Monday, October 15, 2012

What Hath Gordon Wrought?

Last month we covered this paper by Robert Gordon about the end of growth: The End Of Growth Goes Mainstream (Sort Of). It's been popping up everywhere recently. Martin Wolf gave it an airing in the Financial Times, which prompted quite a bit of discussion.  Some of his comments:
What does this analysis tell us? First, the US remains the global productivity frontier. If the rate of advance of the frontier has slowed, catch-up should now be easier. Second, catch-up could still drive global growth at a high rate for a long time (resources permitting). After all, the average gross domestic product per head of developing countries is still only a seventh of that of the US (at purchasing power parity). Third, growth is not just a product of incentives. It depends even more on opportunities. Rapid increases in productivity at the frontier are possible only if the right innovations occur. Transport and energy technologies have barely changed in half a century. Lower taxes are not going to change this.

Prof Gordon notes further obstacles to rising standards of living for ordinary Americans. These include: the reversal of the demographic dividend that came from the baby boomers and movement of women into the labour force; the levelling-off of educational attainment; and obstacles to the living standards of the bottom 99 per cent. These hurdles include globalisation, rising resource costs and high fiscal deficits and private debts. In brief, he expects the rise in the real disposable incomes of those outside the elite to slow to a crawl. Indeed, it appears to have already done so.

Similar developments are occurring in other high-income countries. For almost two centuries, today’s high-income countries enjoyed waves of innovation that made them both far more prosperous than before and far more powerful than everybody else. This was the world of the American dream and American exceptionalism. Now innovation is slow and economic catch-up fast. The elites of the high-income countries quite like this new world. The rest of their population like it vastly less. Get used to this. It will not change.
Energy Bulletin had a few links as well, with almost the exact same title I had given it: The end of growth - going mainstream? - Oct 10. this article does a good roundup of both sides of the argument:

And now: Peak Growth Theory

Any good theory is based on facts, and Peak Growth theory is based on an awful lot of them. The opposite side seems to have very little facts, and their argument rests almost entirely on the assumption that what happened in the past must continue indefinitely into the future, and little else (except blind optimism).

This article from Macrobusiness makes some good points: Growth: The False God
 If a team of interplanetary anthropologists (the phrase is an oxymoron, but we have none better) were to descend to earth in their spacecraft they would notice that, like some distant tribe who worships a panther’s claw, a voodoo mask or the gnarled roots of an ancient tree, the human race has a strange fetish for growth. 

Whereas past civilisations built their pyramids to gods who brought rain, or made the rivers flow, in ours we shop. The temple is the air-conditioned mall, where we occasionally have lunch on small rolls of tuna and rice – a tasty mix of the endangered and the engineered – before maxing out the credit card for clothes we don’t need to impress people we hate. Those extra-terrestrial anthropologists would think, wouldn’t they, that ours was a society headed for self-imposed destruction, like the stone head builders of Easter Island or the Vikings in medieval Greenland. 

From the self-development books of Oprah and Tony Robbins to the world records in the Olympic Games, the act of standing still, or of tomorrow not being better than yesterday, is the ultimate sin. From computer processing speeds, to pixels on phone cameras to waistlines queuing for the food buffet, everything must be faster, better or bigger. Achievement and victory, inculcated since school – themselves ranked against each other for parental selection – are the ultimate virtues.

Nowhere is this obsession more apparent than in finance and economics. Governments are obsessed with GDP growth, even if that means unsustainable debt, imbalances or environmental destruction. Businesses are obsessed with profit growth. Regardless of growth’s long-term merits, the CEO of any publicly-listed company will be sacked quicker than you can say ‘board meeting’ if he says otherwise. Investors, more to the point, are obsessed with beating inflation and each other. And of course they are, they’re investors.

Perhaps what we need then is not institutional or philosophical revolution, but a broadening of our economic objectives. Growth is fine of course – just like panther claws, voodoo masks or gnarled roots – but growth for its own sake, fetishised growth, is an unhealthy obsession.

