Category Archives: Post Growth

Chart of the Day, 20 Jan 2014: Generation Rent and the New Rentiers

I’ve been looking for an excuse to link to a delightful commentary by the British novelist Will Self, carried by the Financial Times. But before I do, below is my chart appetiser, courtesy of the UK’s Office of National Statistics:

A Century of Home Ownership and Renting jpeg

Obviously, the UK was a land of the renter and the rentier before WW2; few but the relatively wealthy could afford to own their own home. Also noteworthy is the rise and fall of social housing. In Self’s piece, titled “A  rentier nation’s fading dream of home” (free access after registration with the FT), the author retells the failure of Thatcher’s grand sale of council housing stock, the ultimate aim of which was to make Tory voters of all of England by way of expanding the property-owing class.  It didn’t quite work out that way:

The current housing crisis is not so much emblematic of a transmogrification from a social market economy to a neoliberal one. It is constitutive of that process: the asset transfer from the state to the rich; the pump-priming of the value of those assets; the forcing of the poor into more expensive private rental accommodation — all of which measures are underpinned by a financial system heavily dependent on mortgage lending. Of all British bank loans, 76 per cent are for property, and 64 per cent for residential property alone. Any radical reform of the system entailing a fall in land and house prices would, ipso facto, result in a fundamental destabilisation of the banking system.

I quibble at bit at criticising Will Self’s mixing of prose, polemic and the underlying problem–but I will. At heart, we are just not building enough houses. From a Civitas report out last week titled ‘The Future of Private Renting“:

House Building by Tenure jpeg

On top of this, we face the growing problem of secular stagnation (more to come on that tomorrow), the only treatment for which is deemed by the policy-making classes to be huge dollops of easy money by way of a massive central bank-directed quantitative ease (QE). The economics 101 definition of inflation is too much money chasing too few goods. In the UK housing market, we have ever more amounts of money chasing ever fewer new-build houses. Which leads to this:

Factors Driving an Increase in Renting jpeg

QE, as operated through buying up bonds and forcing down interest rates, rewards those who have assets at the expense those who don’t. So the rentiers property becomes worth more, allowing he or she to leverage up with ultra cheap money, and so buy even more. In this game, if you start with nothing, you never catch up.

But it doesn’t have to be this way. The government could choose to build houses itself, funded by bond issuance that the central bank buys; if you were a populist by persuasion, you could call this the people’s QE. But how can we afford to pay interest on all those new 30-year housing bonds I hear you ask. Bloomberg tells us that 30-year UK gilts are yielding 2.16%. Private sector low-end rental property is providing net yields after maintenance costs of double that or more.

Here’s a toast to aggressive and acquisitive rental landlords; that is, government-backed ones.

Chart of the Day, 19 Jan 2015: The 1% and the 0.1%

Forget the 1%–mere peasants–the real wealth lies with the 0.1%. From a study late last year by Emmanuel Saez and Gabriel Zucman (click for larger image):

Wealth and the 0.1% jpeg

Note we are talking about wealth. This is important because most studies of the 1% focus on income. Wealth is difficult to measure, especially for the uber-rich, which is why this is a landmark study. The authors backed out their wealth estimates using investment income tax return records. In the process, you can see that those poor 1% to 0.5% have been struggling. Forget the squeezed middle, next up is the squeezed upper middle class and then the squeezed lower upper class (click for larger image)?

Decomposing the 1% jpeg

Seriously, the charts suggest the precariousness of the game the super rich are playing. Immense wealth brings immense political power, at least in the United States. But as you eliminate more and more cohorts from the winners’ enclosure, even the most well-financed lobbying machine will start to struggle.

And the mechanism behind this wealth concentration? Saez is a long-term collaborator on inequality questions with Thomas Picketty of “Capital in the Twenty-First Century” fame. From a paper the two did together on income inequality (together with Anthony Atkinson):

Top 0.1% Income jpeg

So we have an ever-growing share of income by the 0.1%. But the income edge of the 0.1% then starts compounding away as return on investment, which then gets passed on to children and grandchildren if the tax regime permits (which it currently does). And– following Piketty’s iron law of inequality–when r (the return on investment) is larger than g (economic growth), wealth inequality explodes. What eventually stops this process is war, revolution, or, more prosaically, government redistribution. We shall see how this cycle ends.

