Wednesday, September 5, 2012

The End Of Growth Goes Mainstream (Sort Of)

Is US Economic Growth Over? reads the headline. No, it’s not an article on Energy Bulletin written by Richard Heinberg or Herman Daly as you might expect, it’s actually the title of a research paper from the National Bureau for Economic Research (NBER). Now you might be wondering, as I did, what is the National Bureau for Economic Research? Well, according to Wikipedia, in the world of economics they’re as mainstream as you get:
 The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community."The NBER is well known for providing start and end dates for recessions in the United States.

The NBER is the largest economics research organization in the United States. Many of the American winners of the Nobel Prize in Economics were NBER Research Associates. Many of the Chairmen of the Council of Economic Advisers have also been NBER Research Associates, including the former NBER President and Harvard Professor, Martin Feldstein.
So naturally this is a fairly significant development. Now as might expect, this paper has engendered quite a bit of discussion in the economics blogosphere. Here’s Paul Krugman. Here’s Noah Smith. Here’s Matt Yglesias. The main points are covered on the FT Alphaville blog. Here’s the synopsis of the paper, again sounding more like something you would read on The Oil Drum (emphasis mine):
It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.
Most provocatively, he divides innovation into a series of revolutions, and gives the key innovations for each:
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…The computer and Internet revolution (IR #3) began around 1960 and reached its climax in the era of the late 1990s, but its main impact on productivity has withered away in the past eight years…
(Note the similarities with Mumford's division of Eotechnic, Paleotechnic and Neotechnic revolutions) Attracting the most attention is his contrast of today's innovations with those of the past:
    A thought experiment helps to illustrate the fundamental importance of the inventions of [Industrial Revolution] #2 compared to the subset of [Industrial Revolution] #3 inventions that have occurred since 2002. You are required to make a choice between option A and option B. With option A you are allowed to keep 2002 electronic technology, including your Windows 98 laptop accessing Amazon, and you can keep running water and indoor toilets; but you can’t use anything invented since 2002.

    Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3am on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. Which option do you choose?
Economix summarizes the main points this way (emphasis mine):
In the past, the United States economy grew quickly and its citizens got richer, in no small part because of advances made in three consecutive industrial revolutions: steam engines and railroads first; electricity, indoor plumbing and the combustion engine second; and the computing revolution third.

But the productivity and income gains begot by that third revolution have not been as impressive as the productivity and income gains from the first and second, he writes. Moreover, the United States is facing a number of headwinds. We’ve gotten most of the gains from the “demographic dividend.” Inequality is rising. Higher education is getting more costly, and student performance waning. We have high levels of government and household debt. And we have taxes and regulations stifling innovation and businesses.

That leads Mr. Gordon to question the notion that growth is a “continuous process that will persist forever.” We might not stop growing. But he argues we will stall out.

“Doubling the standard of living took five centuries between 1300 and 1800. Doubling accelerated to one century between 1800 and 1900. Doubling peaked at a mere 28 years between 1929 and 1957 and 31 years between 1957 and 1988,” he writes. “But then doubling is predicted to slow back to a century again between 2007 and 2100.”
What’s most remarkable about this paper is its contention that economic growth for the 99 percent will essentially return to what it was before 1750 - essentially no growth for the majority of people. And it does this without even using Peak Oil as its main thesis! Now, of course, many have been making the point that this is obvious when you consider that the net energy available to society has plateaued, and we’re now going after more difficult and harder to reach sources of energy with ever more expensive and complex technology. And energy per capita has peaked as well, with implications for the global economy and the prospect of development. From the summaries (I have not read the article), he seems to confine his analysis to climate change (i.e. pollution) rather than resource scarcity.

So you might be thinking to yourself, “so what’s new?” In 2004, an Swedish author names Mats Larsson wrote a book which stated the following, as quoted in Heinberg:
...Larsson’s [book] conveyed a sobering message—one that the business community evidently didn’t want to hear: Our human ability to invent genuinely new activities is probably limited, and most recent inventions have consisted merely of finding ways to speed up activities that humans have been performing for a very long time—communicating, transporting themselves and their goods, trading, and manufacturing. These processes can only be taken to the limits where things can be done at almost no time and at a very low cost, and we are fast approaching those limits.

