Wednesday, August 29, 2012

American growth could be higher than the pessimists think!


Robert J. Gordon has a new NBER working paper essay that really should cite Tyler Cowen, since it's all about a Great Stagnation in U.S. growth. Unlike Cowen, however, Gordon believes that the Stagnation will persist into the indefinite future. The paper is really two essays in one - the first part speculates that most of the big discoveries and inventions have already been made, and the second part identifies social and institutional constraints on U.S. growth. (Here are thoughts on the paper by FT Alphaville and Paul Krugman). Although there are some parts of the paper with which I agree, overall I think Gordon overstates the case for pessimism.

First, the technology part. Gordon claims that there have been three big "industrial revolutions" that have driven growth over the past two centuries, but that these bursts of innovation have diminishing returns:
A useful organizing principle to understand the pace of growth since 1750 is the sequence of three industrial revolutions. The first (IR #1) with its main inventions between 1750 and 1830 created steam engines, cotton spinning, and railroads. The second (IR #2) was the most important, with its three central inventions of electricity, the internal combustion engine, and running water with indoor plumbing, in the relatively short interval of 1870 to 1900. Both the first two revolutions required about 100 years for their full effects to percolate through the economy. During the two decades 1950-70 the benefits of the IR #2 were still transforming the economy, including air conditioning, home appliances, and the interstate highway system. After 1970 productivity growth slowed markedly, most plausibly because the main ideas of IR #2 had by and large been implemented by then...

The computer and Internet revolution (IR #3) began around 1960 and reached its climax in the dot.com era of the late 1990s, but its main impact on productivity has withered away in the past eight years. Many of the inventions that replaced tedious and repetitive clerical labor by computers happened a long time ago, in the 1970s and 1980s. Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it...

The article suggests that it is useful to think of the innovative process as a series of discrete inventions followed by incremental improvements which ultimately tap the full potential of the initial invention. For the first two industrial revolutions, the incremental follow-up process lasted at least 100 years. For the more recent IR #3, the follow-up process was much faster. Taking the inventions and their follow-up improvements together, many of these processes could happen only once. Notable examples are speed of travel, temperature of interior space, and urbanization itself.
As I always say, we economists don't really know where technology is going. No one really does, and we probably know less than most. I agree with most of Gordon's claims about the three industrial revolutions. But what does that tell us about future revolutions?

There are many hypothetical technologies that have the power to transform the human experience even more profoundly than any that have gone before. Fusion power and self-replicating networked nanotech are two popular ones, but there are others that have the potential to be even more transformational. For example, personality upload (also called "brain emulation"). Why spend all your wealth rearranging the world we live in, when you can just create your own? An even bigger one is desire modification. Why spend all your wealth creating a better world, when you can make yourself like the one you're in? In fact, inventions like this are so transformational that they would call into question the very definition of economic growth, economic value, GDP, etc. The "industrial revolutions" from personality upload and/or desire modification would dwarf anything that has gone before.

But even on a more modest level, there are technological improvements already in the works that will help sustain growth. The fall in solar costs is one of these. Improvements in robotics/automation/A.I. are a second. Genetic technologies are a third, and biomechanical engineering (artificial eyes and the like) is a fourth. These things are real.

After delivering a long discourse on technology, Gordon pivots on a dime and lists six non-technological "headwinds" that will supposedly drag down U.S. growth in the near future. I'll go through these one by one...
(1) The “demographic dividend” is now in reverse motion. The original dividend was another one-time-only event, the movement of females into the labor force between 1965 and 1990, which raised hours per capita and allowed real per-capita real GDP to grow faster than output per hour. 
This is correct. Next:
(2) The second headwind already taken into account in the 2007-27 forecast is the plateau in educational attainment in the U.S. reached more than 20 years ago, as highlighted in the path-breaking work of Claudia Golden and Lawrence Katz (2008). 
This is also correct, BUT, then Gordon turns around and says this:
At the secondary level the OECD PISA test results for 37 nations had the U.S. recently ranked as ranked as 21st in reading, 31st in math, and 34th in science. There is an ongoing achievement gap between whites and Asians on the one hand and Hispanics and Blacks on the other, while the Hispanic percentage of our nation’s schoolchildren keeps increasing, dragging down the national average. Making matters worse is a new and growing gap between the educational preparation and achievement of American girls and boys; the female share of college graduates is now up to 58 percent.
First of all, this paragraph contains the disturbing assumption that Hispanic educational underachievement is something permanent (racial/genetic?). Fortunately the evidence seems to say otherwise.