Chart of the Day, 17 Jan 2015: Growth and Demographics

I have been struggling to find the time to complete long-form posts, but am continuously coming across subjects of interest to this blog. To capture some of this great content I have decided to introduce a Chart of the Day to highlight topics relating to climate change, resource constraints, economic growth and human welfare. Accordingly, I am kicking off with this chart from a McKinsey report on growth and ageing demographics (click for larger image):

17 Jan 2014 McKinsey jpeg

Basic message is get used to slower growth, since much of past growth was achieved on the back of an expanding labour force. As usual, a big caveat: growth does not equal welfare, although it does more so in less-developed countries.

Separately, I think the productivity forecasts look a bit rich, which means the growth slowdown could be even more extreme. The dance between technology and productivity is a hot, hot topic in economics at the minute and I will return to this theme later.

Finally, the McKinsey numbers fail to capture the impact of resource constraints and climate change, both of which will be kicking in with a vengeance well before the 50-year forecast comes to pass. Economic welfare, at both the household and state level is a function of both income and wealth. For example, if a country’s wealth (capital stock and infrastructure) is getting trashed by climate change then economic welfare will fall even if income (GDP) is holding up.

One Percentism

Since the 2008 financial crisis, we have seen a flurry of interest over the issue of inequality. Most recently, Thomas Piketty’s book “Capital in the Twenty-First Century” has drawn  a lot of attention. Yet there are a number of other academics who have been writing on this topic for some time, not least Danny Dorling, a social geographer now at Oxford University.

Dorling’s output is prodigious, and encompasses not just academic articles but also books aimed at the general public. You can get an idea of the breadth of his work by looking at his personal web site here. Last week, my daughter and I had the good fortune to see Dorling introduce his latest book, “Inequality and the One Percent“, to a packed house at the London School of Economics (LSE).

The LSE has done an invaluable service to the intellectual life of London and beyond by hosting free and open public lectures by just about everyone who is anyone in the field of economics or politics today. Furthermore, you can access podcasts, videos and slides of the events if you are not able to attend in person. The one for Danny Dorling’s lecture is here.

Apart from being a gifted speaker, Dorling is noted for using innovative data visualisation techniques to communicate his arguments, so we can get a sense of London’s monopolisation of UK wealth through looking at a slides such as this one (click for a larger image):

London Wealth jpeg

A key driver of this wealth disparity is the value of property in London:

London Home Value jpeg

Actually, there are two categories of “one percenters”: income and wealth. To qualify as a one percenter by income, you need to be earning £160,000 a year. To get into the top one percent by wealth, you need £2.8 million. This is a chart taken from the work of the LSE academic John Hills (see here):

Total UK Wealth jpeg

And from such data, Dorling produces infographics for both the UK and US:

UK Land by Wealth jpeg

US Land by Wealth jpeg

Dorling is a proud left-winger: as such, a polemic against the super rich is to be expected. Nonetheless, I am surprised by how Dorling’s arguments are resonating across the political spectrum. In particular, he argues that the one percent has, in effect, detached itself from its natural allies the top 10% and the top 50%. Even the upper middle class is feeling the squeeze, with much of it going backwards in terms of financial security. In short, what economic growth there is is being monopolised by the super-rich.

