Tag Archives: End of growth

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.

Greece: A Tale of Two Consultations

The IMF certainly wasn’t responsible for Greece’s economic downturn; indeed, Greece only entered an IMF programme (jointly orchestrated with the European Commission and the European Central Bank—the so called Troika) through a Stand-By Arrangement (SBA) agreed in May 2010, 18 months after the collapse of Lehman Brothers in September 2008 (the fulcrum point for the credit crisis).

Nonetheless, the IMF’s track record in both evaluating Greece’s economic risk before trouble hit and in helping craft a set of coherent economic policies that would supposedly build the foundations for renewed growth has been abysmal.

Unfortunately for the IMF, we have a ‘before and after’ comparison in the form of the last two Article IV Consultations (the IMF’s economic health checks) of Greece, the first conducted on July 2009 before the recession bit (here) and the latest conducted in June 2013 after all hell had broke loose (here).

Let’s start with how we always keep score in economics: GDP growth. In the 2009 consultation, the IMF forecast that GDP would contract by 1.7% in 2009, followed by 0.4% in 2010, before seeing a return to 0.6% growth in 2011 and 1.2% in 2012. In their words:

Staff projects negative growth in 2009 and 2010. Greece is feeling the downturn with some delay. Moreover, even with the staff’s weaker outlook relative to the authorities, Greece’s growth decline from peak to trough would still be milder than for the euro-area as a whole.

Milder? The reality was far, far worse: -3.1% for 2009 and -4.9% for 2010. And then far from rebounding, the downturn picked up speed with the economy shrinking an extraordinary 7.1% in 2011. For 2012, the advance estimates have the economy down another 6% plus. This is a stunning forecasting failure: the IMF was off by around 20%—a fifth of GDP! Continue reading

One Reason We Struggle to Grow: Energy Return on Investment (EROI)

This week’s edition of Scientific American has a couple of great infographics put together by Mason Inman on Energy Return on Investment (EROI). Strangely, these graphics are behind a paywall on Scientific American’s web site but are available open access on the site of Nature, the sister publication, here (click for larger image).

Liquid Fuels EROI jpeg

The infographics show that we are needing to use an ever-larger amount of energy in order to harvest energy from liquid fossil fuels. From a world in which we used to invest one unit of energy in conventional land-based oil production and get perhaps 50 units out, we are moving to a world where we now invest one unit of energy in unconventional fossil fuels but only get five or six units out.

For those interested in the source of the numbers that sit behind this graphic, then Inman has done us a service by listing them all here. As would be expected in any piece on energy extraction efficiency, he also references Professor Charles Hall, the father of EROI and, indeed, conducts a Q&A with Hall here. If you want to understand the implications of a low EROI, Hall explains it this way: Continue reading

Long-Term Interest Rates and Growth

Barry Ritholtz over at The Big Picture recently posted the chart below (click for larger image) detailing U.S. long-term interest rates (here). He then went on to draw the conclusion that it must be a golden time to make infrastructure investment at these yields.

Long-Term Interest Rates jpg

For myself, the chart calls forth an entirely different question: Why are long-term interest rates at their lowest level since the industrial revolution took off in America? Continue reading