Thought of the Day #7

It starts quietly, the defense of the Keynesian failures.  Published Wednesday in Global Post – Northwestern economist Robert Gordon opines that “We’ve had a lot of inherent advantages: abundant natural resources, favorable demographic trends, relative political stability supported by the protective benefit of two oceans, to name a few. But from colonial times to the present, our happy economy has also been powered by three separate industrial revolutions:

  1. the introduction of steam engines and railroads
  2. the inception and widespread use of electricity and the combustion engine
  3. the invention of computers, the web and mobile communications.”

“Gordon writes that future growth in consumption per capita — the main engine of the consumer-based US economy — could fall below 0.5 percent a year for what he calls “an extended period of decades.” Yes, that would be a big deal. For some context, between 1860 and 2007 that annual growth rate was 1.9 percent. What’s driving this structural economic slowdown, according to Gordon? He argues that six “headwinds” are buffeting the US economy, and that these factors were in place even before the Great Recession of 2008.

Count ’em:

  1. changing and unfavorable demographics,
  2. rising education costs and poor secondary school performance,
  3. growing economic inequality,
  4. increased competition due to globalization,
  5. energy and environmental costs and challenges, and
  6. high levels of consumer and government debt.

Taken together, these headwinds will slow growth dramatically into the foreseeable future.

Here’s the money quote of Gordon’s paper, which is titled “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds, 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. But then doubling is predicted to slow back to a century again between 2007 and 2100.”

This slowdown is happening because the productivity gains associated with computers and mobility have been far less dramatic — at least so far — than the two previous industrial revolutions, all of which leads Gordon to his depressing theme: “Economic growth may not be a continuous long-run process that lasts forever.”

As Milton Friedman would say – we need to have the freedom to choose for ourselves. Government at times becomes the beneficent uncle and everyone becomes inured to poor performance.  The adults are arriving in the room with the convention underway. Choose wisely. The time is now.