The arch Tory Charles Moore, no friend of any socialist, has an article in The Daily Telegraph with this headline echoing Dorlng’s analysis:

Today’s political leaders don’t realise how vulnerable voters feel

Followed by this subhead:

Capitalism’s benefits are not felt by all, and the main parties are not talking about it

Moore goes on to argue that fewer and fewer are benefitting from the current political game:

Socialists love saying that the Tories are the party for the rich. If that were the case, they would never have won an election in the era of the universal franchise, since the rich are, by definition, a small minority. Labour’s underestimation of Margaret Thatcher in the Eighties arose from this error: it could not understand why she also appealed to many who were poor and to even more who were middling. So it lost. But now that the Conservatives have, as I say, not hit 40 per cent of the vote for 22 years, perhaps the criticism has greater validity. Perhaps they have got themselves on the wrong side of the divide between those who are comfortable and those who are struggling. And perhaps – stranger thought – the same problem applies even to the party which takes its name from the workers. For 13 years, Labour too has not hit 40 per cent. Those years have encompassed the crisis of capitalism, out of which it should have done well.

Moore finishes with an extraordinary paragraph that could have been written by Danny Dorling himself.

For six or seven years now, voters in the West have realised that capitalism was disastrously captured by those who operated it, so that it stopped benefiting the rest of us. No leader, of Left or Right, has yet worked out what to do about this. In Britain, both main parties have tacitly agreed not to discuss it at the next election.

The analysis here from someone of the political right is interchangeable with someone of the political left. Is a strange world we live in.

Links for the Week Ending 16 July 2014

I haven’t posted for quite a while. Basically, family commitments have eaten into my blogging time, and this state of affairs will likely continue for an indefinite period longer. Nonetheless, I will try to get some posts out as we grind through the last few innings of what I would term the ‘Great Hiatus’: a hiatus period—or pause— amid the longer term trend of rising global mean temperatures, higher oil prices, increasing resource constraints and greater global economic instability.

For example, with a 70-80% chance of an El Nino by year-end, temperature records have the potential to start falling again. Further, oil has built a solid base above $100 per barrel but appears poised to go higher in the next year or so as oil companies struggle to find new fields that can be developed at the right price.

At the same time, many of the financial fragilities in the system posed by ageing demographics, declining productivity and increasing resource constraints have to date been countered by the super easy monetary policy pursued worldwide. The aggressive, unprecedented and unorthodox monetarism  led by the Federal Reserve Board has been a policy triumph over the short term. Since the credit crunch of 2008/2009, the sky has not fallen down.

Yet the jury is still out as to whether the provision of free money can be maintained long enough to see a return to sustainable economic growth, or whether it will beget a new cycle of chronic instability through having fostered the extension of credit into intrinsically poor investments and a generalized asset price inflation that benefits few but the rich.

In the meantime, here are some links which I hope will flesh out some of the themes of this blog:

