While everyone has his gaze fixed on the “fiscal cliff,” Paul drew our attention this morning to the fact that France is already mid-air after leaping of their version of the fiscal cliff. And that’s only the beginning. The can of European fiscal woes has been kicked so hard and so far down the road that they’re having to borrow new cans to kick from central bank recycling bins. How else to explain the backtracking and backfilling on terms of the crocodile tear-jerker that is the Greek bailout? How else to read the news that European finance ministers are trying to stretch out loan terms for Greece? There’s an obvious Groundhog Day quality to headlines like today’s (“Finance Ministers, IMF, Seek Greek Debt Solution&rdquo. Haven’t we been meeting to “solve” the Greek problem for more than two years now?
We may be missing a more fundamental problem beneath our fixation on debt and deficits and our out of control welfare states. I’ve been reading a lot of recent economic literature that is saying, in plain speech, “hey wait a minute—we really don’t know what drives economic growth over the long term.” In other words, believe it or not there is no widely accepted “field theory,” so to speak, to explain economic growth over the long term. That’s one point of Deirdre McCloskey’s fine book Bourgeois Dignity: Why Economics Can’t Explain the Modern World, but see also another recent book that I think is destined to become a classic of recent economic literature, Daron Acemoglu and James Robinson’s Why Nations Fail: The Origins of Power, Prosperity, and Poverty. (And if you’re inclined to do a survey of good literature on this subject, don’t overlook David Landes, Hernando de Soto, and Tyler Cowan, among others.)
What if, a few pessimists are asking right now, if the long-wave of steady economic advance starting with the industrial revolution 200 years ago is over, and we are now going to revert to the mean of almost no economic growth that characterized human history prior to the industrial revolution? This is the melancholy speculation of Northwestern University economist Robert J. Gordon, in a recent NBER working paper entitled “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.” Here’s a sobering excerpt from the abstract:
This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. . . The paper is about “how much further could the frontier growth rate decline?”
Meanwhile, investor Jeremy Grantham is just out with his latest economic analysis, and it fits right in Gordon’s slipstream:
read more here:
I do know that our economic base has changed and did so about 20 years ago, or so. We are no longer an industrial-based economy, we became a "service-based" economy. We have struggled a great deal with this as the shift has been hard on the people; people that found their employment in industrial-based have had to shift or, if they did not do this, they have been finding themselves unemployed at a faster and faster pace. I remember the warnings of a past boss and how he said that traditional manufacturing companies were going to have the challenge of innovation and making changes to fit the realistic needs of our society or they would be "leaving the country to find a customer base" or they would be closing their doors completely. That is exactly what has happened.
Fortunately for the manufacturing company that he directed, they found that innovation and made the changes and they are stronger and more economically sound than ever. Manufacturing like the last place I worked did not head the warnings and they are suffering and close to closing their doors completely; dropping from 60 employees to the owner, his son and 5 employees; going from 24/7/365 production with 29 machines operating at full capacity to 2 machines producing four hours a day, 3 days a week or 121 days a year. Where they were doing $2.5 million a year in business, they are now doing $175,000. Due to increased cost of materials used in their production, they can't guarantee that any more as customers can't pay the higher cost of product.
This is just an illustration of the fact that we have to we have to find a new direction for economic growth. And as this suggests, does this signal that economic growth is going to continue to decline?
Diane, you have found another great article and given us more to consider. What it does suggest is that our direction and our thinking are going to have to change.