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A Critique of Grantham and Gordon: The Prospects for Long-term Growth

November 27, 2012

by Laurence B. Siegel

But the problem of worker obsolescence has existed since the days of Ned Ludd (the worker after whom the machine-smashing Luddites were named) and people of average ability still live better than ever before. There has been some regression in the last decade, as there has been in other recessionary decades. But changing technology has always created new jobs for the relatively less-skilled, and the natural rate of unemployment has hovered around 4% for as long as unemployment rates have been measured.  We underestimate the dexterity and adaptability of ordinary people at our peril.

4.  “The interaction between globalization and ICT (information and communication technologies) is a daunting headwind.”

Basically Gordon is noting that rapid communication interacts with the increasing skill base of non-U.S. workers in a way that moves even high-skill jobs offshore.  This amounts to an argument that global wealth shares will be rearranged in a way that is unfavorable to the United States.  Gordon writes that the convergence of these effects “inevitably has a damaging effect on the nations with the highest wage level.” He’s right – labor will be employed where it is cheapest, when all factors, including the relative productivity of labor in different countries, are taken into account. But that rearrangement will only take place if there is a net welfare gain across all parties.  Thus, this supposed “headwind” is actually a tailwind to the developing world – and it’s about time.

5.  Increasing efforts to consider environmental concerns

“Energy and the environment represent the fifth headwind,” Gordon says. “Part of any effort to cope with global warming represents a payback for past growth.”

As I argued in another article, “Fewer, Richer, Greener,” a clean environment should be seen as a consumer good that contributes to well-being like any other.  Unfortunately it does not show up in GDP data unless it is explicitly paid for.  Pollution avoided through cleaner technology or through resource conservation is a positive good, but not a component of GDP.  A stable climate may be seen in a similar light, as a type of infrastructure investment that is valuable, but which does not show up positively in GDP data.

Overall, real (inflation-adjusted) commodity prices have been in a downward trend for more than two centuries. The history of capitalism has been described (by Charles Gave, of GaveKal) as the history of falling real commodity prices.  The latest uptrend, covering roughly a decade, could be the end of the history of capitalism or it could be among the largest of many fluctuations that have occurred within the context of that steady decline without constituting a reversal of it.  If world population growth were accelerating, I might entertain the possibility that falling real prices (although not capitalism itself) are coming to an end.  With population stabilizing almost everywhere, however, the long-term downtrend in real commodity prices, including energy, is likely to continue. 

For example, just when things started to look really dire for energy prices, natural gas was discovered in the United States on a scale that drove the price down to less than $2 per million British thermal units (BTUs).5  On an energy-equivalent basis, that’s as if oil were selling for $13 per barrel instead of $90.  This should not be a total surprise; when the price of something is high, entrepreneurs are motivated to find substitutes.  That is how markets operate.

6.  “The twin household and government deficits represent the final headwind.”

This claim is hard to figure out.  If a household spends more than it produces, then it must later produce more than it spends.  One can either work harder or spend less.  It’s not clear which solution American households, in aggregate, will adopt, but it is very possible that we will collectively elect to produce more, not less.

The existence of government as an agent or intermediary makes the decision to increase production less likely.  Tax increases and government spending cuts are the mechanism by which public debt is retired.  There is an old saying in economics that “if you want more of a good, subsidize it; if you want less of a good, tax it.”  Higher taxes tend to depress production by reducing the incentives to produce.

So I’d err on the side of caution and say that this headwind is a legitimate concern over the intermediate-to-long run.  Over the very-long term, though, the last baby boomer will die, and the problem of a large population of entitlement collectors supported by a smaller population of producers will go away.  The age pyramid will turn into an age pagoda everywhere.6  The institutional arrangements for having a smaller population of workers supporting a larger population of children and retirees will have been established.  People will work longer and save more for their old age, either through pension systems or private saving.  It’s just that reaching this equilibrium could take a long time.

5. Data as of April 2012.  Natural gas prices have since risen to above $3 per million BTU.

6. In the conventional age-distribution diagram in demography, the prevalence of young people in traditional societies makes the diagram look like a pyramid.  As people live longer and have fewer children, the distribution of population across age categories becomes more even and the diagram looks like a pagoda.