The Six Headwinds slowing Innovation down

Earlier this year I came across a slide show by economist Robert J Gordon in which he talks about the end of economic growth. The slideshow I have was titled “Is U. S. Economic Growth Over? Lessons from the Long 20th Century” and it spells out his view that economic growth is over. Later he talks about the 6 headwinds but first a brief snapshot of his big idea.

  • The central theme: technological change is not continuous. The Great Inventions involved a one-time-only set of changes.
  • One-time-only changes included horses to trucks, outhouses to indoor plumbing, housewives carrying buckets to running water, and many more
  • Maybe this seems obvious about horses and outhouses, but once you accept that, you’ve been drawn into my central thesis. Economic growth is not a continuous long-run process but an artifact of a unique three-century period of human history.

Gordon is a professor at Northwestern and this topic seems to make a certain amount of sense to many.

It is true that we have seen some remarkable growth especially in the last 5o or so years with technology becoming more ubiquitous. What I was interested in was his idea of the 6 headwinds. Here they are direct from his slides.

#1. Demographic Dividend is Reversed
Y/N grew faster than Y/H 1970-1995 because of female entry to the labor force and Baby Boom bulge of labor-force entry
Y/N will grow slower after 2011 due to Baby-Boom retirement
#2. Plateau of Educational Attainment
Cost inflation in higher education, mounting student debt distorts life choices
Poor math-science scores in OECD cross-country tests
Achievement gap of black and hispanic minorities
#3. Inequality: growth in median income is much slower than in statistical averages for income per capita
1993-2008. Growth of average real household income = 1.3%
Growth in bottom 99%, 0.75%. Top 1%, 3.9%
Top 1% captured 52% of income gains during 1993-2008
#4. Globalization linked with IT: Hurts the leading nation more than others. Outsourcing and those radiologists in India (let’s hear from Alan Blinder).
#5. Environment: Payback for past growth, sacrifice for emerging market growth (is it fair?)
1901 full steam ahead, environment be damned
#6. Twin deficits: consumer and government debt overhang. However slow is growth in production per capita, consumption per capita will grow slower.

It seemed to me that if we can untangle these 6 headwinds we might come up with a different result.

At this point I’m reminded of the old joke about how many economists it takes to explain a past event like the Great Depression. The answer is no one really knows what caused the great depression more than 75 years later so expecting them to be right about the future is asking for trouble.

Here is a slide from Gordon on what he calls IR #3 – ( indistrial revolution # 3 being electronics after 1960 until now.)

Marshall McLuhan famously once said:

“The past went that-a-way. When faced with a totally new situation, we tend always to attach ourselves to the objects, to the flavor of the most recent past. We look at the present through a rear view mirror. We march backwards into the future.”

That is part of the problem here. Looking at history through a rear view mirror doesn’t really prepare us for some of the innovations that are just around the corner. Also a very small calculation error can make a huge difference over the long run.

One outcome is clear though. Real growth going forward will likely be much smaller than we have seen before as the implications of technology led innovation become more pervasive globally.

David R. Henderson who is a features editor at Econblog summarised the Gordon hypothesis over here.

“So why the pessimism? Gordon points to six “headwinds” that he thinks will reduce growth: demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt.
His tentative bottom line:
A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.”

In a follow up post Henderson notes

“My main critique is that Gordon is way too certain of his conclusion. His big argument–not the one about the six headwinds–is as follows:
[T]he central theme of this article is that innovation does not have the same potential to create growth in the future as in the past.

Again, I emphasize that I don’t want to say that he’s wrong–he could well be right. But I don’t think his degree of certainty is justified. By the very nature of innovation, we don’t know what it will be. Gordon is aware of this and points to “four classic examples of innovation pessimism that turned out to be wildly wrong”

Here is headwind # 4 explained by Henderson

4. The interaction between globalization and developments in information technology and communications (ICT). He writes, “Foreign inexpensive labor competes with American labor not just through outsourcing, but also through imports.” True. But that makes us better off, not worse off. When we can buy something cheaper, our real income is higher. Ricardo nailed this almost 2 centuries ago. It’s true that if the United States is a net exporter of something, then competition from abroad can hurt producers here more than it helps consumers here. But that’s not what he’s getting at. He’s getting at “factor price equalization.” The idea is that wages will equalize and, with the U.S. being one of the highest-wage countries, that means wages will fall. Of course, this is premised on the idea that all labor within a country and around the world is the same. This factor gives him a 0.2-percentage-point drop in growth.

Hoever what really caught my eye here was a comment by Chris Koresko ( whom I think is this guy.)

“Chris Koresko writes:
It’s hard to be sure what might drive economic growth over the next century or two, but it’s not hard to think of a few things that might:

* Raw materials from space. That means energy, metals, ceramics, and volatiles in quantities that can ultimately vastly exceed what’s available to us today. We’re probably on the cusp of this now, with the rapid decline in launcher prices (by a factor of around 3-5 in the last few years, probably another 3-10 over the next decade), and the widespread availability of computers, software, and sensors to enable cheap smart spacecraft.

* Personalized medicine. With sensors, processors, and software all making dramatic progress, it should soon be practical for a family to own and use diagnostic and therapeutic tools exceeding the best available in modern hospitals, at a cost affordable to most. That’d free up a good fraction of the GDP, and effectively increase it by improving overall health.

* Virtual teleportation (telepresence). While it’s possible to do a fair amount of work from home today, the combination of increasing low-latency bandwidth, cheap robotics, and immersive displays will allow people to routinely visit and interact with real environments almost as if they were physically there… but with the advantages of near perfect safety and instant “mobility”.

* Flexible fabrication: Today’s primitive “3D printers” may evolve into much more powerful devices capable of creating robust, intricate machines with more or less raw materials as input. Need a new air recycler unit for your Martian apartment? Print one!

* Robots: The perennial science-fiction appliance that takes care of the tedious chores at home and the dangerous jobs at work will bring us a lot of new wealth. We’re on the cusp of this now in the physical world. Most U.S. factories already highly automated, and driverless cars having begun to gain regulatory approval. In the virtual world, robotic assistants that can understand and make sense of your words, make your appointments, buy your tickets, and make your travel arrangements are pretty much here now (though not yet in wide use).

We could be on a path to permanent stagnation, but it’s not exactly obvious that’s true.”

My own thinking is that despite the wealth of information it is much harder to predict the impact of innovations as yet unknown.

With better communication and larger shared global problems such as climate change, peak oil and other fossil fuels running out it just may be that future innovations may provide even bigger growth implications that we have seen before.

What do you think?