  • Occasionally, my left-learning friends berate me for reading the right-of-centre Daily Telegraph. I offer two defences: first, you need to read opinion with which you may instinctively disagree, but find of some merit with a bit of reflection. Second, a good newspaper has intellectual mavericks—and The Telegraph has many (probably more than The Guardian). Here is an article by Ambrose Evans-Pritchard portraying the fossil fuel industry as poor capitalists; in short, the oil majors have been investing ever more, to reap ever less; while renewables are slowing sloughing off their subsidies. Joseph Schumpeter would be proud of this epic creative destruction.
  • And despite all the new technology we are bringing to bear on oil extraction, when fields go into decline it is damn tough fighting the tide. North Sea oil was a much ignored saviour of the British economy in the 1980s, but is decline is inexorable and, according to the Office for Budget Responsibility (OBR), accelerating. The Financial Times has the story here (access to FT articles after free registration), but if you want to go to the primary OBR source you can find it here.
  • We are still seeing a lot of commentary over “Capital in the Twenty-First Century” by Thomas Piketty. Piketty argues that the relative reduction in inequality in advanced countries over the post-war period was something of an aberration. Accordingly to his analysis, without direct political intervention (or in the most extreme case revolution), capital will gradually accrue to a relative few. In short, when the return on capital is greater than the growth rate, it is the owners of capital who prosper most, not those in capital’s employ. For a fuller treatment, I recommend Cory Doctorow’s summary here,  and an interview by Maththew Yglesias of Vox  a while back with Piketty here.
  • You can also slice growing inequality in different ways. The Institute for Fiscal Studies (IFS) in the UK has just issued a report detailing how the real incomes of young people are falling much faster than those of any other age cohort (here). Meanwhile, I have often commented on how London has detached itself form the rest of the UK. In the US, Emily Badger of The Washington Post’s Wonk Blog charts a similar divergence between cities showing a virtuous cycle of education and growth and those showing a vicious cycle of poor education and decline (here)
  • Climate sceptics love to start any global mean temperature chart with a data point centred on 1997/98, which happens to coincide with the largest El Nino for a century. This monster El Nino ushered in the record breaking hot year of 1998 (slightly eclipsed in later years depending on which data set you look at, but still one of the hottest years on record: see NASA’s data set here). Global mean temperature is a construct of short-term weather volatility, long-term green-house gas induced temperature rise and the medium-term ENSO cycle. Eventually, CO2 will do its stuff and records will fall regardless of whether we have an El Nino. But for us to quickly retire all the talk of a hiatus in temperature rise will require a new and powerful El Nino. True, an El Nino appears on the cards by year-end, but quite how strong it will be is still clouded in uncertainty as this post at Skeptical Science explains here.
  • If you visit London, take time to visit some of the quirky, smaller museums. One of the most intriguing (and downright disturbing) is the Old Operating Theatre that used to be part of St Thomas Hospital just south of The Thames. This is no Disney Land reconstruction, but a perfectly preserved part of pre-antiseptic medical history.  Despite appearing to be a set from a particularly dark Harry Potter movie scene, the Old Operating Theatre shows how and where surgeons removed a damaged limb in around two minutes flat, with minimal anaesthetic. The museum demonstrates how far we have come health-wise in an historical blink of an eye (150 years or so). And for those who would welcome an economic collapse as a route toward a more authentic form of living, I direct you to a post at Club Orlov explaining a world of post-collapse, or village, medicine. Humanity is put right back on the St Thomas Hospital’s operating table. Pray for four strong men to hold you down—and a surgeon who has not only washed his hands, but is also quick with blade and saw.

Links for the Week Ending 6 April 2014

  • The second instalment of The Intergovernmental Panel on Climate Change’s (IPCC) Fifth Assessment Report (AR5), titled “Impacts, Adaption and Vulnerability”, was released in Tokyo on the 31st March and can be found here. The “Summary for Policymakers” can be downloaded here. On page 19 of the Summary, the IPCC states that “the incomplete estimates of global annual economic losses for additional temperature increases of around 2 degrees Celsius are between 0.2 and 2.0% of income (± one standard deviation around the mean)” with the risk for higher rather than lower losses. The report then goes on to say “Losses accelerate with greater warming, but few quantitative estimates have been completed for additional warming around 3 degrees Celsius or above”. Given that it looks almost impossible that we will constrain warming to 2 degrees Celsius based on the current CO2 emission path and the installed fossil fuel energy infrastructure base, the world really is going into an unknown world of risk with climate change.
  • A key area of economic loss from climate change relates to drought. To date, most models have focussed on precipitation as the principal driver of drought. A new paper by Cook et al in the journal Climate Dynamics titled “Global Warming and Drought in the 21st Century” gives greater emphasis to the role of evaporation (more technically, potential evapotranspiration or PET) in drought. Through better modelling of PET, the paper sees 43% of the global land area experiencing significant dryness by end of 21st century, up from 23% for models that principally looked at precipitation alone. A non-technical summary of the paper can be found here.
  • Meanwhile, the general public has lapsed back into apathy around the whole climate change question, partially due to the hiatus period in temperature rise we are currently experiencing. However, evidence is slowly mounting that we could be about to pop out of the hiatus on the back of a strong El Nino event (periods of high global temperature are linked to El Ninos). Weather Underground has been doing a good job of tracking this developing story, with another guest post from Dr. Michael Ventrice (here) explaining the major changes in the Pacific Ocean that have taken place over the last two months and which are setting us up for an El Nino event later in the spring or summer.
  • Changing subject, The Economist magazine ran a special report last week on robotics titled “Immigrants from the Future“. In some ways, I came away less impressed by the capabilities of the existing generation of robots than more.
  • I often blog on happiness issues (most recently here). This may seem strange for a blog whose stated focus is on such global risks as resource depletion and climate change, but I don’t see the contradiction. For me, much of our striving to extract and burn as much fossil fuel as possible comes through the pursuit of goals that don’t necessarily make us more happy. A new book by Zachary Karabell titled “The Leading Indicators” adds a new dimension to this argument. Karabell argues that over the last century or so we have created a series of statistics that are more than pure measurements of economic success. In short, they are ideology laden more than ideology free. Political parties set out their manifestos based on a mishmash of economic achievements and goals based on GDP, unemployment, inflation, the trade balance, interest rates, the strength of their national currency and so on and so forth. But these number encapsulate only part of well-being. Yet such statistics totally dominate political discourse because that is how we have been taught to keep score in a modern capitalist economy. As we career towards extremely dangerous climate change, I think it is time that we recognise these economic indicators for what they frequently have become: false gods. Karabell has an article in The Atlantic setting out the book’s main ideas here and there is a good review in The Week here.
  • Rising inequality has been one of the major economic development over the past 40 years. I am a great fan of the Word Bank economist Branko Milanovic, who wrote a wonderful book called “The Haves and Have-Nots: A Brief and Idiosyncratic History of Global Inequality“, in which he pulls together many strands of the inequality literature within a global context. I blogged on this once here. A nice complement to this book is the new web site titled Chartbook of Economic Inequality, which has been put together by two academic economists Anthony Atkinson and Salvatore Morelli. If you like infographics, you will love this site.

