The good news: an elite consensus is crystallizing around the need for massive economic stimulus funded by deficit spending. Hundreds of economists are calling for stimulus on the scale of 2-3 percent of GDP — or $300-500 billion per year, equivalent to the expected decline in U.S. consumption as a result of the housing market collapse — to confront the recession head-on.
The bad news: this growing consensus may only support short-term stimulus investments – such as aid to state and local governments, extended unemployment benefits, and rebate checks – without any long-term economic strategy. Infrastructure spending is gaining support, but mostly for proposals that have already been planned and scheduled. Given the increasingly dim prospects for long-term U.S. competitiveness, it’s critical that we think smart and act quickly to secure our economic future. As Harvard Business School guru Michael Porter put it in last week’s BusinessWeek cover story:
The stark truth is that the U.S. has no long-term economic strategy–no coherent set of policies to ensure competitiveness over the long haul. Strategy embodies clear priorities, based on understanding the strengths we need to preserve and the weaknesses that threaten our prosperity the most. Strategy addresses what to do, but also what not to do. In dealing with a crisis, experience teaches us that steps to address the immediate problem must support a long-term strategy. Yet it is far from clear that we are taking the steps most important to America’s long-term economic prosperity.
So what are some guidelines for a long-term growth strategy? A good place to start is with a basic recognition of how economic growth occurs: growth is driven primarily by increases in productivity. Why? Because greater productivity allows us to do more work with less resources. It’s that simple.
Productivity growth reflects multiple factors — technology, management, human capital — but the biggest factor is technology. Indeed, the dominant role of technological development in economic growth has been well-documented ever since Nobel Laureate Robert Solow published his seminal paper in 1956, “The Economic Record,” which demonstrated that technological progress drove at least 80% of economic growth in the United States between 1909 to 1949. As another recent cover story of BusinessWeek concluded, “Historically, technological change has been the biggest force for productivity growth in the US.” It continued:
The latest figures show that “multifactor productivity”–a category that includes technological change and other improvements in business processes–accounted for 45% of productivity gains between 1987 and 2007. “Ninety-five percent of economists agree that innovation is the most important thing for long-run growth,” says [Daron] Acemoglu of MIT.
Indeed, contrary to some wisdom, the overwhelming majority of economists assert that the economic boom of 1990s was due to productivity gains from information technology — not from a balanced budget. The Bureau of Labor Statistics has shown that productivity growth between 1995 and 2004 was more than twice the average of the previous two decades. And as Robert Samuelson put it in last week’s Newsweek cover story:
Arithmetically, economic growth reflects the increases in workers’ hours and their productivity–a.k.a. efficiency. From 1960 to 2005, annual U.S. economic growth averaged 3.4 percent, split almost evenly between labor-force growth (1.5 percent) and productivity gains (1.9 percent).
In other words, at least 55% of U.S. economic growth over the last half-century was due to productivity gains. But we can expect the importance of productivity to be even greater in the years ahead, because the pace of U.S. labor force growth will decrease as our population ages. Not only is our labor force growth and quality declining, but as the baby boomers retire, the elderly will require ever-larger federal spending on Social Security, Medicare, and Medicaid.
The implication is this: the single most important factor for long-term U.S. economic vitality is our productivity growth. The question we should be asking, then, is what are the best policy strategies to promote productivity? And how can productivity be best promoted in areas of national strategic importance, such as energy, infrastructure, health care, education, and national security?
Some answers are obvious, but it’s only in recent years that these questions have begun to be explored in depth. The role of productivity and innovation has been recognized for years — and some economists like Paul Romer of Stanford have pioneered the field with New Growth Theory (a.k.a. Endogenous growth theory) — however, it has not been central to national economic policy debates. This story is told well by the Information Technology & Innovation Foundation:
Fortunately within the last decade a new theory and narrative of economic growth grounded in innovation has emerged. Known by a range of terms – “new institutional economics,” “new growth economics,” “evolutionary economics,” “neo-Schumpertarian economics,” or just plain “innovation economics” – collectively, this new economics reformulates the traditional economic growth model so that knowledge, technology, entrepreneurship, and innovation and are now positioned at the center, rather than seen as forces that operate independently.
But up to now, innovation economics, and innovation policy, has not fully been appreciated by policymakers, in large part because the dominant economic policy models advocated by most economic advisors and implicitly held by most policymakers largely ignore innovation and technology-led growth, in favor of macroeconomic issues, such as tax cuts on individuals, budget surpluses, or social spending, which at the end of the day pale in significance to innovation in driving economic growth.
