Art Cashin: "Is US Economic Growth Over?"
As investors' and traders' attention spans diminish at ever-increasing speed, it is perhaps useful to step back and survey a landscape of global economic growth from a longer-term panorama in order to grasp the real trend and the real unusualness of our current environment. UBS' Art Cashin, while not 800 years old, reflects on such a long-term cycle providing some perspective on our belief that "economic growth be regarded as a continuous process that will persist forever," opining that perhaps, based on the study below (Is US Economic Growth Over?), we "could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate." Of course, that would never fit with the current meme that growth is credit is life, but nevertheless well worth some introspection as we give thanks this week.
Via UBS' Art Cashin:
An Absolutely Fascinating Study – A friend of mine pointed me to an absolutely fascinating study. My friend felt it added credibility to his thesis that civilization and economics are subject to an 800 year cycle. My friend likes to cite lots of markers to prove/justify his thesis. He talks of the Dark Ages, the Age of Discovery, and the Age of Enlightenment as some of those markers. It is an entertaining hypothesis and, some day, if there is enough time, space and mental lubricant available, I may outline his hypothesis (at least as far as I can understand it).
In the meantime, I am grateful that he pointed me to a study by Professor Robert J. Gordon of Northwestern University. The study is published by the Centre for Economic Policy Research. While I don't see any connection or support for an 800 year cycle, the report is chock full of eye-opening historical data. Here's how the author begins to outline his thesis:
The paper makes these basic points:
- Since Solow’s seminal work in the 1950s, economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.
- The frontier established by the US for output per capita, and the UK before it, gradually began to grow more rapidly after 1750, reached its fastest growth rate in the middle of the 20th century, and has slowed down since. It is in the process of slowing down further.
- A useful organising principle to understand the pace of growth since 1750 is the sequence of three industrial revolutions. The first (IR1) with its main inventions between 1750 and 1830 created steam engines, cotton spinning, and railroads. The second (IR2) was the most important, with its three central inventions of electricity, the internal combustion engine, and running water with indoor plumbing, in the relatively short interval of 1870 to 1900. Both the first two revolutions required about 100 years for their full effects to percolate through the economy. During the two decades 1950-70, the benefits of the IR2 were till transforming the economy, including air conditioning, home appliances, and the interstate highway system. After 1970, productivity growth slowed markedly, most plausibly because the main ideas of IR2 had by and large been implemented by then.
- The computer and internet revolution (IR3) began around 1960 and reached its climax in the dot.com era of the late 1990s, but its main impact on productivity has withered away in the past eight years. Many of the inventions that replaced tedious and repetitive clerical labour with computers happened a long time ago, in the 1970s and 1980s. Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labour productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it.
- The paper suggests that it is useful to think of the innovative process as a series of discrete inventions followed by incremental improvements which ultimately tap the full potential of the initial invention. For the first two industrial revolutions, the incremental follow-up process lasted at least 100 years. For the more recent IR3, the follow-up process was much faster. Taking the inventions and their followup improvements together, many of these processes could happen only once. Notable examples are speed of travel, temperature of interior space, and urbanisation itself.
What I found most compelling was the recounting of the labor involved in certain tasks before invention and progress changed or replaced them. Here's a key example:
But the biggest inconvenience was the lack of running water. Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tonnes of water. Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out. There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930.
And we all know that the automobile produces smog and may contribute to global warming. We should all yearn for those idyllic days before the internal combustion engine – or maybe not.
While the railroad connected the cities, there were horses on every urban street. Within the cities, steam power was not practical, so everything was hauled by horses. The average horse produced 20 to 50 pounds of manure and a gallon of urine daily, applied without restraint to stables and streets. The daily amount of manure worked out to between 5 and 10 tonnes per urban square mile, all requiring disgusting human labour to remove. The low standard of living reflected not just the small amount that people could purchase but also the amount of effort at the workplace and at home where they had to expend to perform ordinary tasks.
Remember some of those things as you give thanks on Thursday.