Warning: Silicon Valley is fighting a no-win battle against six fatal headwinds — cultural, political and ideological trends that have become hard wired within America’s collective brain, psyche, soul.
These headwinds are making it virtually impossible for our best ’n’ brightest innovation and technology geniuses to save America from becoming a second-rate superpower trapped in a no-growth economy.
OK, so you don’t believe it? You’re a Silicon Valley superoptimist? Got lots of tech stocks? Believe technology is already building a new world? Saving the future? You’re convinced our best ’n’ brightest innovators, entrepreneurs and capitalists will save us, the whole world, civilization, the planet?
Wrong. High-tech solutions cannot and will not prevent America’s economic growth’s collapsing from an average of greater than 2% GDP growth beginning in 1750, with the Industrial Revolution, but ending a generation ago. America’s GDP is already collapsing. Now, growth is a weak 1.8% on average. Worse, America’s GDP is predicted to sink much further — down near the no-growth 0.2% GDP common on the planet for the years and centuries prior to 1750.
New Silicon Valley innovations can’t stop a collapsing economy
The clear message in economist Robert Gordon’s must-read National Bureau of Economic Research paper, “Is U.S. Economic Growth over?” is that Silicon Valley can’t maintain the economy on its own. His paper is guaranteed to make investors lapse into denial if not cardiac arrest, especially hard-core high-tech fans convinced that technology is indeed the miracle worker that can solve all problems and will save the world.
Until we all wake up, the Gordon deniers are good company: Federal Reserve Chairman Ben Bernanke, in fact, recently dismissed Gordon, saying, according to Bloomberg News: “Pessimists may be paying too little attention to the strength of the underlying economic and social forces that generate innovation in the modern world.
“Trade and globalization increase the size of the potential market for new products, the possible economic rewards for being first with an innovative product or process are growing rapidly.”
Yes, Bernanke believes in the eternal-growth myth.
Old-school economists sinking America’s future
Bernanke is trapped in old-school classical economics; it works in theory, fails in practice. Gordon opens with a direct challenge to that core classical principle of perpetual growth: His paper “questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever.” For that Robert Merton Solow won the 1987 Nobel Prize in economics. Gordon deserves one, too.
Gordon’s challenge: “There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely.”
Rather, he says, “the rapid progress made over the past 250 years could well turn out to be a unique episode in human history,” a collection of “one-time-only inventions” that Silicon Valley cannot and will not repeat.
Warning: Collapsing economic growth ahead
Early this year, in a Bloomberg Markets report, Gordon delivered his downbeat message to the upbeat Davos World Economic Forum. Jeremy Kahn wrote: Gordon “doesn’t mean ‘over’ in some happy-days-aren’t-quite-here-again-yet-just-wait-another-quarter kind of way. He means ‘over’ as in finished, finito, happy days ain’t never coming back.”
“Never”? Why so brutal? Gordon said: “Future growth in real GDP per capita will be slower than in any extended period since the late 19th century. … The inevitable decline in future growth required by the need to reduce government and consumer debt will guarantee a contentious political landscape not just over the next year but over the next several decades.”
Bloomberg Markets asked for bond king Bill Gross’s reaction to Gordon’s challenge: “A 1% differential means a lot in terms of unemployment. … Corporate profits grow more after overall economic growth hits 2%. Below that, they stall out.” Translation: America is heading into a “new, new normal” of low corporate profits and a downhill slide of gross domestic product into a growth cycle so anemic that investors will lose interest and stocks will just keep sinking.
Economist Tyler Cowen also “shares Gordon’s belief in a technological plateau,” adds Kahn. In his book “The Great Stagnation,” Cowen refers to the work of Pentagon physicist Jonathan Huebner, who looked at innovations per capita throughout history: “Huebner found that the rate peaked around 1873, in the early years of the Second Industrial Revolution. Declining innovation slows per capita productivity gains and, in turn, economic expansion.”
