And now: Peak growth theory

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Niccolo and Donkey
And now: Peak growth theory

National Post

Terence Corcoran

October 5, 2012

Serious economists lend their names to the idea that the end of growth is near
One of the more persistent economic ideas rattling through the intelligentsia is that the last 250 years of amazing innovation, productivity and growth —from the steam-engine birth of the first industrial revolution in the 1700s to last month’s launch of the iPhone 5 — have come to an end. The nations of the developed world, especially the United States, have seen their best centuries. Growth has peaked. The future is flatlined.

Serious economists are throwing their good names behind this speculative idea, the latest being Robert J. Gordon, at Northwestern University. In a U.S. National Bureau of Economic Research working paper, Prof. Gordon raises the possibility that the last 250 years “could well turn out to be a unique episode in human history.” The opening words of the paper’s title are designed to provoke: “Is U.S. Economic Growth Over?”


While Prof. Gordon is talking about the United States, his thesis would apply to the United Kingdom and other developed nations. Prior to 1750, growth rates were non-existent on a per capita basis over hundreds of years. Then, fed by three main waves of innovation — from the steam engine era to the dawn of electricity to the computer revolution — growth in Britain and the U.S. soared. But those spectacular rates of growth — averaging more than 3.5% over much of the last century — actually “peaked” in the middle of the last century, says Prof. Gordon, and have been in decline ever since, with worse to come.

Prof. Gordon’s analysis, about which more later, received world-wide publicity in the Financial Times on Wednesday when economics columnist Martin Wolf endorsed the idea that the era of unlimited growth is over. “Get used to this,” he wrote a little too enthusiastically as he turned the slow growth theory into an Occupy theme. “For almost two centuries, today’s high-income countries enjoyed waves of innovation that made them both far more prosperous than before and farm more powerful than everybody else. This was the world of the America dream and American exceptionalism. Now innovation is slow…. The elites of the high-income countries quite like this new world. The rest of their population like it vastly less.”

Preposterous though that last bit about the elites being slow-growthers, Prof. Gordon may have prompted Mr. Wolfe’s little aside with his experimental calculations that future U.S. growth might average 0.2% in future. This suggests, wrote Prof. Gordon, “that future growth in consumption per capita for the bottom 99% of the income distribution could fall below 0.5% per year for an extended period of time.”

Another economist who has been trumpeting a long-term decline in U.S. growth is John Ross, Visiting Professor at Antai College of Economics and Management, Jiao Tong University, Shanghai. He sees a “long-term deceleration” in U.S. economic performance, a trend he pins in part on the failure of “Reaganite/neo-Liberal policies.”

In Prof. Ross’s view, this entrenched decline in growth rates should be the dominant focus of current economic analysis and forecasting. It is folly, in this context, to constantly view quarterly U.S. growth data as “disappointing” when in fact the much-lamented slow growth of GDP they may be the new normal. “Analysts are surprised by the new data only when they have no internalized or built into their models this long term deceleration of the U.S. economy.”

If the U.S. is indeed in a new end-of-growth era and will never see long-term growth of 3.5%, huge questions emerge. What purpose is served by Ben Bernanke’s attempts at the Federal Reserve to generate 3.5% growth via massive quantitative easing?

Canada’s leading end-of-growth theorist is Jeff Rubin, the former CIBC economist turned green activist who wrote The End of Growth, a 2012 book that reached its conclusions based on the narrower idea that the world is running out of resources, especially cheap energy, and the result can only be reduced growth. Peak growth, in his book, is a function of peak oil, which is a function of the idea that the world is running out of innovation.

Not that Mr. Rubin has a problem with no growth. He accuses his profession of being “hooked on growth” and sees global warming as a threat that can only be removed with reduced growth rates across the board—in population, “conspicuous” consumption, resource extraction, energy.

This line of argument dates, with moral overtones, back to Thomas Malthus, an 18th century scholar who argued that population growth was outstripping productive capacity and the world would be turned into a horror of starvation, pestilence and ruin. As innovation spread through the centuries, none of Malthus’s predictions came even remotely true.

In The End of Growth, Mr. Rubin reviews the Malthusian failure, but then adopts the ideas as if they were now suddenly valid. Market prices for oil and other resources, he says, are sending new signals that the end is indeed near. “Human ingenuity will still make breakthroughs, but rising commodity prices point to a world in which technological innovations can no longer keep pace with the rate at which our economies are consuming key resources.”