To broaden our economic objectives we could start by broadening our economic measurements. As my colleague blogger Sell on News wrote on Saturday, GDP – the lodestar of the growth religion – measures economic transactions, not economic wellbeing or advancement, and thus, since it came into mainstream use leading up to the Second World War, it has not only been an imperfect measure of economic success or otherwise, but a policy signal of dubious value. Whether examined from the inequities of the ‘99%’ in the United States, the glaring imbalances in China, the productivity challenges of Australia or the debt crisis in southern Europe, an elite focussed on the GDP speedometer has failed to avoid hitting the proverbial tree.
And finally Robert Edsall writing in The New York Times reviews the arguments and some opinions from economists who have previously talked about some of the issues, like David Autor and Lawrence Katz. But the conclusion of the column rises to brilliance, and makes a point I've been trying to make here:
For Obama, the argument that America has run out of string is politically untouchable. In the case of Romney and the Republican Party, something very different appears to be taking place.

There are two parallel realizations driving policy thinking on the right. The first is the growing consciousness of the threat to the conservative coalition as its core constituency – white voters, and particularly married white Protestants — decreases as a share of the electorate. Similarly, the conservative political class recognizes that the halcyon days of shared growth, with the United States leading the world economy, may be over.

While Gordon projects a future of exacerbating inequality (as an ever-increasing share of declining productivity growth goes to the top), the wealthy are acutely aware that the political threat to their status and comfort would come from rising popular demand for policies of income redistribution. It is for this reason that the Republican Party is determined to protect the Bush tax cuts; to prevent tax hikes; to further cut domestic social spending; and, more broadly, to take a machete to the welfare state. Insofar as Republicans prevail in their twin aims of cutting – or even eliminating – social spending, and maintaining or lowering tax rates, they will have succeeded in obstructing the restoration of social insurance programs in the future.

Affluent Republicans – the donor and policy base of the conservative movement — are on red alert. They want to protect and enhance their position in a future of diminished resources. What really provokes the ferocity with which the right currently fights for regressive tax and spending policies is a deeply pessimistic vision premised on a future of hard times. This vision has prompted the Republican Party to adopt a preemptive strategy that anticipates the end of growth and the onset of sustained austerity – a strategy to make sure that the size of their slice of the pie doesn’t get smaller as the pie shrinks.

This is the underlying and inadequately explored theme of the 2012 election.
Bingo! As I've said before, the asset stripping, rent-seeking, austerity measures, cries of "we're broke," and outright looting and plundering of society are consistent with a realization that growth is over and that the future will be a zero-sum game. That is why the wealthy are pushing for austerity even thought their political sock puppets talk about nonsense like "more growth," "returning to normal," and "more education" even as funds for R&D, infrastructure, education and public health are gutted. A few astute commenters even used the "f"-word:
1. The chart ignores that Western Europe had a re-awakening in the 15th century, and an Enlightenment in the 18th. It also shows that, even in the Middle Ages, productivity rose by 0.25% every year, so things were slowly getting better. This is an overly optimistic pessimism: in the 4th and 5th century, Western European productivity declined drastically, for reasons I was never taught in school, so GDP growth can go below well below zero, a condition not shown in the chart.

2. Before the middle of the 20th century, countries other than the US 'knew' that education was wasted on 90% - 99% of the population, so only the US offered universal education, while the rest of the world laughed at how the US was squandering the money. Around the middle of the 20th century, Mao insisted on universal literacy in China, something known to be impossible. (But he somehow succeeded, and China now has more than 90% literacy.) The growth in education in countries outside the US has eroded the US advantage, but there's not much the US could do about other countries seeing the US example and realising that universal education gives a competitive advantage.

3. As GDP per capita declined in the 4th and 5th centuries, the rulers knew that only one solution was possible, and today, the 1% are doing everything they can to re-institute that enlightened response: a return to feudalism.
 And another:
What underpins Gordon's argument is that IR #1 and IR #2 (and to a certain extent IR #3) are all dependent on coal and oil, a non-repeatable windfall. Oil is running out, and we cannot afford to burn coal at rates that would replace it without forcing the planet into climate collapse. Endless growth was based on endless energy. (Though even with free energy it is an absurd hypothesis; you cannot fill every square inch of the planet with cars and television screens and have a life, much less an economy.)