On a more basic level, this paragraph doesn't support Gordon's contention. Gordon is arguing that growth from educational attainment is finished. As evidence he then points to low educational attainment. But low levels mean more room for growth. Doesn't everyone know this? You wouldn't point to Vietnam and say "Look how little capital this country has; slow capital accumulation will be a drag on Vietnamese growth"...right?

In other words, U.S. educational attainment has little room to grow in terms of quantity (years of study), but has absolutely huge room to grow in terms of quality. That is a potential source of accelerated growth.

Gordon goes on...
(3) The most important quantitatively in holding down the growth of our future income is rising inequality. The growth in median real income has been substantially slower than all of these growth rates of average per-capita income discussed thus far...If what we care about when we talk about “consumer well being” is the bottom 99 percent, then we must deduct 0.55 percent from the average growth rates of real GDP per capita presented here and elsewhere.
This is moving the goalpoasts, to be sure, though I agree with the sentiment. But notice that again, Gordon is claiming that levels are correlated with growth rates, and that's just not right. For example, suppose overall U.S. GDP growth slows to zero, but inequality decreases. By Gordon's own preferred metric, that would speed up growth for the 99%. Presto.

So once again, Gordon implictly assumes that recent trends will continue; if the trends reverse, the "headwind" becomes a tailwind.

And here is yet a third example:
(4) The interaction between globalization and ICT is a daunting headwind. Its effects include outsourcing of all types, from call centers to radiologist jobs. Foreign inexpensive labor competes with American labor not just through outsourcing, but also through imports. And these imports combine lower wages in emerging nations with growing technological capabilities there. This is nothing more than the Hecksher-Ohlin-Samuelson factor-price equalization theorem at work, and it inevitably has a damaging effect on the nations with the highest wage level, i.e., the United States.
I strongly agree with Gordon that factor-price equalization has held down American middle-class income, and contributed heavily to the inequality he discusses in his Headwind #3. But again, there is no certainty that this trend will continue. Chinese wages are rising rapidly, and unless India fixes its political problems, there will be no equally big source of cheap labor to replace it. If factor-price equalization goes into reverse, it will be a big tailwind for America's 99%.

Next we have:
(5) Energy and the environment represent the fifth headwind...India and China are both growing more rapidly than the U.S. and taken together those two nations are responsible for double the carbon emissions of the U.S.
Yes, global warming will probably restrain global growth.

Finally, we have:
(6) The twin household and government deficits represent the final headwind. Already in 2007 U.S. households suffered from an unprecedented overhang of debt equal to 133 percent of disposable income. The government debt was then manageable but has since begun to explode. Consumers have gradually been paying off debt, and this is one reason why the economic recovery has been so tepid. As a matter of arithmetic the ratio of government debt to GDP can be reduced by a mix of higher taxes, lower expenditures, and lower entitlement benefits (including higher retirement ages). But the same arithmetic implies that higher taxes and/or lower transfers reduces the growth rate of real household disposable income relative to that of real GDP.
There are two issues here. One is the "balance sheet recession"/liquidity trap. But that is fixable by policy. Next is the distortionary effect of taxation needed to make the government deficit sustainable. But I don't believe that this is nearly as large as conservatives claim, if the taxes are some combination of income, sales, and property taxes.

So in conclusion, I think that Gordon overstates the pessimistic case. Yes, there are headwinds for American growth, but there also potential tailwinds. These include:

  • Improved educational quality
  • Slowing factor price equalization
  • New technologies like cheap solar, robotics, and biotech
  • Increased high-skilled immigration

And farther in the future, there is the potential for further industrial revolutions that will dwarf the ones we've seen in the past.

