January 24, 2013

What will it take to overcome economic stagnation ?

Robert J Gordon (Northwestern University and the Center for Economic Policy Research) wrote 'Is US economic growth over? Faltering innovation confronts the six headwinds' He makes the case that it will be a lot tougher to have economic growth in the future.

The US for output per capita, and the UK before it, gradually began to grow more rapidly after 1750, reached its fastest growth rate in the middle of the 20th century, and has slowed down since. It is in the process of slowing down further.

A useful organising principle to understand the pace of growth since 1750 is the sequence of three industrial revolutions. The first (IR1) with its main inventions between 1750 and 1830 created steam engines, cotton spinning, and railroads. The second (IR2) was the most important, with its three central inventions of electricity, the internal combustion engine, and running water with indoor plumbing, in the relatively short interval of 1870 to 1900. Both the first two revolutions required about 100 years for their full effects to percolate through the economy. During the two decades 1950-70, the benefits of the IR2 were still transforming the economy, including air conditioning, home appliances, and the interstate highway system. After 1970, productivity growth slowed markedly, most plausibly because the main ideas of IR2 had by and large been implemented by then.

The computer and internet revolution (IR3) began around 1960 and reached its climax in the era of the late 1990s, but its main impact on productivity has withered away in the past eight years. Many of the inventions that replaced tedious and repetitive clerical labor with computers happened a long time ago, in the 1970s and 1980s. Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it.

NBF - The internet and computer revolution is just getting started. There is lot more room for computers and the internet to improve.

We will be able to get to terabit per second communication speeds.
Computers have over a billion fold speed improvements to still be made.
Additive manufacturing and robotics are just getting started.

Gordon notes - The US economy still faces six daunting headwinds that will limit future potential growth and hold it below the pace which innovation would otherwise make possible.

1. The “demographic dividend” is now in reverse motion. Hours per capita are now declining, and any tendency for life expectancy to grow relative to the average retirement age will further augment this headwind. By definition, whenever hours per capita decline, then output per capita must grow more slowly than productivity.

Robotics and process automation can provide recurring economic boosts.

Smartphones and tablets are the brains of future robots. They have processing and can send and receive video and can recognize the environment. There will be smartphones and tablets for every person on earth in a few years. Robotics is just adding some movement. There are millions of Roombas that sell for a few hundred dollars. Rethink robotics is part of a wave of new industrial robots.

Robotics and automation will provide the extra labor and productivity to the economic equations.

2. The second headwind already taken into account in the 2007-27 forecast is the plateau in educational attainment in the US reached more than 20 years ago, as highlighted in the path-breaking work of Claudia Golden and Lawrence Katz (2008).

NBF - More than 120,000 enrolled in the MITx online course on electronics

College credit for online courses are eliminating weak universities

Peter Norvig (Director of Research Google) discussed his online education effort. He gave an online Artificial intelligence course to 160,000 students in 200 countries. He is trying to get closer to 1 on 1 tutoring as a goal.

If the United States had closed the education gap by 1998 and reached the level of the top performers, such as Finland and South Korea, the US GDP could have been $1.3 trillion to $2.3 trillion higher in 2008. To put the facts another way, the gap imposes a higher recurring annual economic cost on the US economy than the current recession does.

Finland has an education reform success story.

Leaders in Finland attribute the gains to their intensive investments in teacher education—all teachers receive three years of high-quality graduate level preparation completely at state expense—plus a major overhaul of the curriculum and assessment system designed to ensure access to a “thinking curriculum” for all students. A recent analysis of the Finnish system summarized its core principles as follows:

* Resources for those who need them most.
* High standards and supports for special needs.
* Qualified teachers.
* Evaluation of education.
* Balancing decentralization and centralization

3. The most important quantitatively in holding down the growth of our future income is rising inequality.

4. The interaction between globalisation and ICT is a daunting headwind. Its effects include outsourcing of all types, from call centres to radiologist jobs.

There is an insourcing boom where US companies are finding the business advantage of staying close to the manufacturing floor. the cost of labor is a minor factor in the cost of products.

5. Energy and the environment represent the fifth headwind. Gordon is concerned about rising energy costs and the cost of global warming.

Energy policy and plans could be adjusted to double energy by 2025 or 2030.

Existing nuclear reactors can have conventional extended uprates to increase power by up to 20%.

Annular fuel could be developed to increase power by 20-50%.

Natural gas and oil is already increasing again and policies in California, Alaska and other states could enable more oil and gas.

There are possibilities for energy breakthroughs with nuclear fusion and modular deep burn nuclear fission.

6. The twin household and government deficits represent the final headwind.

Highways and Cities are not a one time technology boost

Gordon feels that highways and urbanization are one time economic boosts.

Sky City Skyscrapers (200-300 stories) and robotic cars (4 times the density of road traffic) will make certain megacities (future New York, Shanghai, Tokyo etc...) one third to one half of the overall world population and they would have 75% more GDP per capita than they do today. There would be rural, regular urban then super-urban. Research shows that doubling population and increased urban density boosts productivity by about 15%.

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