The dominant economic models have been macroeconomic models that do not account for the role of innovation and productivity in economic growth, nor the government’s role in supporting them. This is despite the fact that public investment in microchips and the internet — and the education policies that developed the human capital for their creation, like the National Defense Education Act — was the greatest contributing factor toward the global information age productivity revolution. We documented this history in “Fast, Clean, and Cheap,” published in the Harvard Law & Policy Review:
Large public investments in technology innovation and infrastructure are not new. Most of America’s largest industries have benefited from strategic public investment in their development: agriculture, aerospace, transport, biotechnology, and energy. Farm land was granted to early American frontier farmers, and agriculture has been publicly subsidized since the early twentieth century. Before the Civil War, Abraham Lincoln was best known for his aggressive advocacy of publicly funded transit projects intended to modernize industry: canals, roads, and later, famously, railroads. The U.S. government created computer science, aerospace, and the modern highway system through investments that were designed to compete with the Soviets and were justified by national security concerns. And today’s highly mature energy markets are the result of decades of subsidies for coal mining and oil drilling.
Many of these public investments in technology and infrastructure not only served to drive productivity and economic growth, but also to increase our national security. In fact, a majority of these investments were justified for national security purposes. One of the greatest benefits of public investment, as opposed to other forms of public policy, is that spillover benefits are almost always guaranteed. In the case of public investment in R&D, most studies have shown the return rate to be somewhere in the range of 30 to 100 percent. When it comes to promoting growth in specific strategic sectors, investment is sometimes the only possible public policy tool — after all, it would have been impossible to invent the internet if the government had tried to tax or regulate typewriters.
With economic models that don’t account for this history, however, it’s little wonder that deficit hawks have had so much influence over economic policy; that everyone from neoclassical economists to climate policy advocates have put far too little emphasis on technology and innovation policy; that carbon pricing and regulation have attracted more support than a New Apollo Project in clean energy; that legislation like the America COMPETES Act, despite Congressional authorization, cannot even gain enough support for appropriation; and that the total federal budget for energy R&D is less than the R&D budget for one pharmaceutical company.
Fortunately, these debates are shifting. Major deficit spending for economic stimulus is almost a given at this point, and deficit hawks seem to be in the minority; President-elect Obama has said an Apollo-like investment in clean energy will be his single top priority, in addition to stemming the economic crisis. And Al Gore, the most prominent climate spokesperson, has shifted from his longstanding focus on regulating carbon pollution to direct public investments in clean energy as the best way to deal with climate change.
Now is the moment to complete this paradigm shift. As we enter a new economic and political era, we face an extraordinary opportunity to advance long-term investments in our economic future and build a new economic governance model to drive American growth, competitiveness, and leadership in the 21st century. But it won’t be easy — antipathy to deficit spending still abounds, market fundamentalists continue to oppose any deficit spending beyond direct stimulus, and many advisors to President Obama will encourage him to be cautious.
Over the next several weeks and months, Breakthrough will be taking a deeper dive into these questions and working to shift the national economic paradigm toward the investments we need to secure America’s future. Stay tuned.
No !!!! The U.S. does not need deficit spending. The U.S. needs economic/job growth spurred by abundant , cheap energy and low rates of taxation on the purchase and sale of assets. Anything else is the same shop worn twaddle which is continuously trotted out by the rocket surgeons in the Dimocrat party. Now … we have found oil in ANWR, off the coast of NC and SC and in the Gulf of Mexico. We have more cola than we know what to do with (and whoopsie, I forgot nuclear). Your president elect (Barry “I’m the smartest guy in the room” Obama) say he’s going to bankrupt the coal industry by imposing onerous caps on co2 (Read this … your right to do anything). What’s up with that???? Folks … San Fran NAN, Casino Harry, and I’m gonna break the U.S Barry need to be stopped. Prove me wrong … but I know you can’t.
Your productivity model of growth can only work if whatever you are producing also creates a large enough cash flow to make a profit, pay decent wages, keep up with new technology and allow the growth of the company to create more jobs which match the growth of the population. The people that are doing it best in the US are Toyota, Honda and Nissan to name a few. Our big three need to figure that out. They have outsourced our US jobs to chase the almighty dollar and it has eliminated all the potential customers in the US. They didn’t do it first – that was electronics – clothing – appliances – but they did it the biggest. The automotive industry is the one industry that could impact our economy the most if it is done right.
