Searching for Infinite Economic Growth

 

It’s tempting to think some favored policy tweak will produce massively positive economic effects. But that usually isn’t the case. Even big policy changes often produce somewhat muted economic responses. When Congress passed big tax cuts back in 2017, President Trump said he saw “no reason” why economic growth couldn’t accelerate to as high as 6%. Yet growth in the ten quarters since the tax cut has averaged 2.6%, not much better than the 2.3% growth experienced over the previous ten quarters or the 2.5% averaged since 1990.

And that’s OK, writes scientist and policy analyst Vaclav Smil in The Financial Times. The whole economy can’t act like Moore’s Law, such that rapid and constants gains in computing power can be replicated “in other economic sectors and drive decarbonisation of energy, huge food production gains and a fourth industrial revolution.” He notes that “modern economies depend on an enormous range of inputs whose yields, performances and capabilities have been constantly improving; but only at rates an order of magnitude lower than the 30% growth dictated by Moore’s law.”

Smil notes, for instance, that corn yields have risen by 2% annually since the 1950s, efficiency gains for indoor lighting have averaged around 2.6% for decades, and gains in the efficiency of steel production have averaged less than 2% since 1950. Smil concludes: “Moderate growth, falling overwhelmingly between 1% and 3% and mostly between 1.5% to 2.5% annually, should be broadly reflected in the aggregates of economic outcomes. Indeed, it has been. Since 1950 the average growth of US GDP per capita (in real terms) has been about 2%.”

So skepticism is warranted regarding claims that this policy tweak or that innovation is some massive game-changer. But growth, any growth, shouldn’t be sniffed at. That’s the power of compounding. Still, there’s a big difference between an economy growing at 1% year after year and one growing at 2.5% annually. It certainly behooves policymakers to think hard about what pro-growth, pro-innovation policies are most effective. And if some policy or innovation — or combination of several — generates a Kurzweillian singularity where the “merger of biological and nonbiological entities will create immortal software-based humans,” then we can probably start thinking about “exponential growth” — or nudge those growth estimates to at least 6%.

You just never know. Back in 2014, the San Francisco Fed wrote that the pace and shape of technological change and innovation will almost certainly surprise economists, injecting a “fundamental uncertainty” into the future of growth: “For example, the possibility that artificial intelligence will allow machines to replace workers to some extent could lead to higher growth in the future.”

Published in Economics
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There are 3 comments.

  1. I Walton Member

    Well, ok, but about half of the economy is directly, in some cases heavily, impacted or controlled by governments. Government output is also counted and has no productivity to measure. So he’s right, but only if we don’t change matters, decentralize, and free the economy from government intervention. Then there will be higher up ticks and probably deeper down ticks, both coming from more significant innovation. The key question; is government intervention worth the cost, does it actually cause positive return to human life in the US. Nothing is obvious, but the thing about government intervention is that it grows and continues to do so until some other sector emerges and replaces the sector that government intervention turned into a stable stagnant non innovative predictable, politically accommodating sector.

    • #1
    • August 8, 2019, at 3:06 PM PDT
    • 2 likes
  2. Mark Camp Member

    If anyone comes across an intelligible, useful observation about economic growth in this article, please quote it.

    • #2
    • August 8, 2019, at 5:00 PM PDT
    • 1 like
  3. Stina Member

    Mark Camp (View Comment):

    If anyone comes across an intelligible, useful observation about economic growth in this article, please quote it.

    Economic growth rates are odd to me as a metric of economic health.

    As an infant, my child has a very rapid growth rate, tripling it’s size in 1 year. Growth remains high until puberty or early twenties when growth rate suddenly halts. Lack of growth rate is not a metric signifying death – just that they have reached full potential in height.

    Let’s say a business sells hammers and their goal is to put their hammer in every house. At first, their growth potential is ridiculously high, because they have the entire world as a potential customer. As their business matures and more people have their hammer, potential growth starts going down and becomes steady as hammers get lost, etc.

    One of the jokes is that to keep growth high is that you produce a crappy product that breaks so you always have a customer. But that’s not really a healthy economy.

    To keep the economy expanding, you need constant population growth – potential new customers. OR you could raise the economic potential of your community so you have more people that can afford your product…

    At some point, the economy is going to contract as our population contracts. It will be temporary. It won’t need to be fixed. There is no fix for it. It is just a natural response to declining population and market penetration.

    • #3
    • August 9, 2019, at 4:50 AM PDT
    • Like