America Might Be Richer and More Powerful in 20 Years Than You Expect

 

Let’s take a moment and ignore the bouncing stock market. Let’s cease with speculation about how the American economy will perform over the next year or two — and its possible impact on politics. Let’s both pull back the camera from current events and point it toward the far horizon.

What might things be like in, say, 2040? The expert consensus predicts the same old, same old economic growth, about the same pace as we’ve seen throughout the 2000s. A (maybe, nearly, hopefully) 2 percent economy. Real GDP will likely grow at about half the pace of what it did in the last half of the 20th century.

And there are good reasons for this forecast, a combo of demographics (an aging society with lower birthrates) and weak productivity growth. On that latter point, the Robert Gordon argument laid out in “The Rise and Fall of American Growth” represents the baseline in mainstream thinking. All the low-hanging fruit of innovation has been picked. New inventions like the iPhone and even autonomous vehicles pale against the old such as electrification and the combustion engine. Sorry, Millennials.

But what if the future is already here, just not widely distributed? What if artificial intelligence and advanced robotics spread throughout the economy and improve, boosting worker productivity and economic growth and incomes? How about a 1990s-style tech boom that keeps on booming? That’s just the optimistic prediction of the consultancy Capital Economics, as outlined in its first long-term forecast. From its report:

Over the next couple of decades, the widespread adoption of new technologies should drive a pick-up in productivity growth. That should more than compensate for the restraining impact of the ageing population, causing potential growth to accelerate.

After a short period of very rapid gains in the second half of the 1990s, productivity growth began to slow around 2004, i.e. before the Great Recession, and has remained lacklustre ever since. Since 2005, productivity growth has averaged only 1.0% y/y, compared with 2.3% during the dot.com boom in the 1990s.

Newer technologies, such as the mobile revolution, have improved leisure time, but have not had the same revolutionary impact on business productivity. Nevertheless, we know that cutting edge technologies, in particular artificial intelligence and driverless vehicles, are more likely to provide a genuine boost to labour productivity over the next couple of decades. For that reason we expect productivity growth to gradually accelerate, from little more than 1.0% over the next few years to an average of 1.6% in the mid-2020s and 2.0% in the 2030s.

So thanks, Silicon Valley. Now let’s be clear what we’re talking about. This wouldn’t be the Singularity. Nor would economic growth be quite as fast as in the postwar period, thanks to population aging and the retirement of the baby boomers. But faster productivity growth would push the economy’s growth potential to 2.6 percent. While that “would be shy of the 3.0 percent average growth rate between 1950 and 2007 . . . it would mean a breakout from the postrecession malaise, which would represent a new ‘new normal.’” I like that word, “breakout.”

So we’re talking about a vastly larger and richer and more technologically capable American economy with 2.6 percent growth than 1.6 percent. Over the years 2026-2037, the firm sees unemployment averaging under 5 percent and wage growth averaging over four percent. So no robot apocalypse in the labor market.

What’s more, America’s new normal might actually be better than China’s new normal as that nation continues to move away from a market-driven economy and gets stuck in the infamous middle-income trap. From the report:

China’s economy faces severe structural headwinds from slowing capital accumulation and a shrinking labour force. With policymakers showing little appetite for reforms and employment having peaked, the sustainable rate of economic growth is likely to slow from about 5% currently to 2% within a decade. We think a financial crisis will be avoided because of the government’s control over the financial system and its ability to take more liabilities onto the state balance sheet. … In other words, we think China will fall off the path of rapid development laid down by the Asian growth stars of Japan, Korea and Taiwan. Instead, China is likely to increasingly resemble most other EMs whose income levels have converged with developed economies much more slowly, if at all.

Of course, the world would be better off with a more prosperous China since it would also be a freer China where the state receded and the private sector advanced. That’s also a lesson for America. Let’s not screw up the American Growth Machine by becoming less tolerant of creative destruction and churn. And maybe focus on doing the obvious things to facilitate growth such as greater immigration, public investment, and fiscal responsibility. No trade wars, please.

We shouldn’t count on the Great Acceleration happening. Let’s do what we can to make sure it does.

Published in Economics
Like this post? Want to comment? Join Ricochet’s growing community of conservatives and be part of the conversation. Get your first month free.

There are 17 comments.

  1. Member

    In addition to the focus on GDP growth, attention also needs to be paid to GDP *per capita*. To the extent that GDP growth is brought about only by population increase, there is little effect on individual standards of living.

    There is *some* effect, because a higher population-based GDP can assist in paying off debt and supporting fixed infrastructure….but primarily, GDP per capita is what matters.

    And GDP per capita is basically a matter of productivity.