Addendum: I seem to be the only person talking about Desire Modification as a transformational technology. Greg Egan and Vernor Vinge have written books in which this technology plays a central role. In my "spare time" I'm writing a couple of sci-fi short stories based on the idea. It's a really big deal, and I'll write a post about it soon. (Update: That post is now up.)

Update: John Cochrane makes a similar critique of Gordon's conflation of level effects with growth rate effects.

49 comments:

  1. Shouldn't any paper with "Is U.S. Economic Growth Over?" be seen as an act of pure trollery if the first word of the Abstract isn't "no"???

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  2. PaulS1:34 PM

    Innovations and growth are unexpected by their very nature. If certain innovations were anticipated, they already would have been accomplished (or at least started--so short-term growth can perhaps be anticipated, but not long-term). So to say that future growth is impossible because we don't anticipate further innovation is an impossible connection to make.

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  3. "I seem to be the only person talking about Desire Modification as a transformational technology."

    There is a bit of a paradox about changing what you want. The potential for coercive use of this technology is very high and failure would be a major deal.

    Did you ever watch Clockwork Orange? It's a tough watch due to violence but the underlying message is worth pondering.

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    1. Very true. I'll blog about this soon.

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  4. I think Desire and Mood Modification could be a big deal, too. If I recall correctly, they've already done experiments where they wire up a monkey's brain so that they stimulate pleasure with just the push of a button. Imagine something like that, except with an ultra-compact computer that constantly monitored and occasionally "stoked" your brain, keeping you in a generally upbeat and happy mood.

    Nanotech . . . I'll believe it when I see it, and simply creating tiny gears out of atoms is not the same thing. Fusion is just an open question mark until we actually build a steady "ignition and burn" plant, with nothing but speculation about whether the economics would work out.

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  5. Teleportation

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  6. Anonymous3:25 PM

    Noah,

    Which book(s) by these authors do you recommend as a good start to desire modification. It sounds interesting and I know nothing about it, and couldn't find much on it on my own

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    1. For sci-fi, read A Deepness in the Sky (by Vernor Vinge), and also Diaspora (by Greg Egan). For science stuff, I'm not sure. Stay tuned...

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    2. I strongly recommend, from a science point of view, these two posts by physicist Tom Murphy of UCSD, and I would love to see you play the role of the economist in a replay of this conversation.
      http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/

      He also has a very good piece on attitude adjustment, too. (Everyone's entitled to the occasional rant)

      My personal opinion is that the next real frontier is going to be learning from biological systems and how they make fibres that have way better properties than steel, (spiders webs)adhesives that put many man made glues to shame,(shellfish) and a host of other things, even the potential for biocomputers.

      And they do it all with low level solar energy input. The greater the rate at which we can learn how to replicate these processes and ditch the extraction based technologies, the better chance we will have. And just think of the investment opportunities!

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    3. Oops.... Murphy's link to attitude adjustment blog

      http://physics.ucsd.edu/do-the-math/2011/12/the-future-needs-an-attitude-adjustment/

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    4. Man, how I dislike Tom Murphy's writing style. But I guess at some point I should critique the substance of his arguments.

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    5. Style vs. substance? One can take exceptions to some of Murphy's battery comments, which depend on specific assumptions about vehicle use. And I understand that the Prius battery packs are surviving very well. Check out the LBL site here. http://batt.lbl.gov/ and
      this post on the Zeroth law of Batteries http://gigaom.com/cleantech/the-three-laws-of-batteries-and-a-bonus-zeroth-law/

      However, many of Murphy's physics comments frame the questions really well. If you have an off-grid home, as I do, you will soon start to see the connection between computing power and energy consumption.....There's an interesting econ. calculation on energy and public utility costs for the retiree. If one looks at projected increases in water, gas, electricity and sewer costs vs. savings for retirement income to cover it; a great argument for off-grid rural living.

      Did you notice a change in your writing style shifting to econ from physics?

      Best,

      JH




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    6. Style vs. substance?

      Not really...the annoying style kept me from spending the effort to analyze the substance. But I'm getting around to it.

      There are lots of problems with Murphy's substance. First and foremost is how he keeps saying that no one factor will save us from energy shortages, but provides no convincing argument that a mix of solutions will not be able to save us from shortages.