The current financial system has reached the limits of its effectiveness. Interest on debt has exceeded the system’s ability to pay it off. But debt is simply a promissory note on future productivity – any caveman can tell us that the only way to increase productivity today is to innovate yesterday, not tomorrow.
In modern times, this means that the only way to sustainably create more money tomorrow is to innovate today. This is the tiny little flaw of Wall Street that Innovation Economics will correct.
There are a few simple web applications discussed at http://www.ingenesist.com which will allow human knowledge to become tangible outside of the organizational construct of a corporation, and therefore out from under the thumb of Wall Street.
These applications are as follows:
1. The knowledge Inventory
2. The Percentile Search Engine
3. The Innovation Bank
Believe it or not, human knowledge would make a wonderfully tangible asset upon which to peg a currency – better than Gold, Silver, Oil, or Debt. This can be done today with today’s social networking technologies.
Many people have a deep sense that something very new, something very exciting, and something hugely lucrative is coming down the road as Web 2.0 converges to Web 3.0. Our hope is that we can capture it in our communities before it passes us by and becomes “Incorporated” in the old business model.
If we work together, Innovation Economics can be the best way to capture the engine of wealth creation and distribution for ourselves and our communities. Now is the time to build the Innovation Economy. Our research is open to you.
To conflate economic productivity with ecological efficiency is an amateur mistake. Productivity has often meant people working harder and longer for less. Technological “improvements” in productivity such as mountaintop removal mining and increased use of polluting petro-chemicals are part of those figures as well. Not to mention the insanely inefficient auto based transport sector. You also totally neglect the importance of the financial explosion as a response by business to stagnation brought on by overcapacity created by this increased productivity.
Ted touches on a valid point- where did that all that economic growth from “increased productivity” go to? Who is now doing more with less? Well, between 1979 and 2000 the poorest 20% of Americans got 0.8% of the total income growth; the middle 20% got 5.1% of it, while the wealthiest 20% got 74% of total income growth and within that bracket 38.4% went to the richest 1% of the population alone(EPI: The State of Working America).
Of course, the supply-side and monetarist economics favored by Neo-liberal think tanks would see this as no problem at all. They’ve gone so far as to pretend the Great Depression had nothing to do with a lack of demand. But the exploited middle/working classes’ ability to finance their consumption through debt has been cripple by the successive collapse of the dot come and housing bubbles (along with any claims to validity of monetarist economics).
We need to be wary of Greenwashed Reaganomic policies coming from people like the CATO institute focused on robbing from the public to give to that same richest 20% (or more likely the top 1%) to create windfall profits for private sector construction of the new green infrastructure and agriculture we do desperately need. Public financing is critical but its equally critical where it goes, to whom is the “return on investment” returning? As Van Jones warns, trying to recreate the glory days of growth Teryn points to here using the same engines of inequality is a dead end.
More on these half-baked ideas later…
Most of the posts on this blog site are pretty good but this one seems to hit rock bottom.
Your first big mistake is to bother with what most economists say or write. The environment doesn’t factor in most economic thinking, it’s an infinite resource for most of them.
Unless you make people work physically or mentally harder then the only way of getting more productivity is to use more energy and material resources. That is basically the cause of most environmental problems.
Sure you/we need a new economic model. But pretending that a boost in ‘productivity’ is going to cure the climate is basically barking up the wrong tree.
Any economic plan must result in humanity living within its means and that will often mean ‘doing without’ or ‘making do’ with what you have got.
Some light reading:
http://www.newscientist.com/article/mg20026786.100-special-report-why-politicians-dare-not-limit-economic-growth.html
http://portal.surrey.ac.uk/portal/page?_pageid=822,494813&_dad=portal&_schema=PORTAL
True, mountaintop removal is a “pay me now, or pay me later” phenomenon, but there are technologies such as information technology that have boosted productivity with a lower (though still present) environmental impact than the technologies they replaced.
‘IT’ has increased environmental impacts. The use of computers has increased energy use, paper use and general materials use.
You can not take one aspect of technology or one aspect of society and say, well this bit has improved therefore it must be good, without considering the cascading impacts it has elsewhere.
There are always cascading impacts on other things we do.
The obvious one, is that the development of IT has resulted in the development of games consoles, which in turn has resulted in more TV sets being produced, gadgets being used etc.