In recent years challenges paralleling Gordon’s were raised in many journals, including Foreign Policy and Foreign Affairs, and in an American Interest feature, “The Ends of Growth.” A new consensus emerges: Solow’s economic principle of “perpetual growth” is absurd. But until the next global catastrophe exposes its absurdity, it will be revered by old-school economists, bankers, CEOs, Big Oil, climate-change deniers and capitalist ideologues everywhere because it supports their short-term-profits strategies and lobbying efforts in Washington.
Death of Silicon Valley’s high-tech magic
“Whatever the future of innovation,” says Gordon, “the U.S. economy still faces six daunting headwinds that will limit future potential growth and hold it below the pace which innovation would otherwise make possible.”
Despite the limits of his data, spanning eight centuries and multiple continents, Gordon’s work is rock-solid, an aggressive challenge to the misleading economic principle of “perpetual growth,” whose origins began in with the Industrial Revolution. Problem: “The fact that so many fundamental one-time-only inventions have already occurred limits the potential for a continuing stream of equally basic inventions,” including those past achievements “conversion from rural to urban life, the speed of travel, the temperature of rooms, and the near-elimination of brute-force manual labor.”
What about some new “one-time-only inventions?” Unlikely.
Last week in James Glanz’s New York Times column, headlined “Is Big Data an Economic Big Dud?” Gordon compared Big Data to Big Oil: Gasoline “made possible a transportation revolution as cars replaced horses and as commercial air transportation replaced railroads. … If anybody thinks that personal data are comparable to real oil and real vehicles, they don’t appreciate the realities of the last century.”
Six fatal ‘headwinds’
In his NBER forecast of America’s future GDP growth, Gordon admits starting with a couple of biases favoring an optimistic outcome: First, he admits “pretending that the financial crisis did not happen” and, secondly, he allows that he is making a “heroic assumption that another invention with the same productivity impact of the Internet revolution is about to appear on the near-term horizon. Thus our starting point is quite optimistic.”
Gordon’s forecast begins with America’s average GDP growth rate of 1.8% from 1987-2007. From there, Gordon’s forecast is an “exercise in subtraction” with each of the following six headwinds reducing America’s future GDP growth by a percentage point, ultimately driving America’s future GDP down to 0.2%. Yes, that’s right back to where America’s economic growth rate was before 1750 and the Industrial Revolution.
Gordon’s NBER paper is a must-read, but here’s a summary of the six headwinds, as distilled by Bloomberg Markets:
1. Demographics: “As more and more U.S. baby boomers retire, the number of hours worked per person declines, and so does the growth in GDP per capita.” (Down goes GDP to 1.6%.)
2. Stagnant educational attainment: “The U.S lags behind other advanced industrial economies in reading, math and science.” (GDP growth drops to 1.4%.)
3. Rising income inequality: “From 1993 to 2008, the wealthiest 1% captured 52% of inflation-adjusted income gains.” (GDP falls to 0.9%.)
4. Globalization and information technology: “More and more skilled jobs in the U.S. are being automated or are shifting to low-wage countries. (Down further to 0.7% GDP.)
5. Energy and environment: “Possible U.S. efforts to combat global warming, such as a carbon tax, act as a drag on economic growth.” (GDP reduced to 0.5%.)
6. Massive household and government debt: “Spending money on debt repayments in the U.S. reduces funds available for productive economic activity. (GDP crashes at 0.2%.)
Gordon closes his NBER challenge on a lighter note: “There are more than enough provocative ideas in this article, but I conclude with another. My guess is that a Canadian or Swedish economist looking at the past and future of his or her country would not be nearly so alarmed. Why not? What are the differences in environment, resources, legacy history, policies, and culture that create their relative optimism? Experts [in other countries] are welcome to contribute their own reactions to this diagnosis of the successful ‘American century’ and the possibility that future economic growth may gradually sputter out.”