      Next is his tendency to assume that current costs = future costs for new energy technologies (he does not always do this, but sometimes does). For example he seems to largely ignore the exponential decay in solar costs over the last 30 years.

      Finally there is his mischaracterization of economists' views on growth. No economist thinks growth can go on forever. No mainstream model assumes or requires eternal growth (e.g. the Solow model; growth ends if productivity stops growing). What most people think will happen is that humans will reach a "bliss point", at which point economic concepts like utility can no longer be used (since utility functions require something called "local nonsatiation", i.e. that people always want more). Optimistic economists think that eventually, humanity will be 100% satisfied with levels of consumption that are sustainable for millions of years.

      Just look at how Desire Modification would change the economic calculus. We could produce the same amount of stuff but be more satisfied with that amount.

      Did you notice a change in your writing style shifting to econ from physics?

      In physics I only did math...

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    7. Thanks for the prompt response. I don't disagree with your critiques, but do think his attempts to calculate the total energy required to support a given population are a worthwhile first step, and the energy per individual is definitely going up. Its important to get a handle on the problem. Can you recommend any good papers with a specific look at per capita energy consumption and economic growth?

      A lot of policymakers are influenced by economists who don't tell them that growth can't go on for ever, and solves everything. Drill baby drill, extract, baby extract, cut taxes on the job creators etc... I think a prime policy goof is to not look at natural gas as a bridge fuel, as Sweden is doing, with appropriate carbon tax, and I just wish economists would look at some long term energy planning.

      I think the bliss point anticipations are optimistic. Human nature (which admittedly needs evolutionary refinement) is powerful. John Stuart Mills said, in Social Freedom: “Men do not merely desire to be rich, but richer than other men”.

      Good response on the writing style quip....

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    8. And I forgot to add, speaking of desire modification and satiation, local and otherwise, you might enjoy this show from BBC's wonderful old 60's series, 'Out of the Unknown'. A brilliant critique on supply side economics....and a pretty faithful adaptation of Frederick Pohl's "The Midas Plague" Touches on many of the points mentioned in this post.....

      http://www.youtube.com/watch?v=lXy9jFsRmzM

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  7. Anonymous4:16 PM

    "really should cite Tyler Cowen"

    If Gordon has read, or is aware of, "The Great Stagnation" then he is damn close to being guilty of plagiarism. Given his statement that his article "questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever." his failure to mention Cowen as one of the few others to question this assumption is quite deplorable.

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    1. Anonymous4:22 PM

      There is something else about this claim which irks me. The part where he says that the claim has been "nearly universal" since Solow. I worry when I hear this claim. I hope it is not true. I hope too that the weaker, and possibly implicit, claim that "the assumption has been nearly universal amongst economists" is also not true.

      It certainly seems to be the case that it is assumed in most models relevant to the issue. But how far into the future are these models supposed to extend. If it is 20-30 years maybe it is appropriate to have such an assumption. Then economists could be using it as a modelling assumption while not believing growth is a continuous process that goes on forever. Sadly, I think this is not the case and the modelling assumption has become a belief about reality. A belief that few outside of economics shares. This is what is most annoying about Gordon's claim about the universality of this assumption: Nearly every field of science outside of academics would find this assumption risible.

      I am not saying I agree that growth in America is coming to an end. I am just saying that it is really not a new claim to those who's thoughts and vision extend beyond a small subset (Small, I hope) of the economics community. There have been many claims, essays, books and political movements based on the explicit rejection of the assumption that economic growth in America (and the World) is coming to an end. I don't know how anyone could have missed that.

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    2. Well, not plagiarism, but failure to cite is rude.

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    3. "If Gordon has read, or is aware of, "The Great Stagnation" then he is damn close to being guilty of plagiarism."

      Tyler has obviously read my stuff over the years, and I've long emphasized the three main ideas he featured in his The Great Stagnation:

      http://www.vdare.com/articles/tyler-cowens-great-stagnation-needs-work-especially-on-immigration-but-shows-improvement

      Is that plagiarism? I don't think so. I'd call it common sense.