Yes, but is the impact you mention more than what would exist without IT? We can travel less due to increased communication ability. We use computers to design products better (e.g., less energy or materials use per item). I did not say there is no impact from IT, but that the impacts are smaller than many other industrial activities to produce the same goods and services. Overall, we are likely better off with IT than without it.
I respectfully disagree with the premise of this post on a couple of counts: (a) productivity improvement does not drive economic growth, and (b) any strategy that relies upon never-ending “growth” for a healthy economy is ultimately doomed to failure.
Regarding the first point, it is true that, until fairly recently in human history, productivity improvement has enabled development (not “driven,” a subtle distinction, I suppose) by freeing up labor to tackle new challenges and provide new products. But, when new products aren’t developed at a rate sufficient to utilize the excess labor that has been freed up, then productivity improvement only serves to drive unemployment higher, in which case there is no productivity improvement at all, when the total output of the society is divided by the total labor force available. That’s precisely where we are right now.
Regarding my second point, any strategy for “economic growth” relies upon population growth as a key driver. But we have arrived at the point where rampant population growth threatens our economy and quality of life. I’m not talking just about the obvious problems that we see in the news – growing dependence on foreign oil, carbon emissions, soaring commodity prices, environmental degradation, etc. I’m talking about the effect upon rising unemployment and poverty in America.
I should introduce myself. I am the author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption of products begins to decline out of the need to conserve space. People who live in crowded conditions simply don’t have enough space to use and store many products. This declining per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge implications for U.S. policy toward population management. Our policies that encourage high rates of population growth are rooted in the belief of economists that population growth is a good thing, fueling economic growth. Through most of human history, the interests of the common good and business (corporations) were both well-served by continuing population growth. For the common good, we needed more workers to man our factories, producing the goods needed for a high standard of living. This population growth translated into sales volume growth for corporations. Both were happy.
But, once an optimum population density is breached, their interests diverge. It is in the best interest of the common good to stabilize the population, avoiding an erosion of our quality of life through high unemployment and poverty. However, it is still in the interest of corporations to fuel population growth because, even though per capita consumption goes into decline, total consumption still increases. We now find ourselves in the position of having corporations and economists influencing public policy in a direction that is not in the best interest of the common good.
The U.N. ranks the U.S. with eight other countries – India, Pakistan, Nigeria, Democratic Republic of Congo, Bangladesh, Uganda, Ethiopia and China – as accounting for fully half of the world’s population growth by 2050. The U.S. is the only developed country still experiencing third world-like population growth.
If you’re interested in learning more about this important new economic theory, I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface, join in my blog discussion and, of course, purchase the book if you like. (It’s also available at Amazon.com.)
Please forgive the somewhat spammish nature of the previous paragraph. I just don’t know how else to inject this new perspective into the overpopulation debate without drawing attention to the book that explains the theory.
Pete Murphy
Author, “Five Short Blasts”
Humans coming up with better technology is and should be a given. Eventually the US – Big Three will make greener vehicles because we – as consumers will force them to – if they survive the mess they have gotten themselves into. The US economy will be better if they modify their methods and keep building vehicles here. They have huge R & D capabilities – use them wisely and patriotically – and it will help the US survive and more importantly but often ignored – keep charity money flowing to everywhere in the world that US citizens deem necessary. We are a most generous nation when we have a little extra money in our pockets.
Capitalism seems to have dual personalities as it pertains to our country.
“Greedy capitalism” is when corporations do whatever it takes to build the cheapest product possible so they can make more profit for the few managers at the top. They buy components from the cheapest global suppliers and sell their product to any market available regardless of location.
“Patriotic capitalism” will use US based suppliers for all parts and product because it will keep jobs here. This will create product loyalty and allow local people to purchase the product and pay taxes, which will support the US economy.
If US citizens stop buying foreign goods and start buying US made goods again – it will almost immediately turn our economy around. The bad news is that is has to start with the US automakers because they have a positive impact on the largest number of potential jobs. If the bail out is not handled correctly it will allow Chrysler, Ford and GM to keep doing business as usual until they totally fail in the near future. The automotive industry is possibly the only one that can support itself and many other industries due to the high profit generated by the sale of vehicles.
Another sticking point is that the union wages and benefits must be reduced to allow the big three to compete more fairly on the global scale. There are many non-union companies that can compete globally but they are closing their doors due to the poor economy.