanistan” — I suspect they would come to some alternative conclusions as well.
Another “what if scenario” that springs to mind — what are some trend lines for economic growth numbers if individual savings accounts were not taxed, interest wasn’t taxed, withdrawal of funds were not taxed, etc. In Japan, individuals can open up multiple savings accounts in Japan Post and the first $13,000 are purportedly tax free.
At any rate, there is an unlimited amount of “what-ifs” that can be imagined. Let us discuss Gordon’s specifics. His six headwinds are as follows: demographic, education, inequality, globalization, energy and debt reversal. More on these later.
Seen and unseen
I think his 4th point on p.2 is a bit short-sighted as it only looks at what is happening right now in terms of some “seen” technological transformations, yet there is a lot of “unseen” productivity gains behind closed doors such as robotic automation of factories that is allowing manufacturing firms to save on labor costs. The NY Times had a good piece on this a couple weeks ago — “New Wave of Adept Robots is Changing Global Industry” — which goes into detail regarding new robots that help load and unload parcels as well; and will be a disruptive innovation for those firms (like FedEx and UPS) that rely on large pools of human physical labor.
Another not-so-obvious advancement occurs in the pharmacy as robots replace pharmacists (Salon had a detailed piece on this last year) and in the oil fields, where Zigbee powered devices (a low-powered radio) allows oil pump managers to remotely survey their oil fields without having to drive out to each individual oil field. While Gordon does mention automated automobiles later on (e.g., the Google driveless car), he also ignores the possibilities of emerging technologies like 3D printers which can decentralize manufacturing and of course 4G smartphones and all of the Swiss-army knife innovations it has cobbled together saving time and space — the average smartphone user today has access to more knowledge than any king or president in the past. To his credit Gordon attempts to address the smartphone angle specifically later on, but I will explain what he misses below as well.
What are you bearish about?
I think there are more than six headwinds that the US and other developed countries are running into, unfunded entitlement programs are at the top of that list — yet is barely mentioned by Gordon. At the same time I do not see much of a problem with a “demographic dividend” in the US as he does (p.2) because skilled, youthful immigrants are and will continue to flock to the US and fill in many of those gaps for decades to come. The same cannot be said for other developed economics like Japan or Germany.
I think there are a number of other headwinds that Gordon doesn’t mention, like healthcare. If you nationalize it, you not only shift the burden of compensation from one party to another but the capital allocation process is no longer rationed via organic prices but via arbitrary fiat. Now while I doubt this will immediately result in every hospital turning into a VA like Born on the Fourth of July — it certainly is not going to help anyone in the long-run (except lobbyists and SIGs) as you cannot build hospitals instantaneously by decree and/or train doctors overnight. Medical resources are scarce and allocating access to them in a centrally planned fashion will apriori lead to planned chaos.
While on p.2 and later on p. 10 he makes a good point about physical transportation speeds reaching a limit in 1958, he misses the fact that starting in the ’60s humanity actually went from sub-Mach 1 to the speed-of-light via fiber optics and lasers. In fact, a lot of business communication can now be done via telepresence (like telemedicine) and interactive conference calls — saving untold amounts of time that would have otherwise been spent traveling and saved monies that can now be spent on other productive activities. In fact, Gordon merely mentions it in passing: the continually evolving internet. How much productivity has been gained because you no longer have to spend time in a car to get to the Post Office, stand in line at the Post Office with a stack of documents that needs to be sent from one city to another — whereas many of those same documents today can simply be signed, scanned and emailed? In fact, the productivity gains by internet-based communication is one of the reasons which has decimated the government-managed Post Office, forcing it to the brink of bankruptcy.
Chartism and trend lines
Gordon’s charts (specifically those on p. 6) are very interesting but more illustrative than prescriptive. However, I don’t see him taking this into account: various agencies (e.g., a government) that malinvest and misallocate capital more than an economy can produce. Or rather, productivity in an economy can be hampered by inefficient capital allocation. At some point capital consumption can be so great, cannibalization can take place and if the capital needed to maintain the physical plants runs out, you can run into the productivity vs consumption wall the Soviets did. I would like to see the 70 years of growth and decline in the Soviet Union — if it is possible to actually measure it — and plot it using the same assumptions that Gordon has.
Despite my criticism I really did enjoy his descriptive overview of the dreary life people lived (such as the manure on p.8) prior to the inventions of the modern world we now live with — especially with in-door plumbing and safe electricity.
And speaking of horse manure and streets, one of the unsung saviors of urban planning in the early 20th century was the automobile because it freed the horrifically disgusting streets of London and New York from diseases, death and decay (Gordon describes some of it, but these two pieces go into more detail). In fact, last year NYC set a new record low for the safest roads in terms of commuter deaths per year — the safest the city has had in a century thanks to the automobile.
On p. 12 he points to the jocular 1987 quote that “We can see computers everywhere except in the productivity statistics.” The problem with this is that it would be akin to saying in 1917 “We can see automobiles everywhere except in the productivity statistics.” It was stated too early. Instead we are now in an era Kevin Ashton (and subsequently Steve Jobs) called “an Internet of things.” There are roughly as many always-on, net-connected gadgets today as there are humans. By 2020 the amount of net-connected gadgets will have more than doubled. And while it is certainly too early to predict what will happen next, Charles Stross recently put together an interesting hypothetical for what 2032 will look like — although the bear in me disagrees.