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  8. Zathras4:34 PM

    If you read popular and even some technical article in neuroscience you'd think that desire/mood modification is just around the corner. Not only is it not just around the corner, it isn't even in the realm of possibility for a long, long time. The BS in these article is really astounding. When you dig deeper, and you realize that all neuroscientists can really tell is that X happens, brain part Y lights up on the MRI, you realize that these articles are just grasping at straws.

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    1. Well, Desire Modification tech already exists: antidepressants, study drugs, etc. It just doesn't work incredibly well, and has a lot of side effects. Yes, we're a long way away from chips that control your personality.

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  9. The key graph is GDP per capita over last 700 (!) yrs merging US and British data. Looks like we peaked around fifty years ago and have declined steadily since. Which is consistent with household income data. The last fifty yrs have obviously had innovations, but not as important as the prior fifty yrs. None of the innovations suggested above are nearly as profound as industrial revolution #2.

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    1. Past performance is no guarantee of future results, nor is there any compelling reason to believe that growth is single-peaked.

      Also that graph fails to show the increase in U.S. growth in the 80s and 90s relative to the 70s, so I don't trust it.

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  10. Here's the comment I left on this:

    1) Robotics is starting to be revolutionary, and that's going to be far more than HD videos on your iPhone – see the recent long Times article:

    http://www.nytimes.com/2012/08/19/business/new-wave-of-adept-robots-is-changing-global-industry.html?pagewanted=all

    It's an amazing, stunning article, just of what's happening right now! let alone the future.

    2) Nanobots could be an amazing revolution over the next generation or two, even repairing aging.

    3) Biotech, stem cells, and cloning could be an amazing revolution over the next generation or two, even repairing aging – http://www.dailymail.co.uk/home/moslive/article-2138956/Organ-donation-Making-thing-past--British-lab-growing-human-spare-parts.html

    4) Solar is really starting to come of age.

    Google this stuff and see. Of course, if we keep voting Republican, so basic science, education, and infrastructure are starved so the rich can build bigger mansions...

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  11. Speaking of desire-modification in science fiction, there is of course Philip Dick's "mood organ" in Do Androids Dream of Electric Sheep, to say nothing of the classic conditioning in, say, Brave New World or We. I think desire modification is pretty generally popular in science fiction, but it's usually taken in a dystopian direction--and why not? Certainly if one has teleotheistic leanings along the lines that Miles Kimball seems to espouse, desire would have value as one of the catalysts that would lead human beings to the eventual creation of God.

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    1. Good point!

      Also, good job pointing out those short stories...I was only focusing on books.

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  12. In my youth, my friends and I experimented with the use of alcohol to achieve desire modification - the results weren't pretty.

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  13. Jeff Graver1:04 AM

    I wonder if it wouldn't make sense to consider IR#3 to be at least as much a revolution in materials as in computers and internet. After all, boolean logic has been around for awhile, but it was only with the invention of silicon based circuits that it became revolutionary.

    I say it with some misgiving, since I write software for a living, but maybe the whole amazing world of software is the inevitable result of developments in materials handling and processing.

    The materials revolution encompasses not only silicon, but polymers. Plastics! From Tupperware to intraocular lenses, the applications of plastics that were unthinkable 40 years ago are innumerable. And the materials revolution is only picking up steam.

    And new materials include advances in ceramics, metals, and more.

    But even if we only consider info tech, I think it's fair to say that productivity consequences continue to unfold. But the labor displaced is climbing higher on the "professions" scale. I expect that smartphones and tablets are going to be seen in retrospect as huge productivity enhancements. They will be seen as the devices that make it possible for anyone to have a computer with them at all times.

    More and more, arguments for general decline seem to me to be just bad tempered.

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  14. Everyone, ok, Yglesias and Krugman, seem impressed by Gordon's in door plumbing vignette. But in door plumbing is three thousand years old, so growth peaked with King Minos?

    It was mechanization and replaceable parts that brought it to the masses.

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  15. Anonymous7:29 AM

    There is an important effect that I think you ignore. Level effects can turn into growth effect. When a level effect becomes too pronounced, it can change the environment for development, which can reduce the growth in the long term. In particular, when a level effect crosses a threshold, it can lead to a self-enforcing effect, which affects growth.

