Is Growth Over?

RoboticsThe great bulk of the economic commentary you read in the papers is focused on the short run: effects of the “fiscal cliff” on U.S. recovery, stresses on the euro, Japan’s latest attempt to break out of deflation. This focus is understandable, since one global depression can ruin whole day. But our current travails will eventually end. What do we know about prospects for the long-run prosperity? The answer is: less than we think. (source: Paul Krugman – NYTimes – 28/12/2012)

The long-term projections produced by official agencies, like the Congressional Budget Office, generally make 2 big assumptions. One is that economic growth over next few decades will resemble growth over the past few decades. In particular, productivity, key driver of growth, is projected to rise at a rate not too different from its average growth since the 1970s. On the other side, however, these projections generally assume income inequality, which soared over past 3 decades, will increase only modestly looking forward. It’s not hard to understand why agencies make these assumptions. Given how little we know about long-run growth, simply assuming the future will resemble the past is a natural guess. On the other hand, if income inequality continues to soar, we’re looking at a dystopian, class-warfare future, not kind of thing government agencies want to contemplate. This conventional wisdom is likely to be wrong on one or both dimensions.

Recently, Robert Gordon of Northwestern University created a stir by arguing the economic growth is likely to slow sharply, indeed, that the age of growth that began in 18th century may well be drawing to an end. Gordon points out long-term economic growth hasn’t been a steady process; it has been driven by several discrete “industrial revolutions,” each based on a particular set of technologies. The first industrial revolution, based largely on the steam engine, drove growth in late-18th and early-19th centuries. The second, made possible, in large part, by application of science to technologies such as electrification, internal combustion, chemical engineering, began circa 1870 and drove growth into the 1960s. Third, centered around information technology, defines our current era. And, as Mr. Gordon correctly notes, the payoffs so far to the third industrial revolution, while real, have been far smaller than those to the second. Electrification, for example, was a much bigger deal than the Internet. It’s an interesting thesis, and a useful counterweight to all the gee-whiz glorification of the latest tech. And while I don’t think he’s right, the way in which he’s probably wrong has implications equally destructive of conventional wisdom. For the case against Mr. Gordon’s techno-pessimism rests largely on the assertion that the big payoff to information technology, which is just getting started, will come from rise of smart machines. If you follow these things, you know that the field of artificial intelligence has for decades been a frustrating underachiever, as it proved incredibly hard for computers to do things every human being finds easy, like understanding ordinary speech or recognizing different objects in a picture.

Lately, however, barriers seem to have fallen, not because we’ve learned to replicate human understanding, because computers can now yield seemingly intelligent results by searching for patterns in huge databases. True, speech recognition is still imperfect; according to the software, one irate caller informed me that I was “fall issue yet.” But it’s vastly better than it was a few years ago, has already become a seriously useful tool. Object recognition is a bit further behind: it’s still a source of excitement that a computer network fed images from YouTube spontaneously learned to identify cats. But it’s not large step from there to a host of economically important applications. So machines may soon be ready to perform tasks currently require large amounts of human labor. This will mean rapid productivity growth, therefore, high overall economic growth. But, this is crucial question, who will benefit from that growth? Unfortunately, it’s all too easy to make the case most Americans will be left behind, because smart machines will end up devaluing contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe conventional wisdom embodied in long-run budget projections, projections that shape almost every aspect of the current policy discussion, is all wrong. What, then, are the implications of this alternative vision for policy? Well, I’ll have to address that topic in a future column. 


Acerca de ignaciocovelo
Consultor Internacional

7 Responses to Is Growth Over?

  1. Professor Uziel Nogueira says: If economists had to rely on (correct) future projections for a living, the profession would have disappeared a long time ago. Trying to predict the economic future of the US is a futile exercise. However, perception about the future is shaped by current events. No doubt, there is funk mood in the so-called highly indebted countries, known as the G-7. We’re living in an upside down world. While China introduces the longest high speed train line in the world, the US Congress debates the fiscal cliff. In Brazil, the economy is running at full employment for the first time ever. Emerging economies in Asia, Latin America and Africa are booming. Optimism about the future shows in any poll taken among the population in those countries. The fundamental question about the US is: Can the economy generates enough well paid jobs to sustain the largest middle class in the world? this in times when labor saving technologies, like robotics, are becoming more prevalent in manufacturing production.

    The future of the US economy depends on tough choices to be made at a political level.

    For example, the US elite has to decide whether to use taxpayers money to sustain a huge and costly military machine or to improve education, health care and upgrade decaying infrastructure. Perhaps, the US is reaching a similar situation of England after two major wars that have bankrupted the Empire. Today, England is a pleasant place to raise a family in a gun-free environment.

  2. Pilgrim: The US is being turned into another worker bee colony to be exploited by the nameless / faceless corporate plutocracy that are really running this country.

    This nouveau international business model has no homeland nor are they regulated or pay taxes to any country.

    They set up shop where ever they can take advantage. America is just becoming colonized by those who are masters of the financial universe. Welcome to ‘brave new world’ order. The future is not what it used to be.

  3. Professor Uziel Nogueira says:

    “The US is being turned into another worker bee colony to be exploited by the nameless/faceless corporate plutocracy that are really running this country”.

    As my daughter used to say: Welcome to my world, daddy! What is happening to US workers is nothing new. In Brazil and LA we know quite well how the system works. US based transnational companies have been doing the same thing for decades in the rest of the world. The bad news for American workers is that the US is no longer the most important market in the world. Production and consumption have been shifted to other high growth regions, particularly Asia-China. The only way out for American workers is regime change that voters are not contemplating. After all, there is not much difference between Obama’s policy and Mitt Romney’s policy proposals. Is there?