Happiology Comes of Age

For non-Brits, the U.K.  has a strange annual ritual called ‘The Budget’, at which time the Chancellor of the Exchequer (the U.K. minister of finance) unveils his tax and expenditure plans for the year. For two to three days, ‘The Budget’ acts as  a media neutron bomb, destroying any other debate. The odd geopolitical story (Crimea) or human interest (MH370) story may limp on, but nothing much else can survive. Most PR staffers are acutely aware that ‘The Budget’ is a Bermuda Triangle for any press release and take a long weekend off. But not all.

The Legatum Institute (a non-partisan London-based think tank) chose budget day to release an important report called “Wellbeing and Policy“. Not surprisingly, media coverage was meagre, with The Financial Times being a notable exception (here). The report is authored by the great and the good of happiness academics including Angus Deaton, Martine Durand, David HalpernRichard Layard  and  Gus O’Donnell.

In my humble opinion, the burgeoning field of happiness economics is a truly exciting field of the social sciences—whose time has really come; as such, this report is important.

Moreover, as we contemplate a world facing ever greater headwinds to that of the traditional metric of success, GDP, happiness economics provides us with a rare opportunity to have our cake and eat it. That is, it should help us intelligently adapt to low or zero growth due to climate change and resource depletion, but at the same time maintain, or even improve, our level of social welfare.

The Legatum Institute report gives ground for some optimism (which is usually lacking in this blog). For a start, a wave of national statistical offices have started to collect data on subjective wellbeing (click for larger image).

Availability of Official National Statistics on Subjective Wellbeing jpeg

Moreover, the somewhat vague concept of ‘happiness’ has now been deconstructed to the extent we can isolate its three main elements: life evaluation (the remembering self: how do your rate your life), affect (hedonic feelings of pleasure or pain, joy or sadness, stress or relaxation) and eudaimonia (a sense of purpose to one’s life or ‘flourishing’). I’ve posted frequently on this topic, as, for example, here and here.

These three categories provide a very rich metric for measuring differing aspects of happiness, and each of these three categories has its own nuances and idiosyncrasies. Nonetheless, the job of national statistical offices is one of trade-offs: complex questionnaires have a price, both in return rates and the cost to complete and process. The trick is to produce the minimum number of necessary questions that are both simple yet not naive. The Organisation of Economic Cooperation and Development (OECD) has come up with a set of core measures of subjective welling:

OECD Core Measures of Subjective Welling jpeg

A1 relates to life evaluation, A2 covers (very simplistically) eudaimonia and A3 through A5 positive and negative affect.