“Through centuries and millennia,” Larsson writes, “humans have struggled to simplify production and make tools and products less expensive and easier to manufacture.” Possible examples are legion from virtually every industry—from telecommunications to air travel. “Now we are finally in a situation where many things can be done in close to no time and at a very low cost.” He goes on:

    [A]t close scrutiny we do not seem to have done anything except gradually automate activities that human beings have been performing for a few hundred, and sometimes thousand, years already. The development of a large number of different technologies that help us to automate these tasks has driven economic development and business proliferation in the past. Now, technological progress is at the stage where a number of these technologies and products have been developed to a point where we cannot realistically expect them to develop much further. And, despite widespread belief of the opposite, we cannot be certain that there are enough new products or technologies left to be developed for companies to be able to make use of the resources that are going to be freed from existing industries.
And in 20010,  Jeremy Grantham declared “Time to wake up: Days of abundant resources and falling prices are over forever.”  Many commentators have also noted the similarities to Tyler Cowen’s The Great Stagnation (which also avoided mentioning Peak Oil). A certain blogger in his initial series of posts wrote the following:
In his much-discussed book, The Great Stagnation, Tyler Cowen points out that the low hanging fruit of innovation has already been harvested. The truly revolutionary inventions have already been thoroughly absorbed and integrated into everyday life. The discoveries between 1850 and 1950 were transformative: harnessing electricity (Siemens and Wheatstone dynamo, 1867), railroads, dams and bridges (the Hoover Dam 1935), harnessing oil (Edwin Drake’s first well, 1859), building an automotive industry from scratch (Ford’s Model T, 1913), interstate highways, telecommunications (telegraph, 1837, telephone 1876, radio 1895, television, 1935), radar, electric lights, recorded sound, powered human flight (1903, jet engine, 1942), the internal combustion engine, penicillin (1928), X-Rays (1895), submarines, basic computers, synthetic materials and plastics, artificial fertilizers, mass education, and on and on. All we’ve really done since then is perfect these inventions. What has transformed life since 1950 to that extent? Most would say computers. We really still do the same jobs, just with computers. We still drive cars with internal combustion engines, work in heated and air-conditioned offices, and watch television, just like we did in 1950. The Internet and cell phones seem transformative, but it’s really just fundamentally based on the same telecommunications principles as the telegraph, TV and radio. Cramming ever-more functions into our cell phones is hardly as transformative as the laying of the first Transatlantic cable (1866), the Transcontinental Railroad (1869), the first radio broadcast (1895), or the Interstate Highway System (1950’s).
I'm glad the author of the piece also turns a jaundiced eye to the communication "revolution" (emphasis mine):
Attention in the past decade has focused not on labor-saving innovation, but rather on a succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages. The iPod replaced the CD Walkman; the 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.
Yes, a glorified high school yearbook is not worth 100 billion dollars, and investors are slowly finding that out.

Essentially, what he is describing (although he does not name it) are the diminishing returns of technology. Diminishing marginal returns is a phenomenon observed in almost every area (including business), so one would think that economists would have an easy time understanding and accepting it were it not for the fact that it would make many of the underlying assumptions of their entire discipline invalid ("It is difficult to get a man to understand something when his salary depends on not understanding it…”).

So, then, here are my comments to the comments by FT Alphaville and Noah:

1.) Although to his credit he does cite high energy prices due to China and India, mainstream economists still can’t mention that 1972 work by the Club of Somewhere in Italy, not to mention the warnings of Malthus, Frederick Soddy, Hyman Rickover, M. King Hubbert, Kenneth Boulding, Georgescu-Roegen, Herman Daly, Charles Hall, et. al. In short, nothing that “heterodox” economists have been warning for decades. Entire books and Web sites are dedicated to that, so I’ll say no more here.

2.) About those high taxes and regulations- the regulations are a necessary side effect to complexity – I don’t know why no one gets this. Removing regulations is no net benefit unless complexity is reduced – see Deepwater Horizon and Fukushima for some examples. Add to that many of these regulations have been put in place by industry itself to strangle cometition and enforce monopoly.