What is broken and unequal about it?
In terms of education as a headwind (p. 17) Gordon claims that the education system in the US has a number of unequal aspects that hinder productivity and ultimately creates two-classes of citizens. Unfortunately he does not cite sources for this and as an aside, if the US education system is so broken as he laments, why would say, affluent Chinese people want to matriculate to it? Suckers? For example, a large portion of my current students here in China try hard to get placed and accepted into US grad schools (see a tangential story here). The older ones want their children to go to US high schools. In fact, this chart beautifully depicts where affluent Chinese send (“export”) their children for education.
I’m not saying that the numerous US school systems are not “broken” or “disjointed” I just don’t see any objective criteria for what Gordon claims is a huge impending quagmire. Or perhaps, maybe the school systems here in China are “brokener!” Brokenest even! And then we devolve into hyperbole. With all of this said, I think the move towards free online programs like Khan Academy and Udacity will enable a new generation of self-taught innovators to disrupt the marketplace. A significant portion of IT and engineers are already self-taught and contribute substantially to aggregate productivity. I do not see this trend (or the immigration trend) declining and thus disagree with Gordon.
His point 4 on page 17 is a bit short-sighted too. Sure low-skill, low-end manufacturing jobs have moved from the US to other countries (yet Gordon leaves out the concept of global labor arbitrage — the Brits could have and surely did complain 200 years ago when lowly Americans were “stealing” manufacturing jobs), but as the Chinese lament, high-skilled jobs are not moving to China.
To quote a recent WSJ report, these desirable jobs remain in the developed world:
“High-end jobs that should have been produced by industrialization, including research, marketing and accounting etc., have been left in the West,” said Chen Yuyu, associate professor at Peking University’s Guanghua School of Management. Referencing the trade name of Hon Hai Precision Industry Co.,the Taiwan-based company that makes gadgets for Apple Inc. and others in Chinese factories, he said, “We only have assembly lines in Foxconns.”
Solving the problem is complex, involving a gradual overhaul of China’s education system as well as efforts to add more service-sector jobs. China’s Ministry of Education in 2010 unveiled new guidelines pressing universities to shift away from their traditional focus on increasing enrollment. It is also experimenting with giving faculty greater say over curriculum and school operations, though universities remain tightly controlled by the Communist Party.
Moving along, on p.17 I don’t see a huge push for a carbon tax at the moment. And while I am not a huge fan of environmental government-based regulation, I don’t see much regulation “uncertainty” in this area — especially since CO2 levels in the US are now at a 20 year low — what can US environmentalists rally around at this point? Perhaps my own geographical location in Shanghai distorts my view but this is one fight China and India continue to win at places like the WEF and G20 and as a consequence, I don’t think US policy makers will be able to push this through as easily. Thus I don’t see the US moving in Europe’s carbon tax direction any time soon as Gordon predicts.
Of all his claims, I am most puzzled on p. 20 where he states:
The “revival of American manufacturing” is heralded in the media without recognition that this is part of an ongoing process that erodes the number of high-paying middle-class jobs available to those without a college education.
He is referring to union jobs — or many others that require occupational licensing. I do not see labor arbitrage as having a negative effect that he does. It will be negative to those union workers, but because labor costs decrease in those industries and thus the total cost of finished goods decrease, it means consumers will have more money to spend on other economic activities. Opportunity costs from the diminishing”union tax” have the potential to free up capital that can be allocated elsewhere.
As I mentioned at the beginning, on p. 14 Gordon directly discusses the contribution of smartphones, noting that:
[T]he smartphone replaced the garden-variety “dumb” cellphone with functions that in part replaced desktop and laptop computers; and the iPad provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines.
The problem with this specifically is that he does not distinguish between the seen and unseen. You cannot see the opportunity costs in an alternative 2012 world that does not have smartphones. While a smartphone today may not be very useful for editing and rendering wireframes, they are incredible time savers and organizational tools. Imagine all of the round-trips saved going back and forth to your home now that you can access your email anywhere you are or all of those wrong turns that no longer take place due to GPS. These smartphones have become a just-in-time, jack-of-all-trade in a box. I would argue that one of the reasons that the current global recession the developed world has experienced over the past 5 years seems to be relatively muted (that the riots in Athens are fortunately so far the exception to the rule) is that technological productivity has managed to keep apace of aggregate malinvestment and unproductive assets.
Unfortunately Gordon doesn’t measure this.
Overall I think he raises some interesting points but I am not convinced by his six headwinds for a bearish case — I have many other reasons to be bearish (which I made in that tech/debt piece a few months ago). And I think it is a cheap shot to claim that Canada and Sweden will not face their own problems — “free” health care sounds great until whoever pays for it runs out of money and/or you misallocate capital so poorly that hospitals are no longer properly maintained and/or you don’t have the ability to meet the demand of subsidized visits.
Lastly, I do not think that that private investment and private entrepreneurs always make great decisions and/or profitable ventures — 56% of startups fail within the first 5 years. And while I think it would be hyperbole to suggest that these entrepreneurs failed because of government intervention (there are plenty of incompetent pointy-haired bosses in the private marketplace) — to ignore the effects government intervention on the marketplace and economic growth as a whole would be myopic.