It is very easy to pick away at the arbitrariness  of these questions. The “Wellbeing and Policy” report references a New York Times article (here) covering the work of Martin Seligman, one of the pioneers of the ‘positive psychology‘ movement, in which Seligman struggles to reconcile the eudaimonia produced by ‘flow’ from that of the satisfaction of just winning.

You might also start to question some of your goals and activities, the way that Dr. Seligman occasionally wonders why he spends so much time playing bridge. It’s brought him some clear achievements — including a second-place finish in the North American pairs championship — but he doesn’t pretend that bridge provides any meaning in life. He says he plays for another element of well-being, the feeling of engagement. “I go into flow playing bridge,” he writes, “but after a long tournament, when I look in the mirror, I worry that I am merely fidgeting until I die.”

Is playing bridge for the feeling of flow any more worthwhile than playing it just to win? Dr. Seligman doesn’t want to judge.

“My view of positive psychology is that it describes rather than prescribes what human beings do,” he says. “I don’t want to mess with people’s values. I’m not saying it’s a good or a bad thing to want to win for its own sake. I’m just describing what lots of people do. One’s job as a therapist is not to change what people value, but given what they value, to make them better at it.”

I am not so sure. In Dr. Seligman’s world, there exist bridge players who evidence no sense of ‘flow’ nor sense of satisfaction in the game they play. But I wonder how they evaluate their life satisfaction or positive and negative affect. Yes, this is all difficult, but just because it is difficult does not mean it lacks depth.

A silent revolution appears in train, where we collect ever more data on happiness and decide what that data means. ‘Happiology’ is not GDP for hippies. I would turn this around: GDP is the measure of success for the educationally subnormal. It’s both simple and stupid. We are just starting to get to grips with what happiness means—and its complicated. But we are adults, and it is time to put  away childish things—such as our obsession with GDP.

Lack of Growth Economics

Various individuals have been writing about ‘no growth’ or ‘negative growth’ economics in recent years: Richard Heinberg of the Post Carbon Institute springs to mind; or for those who like to ski off piste, James Kunstler at Clusterfuck Nation or Nicole Foss at Automatic Earth. But don’t expect to find any hypertext links to Heinberg et al’s writings at Economist’s Viewthe highest profile aggregator of economic commentary collated by economics professor Mark Thoma—since the CVs of all three can best be described as lacking gravitas in the area of formal economics.

Then something strange happened back in September 2012. Heinberg, Foss and Kunstler unknowingly recruited the most unlikely of allies.

The doyen of growth economists Robert Gordon wrote a short commentary for the Centre for Economic Policy Research suggesting that the glory days of economic growth in the U.S. were gone for good. Gordon’s “Is US Economic Growth Over? Faltering Innovation Confronts the Six Head Winds” is still an important read and can be found here. In the paper, Gordon  suggested that the last 250 years of high growth could be considered an exception rather than the rule:

Since Solow’s seminal work in the 1950s, economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.

The unique nature of recent growth can be put in perspective by looking at the following chart from Gordon’s paper that splices together a times series from the U.S. and England (obviously data doesn’t go as far back as 1300 for the U.S.):

Growth in Real GDP per Capita jpeg

Gordon then went on to make what he calls a “fantasy forecast”, under which growth in GDP per head declines to the rate of 0.2% per annum by the end of the century.

Real GDP Fantasy Forecast jpeg

By fantasy, he meant a hypothetical growth rate that would be consistent with the six headwinds to growth that he identified, albeit accepting a degree of uncertainty in the chosen variables. The six head winds are as follows:

  1. Poor demographics
  2. Faltering educational attainment
  3. Rising inequality
  4. Globalisation
  5. Energy depletion and environmental degradation
  6. The burden of household and government debt

Each headwind is given a rough value that subtracts from the 1.8% average GDP per head growth rate that was sustained for the two decades up until the credit crisis of 2007.

