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Are we Looking at Things too Narrowly?

December 10th, 2012
in Op Ed

Written by Sig Silber

In a very interesting recent article John Mauldin shows:

Growth = Population Growth + Productivity Increases

I don't believe that is correct.

Follow up:

In a related piece by Steve Hansen, he says that some pundits say that growth is equal to population growth plus productivity. But then he shows this chart:

Close only counts in horse shoes. GDP has grown faster than population growth plus productivity.

That formula seems like a silly concept to me. The population growth part seems reasonable. But the productivity part does not. Yes if you can produce more with the same number of people, that translates (if the added production enters commerce) into an increase in GDP.

But is it realistic to think of the Sony Walkman as being an increase in productivity? I don't think so. It was the creation of a new demand.

Increasing productivity may be a drag on GDP because without new demands, it means more unemployment. So it could translate into decreased aggregate demand.

And is it sensible to view the discovery of a new oil reserve as an increase in productivity? And can you look at this nation by nation? Oil and gas shales are a form of negative productivity as compared to Saudi oil. It improves our balance of payments but the amount of labor per gallon of oil produced probably goes up on a worldwide basis.

So that formula strikes me as too simplistic.

Productivity increases are wonderful but you need a Schumpeterian stimulus also and maybe some creative destruction to have GDP growth and increases in employment resulting.

I think that is what we are missing in developed nations such as the US and I think it was the motivation behind the shovel ready projects concept. But resurfacing a road is not a new demand. It just puts some auto repair folks out of work and makes morticians wait longer for their due. Both of which are drags on GDP.

I don't buy the Jean Baptiste Say/Ronald Reagan/IBM theory that supply creates its own demand but I do believe that:

A. New demands are continually manifesting themselves and

B. Unemployment encourages people to think about what previously unacknowledged demands might be able to be profitably provided and

C. Negative events, perhaps things like Climate Change, might create new demands.

What has surprised me has been the slow pace of the generation of new demands since 2008 given the high rate of unemployment. I have written several papers on how economic adversity in Manhattan led to the creation of Silicon Alley. Why are we not creating new Silicon Alleys? Why are decaying inner cities not being converted into new areas of dynamism? They seem to resemble in some fashion the conditions that led to the formation of Silicon Alley.

One wonders what has changed, if anything, such that adversity has not stimulated creativity.

Perhaps it is coming but has not yet arrived. The historical data does show a time lag but not this long. Or perhaps we are doing things to stifle it. Should we not examine that possibility?

I would have hoped this would have been a topic of discussion in the US during the last political campaign but unfortunately neither campaign discussed this topic in any substantive way. But it is not too late. Thinking about how developed nations can invigorate their economies is never too late to be thinking about.

Developing nations don't have that problem. They have many clearly unmet needs to be filled. Actually some developing nations such as China are beginning to have that problem in the modern sectors of their economy. But it is mainly a problem of developed economies which need to either:

A. generate new needs faster than productivity is reducing the need for labor hours or

B. be prepared to shorten work weeks or

C. have a smaller percentage of people supporting a larger percentage of people. Oh..that is what tax hikes are intended to accommodate. So I guess it is not a problem from the perspective of those in charge of developed nations.

Those who work will not resent those who don't. Just watch!  And as the ratio of people needed to work to those not needing to work is reduced over time, what new problems might be generated? We may not have to wait until all that is desired is produced by robots and automation to encounter serious problems. It may be a problem that materializes as productivity increases. And it may not materialize as a problem linearly.

When I was a kid, I was afraid that everything would get invented before I got my chance to invent anything. I was worried about something that clearly was not a problem. There has been a constant stream of inventions. It has gotten a little more complicated as we now realize that many things have downsides as well as upsides. So there is a certain developing bias against new things or too much of what might otherwise be considered a good thing.

One thing that really surprises me is the bias against health-care. We seem to view health-care collectively as some sort of horrible evil that will consume us. Individually most of us want all of it we can get.

Electronics is not a solution because Moore's law doesn't allow innovation in electronics to lead to increased employment. Defense is no longer an option because modern communications means we get to watch the impact of defense expenditures when weapons are used and we don't like watching it.

Education is not a good sink for our innovation since the better we make education, it seems the lower the quality of the output. We could completely destroy our kids if we improved education any more.

There is only so far we can go with pet clothing, jewelry, and theme parks for pets plus the cost of feeding pets is getting out of hand.

The personal aircraft might have potential.

We already have in our household a robotic vacuum cleaner but I guess we have gotten bored with it. I have quite an imagination in that area of appealing robots but that is best left undocumented.

Steve mentioned the underground economy. That works well for getting out from under the yoke of repressive governments but does nothing for those responsible for reporting GDP.

My parents had a simple solution for this problem. They would just cut my allowance. I found things to do and ways to generate income when I needed to. Now cutting a persons allowance is considered equivalent to throwing them off a cliff. BTW I am not pleased that the folks over at Agora have not seen the wisdom of at least nominating La Bajada Hill New Mexico (the gateway to Santa Fe from Albuquerque) as the true Fiscal Cliff. I think I might have to take up my beef with Dave Gonigam at The 5 Min. Forecasts or Bryon (Peak Oil) King. I have not explicitly make the connection in this article but the Fiscal Cliff is directly related to our inability to create new categories of aggregate demand and the distribution challenges created when we are able to meet all reasonable needs with a smaller percentage of the population having to work. It is a glimpse into the World of the Future and a hint that our future problems may be surplus not shortages.

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