3.) As for taxes, of course taxes should go up as the cost of things go up. Government has to buy stuff and pay for things just like the rest of us, and just like the rest of us, they must pay more and more. Yet we know that taxes on the wealthy and corporations are the lowest they’ve been in the postwar period, so this point seems invalid. Note that this dismantling of the commons is a net economic loss. Schools get worse, fires rage without firemen, bridges collapse, public health suffers, diseases spread, all while the rich build bigger mansions, buy multimillion-dollar paintings and ten-thousand-dollar trash cans, fly in private jets, and purchase entire islands. The secession of the rich is a drag on the economy much more than taxes. Even the Heritage Foundation has declared taxes on the rich and businesses to be at historic lows. On a related note:

4.) I’m glad to see he’s even bringing up inequality as both a drag on growth and as a refutation of past growth. Growth for whom? Noah Smith cheerfully thinks this trend could reverse. Come on now, who are we kidding? Wealth concentration is a self-reinforcing feedback loop; it has been in every society until collapse, and the only people who could reverse it are completely captured. Saying it could reverse is like saying the Late Roman Empire could put it all back together and retain its former glory ca. A.D. 400. Not. Going. To. Happen.

5.) More education hasn’t really delivered the supposed benefits - education quality has just been dumbed down to the level of the average person entering it - hence a Bachelor’s degree as the new high school, a  Masters as the new Bachelors etc. Even today most jobs do not require a post-secondary education, and in the past businesses actually trained their employees. Now students must go into debt for little more than a “work chit” - a sign that you can even get a job at all. Higher education in the U.S. is increasingly an international bazaar for elites that most Americans are priced out of.

The end result is simply to funnel money into the pockets of big education while creating little benefit to society at large and depressing discretionary spending. Let’s bury this “more education” meme soon, mmmkay? People ain’t getting any smarter. As one commentator put it:
... If the public, economists, and politicians recognized these realities they'd all quit deluding themselves that the economic problems we face are tied to too few Americans having college degrees. Believing that putting more Americans through college is the solution to our economic problems has resulted in the US Government now helping to create a higher education ponzi scheme to rest upon all the other American ponzi schemes. Every year the per capita rate of Americans with college degrees increases-if that were the key to economic prosperity then there would have never been a near financial collapse in 2008.
6.) Debt is essentially an artificial creation, so it's ridiculous to say that it's an impediment to growth. It could be repudiated in a debt jubilee as economists such as Steve Keen have called for. If growth were truly the motivation (rather than looting by elites), this is what would be done. It's not in the same category.

7.) The usual suspects of biotech and robotics are dragged out as exhibits for innovation, but biotech has miniscule employment possibilities, and as documented here ad nauseum, automation will destroy, not create, jobs for most people.

And as a concluding thought, I’m kinda like, “is that all you got?” I can think of a number of other reasons that growth is not going to happen just off the top of my head, even without mentioning Peak Everything:

1.) We’ve monetized just about everything in sight. Just about everything is a "professional service": taking care of children, taking care of the elderly, working out, cooking food, dog grooming, etc. For economists this is great – doing stuff yourself generates no monetary exchange, but paying others to do it because you’re too damn busy increases the size of the economy. But do we really benefit? How many more things can we monetize – we can’t pay others to take a dump for us, after all. See the clothesline paradox.

2.) Each new technology is causing as many problems as it solves at an ever more rapid pace. Take GMO crops, for example. These are creating resistant superweeds and pests, depleting the soil, etc. Or hydraulic fracturing, which is destroying and polluting some valuable resources even as it makes others available. New “products" by the food industry are paid for elsewhere by rising costs of obesity, diabetes, and lost productivity. The actual net benefit to society of new products and innovations is lower and lower (if not already negative, as Daly and others have pointed out).

3.) Climate change is already causing and will continue to cause massive destruction to the global economy, dampening future growth. Crops are dying, roads are buckling, bridges are being washed out, rivers are drying up, capital stock is ruined, supply chains are disrupted, new diseases are emerging, and entire nations are slowly sinking underwater, thinks to climate weirdness. This is not science fiction; this is happening right now.

4.) Despite assurances that there is no such thing as a “lump of labor,” massive unemployment stalks the world, with no end in sight. There are already more advanced degree holders around the world than there are jobs for them.