    • #1
    • December 18, 2018 at 4:45 pm
    • 2 likes
  2. Inactive

    James Pethokoukis: And maybe focus on doing the obvious things to facilitate growth such as greater immigration, public investment, and fiscal responsibility.

    Corey Booker, Kamala Harris, Designated Driver O’Roarke and Elizabeth Warren couldn’t have said it any better.

    • #2
    • December 18, 2018 at 4:53 pm
    • 5 likes
  3. Coolidge

    I am not feeling the love for high productivity growth. I think the US economy is largely made up of government and healthcare, which have proven to be very resistant to productivity growth. Another factor against productivity growth is our immigration policy. The current and foreseeable policy favors low-skill folks over high-skill. With abundant low-skill labor there is less benefit to capital investment and innovation. In addition, the current high-skill immigrants will either be forced to “go home” after their visa’s expire or, increasingly, choose to go home where there is more opportunity. One last factor against productivity growth is the enormous public debt. That will eventually lead to high interest rates and high taxes and less capital investment. Cheers!

    • #3
    • December 18, 2018 at 4:57 pm
    • 2 likes
  4. Member

    DonG (View Comment):
    With abundant low-skill labor there is less benefit to capital investment and innovation

    and

    DonG (View Comment):
    One last factor against productivity growth is the enormous public debt. That will eventually lead to high interest rates and high taxes and less capital investment.

    There was an interesting study done of Spinning Jenny relative acceptance in Britain and France, also India. What mattered was relative labor costs *relative to the cost of capital*.

    https://www.nuffield.ox.ac.uk/users/Allen/unpublished/jenny5-dp.pdf

    • #4
    • December 18, 2018 at 5:25 pm
    • 1 like
  5. Member

    James Pethokoukis: The expert consensus predicts…

    I hope that some Ricocheteers who previously accepted this claim–that it is possible to predict the future of the economy–are at least willing to question it.

    In fact, no-one has any expertise in the area of quantitatively predicting the generation of wealth over the next decades. That such predictions are theoretically impossible was proven by economists like Mises and Hayek decades ago.

    No rational basis is ever given in defense of these claims. They are based solely on precisely the same combination of forms–fallacious reasoning and technical-sounding mumbo-jumbo–as progressives use to advance the predictions of global warming, or that unscrupulous or delusional investment experts use to advance their assertion that they can predict the future of gold prices or the stock market. (Both would be easier to predict than the state of the economy.)

    • Appeals to authority, and my favorite: appeals to the “consensus” of authorities
    • Claims with no basis in rational argument that statistical correlations will repeat themselves.
    • The use of technical terms and methods that give the impression of arcane-sounding knowledge: the names of advanced mathematical techniques, references to “computer models”, and so on.

    My challenge to Mr. Pethokoukis is

    1. Name one of these “experts” who can present a defensible method of predicting the future of the economy.
    2. Tell us how, if not one expert can step forward, how a consensus of such experts has any credibility.

    How can one quantitatively predict the future if one cannot predict the major extrinsic inputs to the system? That is, what events will occur when. All economists know that these extrinsic factors include

    • future inventions and innovations
    • wars
    • political interventions
    • natural phenomena like weather and natural disasters
    • trends in consumer tastes and preferences

    Which expert claims to be able to predict any one of these, let alone all of them?

    And if one expert could predict all of them, what good would it do if there is no theoretically proven procedure for crunching the information and spitting out predictions?

     

    • #5
    • December 18, 2018 at 6:00 pm
    • 4 likes
  6. Coolidge

    Ekosj (View Comment):

    James Pethokoukis: And maybe focus on doing the obvious things to facilitate growth such as greater immigration, public investment, and fiscal responsibility.

    Corey Booker, Kamala Harris, Designated Driver O’Roarke and Elizabeth Warren couldn’t have said it any better.

    Except for the fiscal responsibility.

    • #6
    • December 18, 2018 at 9:31 pm
    • 1 like
  7. Coolidge

    I hear a lot about AI and robotics, but rarely hear space factored into these future predictions. But surely, we are closer to being able to mine asteroids and establish a foothold on the moon and perhaps other planets. Space travel will open up new economic opportunities and fuel our thirst for adventure.

    • #7
    • December 18, 2018 at 11:10 pm
    • Like
  8. Member

    He’s conflicted here. Greater immigration isn’t going to raise productivity and the growth it drives is without inherent meaning or obvious benefit. It’s just numbers. .

    Greater public investment? Depends on who is investing in what. The one thing he says we can easily agree with is to learn from China, but then he doesn’t get that right all the way. He says

    “let’s not screw up the American Growth Machine by becoming less tolerant of creative destruction and churn.