Growth Subtraction Gordon jpeg

For some additional colour on his thinking, you can find a TED talk of Gordon’s here.

Eighteen months on and Gordon is back with a paper for the National Bureau of Economic Research (NBER) called “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections”. It’s behind a paywall (here), although you can buy a copy for $5, but I will pluck out a few charts and the main points. First, this critical chart:

Disposable Real Income Growth jpeg

At first glance, it looks similar to Figure 6 from the original commentary that I reproduced above, but actually there are some substantive differences.

First, our starting point is the average GDP growth rate from 1891 until 2007, encompassing the entire Second Industrial Revolution (to use Gordon’s terminology) and its aftermath;  the growth figure (GDP per head) he gives for this period is 2.0% per annum. We then subtract bad demographics (-0.3%), the stagnation in education attainment (-0.2%), rising inequality for the bottom 99% of the income distribution (-0.5%) and debt transfers (-0.2%).

The last bar is critical since it captures faltering innovation (-0.6%), which Gordon sees as a central concern for all advanced economies. He contrasts the three general purpose technologies—electricity, the internal combustion engine and remote communications by telegraph and then telephone—developed during the Second Industrial Revolution with the lesser value information technologies of the so called Third Industrial Revolution currently taking place.

Gordon is lukewarm with respect to the degree to which the current information and communication technology revolution have contributed to human welfare. Here are the main fruits of the so called IR3 as he sees them (click for larger image):

Third Industrial Revolution

Yet, despite these innovations, productivity has already slowed substantially:

Annualised Growth Rates of Output per Hour jpeg

Gordon is at pains to stress that he is not forecasting a new slowdown in productivity, just extrapolating one that has already taken place:

There is no need to predict any faltering or slowdown in the rate of innovation over the next 40 years. My baseline productivity growth forecast (for the total economy) of 1.30 percent per year starts from the realised growth rate over 1972-2012 of 1.59% and subtracts Jorgenson’s 0.27% precent for the likely effect of the slower advance of education attainment.

He is also highly skeptical of those techno-optimists like Brynjolfsson and McAfee who see a technical nirvana.

They remind us Moore’s Law that predicts endless exponential growth of the performance capability of computer chips, without recognising that the translation from Moore’s Law to the performance-price behaviour of ICT equipment peaked in 1998 and has declined ever since.

Moreover, all those new technologies beloved by newspaper columnists receive short shrift including small robots, AI, 3-D printing, gene-based medicine, Big Data and driverless cars. In Gordon’s view, most of these are merely refinements of existing technologies that date back decades. Further, although there was a short-lived jump in technology led productivity during the tech boom of 1996-2004, such gains have since slumped. So why should the future be any different?

Lastly, and critically, the new paper leaves out two head winds to growth from his older analysis: globalisation and energy/environment. If you add these into the new new forecast, then it is easy to take future growth into negative territory.

Factor in some geopolitical instability, and a low level class war as the 99% bite back, and things could get even worse. And this is without any consideration of Joseph Tainter-style fragilities. Our complex societies have been built on the assumption of ever-lasting growth. Reverse growth and our socio-economic institutions look weak—just look at the challenges facing health provision and pensions in the West.

In total, it may not all add up to Kunstler’s dystopian vision of the future chronicled in his “Made by Hand” series of novels, where society cannot even maintain the necessary technology to sustain transport by bicycle, but it could certainly be a very different world from the one which we inhabit today.

Links for the Week Ending 9 March 2014

Apologies for the late posting of this week’s links. Has been a crazy week.