    I think there are currently two headwinds that have this signature. One is inequality, the other is climate change (basically #3 and #4). If growing inequality is not soon reversed (especially if a certain someone wins...) I am afraid it will be irreversible, and an unequal society will inhibit rather than increase technology, and therefore growth. This has been shown in history many times (I recommend Why Nations Fail on this.) As for climate change, when even the most conservative predictions come to pass (and I really don't see what would stop that), stable societies with a sustained growth will be all but impossible within a century or so.

    So unlike Gordon I don't think the problem is that there's not sufficient (potential) technology (I do think in principle we're more than capable to develop it), but rather that the environment won't be there to allow such technology to be developed.

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  16. Larry Headlund1:00 PM

    The Financial Times has put a copy of the complete Gordon article outside of any pay wall here.

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    1. Thanks!

      (Note: Any additional growth from immigration will come at the expense of Larry Headlund's job.)

      #trollingmycommenters

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    2. Larry Headlund4:52 PM

      Still waiting for justification for your statement ". Salaries for software engineers have doubled, signaling high demand. "

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    3. Larry Headlund11:19 AM

      Denying you made the statement?

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    4. ?? No, go see our earlier lengthy discussion...

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    5. Larry Headlund7:19 PM

      The statement "Salaries for software engineers have doubled" is false. Obviously false to anyone who has even superficial knowledge of the software industry. From the Bureau of Labor Statistics the median salary for Software Engineers went from $67,670 in 2000 to $85,430 in 2008, a 30% increase. This is nominal increase, unadjusted for inflation. Using the CPI to adjust for inflation gets a 2% increase after 9 years.

      You make a claim for an increase 50 times that over some unknown period. Were you foolish enough not to suspect your source for that figure? Or ignorant of the real figures? The other options are less pleasant.

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  17. Peter Schaeffer1:38 PM

    "First of all, this paragraph contains the disturbing assumption that Hispanic educational underachievement is something permanent (racial/genetic?)."

    The reasons are ultimately irrelevant, but the reality of long-term low performance is quite real. Let me quote from Telles and Ortiz, the authors of

    "Generations of Exclusion: Mexican Americans, Assimilation, and Race"

    "Despite sixty years of political and legal battles to improve the education of Mexican Americans, they continue to have the lowest average education levels and the highest high school dropout rates among major ethnic and racial groups in the United States. … However, leading analysts, apparently believing in the universality of assimilation, argue that this is the result of a large first and second generation population still adjusting to American society. … These and other scholars predict that Mexican Americans will have the same levels of education and socioeconomic status as the dominant non-Hispanic white population by the fourth generation."

    Note that Huntington and Richwine have reached the same conclusions.

    Of course, high school graduation rates do vary over time. Heckman and LaFontaine found that

    "In fact, we find no evidence of convergence in minority-majority graduation rates over the past 35 years."

    See "The American High School Graduation Rate: Trends and Levels"

    However, there is a deeper point. A huge fraction of Hispanic high school graduates are "graduates in name only". The NAEP data shows that they have below basic skills in reading and math. Excluding the "below basic" group, the actual high school graduation rate is 25% at best. Of course, other demographic groups have large numbers of below basic "graduates" as well.

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    1. It's just weird how economists love to show off in public that they are ignorant about Hispanics.

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  18. Anonymous2:14 PM

    A comment on the education bit: how can education increase in "quality", really? After all, are those countries that beat the US in those standardized exams we use as a metric for education seeing higher growth rates than the US once we factor out comparitive levels of economic development? I doubt it.

    Is it possible to "educate" an individual more highly than Plato did Aristotle? Given that humanity has made many discoveries in these 2300 or so years, an individual today must retain far more facts to be considered knowledgeable, but being a repository of facts is not the same as having the sort of education that might allow an individual to be "innovative." Clearly one needs to know the facts to build upon them, but the mental skills that allow for real "outside the box" thinking have not changed in the past millenia since Plato or Aristotle anymore than the practice of sex has evolved and changed in time. Prostitution might be the world's oldest profession but education is not far behind, and neither has really changed, nor will they as long as we remain humans.

