...against fictions and other tall tales

Saturday, 8 June 2013

Robert Gordon on the death of innovation and end of growth

This TED talk by Robert Gordon (Northwestern) is a must-see (do it, it's only 12 minutes long). You may recall that a paper by Gordon created quite a stir in the news a few months ago because of the bleak outlook it gives regarding future economic growth in the US.

In the talk, Gordon counters the commonly-held idea that economic growth is a continuous process. He makes the case that the rapid growth experienced during the last two and half centuries may have been an anomaly rather than the start of a new, everlasting historical trend.

According to Gordon, economic growth in the coming decades will slow as a result of six headwinds that will reduce future productivity and income growth. In the end, the impact of these six headwinds will leave long-term growth at half or less of the (near) 2 percent annual rate experienced between the mid-1800s and today.

The six negative headwinds that make up Gordon's "exercise in subtraction" are demography, education, inequality, globalization, energy and debt (for more, see Gordon, 2013).

My take on this issue is that I'm generally optimistic about the prospect of continued future growth but becoming somewhat pessimistic about the ability of governments to take the appropriate steps to encourage the type of innovation and technological advancements that promote robust long-term economic growth.*

As I've mentioned before, the current preoccupation of politicians and policymakers with slashing spending and reducing public debt levels is likely going to be detrimental to long-term growth. I doubt there are many growth theorists out there who would argue that trillions of dollars in lost output (as witnessed by the huge amount of idle resources, including unemployed workers) and cuts to public investment are beneficial to a nation's long-term growth prospects.

A few years ago, (the great) economist Albert Wojnilower summed up the problem that's emerged in the US with respect to government support for innovation in a 2011 interview as follows:
Gail Foster: What about the long term? There are many, maybe even a majority, who believe that we are possibly in a temporary innovation funk — maybe not so temporary. In other words, while it may be possible to be encouraged about the short term, we are just getting back to where we were before the recession, and there is not much that is economically exciting to look forward to. Would you agree?
Albert Wojnilower: I wouldn’t sell the future short. There is no lack of new business opportunities (cell phones, Facebook, electric cars, energy innovation, services that cater to aging societies). The question is, where will they be invented, used and exploited? And to whom will the benefits be distributed? The United States has traditionally been a leader in this important growth process; now it is a laggard. The shift in the U.S.’s relative position is a matter of ideology, not economics.
GF: What do you mean by ideology?
AW: The United States has adopted a free-market, small-government ideology, ostensibly copying what we did in the distant past. The difference today is that there is no frontier. Most opportunities tread on someone else’s toes (as in property rights). There is less space for greenfield experimentation. The small-government mentality means that there is no effective arbitrator of the trade-offs to break the log jam. Many of our newest “innovations” have occurred outside the traditional economic sectors — for example, creating a new sector that today we refer to as technology. Major inventions have been made by civil servants, at little personal benefit. The United States has usually been pragmatic on these matters, but now it appears to be headed in a much more dogmatic direction...
GF: Would it be fair to say that you are an optimist with respect to human ingenuity but not human nature?
AW: Yes, indeed.
* For a more optimistic view, see Baily et al, the TED talk by Eric Brynjolffson and this debate between Robert Gordon and Eric Brynjolffson

Gordon, Robert, US Productivity Growth: The slowdown has returned after a temporary revival, International Productivity Monitor, Spring 2013.

Baily, Martin.N. James Manyika and Shalabh Gupta, US Productivity Growth: An optimistic perspective, International Productivity Monitor,  Spring 2013.

Fosler, Gail and Albert Wojnilower, Interview: Are we out of the woods yet, Gail Foster Group LLC. February 9, 2011.