  • For those of a non-business background, any reference to The Economist magazine with respect to climate change may appear strange. Who cares what The Economist writes on the subject? I would beg to disagree. Few, if any, senior business executives will read posts on Real Climate or Skeptical Science, let alone academic articles on the subject. For English speakers, most climate change commentary will come out of the pages (much of which will, of course, be online these days) of The Wall Street Journal, The Financial Times, other serious non-financial dailies like The New York Times in the U.S. and The Telegraph in the U.K., a motley collection of weeklies like Forbes, and, of course, The Economist. And The Economist is rather special in terms of its reach into board rooms across the globe (and for that matter cabinet offices). For example, Playboy Magazine once asked Bill Gates what he reads. The answer: “The Economist, every page”. A year ago, The Economist wrote an extended article on the global warming ‘hiatus’ that, I thought, gave too much weight to a few studies suggesting that climate sensitivity was far lower than previously thought (here, free registration). This week, however, the magazine made amends by publishing an excellent piece titled “Who pressed the pause button?” on the so called ‘hiatus’ in temperature rise. It ended with this statement:  “Most of the circumstances that have put the planet’s temperature rise on “pause” look temporary. Like the Terminator, global warming will be back.”
  • Talking of ‘The Terminator’, The Guardian carries an interview with the Crown Prince of techno-optimists and Google geek in chief Ray Kurzweil. God help us if anyone actually believes this stuff.
  • Up the road from me in Oxford is the NGO Climate Outreach and Information Network (COIN). Its founder George Marshall has an interesting blog that looks at the narratives surrounding climate change. In a post called “How the Climate Change Messengers Became Blamed for the Floods” he deconstructs the media’s reaction to the recent U.K. floods. It’s somewhat depressing stuff.
  • One of the sharpest observers of the shale hype has been the petroleum geologist Art Berman. He has a site called The Petroleum Truth Report, but, frustratingly, doesn’t keep it current. Fortunately, he has just given a new interview with Oilprice.com updating us on his recent thinking. The interview is full of gems such as this: “Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let’s face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs.” I highly recommend you read the whole thing.
  • The economist Noah Smith writes a lively blog called Noahpinion. In this post he makes some keen observations on the ‘jobs and robots’ debate, while in this article in The Week he compares America’s decline with the collapse of the Ming Dynasty.

Links for the Week Ending 2 March 2014

  • Martin Wolf has been revisiting the robots and jobs topic over the past few weeks in a couple of articles in The Financial Times here and here (free access after registration). This is a theme I have been addressing a lot recently in a series of posts starting here. Wolf finishes his last article with the observation that technology does not always have to shape institutions; it should be the other way around: “A form of techno-feudalism is unnecessary. Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we must change them.” I agree, but this will not be easy.
  • I have also just discovered a fascinating blog that pulls together articles on the new robot economy called RobotEnomics (sic). For example, check out this post on the economic implications of driverless cars.
  • California has experienced significant rainfall over the last few days. The latest Drought Monitor (released weekly) doesn’t capture this rainfall, so we should see some slight improvement when the next update comes out. Critically though, California’s water bank—its high mountain snow pack—is still running at around 20% of average. You can see the end month figures as measured by the Department of Water Resources here and an article giving background to the snowpack hereMother Jones has some nice graphics on the crops being hurt by the drought here, while The Atlantic has a very interesting (and very long) article on the history and future of California’s massive water engineering projects here.
  • Here I go again: linking to the March 1998 Campbell and Laherrere article titled “The End of Cheap Oil” in Scientific American. The authors ended the article with this sentence “The world is not running out of oil—at least not yet. What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.” Average price of Brent crude in 1998: $13.2 per barrel, equivalent nowadays to around $19 after adjusting for inflation. Brent now: $109 per barrel. But isn’t fracking going to give us an endless supply of cheap oil?  Here is an article in Bloomberg titled “Dream of Oil Independence Slams Against Shale Costs”. In other words, Campbell and Laherrere continue to be proved right and the energy cornucopians continue to be proved very wrong.
  • For technological optimists the dream is for a transformational technology that can permanently alter the energy supply equation. Fusion has always been one such hope, but forever decades away from commercial development. The New Yorker has just published a superb article called “A Star in a Bottle” on the International Experimental Thermonuclear Reactor (ITER) being built in France. The audacity and scope of the project is extraordinary. Yet my takeaway from the article is that fusion provides little hope of providing a timely saviour with respect to either climate change or fossil fuel depletion.