Friday, August 2, 2013

The economic future: 6 headwinds, 4 incorrect forecasts, and 2 options

Every once in a while I find among my readings something that brings joy to my heart: an opinion piece (by someone much brighter than myself) which supports a contention I recently advocated. Several weeks back I put forward the idea that we live in a "hockey stick" period of human economic history - that the progress that this country has become accustomed to, and that many believe will continue, is in fact a great anomaly...a one-off event that will never again be repeated and is already fading. 

John Mauldin has written a free weekly market letter for well over 10 years and one which I have followed faithfully. What I enjoy about Mauldin is not that he is always correct (although his record is better than most), but that he is always ready to concede that he has made mistakes and will recount them and search for elements he may have overlooked. 

In his most recent column he recounted the results of a paper published by Dr. Robert Gordon of Northwestern University. I could recount the highlights as I see them but you'll find an excellent synopsis here, or the original paper, which is actually a very good read, can be found here

So, just a few high points for those who dislike reading lengthy papers but which won't be found in the synopsis: on page six (6) of his paper he has shown two graphs, both of which demonstrate a "hockey stick" formation similar to those I used previously - unlike mine, though, Gordon continues his into the future and is bleak.

Gordon also supplies (pages 16-18) "six headwinds" that future generations must deal with if we are to avoid a diminishing standard of living. However, on page 15, Gordon provides some hope by giving four examples of recent "innovation pessimism" that have provenly woefully incorrect (including one from IBM's Watson and another from Microsoft's Gates).

And, finally, to demonstrate the relative importance of recent innovations with those of the past, the good doctor asks us to choose from two options:

With option A you are allowed to keep 2002 electronic technology, including your Windows 98 laptop accessing Amazon, and you can keep running water and indoor toilets; but you can’t use anything invented since 2002.

Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3 a.m. on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. 

Which option do you choose? 

Afterthought: In his analysis, Dr. Gordon does credit World War II production as a factor in America's economic growth. However, I adhere to my contention that much of the sustained growth that followed the conflagration is attributable to the fact that every other major industrial power was crippled and required many years to rebuild the competitive industries we deal with today.