Special report: The future is already working

New technology is driving growth
April 23, 2014

Robert Gordon’s remarks in the April issue of Prospect outlined a pessimistic view of US growth. His theory about why US productivity has stagnated is fascinating and quite worrying. Persistent poor productivity levels (economic output relative to input) would imply that the United States is on course for very low rates of economic growth. I can imagine many pessimistically-inclined readers immediately jumping on Gordon’s ideas, seeing in them a justification for their own hunches. But I do not accept his pessimistic outlook for economic growth. I have four reasons for worrying less. First, as authoritative as Gordon is on the topic, do we really know what we are measuring with productivity data anymore? Many senior economists will probably be horrified to read me saying this—or perhaps pity me as a lesser mortal. But in a modern economy, measuring the output from a service sector business is very difficult, much more so than counting up the number of cars rolling off a factory production line. So can we be so sure of ourselves when measuring productivity in a modern economy? If we cannot, then conclusions about long term growth based on these productivity measurements begin to feel uncertain. In any case, do normal people really care about productivity? Certainly, economists know of its importance, or at least think they do. But given how difficult it has been to anticipate changes in productivity, and how intangible the idea itself actually is, can it really be that important? People care about their jobs, incomes and lives—not especially their productivity. Gordon suggests that many modern inventions have turned out to be very unproductive, which may lead to economic problems as a result. But as that problem becomes apparent, policymakers will either choose, or be forced, to deal with it. Now as I say, economists in general will probably pity me for raising such issues, but I say it partly because Gordon might well be wrong. How can anyone know in advance whether technological innovations are going to change all of our productivity? Yet a second, stronger point follows closely from this. While the adoption of modern technologies might not be as productive as the advent of the motor car or of the light bulb, the way in which technologies are applied to production processes is also important. One example is the development and usage of shale gas, which currently appears to be giving the US a considerable competitive edge, especially in industry. I was brought up in the first half of my professional career as a foreign exchange market specialist (whatever one of those is supposed to be!). I used to follow very closely international trade and balance of payments data: that is, data showing the money going in and out of countries. I still follow these to some degree. It used to be the case that whenever the US was going through a period of economic recovery, the one guarantee was that imports would begin to increase in volume and money would begin to flow out of the country to pay for those imports. While the post-crisis recovery has been modest by US standards, it has been stronger than most of its developed nation counterparts. But look what has happened to its external accounts. In the recently published data covering the last three months of 2013, the US current account deficit was just over $80bn, equivalent to not much more than 2 per cent of GDP. This is pretty close to miraculous for the US and shows that it is undergoing economic recovery, but without the usual surge in imports. There are many possible reasons for this, but I suspect two are pertinent to my point. First, the US is importing much less crude oil and second, US industry is probably finding it easier and more attractive to produce goods at home and export them, rather than basing operations overseas where costs have previously been cheaper. This might just be the beginning of a new relative advantage. A third important point that Gordon touches on, is that many other economies, especially large emerging economies, have plenty of scope for “productivity catch-up.” By this he means that new technologies will provide a greater economic boost to developing economies than to developed ones simply because there is more scope for improvement. This was and remains a central tenet of the Bric thesis in which I argued nearly 13 years ago that the combined economies of Brazil, Russia, India and China had the potential to become as large as that of the G7 economies combined by 2037. Despite some disappointments in the last couple of years in some of these countries, they are still at a size consistent with that trajectory and I continue to believe it is possible. They are already nearly as big as the US, and China on its own is now more than half the size of the US economy. For this decade, I have assumed for the past three years that China would grow on average by 7.5 per cent and the Bric economies by 6.5 per cent. Because China has actually grown by 8.2 per cent in the first three years of the decade, despite the weakness of the other three compared with my expectations, the Bric economies have indeed grown by 6.5 per cent. Other important emerging economies including the so-called “Mint” economies of Mexico, Indonesia, Nigeria and Turkey are growing strongly as is much of Africa (although Mexico is currently disappointing). As a result, I continue to believe it is quite possible that global GDP growth this decade could be even stronger than the 3.7 per cent it managed from 2001-2010, itself already stronger than the 3.3 per cent of the previous two decades. It is generally unappreciated that world growth was stronger in the last decade than in the previous two, despite it being a disappointing decade for the US. China growing at a 7.5 per cent rate this decade will have the same global impact as if the US were to grow by 4 per cent. The US is still the world’s biggest economy but it is no longer so dominant. My final point is that for much of the era from the early 1980s until the 2008/9 crisis, the US economy drove the world economy through its domestic demand and strong imports. The post-crisis US is becoming a different animal, more likely to export to the rest of the world. Not only does it have rising coal exports to China, but it has many companies exporting to China, as well as to the other Bric and rising emerging economies. In 2013, China became the US’s third most important export market and while China may never reach the importance of its immediate geographical neighbours of Canada and Mexico, it will be a key marginal driver of US export growth. US economic fortunes will partially depend on global economic forces, a distinct difference from the status quo of the world with which I, and many others—including Gordon—have been familiar. Read more:Nigel Walton: New GroundDigital technology and the internet have given rise to five disruptive technologies that are likely to have a significant impact upon global growth. Dave Birch: Text ££The evidence is incontrovertible—as mobile phones have spread they have brought access to information and financial services.