Malthus is dead. Long live Malthus. When I read the above sentence to Deirdre McCloskey at the University of Illinois, she responded: “Oh, God. You know, I just have very little patience with this kind of argument. It’s Malthusian!” Prof. McCloskey then cited Julian Simon, the economist who won a bet with Paul Ehrlich, the 20th century Malthusian who claimed that world starvation and other calamities loomed. Simon bet Ehrlich was wrong, and won. “What Simon said,” said Prof. McCloskey, “is that a resource is itself a product of ingenuity.”

As Prof. McCloskey notes , predicting the end of growth has proven to be dangerous in the past and is likely to continue to be in the future — so long as the world and the United States remain open to market-driven innovation. In her book, Bourgeois Dignity: Why Economics Can’t Explain the Modern World, she debunks just about every economic theory in existence and argues that the modern world is the product of innovation.

The motive power for innovation, however, was not economic policy or economic calculation or even economic theory. “What was different after 1800,” she writes, “and with unstoppable force after 1900, was a novel and immense and sustained, almost lunatic, regime of innovation, finally breaking the Malthusian curse.” The enabling force for all this activity was liberalism, the discovery that is was acceptable to achieve bourgeois success.

If that’s true — if the idea of being free to achieve success and to innovate generates growth and prosperity over time—then there is no reason to expect that the future will fail to deliver more ‘‘lunatic’’ innovation.

Getting back to Prof. Gordon’s dismal speculative outlook on U.S. growth, it is based on several questionable assumptions. First, it assumes that the financial crisis “did not happen” and is therefore not a cause of recent U.S. growth rate declines. He also sidesteps various government policy moves as factors. Then, looking forward, he deducts future growth points for each of six different “headwinds” that he says will hurt U.S. prospects. Among the six are government deficits, energy and environmental issues, demographic shifts and inequality. In the face of these headwinds, U.S growth in real consumption per capital for the bottom 99% could drop to an average real growth in consumption per capita of 0.2%.

To reach that rate, Prof. Gordon seems to assume that innovation will contribute little to growth, reversing a powerful trend that was unleashed 250 years ago by what Prof. McCloskey calls a climate of liberalism that make innovation acceptable and desirable. It’s a climate she says now dominates China and India, and there is no reason to believe that it will not continue to propel the United States and the rest of the developed world.
Niccolo and Donkey
Team Zissou
niccolo and donkey Broseph President Camacho Ploni Almoni

'Growth' is considered a normative necessity by most economists because they're almost all Keynesians, and Keynesian policy is to use fiscal and monetary tools which pull future wealth forward and consume it in the present and pray for some deus ex machina to pop out of the economy and make the books balance. This is why most economists have a fixation bordering on mania for immigration and global trade. Without constant population growth or new markets opening up, their models end in some combination of hyperinflation and recession.

Since the 1940's, virtually the whole Western world has been living some present-oriented homosexual economist's worldview. Fun times, then you run out of future.

Given that the effect of money-printing and deficit spending is to consume future wealth, Prof. Gordon is probably the closest to correct, though it may not be for reasons he wants to admit.
Bob Dylan Roof

Although Richard Posner recently pointed out that Keynes predicted double the growth and efficiency that actually exists today, he remains steadfast in his commitment to optimism about the future. He makes at least one relevant, if obvious, point: predictions about the future invariably depend on extrapolations from the present, and if the present inspires pessimism, predictions about the future are more likely to be pessimistic.

This is the concluding paragraph of his analysis of Prof. Gordon's forecasts:

Efficiency works on both sides of the labor equation. Posner should remember that commanding a lower wage is only more efficient if the immigrant engineer's quality and productivity are identical to the displaced engineer's.

The flow of labor is not determined by efficiency or the free market, but rather the DOL, and therefore Obama and Linda Solis. Does anyone believe that Obama is going to be handing out work visas to the best engineers the global market has to offer?
President Camacho
And herein lies the deeper problem: the manner in which "labor" itself is interpreted: as an interchangeable commodity like corn or steel.

Even if imported foreign labor is equally productive, labor arbitrage can result in--to put this into the dry terminology of Anglo-American economics-- NEGATIVE EXTERNALITIES in the form of reduced civic cohesion, political strife, diarrhea carnage in public restrooms from Vikram's squat-stance on the toilet seat, etc. Even the attempt to distill these externalities into strictly monetary terms is a sign of modern degeneracy.

At the end of the day, importing labor is a political decision, not an unconscious mechanism by which the market "corrects" itself. That is a formula for a stateless world where piracy reigns supreme.