5.) Billions of dollars around the world now go to bribery, both the illegal kind and the legal kind which we call elections. In America, approximately six billion dollars will be spent to persuade an infinitesimally small percentage of “low information voters” to go to the polls on election day and vote for Coke instead of Pepsi. This is money not going for education, infrastructure, research and development, clean technology, etc. etc. etc. It is essentially waste.

6.) You’ve not only got to grow exponentially, but you’ve got to maintain what you’ve already got on top of it. As I drove around during the holiday, I saw personally the miles and miles of sprawling heroic works that it takes just to maintain the exiting road system near its current condition. Similar interventions are need for every system in society – rail, electric lines, sewers, telecommunications, etc. The foreclosure mess has shown that unless a house is continually maintained, it falls apart quite rapidly (c.f World Without Us). So unless you want to regress, you’ve got to spend resources countering entropy and growing on top of it. This is often forgotten. If your new stuff comes by not maintaining old stuff, you’re not really growing. This will get harder and harder, thanks to climate change above.

7.) Draconian copyright provisions – see the Apple/Samsung lawsuit. Experts say that copyright protections will become a major factor in stagnating growth as corporate monopolies stifle the adoptation of new inventions. On a related note:

8.) A shift to rent-seeking by big corporations as avenues for legitimate profits dry up. This will basically turn the major corporations into net wealth extractors rather than wealth creators (if they are not so already). Get ready for the return of the zero-sum economy. This will make most people far, far poorer as blood is squeezed from a turnip.

9.) I keep hearing that “more entrepreneurs” are the solution to our problems (of stagnation, unemployment, etc.) In school, I was taught that entrepreneurs step in to fulfill some useful need in a society that is currently unmet. But what are all these unmet needs? And aren’t currently existing business fulfilling them already? Why not? Are these supposedly undiscovered unmet needs infinite, and what does that say about us? I suspect they’re not. Haven’t we long since been in the business of creating needs just to fulfill them, or just trying to solve new problems raised by earlier entrepreneurship (e.g advertising, databases)? Isn’t this push for entrepreneurship really just to give people something to do to earn money ("jobs") rather than fulfill genuine unmet needs? And if there indeed are all these unmet needs, why is it so difficult to come up with new business ideas, and why do so many of them fail? Aren’t most of our unmet needs social in nature? Can we really expect entrepreneurship, which is all about turning a profit, to address these?

10.) There is already such a huge existing base of cars, refrigerators, computers, power tools, etc., that it is competing against new products, especially since the improvements in new products are minimal. The software industry has to resort to gimmicks to make people buy the same software they bought four years ago (subscriptions, etc.), and planned obsalescence is getting more and more ridiculous. The average age of a car on the roadway keeps getting higher. Once everyone has an air conditioner, refrigerator, washing machine, television, computer and two cars, how many more can they use? Many counties are going through a phase of catchup growth, which is nice as long as the resources hold out. Once they're caught up, then what?

11.) Our resources are getting ever-more crappy, as we’ve picked the low hanging fruit of not only technology and innovation, but of materials and resources. As a commentor put it:
"I believe we are in a contracting economy. We have harvested the easy to find and highly concentrated ores, timbers and animals. While you once might find a 300 pound nugget of pure copper, copper is now mined at .3% concentration. You once might find the giant old-growth, but now we cut weedy second growth into lumber so crooked we need to glue little bits together to make a straight board. And once we could eat Atlantic Cod, but now we eat Patagonian Toothfish."
11. Bad actors like computer viruses, and more and more outright fraud and scams are eroding the foundations of trust in the economy.

Anyway, that's all I can think of for now. So I'm glad to see this issue is finally starting to see the light of day, if only in passing. As our doldrums drag on for year after crushing year, these ideas might eventually start to represent the conventional wisdom. As Schopenhauer allegedly said:

"Every truth passes through three stages before it is recognized. In the first it is ridiculed, in the second it is opposed, in the third it is regarded as self- evident."

1 comment:

  1. It seems like the Millenials are reacting rationally to the changes they feel directly in their lives (unrealistic student debt, little economic future but insecure service-sector jobs, still too-high housing prices) by not buying cars and houses but sharing rides and residences. And they stay connected with each other rather than seeking isolation in 5-bedroom McMansions 30 miles out. They've probably never read Limits to Growth, but seem to understand things have changed.


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