Monday, October 22, 2012

The coming economic mega boom


I was recently handed a copy of the working paper by Robert Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”. Spoiler alert, the music is about to stop for economic advancement in the U.S. The paper is thought provocative, but I put it down unconvinced. One of the better reviews I’ve read came from Gary Becker. Gordon’s paper has a strong flavor of “everything that can be invented has been invented” to it.

My counter to the Gordon hypothesis might be summed up in the actual quote from the former Commissioner of Patents, Charles Holland Duell, “In my opinion, all previous advances in the various lines of invention will appear totally insignificant when compared with those which the present century will witness. I almost wish that I might live my life over again to see the wonders which are at the threshold.”

All right, so “you ain’t seen nothing yet” is not exactly a counter hypothesis. But it does summarize my optimism which is rooted in a more sound argument. Like Becker, I believe dividends from the current industrial revolution period as defined by Gordon have yet to fully play out. The most significant potential gains and growth from major improvements similar to the epic advances cited by Gordon like running water, the internal combustion engine, and electricity would be medical advances (imagine a world where no one gets sick, ever; illness as a quaint artifact of history) and true energy independence (completely individualized, self-sufficient machines able to generate enormous amounts of energy on demand; a power station in every house, car, device).

It is reasonable that the Gordon thesis is ever more easy to convince oneself of. What comes next becomes further and further out toward what we can’t imagine. Let me reverse Gordon’s thought experiment (option A is you get running water and indoor toilets plus 2002 levels of electronic technology; option B is you get everything since 2002, but you have to give up running water and indoor toilets—a false-bargain, straw man if there ever were one). Here is the reversal: Pick the easier task. Task 1 is to explain to someone in 1800 the idea of running water and indoor toilets. Task 2 is to explain to someone in 1930 the idea of how you saw a status update on Facebook which caused you to program your DVR from your iPhone. The next technology is more difficult to imagine; hence, we fall for the illusion that advancement is also more difficult per se.

Some other critical thoughts I had were that:
  • Throughout Gordon’s paper there seems to be an under appreciation of quality improvements. Airplanes may travel at essentially the same speed as they did in 1958, but there is no comparison between the available experience then and now.
  • He cites four classic examples of greatly mistaken past innovation pessimism but then seems to build his own as he elaborates on the six headwinds.
  • In the headwinds I detect some cause/symptom confusion. The education and deficit headwinds, numbers two and six, have this quality.
  • Globalization cannot be a bad thing—part of headwind number four. This is especially odd considering the mostly positive ink he gives to immigration.
  • I agree that a consumption-based analysis is more compelling than income-based analysis. In fact, I believe that will be the only way to fully capture the measure of economic well being in the future, if not today, and that it should be uniformly extended to all—not just the bottom 99 percent. To call income inequality a headwind seems to miss the point that this is simply a bad statistic.
  • I agree with Becker’s optimism on addressing the first headwind, reverse demographic dividend, and the fifth headwind, energy and the environment.
I do agree that economic advancement probably is more a surge-subside phenomenon rather than the smooth glide path upward as the standard Solow-era modeling suggests. But is the party over? Technologies like 3-D printing and continuing communication advances (both a person organizing his thoughts more easily as well as collaborating thoughts more easily) suggest that the cost of experimentation will plummet in the coming decades. Whatever is left to be found, we have a better and better chance of discovering it.