We Need Another Revolution!
Two quick thoughts and then a more detailed summary…
1. Eight days until the election. I haven’t studied the swing states. But, the election sure feels close to me. I continue to find it surprising that markets like Intrade still reflect President Obama as such a strong favorite. If you’re confident that Governor Romney is going to win, you can turn 37 cents into a dollar. If you believe that President Obama will win, you can turn 63 cents into a dollar. Happy wagering.
2. Last week, I wrote about job polarization. One of the factors that I discussed (as a cause of this polarization) was technology. This week, I heard an economist say it in a really interest way. He was talking about income inequality and he said that the issue is whether technology is a substitute or a complement for what you do. If technology is a substitute for what you do, you’re in deep trouble. You may be headed for a lower paying job. On the other hand, if it’s a complement to what you do, you might be able to increase your income.
Headwinds to Growth
I read an incredibly interesting paper this week. It’s titled, “Is U.S. Economic Growth Over? Faltering Innovation Confronts The Six Headwinds” and was written by Robert J. Gordon (Northwestern University Economics Professor). I found the paper on NBER, but if you don’t have access to that, you can just google “Is U.S. Economic Growth Over?” and you’ll pull up some links to it.
The primary gist of this paper is that we’ve experienced three industrial revolutions in the past 250 years. The low-hanging fruit has been picked. Now, we face significant headwinds that will drag long-term growth to very low rates. In addition, the future growth in consumption could be particularly low for the bottom 99% of the income distribution. Here’s a very brief summary of the paper.
The Three Industrial Revolutions
1. From 1750 – 1830 – steam engines, cotton spinning and railroads
2. From 1870 – 1900 – electricity, the internal combustion engine and running water with indoor plumbing
3. From 1960’s – 2000 – the computer and internet revolution
Professor Gordon says that it took approximately 100 years for the full effects of the first two revolutions to work their way through the economy. But, with the third industrial revolution (technology), we’re already pretty much done. Now, most of the inventions we’re getting are simply entertainment and communication devices that are smaller or more capable. But, they do not fundamentally change labor productivity or the standard of living.
Headwinds to Growth
We will continue to have innovation – but it is likely to be at a slower pace. If you think about future growth of real per capita GDP, there are six headwinds:
1. the end of the “demographic dividend” – we had women enter the work force and we had the baby boomers. So, we saw an increase in hours per capita. Now, this is declining.
2. rising inequality – the future income of the bottom 99% will be muted by inequality and this will impact demand.
3. factor price equalization stemming from the interplay between globalization and the Internet – high wage countries like the U.S. suffer due to outsourcing and cheap imports.
4. the twin educational problems of cost inflation in higher education and poor secondary student performance – we have plateaued with respect to educational attainment. Part of this is due to cost. The high cost is also resulting in high student debt and that ultimately distorts career choices. In addition, the high cost makes college unattainable for some low-income people.
5. the consequences of environmental regulation – taxes (such as the carbon tax) are simply ways to pay (in the future) for “benefits” that we’ve received in the past (i.e., the idea that we produced without concern for pollution).
6. the overhang of consumer and government debt – ultimately, this will reduce disposable real income.
Have a great week.
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