Two Top Experts Debate the Outlook for Growth
July 15, 2014
by Laurence B. Siegel
ValueWalk's Raul Panganiban interviews Joseph Cioffi, Author of Credit Chronometer and Partner at Davis + Gilbert where he is Chair of the Insolvency, Creditor’s Rights & Financial Products Practice Group. In the interview, we discuss the findings of the 3rd Annual report. Q2 2021 hedge fund letters, conferences and more The following is a computer Read More
Economic growth in the developed world has been notably slower than in the 20th century. In the last few years, that slowing has spread to emerging markets. Is this the end of a 200-year trend of rapid human development, or is it a short-term fluctuation that we should not worry about?
Growth may slow, as Robert Gordon contends, at least when measured by GDP – if only because population growth is slowing. But that is not a foregone conclusion. And even if it were to happen, it doesn’t mean that global standards of living would face a similar deceleration. Moreover, GDP doesn’t fully capture the improvements in the standard of living that come with advanced technology.
Most economic historians expect continued robust growth propelled by technological progress, but some economists, including Northwestern University’s Gordon, are not so sure. I examined this question in Advisor Perspectives last year in The Prospects for Long-Term Growth: A Critique of Grantham and Gordon. Now, in the light of a friendly feud between Gordon and his campus colleague Joel Mokyr, publicized in The Wall Street Journal on June 15, 2014, I take another look. Gordon, a macroeconomist, believes that six headwinds make further economic growth much more difficult, while Mokyr, a highly respected economic historian who also teaches at Northwestern, thinks that the best years of the human race are yet to come.
Before getting into the details, it’s worth pointing out that no growth rate can continue forever. Jeremy Grantham of GMO is fond of pointing out that if an ancient Egyptian consumed one cubic yard of physical materials (a reasonable amount by today’s standards) per year in 1000 B.C. and his consumption grew at only 2% per year (roughly the rate of per-capita consumption growth in the developed world in the last 200 years), the Egyptian would be consuming more than the volume of the planet each year by the present time. Such expansion can only continue for a finite amount of time, if consumption of physical materials is what we are talking about. (Mokyr asserts that it is not. Economic growth means a reduction in the effort needed to produce a unit of utility, he says, not necessarily an increase in the consumption of physical materials.)
For reference, Exhibit 1 shows U.S. real per-capita GDP (the best available measure of economic productivity) from 1789 to 2012. The long-term growth rate is 1.8% per year, and growth has recently been slower.
Exhibit 1 – U.S. real GDP per capita, 1789-2012
Source: William F. Sharpe, P. Brett Hammond, Martin L. Leibowitz and Laurence B. Siegel. “The Equity Risk Premium.” Presentation at the Q Group, Dana Point, CA, Oct. 16, 2012.
Headwinds and tailwinds
Mokyr summarizes Gordon’s views as follows: “The low-hanging fruit has been picked, because we won’t invent indoor plumbing again.” Nor will we again invent the railroad, the telephone, the electrical grid, the automobile, the airplane or the computer, emphasizes Gordon.
Gordon echoes, “The rapid progress made over the past 250 years could well turn out to be a unique episode in human history.”1
Well, I agree. Nothing like it has ever happened before, and now that the basic tools of modern life have been invented, it does not have to and cannot happen again. The first take-off into sustained economic development is, by definition, unique in history. But what is next?
Gordon argues that improvements will be successively smaller as we refine our knowledge and skill but fail to make fantastic new breakthroughs. He has also written about the six headwinds that make it difficult, in the U.S. especially, to make further rapid economic progress: demography, educational shortcomings, inequality, globalization, energy and environmental constraints and the overhang of consumer and government debt. Gordon concludes that consumption per capita is likely to grow at a rate as slow as 0.5% per year “for an extended period of decades.”2
I believe some of the headwinds are a real concern. The aging of the population will make labor (and tax dollars extracted from it) scarcer. The root causes of aging, however, are longevity and a low birth rate, which, in my 2012 essay, Fewer, Richer, Greener, I argued are huge positives for the economy and environment. I am concerned that entitlement spending is crowding out valuable infrastructure projects. We need to educate and train low- and middle-skilled workers.
- From the June 15, 2014 Wall Street Journal article linked above.
- This forecast is for the U.S. and excludes the richest citizens, who, Gordon argues, can expect faster consumption growth.
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