Furthermore, the Global War on Labor will in the long run undercut the ability of populations to buy the goods and services on which a consumer economy is predicated. This will reduce total wealth, though the Right's program of income redistribution will keep the 1% in comfort for quite a while as we devolve into a neo-feudalist economy.
And other commenters pointed out the obvious energy and resource situation. As Rob Dietz of the Daly News wrote today on Energy Bulletin:
To a neutral observer, it [economic growth] certainly can look like magic — like Adam Smith dressed as Merlin, summoning all this visible wealth with his invisible hand. That’s essentially what Wheelan and other economic analysts are saying. Through the magic of free markets, we can produce and consume an ever-increasing amount of stuff (and as a side note, we’ll be rich enough to clean up any associated environmental messes, or at least export them to less enlightened nations).

That’s some trick, but it’s not real magic — it’s just an illusion. If we take a step back and observe what’s happening, we can expose the illusion and see that the market is hiding something up its sleeve: cheap energy. That’s the crowning achievement of a new book called Energy: Overdevelopment and the Delusion of Endless Growth — it pulls back the curtain on the market’s magic act. With photographs that manage to frighten and inspire at the same time, and with essays that provoke both deep thought and deep concern, Energy clarifies how the economy is able to achieve miracles such as the shipment of papayas to Paris, and it assesses the prospects for keeping the magic going.

Every economic transaction is underwritten by a continuous supply of abundant and cheap energy. This supply “supports the entire scaffolding of civilization.” (p. 8) The complex web of trades and transactions and mass consumption have been made possible by the exploitation of energy-dense fossil fuels. And continued growth of such an economic system requires increasing supplies of energy.

Energy presents facts about the fossil-fueled economy that are well known in several circles but ignored in most:
  •     One gallon of gasoline, which costs a few dollars, is so energy-dense that it can push a 3,000-pound vehicle twenty miles.
  •     If human labor were used to meet the energy requirements of a typical American lifestyle, more than 100 people (dubbed “energy slaves”) would have to work around the clock for each American.
  •     Since the dawn of the industrial revolution, energy use and economic activity have increased in lockstep.
  •     Fossil fuels are depletable, and burning them produces serious environmental side effects.
These facts help illuminate the predicament of modern society. We’ve built a set of institutions and a way of life that require continuous economic growth. But such growth is entirely dependent on access to cheap energy. And using more and more cheap energy is digging us into a deeper and deeper hole of spoiled landscapes, unstable climate, and biodiversity loss. But politicians, pundits, and the public have swept this predicament away with the insane assumption that economic growth can go on forever because of things like technological ingenuity, market efficiency, and labor productivity (all of which are dependent on access to cheap energy).
 Pulling back the curtain on economic growth’s magic act (EB)

Unfortunately, once the one percent learned the power of the media, they decided to use the techniques developed to destabilize and unbalance communist countries within our own borders, as well as construct an all-seeing police state right under our noses. By the time the mainstream public figures out what is happening, it will be too late.

ADDENDUM: Honorable mention goes to this comment:
One element that seems to be missing from the discussion is the role being played by the United States' increasingly unsustainable effort to maintain it's status as a world power.

The pattern documented by historian Paul Kennedy in his 1987 book "The Rise and Fall of the Great Powers: Economic Change and Military Conflict From 1500 to 2000" seems to be playing out with great accuracy for the United States.

Tracing the rise and fall of various one-time imperial powers, from Portugal and Spain to France and England, Kennedy shows how the cost, mostly military, of maintaining and defending their trade routes and colonies around the world eventually produced unsustainable debt and eventually caused these empires to fall.

This is clearly part of what is happening to the United States. Our struggle to maintain our military and political dominance of the world -- two wars in a decade and another on the way -- it is an important contributor to the decline of our productivity and our increasing debt burden.

In the long run it will be hard for the US to maintain it's "superpower" status as it attempts to compete economically with countries that do not have the huge military overhead that we do. Our military budget is larger than that of the next the next 20 countries combined.

Paul Kennedy's book may be 25 years old, but what it said about the future fate of the United States shows that some predictions can be quite accurate, especially if they are ignored.

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