Why stagnation is wrong

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Franklin D Roosevelt warned gloomily in September 1932: “Equality of opportunity as we have known it no longer exists. Our industrial plant is built; the problem just now is whether under existing conditions it is not overbuilt.”

In a campaign speech to the Commonwealth Club of San Francisco, the Demo-cratic Party’s nominee for US president told his listeners that “opportunity in business has narrowed”.

Roosevelt concluded: “Our task now is not discovery or exploitation of natural resources, or necessarily producing more goods. It is the soberer, less dramatic business of administering resources and plants already in hand.”

The pioneering era of opening up the western US was over.

The advent of steam engines and electricity had transformed American society, and now that transformation was largely complete.

The 19th century had unleashed the industrial revolution and created a new dream.

“The dream was the dream of an economic machine, able to raise the standard of living for everyone; to bring luxury within the reach of the humblest; to annihilate distance by steam power and later by electricity, and to release everyone from the drudgery of the heaviest manual toil,” Roosevelt claimed.

Now that dream was realised and the rapid growth unleashed by the industrial revolution would slow or cease altogether.

The idea of “secular stagnation” suffused much of the economic and policy thinking behind the New Deal and was popularised by Harvard economist Alvin Hansen in his 1938 book Full employment or stagnation?

Eight decades later, we know that Roosevelt, Hansen and the other stagnationists were wrong.

The world has been transformed beyond their wildest dreams by motorised transport, civilian airliners, the green revolution in agriculture, computers and the internet, to name just a few of the most important developments.

Yet fears about stagnation, like Malthusian worries about natural resources running out, retain an enduring fascination, even among eminent economists.

Robert Gordon of Northwestern University is probably the most famous and distinguished exponent of the theory at present.

According to Gordon, there are simply no current innovations comparable with the great breakthroughs of the past, which brought clean running water, electric light and the internal combustion engine to every home in the US (“Is US economic growth over? Faltering innovation confronts the six headwinds”, August 2012).

“From 1870 to 1972, Gordon points out, American homes went from lightless, isolated places of drudgery to buildings of air-conditioned comfort, with a dishwasher in the kitchen and a car in the garage,” according to an excellent summary in the Financial Times (“US economy: the productivity puzzle”, June 29).

Current gimmicks like smartphones are not in the same league of importance.

And even the rate at which computing power increases may be starting to slow.

The revolutions started by electrification, the internal combustion engine and the computer are nearing completion.

But is Gordon any more likely to be correct than Roosevelt and Hansen? Or are fears about secular stagnation really due to a failure of imagination? Like most modern stagnationists, Gordon describes his theory in terms of a slowdown in productivity or output per hour worked.

Secular stagnation theories appear to be developed with reference to North America, western Europe and Japan, where average living standards are already high, and technology is advanced.

But elsewhere there are still enormous unmet needs.

The idea of secular stagnation ignores the fact more than 1 billion people around the world still have no access to electricity, and more than 2 billion prepare food with smokey biofuels like wood and dung that are killing them prematurely.

Hundreds of millions of people in the emerging world are still undernourished.

Even in the advanced societies, poverty remains widespread, at least in the relative sense.

The idea that somehow all needs have been more or less met is absurd.

Providing food and energy for all these people without worsening climate change in the process will demand breakthroughs every bit as impressive as the industrial revolution.

Many of those breakthroughs are improvements in processes rather than entirely new products but the impact is no less profound.

 

Productivity improvements

In Roosevelt’s era, steam engines were slow and dreadfully inefficient.

Enormous amounts of coal and water had to be hauled around the rail network and trains had to stop frequently for refuelling.

Modern diesel and electric locomotives transport people and goods faster and using far less energy.

Civilian airliners have replaced locomotives and ships altogether for many long distance journeys.

In agriculture, firms like Climate Corporation, now owned by Monsanto, claim they can boost crop yields by combining data on fertiliser use, soil type, weather and other information in a single database, according to the Financial Times.

In the energy field, too, there is the potential to transform energy production and consumption through the application of new techniques and making better use of data.

Production of oil and gas from shale, which most observers have concluded is a genuine revolution, is the result of applying old technologies (fracking dates back to Roosevelt’s era) in new ways to unlock previously unrecoverable deposits.

The shale revolution is still in its infancy and could be developed for decades.

Most developments still employ a crude “brute force” approach, drilling thousands of wells and pressure pumping them more or less indiscriminately to fracture the rock.

Oilfield services companies such as Schlumberger, Baker Hughes and Halliburton are promoting a smarter approach, which would use advanced seismic surveying and data handling techniques to model the subsurface and enable drilling and fracturing to be targeted at the most promising parts of the rock formations.

Smart fracking holds out the promise of more oil and gas production from fewer wells, using less water and frack sand, and needing fewer drilling rigs.

Technology is improving in other energy areas too.

Batteries are getting better.

Wind and solar energy are being successfully integrated on to the grid.

Scientists are investigating methane from the seabed and Arctic permafrost.

Wal-Mart makes more deliveries to its stores while driving fewer miles using better route-planning software.

Even coal-fired power plants are becoming far more efficient with the development of supercritical and ultra-supercritical boilers.

In future, carbon capture systems must be perfected so that coal and gas can continue to be burned without frying the planet.

Inventors filed a record 12 000 patents related to oil and gas last year, up a third from 2012 and three times as high as the number of approvals sought 10 years ago, according to research published by Thomson Reuters.

In 2013, more than 7 000 patents were filed in China and 2 000 in the US as the shale revolution unleashes a wave of secondary innovation (“Unconventional energy boom drives oil and gas patents to record”, June 30).

Many of these gains may not be as glamorous as the internet or smartphones, but they are nonetheless worth having and they will drive a very real improvement in living standards.

More people will be able to have access to more services with a smaller impact on the environment.

Stagnationists imply that most progress is the result of just a handful of spectacular breakthroughs.

In fact most economic progress is incremental.

Productivity gains are made possible by tens of thousands of small improvements in technology most people will never hear about.

The internal combustion engine, the telephone system and mains electricity may all be over 100 years old, but modern vehicles, communications systems and the grid have been transformed by thousands of small improvements and bear a superficial resemblance to their predecessors.

Modern cars go further, faster, with more comfort and are accessible to far more people than Roosevelt could have dreamed.

The grid provides cheap, reliable electricity with fewer toxic emissions than would have seemed possible in the 1930s and 1940s.

Stagnationists ignore the importance of these gains, which are still occurring.

If the economies of the US, Europe and Japan grow more slowly in the next few decades, which is by no means certain, it will not be because all their wants and needs have been satisfied or because the possibilities of technology have been fully realised.

There is no more reason to predict an imminent slowdown in productivity growth in the 2010s and 2020s than there was in the 1930s.

 

John Kemp is a Reuters market analyst. The views expressed are his own.



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