    Right on.

    But China will slow down not because of demographics but because the world can’t absorb its continued export led growth at the pace it did when China began at zero. To grow at recent rates, China must develop domestic consumption and investment, which of course means greater imports as well. However, it has ceased liberating its economy and is increasing controls and with time the old China disease of rampant deadening corruption will creep back.

    The inevitable corruption that comes from concentration of power in government is the threat the US faces as well. Growth isn’t the goal. It’s freedom. Growth is a by-product and not the most important one. 

    He’s definitely a macro economist, which I always point out isn’t economics, it’s accounting

    • #8
    • December 19, 2018 at 6:38 am
    • 2 likes
  9. Member

    James Pethokoukis: Of course, the world would be better off with a more prosperous China since it would also be a freer China where the state receded and the private sector advanced.

    Truly dim. China has become more prosperous while remaining what it has always been – a communist dictatorship. 

    • #9
    • December 19, 2018 at 6:40 am
    • 1 like
  10. Member

    If you want a more prosperous and secure future, spend about 1.5-2% of GDP on military R&D. Focus on ways and means of making American manufacturing profitable. It’s not like it’s magic.

    • #10
    • December 19, 2018 at 6:42 am
    • Like
  11. Member

    Lotsa folk like the praise China’s vaunted “focus on long-term thinking”, but it really seems that their governance culture swings pretty wildly according to the personality of the guy holding the top job.

    Xi Jinping is no Hu Jintao.

    • #11
    • December 19, 2018 at 8:46 am
    • 1 like
  12. Thatcher

    Or it might not be.

    • #12
    • December 19, 2018 at 9:26 am
    • Like
  13. Coolidge

    Hang On (View Comment):

    James Pethokoukis: Of course, the world would be better off with a more prosperous China since it would also be a freer China where the state receded and the private sector advanced.

    Truly dim. China has become more prosperous while remaining what it has always been – a communist dictatorship.

    You’ll notice he’s saying this while China has been increasing its state persecution of Christians and Muslims for years.

    I suspect he considers that a minor detail.

    • #13
    • December 19, 2018 at 9:29 am
    • Like
  14. Member

    Hang On (View Comment):

    James Pethokoukis: Of course, the world would be better off with a more prosperous China since it would also be a freer China where the state receded and the private sector advanced.

    Truly dim. China has become more prosperous while remaining what it has always been – a communist dictatorship.

    Both are true. If a country is free economically it will grow–the greater the degree to which individuals are secure in their rights to their labor and property, the faster will be the faster the growth. This is true regardless of the degree of political freedom.

    If a country is not economically free it won’t grow, no matter how politically free it is.

    China became more prosperous by reducing the degree of state ownership, without much political liberalization.

    There are many examples in history beside Communist China of countries that experienced the enormous incremental growth that comes with incremental increases of capitalism. Economic theory also predicts this general law.

    Economic growth is caused by the division of labor and the consumer-driven expansion of the capital structure, not by freedom to criticize or select political authorities.

    • #14
    • December 19, 2018 at 9:47 am
    • 1 like
  15. Coolidge

    Mark Camp (View Comment):

    If a country is not economically free it won’t grow, no matter how politically free it is.

    China became more prosperous by reducing the degree of state ownership, without much political liberalization.

    A centrally planned economy can grow, but not as fast as a decentrally-planned (market) economy. It is also possible for a planned economy of lower income to engage in wide-scale industrial espionage and theft of intellectual property to grow relatively quickly. It is not sustainable, but effective as a means of catching up.

    • #15
    • December 19, 2018 at 2:12 pm
    • Like
  16. Member

    DonG (View Comment):

    Mark Camp (View Comment):

    If a country is not economically free it won’t grow, no matter how politically free it is.

    China became more prosperous by reducing the degree of state ownership, without much political liberalization.

    A centrally planned economy can grow, but not as fast as a decentrally-planned (market) economy.

    Don, thanks for the correction–I wrote carelessly. Economics can’t say anything about absolute growth of a nation, only about the likely relative growth due to more freedom.

    • #16
    • December 19, 2018 at 4:31 pm
    • Like
  17. Coolidge

    lowtech redneck (View Comment):

    Ekosj (View Comment):

    James Pethokoukis: And maybe focus on doing the obvious things to facilitate growth such as greater immigration, public investment, and fiscal responsibility.

    Corey Booker, Kamala Harris, Designated Driver O’Roarke and Elizabeth Warren couldn’t have said it any better.

    Except for the fiscal responsibility.

    Stealing my thunder here. That’s 100% right.

    • #17
    • December 19, 2018 at 5:47 pm
    • 1 like