The Wrongologist

(This
is the 2nd column in a continuing series about America’s low growth
future. You can read the 1st here).

What’s
Wrong Today:

Nothing
is more central to America’s self-confidence than the faith that robust
economic growth will continue forever. Between 1891 and 2007, the nation averaged
a 2% annual growth rate of GDP per person. But it appears that future economic
growth will average more like 1% at best, so says Robert Gordon of Northwestern
University: (emphasis by the Wrongologist)

Mr. Gordon
points out that 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
  the late 18th and early 19th centuries

• The
  second, made possible by technologies such as electrification, internal
  combustion and chemical engineering, began around 1870 and drove growth into
  the 1960s. Gordon says:

• The
  third, our current era, is based on information technology

According
to Mr. Gordon, our third industrial
revolution, while creating real value, has had a smaller economic impact than
the second. Electrification, for example, was a much bigger deal than
the Internet. Mr. Gordon:

We continue
to innovate. Some new ideas are amazing, but will they create sustained growth
at historical levels? Gordon says that the era of greatest incremental change
in our standard of living is behind us, while the case against his techno-pessimism
rests largely on the assertion that the big payoff from information technology is
just getting started. And it will come from the deployment of smart machines.

Machines
may soon be poised to perform many tasks that currently require large amounts
of human labor. This will mean rapid productivity growth and therefore, high
overall economic growth.

But the
crucial question is: Who benefits from that growth?

Between
1975 and 2009, US labor productivity doubled, while average real US wages were slightly below the 1975 level.

Where did
the benefits of that productivity go? Into corporate profits. In 2009, the US
corporate profitability index stood at 1300 when compared to a 1975 index value
of 100.

This strongly suggests that increasing
productivity is unlikely to benefit the rest of us in the future, since it has
not benefited us in the recent past.

The
Financial Times published the results of a study by Standard & Poor’s of the
per worker corporate profits for the F500. Their findings:

There
are no statistics that show how much of these profits were shared with the employees
who created it. But we know that bonuses and raises were few and many sustained
cuts to their benefit packages.

The
further deployment of smart machines may leave many Americans behind, particularly
those “middle
wage”
or mid-skilled workers whose skills slowly become redundant in the face of
technology. Our economy has been losing these middle wage jobs for decades. Jobs
are growing for both the highly skilled and least skilled among us.

It makes
economic sense: In affluent nations, competition stimulates technology
improvements that increase labor productivity and reduce costs. As labor
becomes more productive, fewer people are required to produce the same goods.
This leads to unemployment unless
demand grows at the same rate as labor becomes more productive. If
growth stops, unemployment increases, household income drops, demand drops and
the system collapses toward recession.

This shows
the policy dilemmas about growth:

• High
  growth is unsustainable. Unbounded resource consumption exceeds environmental
  capacity

• No
  growth is unstable. It leads to reduced consumer demand, increased unemployment
  and the spiral of recession

What will sustained low
(1%) growth lead to?

Inequality in America
will continue to grow. CEOs will continue to reap the benefits of multinational
sales in emerging markets. The exodus of prime-age males (the missing 1/5th)
from the labor force will not improve. American educational attainment will
continue to slide among our competitors. And with students owing $1 Trillion in
the face of low wage growth, America’s 18-34 year olds will be unable to build
savings adding to the inequality.

From
1993 to 2008, income growth among the bottom 99% of earners was 0.5 points
slower than the economy’s overall growth rate.

If future output
grows at a rate of just 1% a year; that means the overwhelming majority of
Americans will see their incomes grow at just 0.5% annually.

Conclusion:

Our
political system does not have a vision, a strategy or any policy for the
future.

The
assumption that the genius of the “free market” will take care of the future by
itself, is just a theology. We need to get serious. Any change in economic
status of our society flows first from an idea and then follows the tedious
process of implementation. A meditation from Tom Dispatch:

Our
soon-to-be overrated country needs to develop a plan: We need to consider mega projects, joint ventures between the private
sector and the government to employ our middle and low wage citizens.This policy would not need to last forever, our low birth rate will bring population back towards equilibrium with job creation in 20 years or so. 

The Fed’s
Quantitative Easing has not been about improving our economy; it is about preservation
of the current flawed system which brought the current economic catastrophe down
upon us. Harnessing the next wave of economic growth so that it benefits all
the people means confronting the above.

The
question is: Do we have the political sense and moral fortitude to do so?