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    1. Sisyphus7:25 PM

      I think your understanding of innovation is quite truncated. It is not simply a matter of being able to "think differently," as Steve Jobs might have put it. You must also know quite a bit about the world and what people have previously learned about and invented in it in order to create something new to it, that is, to be a true innovator. Indeed, the gradual increase in age of Nobel science winners when they conducted their research is empirical evidence for the increasing need to learn more about the world in order to be innovative within it.

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  20. I am shocked-shocked that you and Cochrane agree on something. :) Worse part is that I agree too!

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  21. There is still a lot of productivity reaping from the computer revolution. Remember, the iPad has only been out for a few years, and it is still relatively expensive. We do need structural changes in cell phone plan fees, but we're just starting to see the future. There is also a lot of great chemistry and material science, so I expect future energy generation and energy use technology to be much more efficient.

    The big problem is the tension between rising productivity and rising inequality. The current balance favors producing more goods rather than producing more customers to buy those goods. When we had higher taxes, government spending and transfer payments easily absorbed the rising productivity and created consumers, but we've been in a downward spiral since the Reagan Revolution.

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  22. Anonymous3:44 PM

    I think that the biggest headwind to future growth is energy; oil production (worldwide) has been on a plateau since about 2005, despite consistently high prices - discovery of new fields peaked in the 1960's and has steadily declined. As oil is our major transportation energy source, this is a significant problem (and please don't point to the small blip from shale deposits, these fields have some of the highest rates of depletion we've seen.
    Fusion? Sure, it's been a "game changer" for the last 60 years - always "20 years away!". I will believe we have overcome the engineering problems when it lights my house.
    Solar is dropping in price, but it will take a remarkable amount of time (and money!) to change our societies to be able to live off of solar power. Keep in mind that per capita energy use has decreased as population has increased "peak per capita energy".
    The next largest headwind I see is permanent unemployment: "robotics!" is touted as the next frontier as cost has decreased and utility increased - however, what are the humans that do not control capital supposed to do for a living so that they may purchase all those nifty robot-produced (or harvested in fields and packaged in warehouses) products? Bank tellers are nearly redundant, as are many phone operators - a nation cannot just be people flipping burgers for one another with a small elite designing robots or writing code (both tasks that computers will increasingly take over) for a smaller elite owning everything. Health care is the next frontier for technology, place your hand in a device which will then take blood, vital signs etc and with a simple decision-tree, triage many patients (goodby to many nurses). Legal secretaries (and perhaps many lawyers)? A computer search engine for appropriate case references is something we could have now.
    Again, how shall all these people displaced by technology earn their daily bread in our glorious future? Unless I am truly surprised by a near-future save by fusion (and a probable need for a restructuring of our capitalistic economy), I fear some of the more dystopian science fiction novels will be our fate.

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    1. Gibbon15:49 AM

      One thing people often don't get is that the energy return on a investment of oil, was 125 to 1 around 1920, but has dropped fairly steadily since. The energy return on solar has been slowly increasing and they are about to cross. Switchover will happen.

      The difference, there is vastly more solar energy available than oil you can pump out of the ground. And this resource is not exhaustible.

      A second comment I have is demographically growth in population is slowing dramatically. In the GDP numbers that looks like a tail wind. In reality, it's a head wind.


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  23. Inequality isn't a force of nature - it's a political choice. So, for that matter, is globalisation. Similarly, if US education is crap, why not improve it?

    Regarding private debt, it is of course true that everybody can't save at once without bringing about a recession. But we've known since Keynes how to fix that. More stimulus, cramdown, or a 5% inflation target are all political choices.

    Even demographics is partly a political choice. If there are two stylised facts about it, it's that the empowerment of women will bring about the demographic transition, and going by the examples of France, the UK, and Sweden, you can get back over replacement with enough of a welfare state.

    As for energy, well, *doing something about it* is a political choice...

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  24. With his "demographic headwind" RJG sets up a red herring, which then serves as the foundation for his one suggestion of a policy response. When you've got chronic 8% unemployment and 15% underemployment, it's a little premature to talk about a workforce deficit. Gordon raises some interesting issues about growth but then confuses the issue more than clarifying it by going off on a tautological digression.

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