  4. By the end of the 19th century, the first age of globalisation and a spate of new inventions had transformed the world economy. But the “Gilded Age” was also a famously unequal one, with America’s robber barons and Europe’s “Downton Abbey” classes amassing huge wealth: the concept of “conspicuous consumption” dates back to 1899. The rising gap between rich and poor (and the fear of socialist revolution) spawned a wave of reforms, from Theodore Roosevelt’s trust-busting to Lloyd George’s People’s Budget. Governments promoted competition, introduced progressive taxation and wove the first threads of a social safety net. The aim of this new “Progressive era”, as it was known in America, was to make society fairer without reducing its entrepreneurial vim.

    Modern politics needs to undergo a similar reinvention—to come up with ways of mitigating inequality without hurting economic growth. That dilemma is already at the centre of political debate, but it mostly produces heat, not light.

    Thus, on America’s campaign trail, the left attacks Mitt Romney as a robber baron and the right derides Barack Obama as a class warrior. In some European countries politicians have simply given in to the mob: witness François Hollande’s proposed 75% income-tax rate. In much of the emerging world leaders would rather sweep the issue of inequality under the carpet: witness China’s nervous embarrassment about the excesses of Ferrari-driving princelings, or India’s refusal to tackle corruption. At the core, there is a failure of ideas. The right is still not convinced that inequality matters. The left’s default position is to raise income-tax rates for the wealthy and to increase spending still further—unwise when sluggish economies need to attract entrepreneurs and when governments, already far bigger than Roosevelt or Lloyd George could have imagined, are overburdened with promises of future largesse. A far more dramatic rethink is needed: call it True Progressivism (…..)

  5. The cliff that America sidestepped with time to spare in 2012 was the one on the nation’s docks. On Friday, harbor operators and shippers reached an agreement with the union representing nearly 15,000 longshoremen on the East and Gulf coasts. The key point holding up the signing of a new contract was whether dockworkers would continue to receive royalties on the containers they hoisted on and off ships. With that issue resolved, apparently to the workers’ satisfaction, their union agreed to call off a year-end strike pending the resolution of less contentious points, and the nation was spared a work stoppage that would have slowed imports and exports to a relative trickle. Had the workers walked, the attacks on them would be easy to imagine. Dockworkers are among this country’s best-paid blue-collar workers; many make more than $100,000 a year. They’re sitting ducks for union critics and are objects of wonderment for many Americans who can’t fathom how nonprofessional work can pay so much.

    Unraveling the mystery of longshoremen’s pay, however, goes a long way toward explaining the U.S. economy and its possible futures.

    The four reasons dockworkers make what they do are, first, there are so few of them; second, they’re highly skilled and productive; third, their work can’t be relocated; and, fourth, they’ve had powerful unions (…..) The mechanization of work that dockworkers have experienced is sure to accelerate across the economy as robotic technology becomes more sophisticated. Google has already perfected the driverless car; how long before FedEx decides to dispense with its drivers? Will the remaining workers have the power to claim a share of their employers’ productivity gains? Will the citizenry have the power to redistribute through taxes some of the employers’ wealth to would-be workers whose would-be work has been rendered redundant by machines?

    The comforting story we tell ourselves — that just as unemployed farmworkers found jobs in factories in the 20th century, so unemployed factory workers will find postindustrial jobs in the 21st century — has already been called into question by declining rates of employment and labor-force participation. In a world of smart machines, how will the remaining workers fare? The lesson of the longshoremen is that workers, no matter how productive, also need power if they — and the nation — are to prosper.

  6. It’s that time again: the annual meeting of the American Economic Association and affiliates, a sort of medieval fair that serves as a marketplace for bodies (newly minted Ph.D.’s in search of jobs), books and ideas. And this year, as in past meetings, there is one theme dominating discussion: the ongoing economic crisis. This isn’t how things were supposed to be. If you had polled the economists attending this meeting three years ago, most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues. So what went wrong? The answer, mainly, is the triumph of bad ideas (…..) Of the papers presented at this meeting, probably the biggest flash came from one by Olivier Blanchard and Daniel Leigh of the International Monetary Fund. Formally, the paper represents the views only of the authors; but Mr. Blanchard, the I.M.F.’s chief economist, isn’t an ordinary researcher, and the paper has been widely taken as a sign that the fund has had a major rethinking of economic policy. For what the paper concludes is not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake. I’ve seen some reporting describing the paper as an admission from the I.M.F. that it doesn’t know what it’s doing. That misses the point; the fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence. The really bad news is how few other players are doing the same. European leaders, having created Depression-level suffering in debtor countries without restoring financial confidence, still insist that the answer is even more pain. The current British government, which killed a promising recovery by turning to austerity, completely refuses to consider the possibility that it made a mistake. And here in America, Republicans insist that they’ll use a confrontation over the debt ceiling — a deeply illegitimate action in itself — to demand spending cuts that would drive us back into recession. The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.

  7. Professor Uziel Nogueira says: Is the US economy different from the rest of the world? Why does Britain decide to face its public debt upfront while the US increases public spending and the federal debt? The reason is not complicated. British economists understand quite well the limitations of Britain to finance its public debt at sustainable interest rates. The US, however, enjoys a privileged position among the most developed economies. It is the only country that issue a world currency called the dollar. There are TRILLIONS of dollars held by Central Banks, international enterprises and individuals all over the world. The only financial instrument available to invest dollars is to buy US debt and apartments in Miami (?).

    Prof Krugman is correct in one important point. The world financial market is held hostage by the US dollar.

    Theoretically, the FED can print any amount of dollars while the Treasure can finance the federal debt at low interest rates for a long, long time. The question is: why so many mainstream economists and policy makers do not subscribe Prof Krugmans’ advice of increasing the federal debt even further?


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