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”). 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:
The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
After fiddling with his model, Grantham concludes:
The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050. This is all done presuming no unexpected disasters, but also no heroics, just normal ‘muddling through.’”
If either Gordon or Grantham are correct, even partially correct, the political impact over time will be devastating, and will make the last election season look like Sesame Street compared to what future campaigns in a no-growth economy will be like.
There are a variety of ways to react to this kind of pessimism. Some might take it as a contrary indicator: buy now! I’ve always tended to be among the “never bet against the United States” chorus. But then I never expected the American people would re-elect an obvious economic illiterate (or worse) like Barackus Obama. But even if you think this pessimism overdone, the bias of policy today ought to be toward removing any barriers, or greasing the skids, to creating the maximum value-added jobs possible. Which means, even for a dunce like Obama, expediting the Keystone pipeline, and permitting offshore drilling in the Atlantic and elsewhere. And that’s just in the energy sector.
As I’ve said here before, only partly tongue-in-cheek: stock up on gold, guns, and canned goods.