Innovation – Too Much, Or Too Little Of A Good Thing?
July 14, 2015
by Michael Lebowitz
Peter Lynch was one of the best growth investors of all time. As the Magellan Fund manager at Fidelity Investments between 1977 and 1990, he averaged a 29.2% annual return. Q1 2021 hedge fund letters, conferences and more The fund manager's investment strategy was straightforward. He wanted to find growth companies and sit on them Read More
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“We wanted flying cars, instead we got 140 characters.” – Peter Thiel
Think about recent innovations that have changed the way you live:
- With a click or two on your smart phone, a sedan appears to take you to your destination.
- Yesterday, you could film a video of your daughter riding a horse and instantly share it with 500 of your closest friends. Today, you can stream the same video live to anyone with a smart phone.
- A wristband can track your exercise activity, weight and even sleep cycles.
- Credit card and mortgage payments can be made while lounging by the pool.
- Finding a boyfriend or girlfriend is possible without cheesy pickup lines.
- And of course, most importantly, you can shop anytime, at any major store, from anywhere.
These and many other new innovations save us a lot of time and effort but, believe it or not, they do little to generate sustainable economic growth. Sustainable economic growth depends on productivity. Despite these new innovations, domestic productivity is flat lining.
In 2014, the annual growth rate of economic productivity in the U.S. was merely 0.10%. Sadly, our negligible productivity growth (or total factor productivity, TFP) compares favorably to Europe (-0.44%), China (-0.10%), Japan (-1.20%), the United Kingdom (-.10%) and most other developed economies. Not surprisingly, global productivity, weighted GDP, declined in 2014.
Despite all of the wonderful innovations that make our lives easier, productivity growth has trended lower since the 1970s, except for a few years around the tech boom of the late 1990s. Economic growth (GDP) in America and much of the rest of the world since the 1970s has trended lower as well. A previous article, “The Humility of Rates and the Arrogance of Equities,” illustrated that secular GDP currently resides at the troughs of prior recessions despite the long, slow recovery from the financial crisis of 2008.
With zero productivity growth, GDP simply becomes a measure of labor and capital deployment. Because labor and capital are limited resources, productivity, or our ability to leverage labor and capital, is the one factor that can produce sustainable economic growth over the long run. The confluence of sub-trend economic growth and declining productivity growth is not a coincidence, and it is not getting the attention it deserves. The U.S. and other leading world economies are consuming the limited resources of capital and labor predominantly for unproductive uses.
“Corporate Buybacks; Connecting Dots to the F-word,” suggested that leadership in corporate America is shirking its responsibility to shareholders. Through the extensive and growing use of share buybacks, today’s corporate executives have opted for actions producing hollow short-term stock price gains and the generous compensation that accompanies such actions. This self-serving use of corporate cash, often borrowed under the guise of expressing confidence in the company’s future prospects, has been undertaken at the expense of longer-term strategic planning and expenditures aimed at growth-enhancing innovation.
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