Lacklustre recovery should be no surprise to anyone
THE US ECONOMY is currently experiencing the most lacklustre recovery of modern times, and only the brave or misguided could possibly envisage any significant improvement in the near future. Constrained by the self-inflicted wounds of over-zealous private-sector credit expansion, the real economy has expanded at an annualised rate of little more than 2 per cent on average, during the 12 quarters that have elapsed since the deepest recession in three-quarters of a century, came to an end three years ago.
The pace of growth registered during the current recovery is less than half that recorded over a comparable time period following the conclusion of the previous 10 downturns in economic activity. Further, real income-per-capita has failed to recover its pre-recession peak for the first time since the post-war adjustment that followed the end of hostilities in 1945.
The official data that records the shift from public to private sector activity following the conclusion of the second World War is considered by most to be wholly unreliable, and is betrayed by anecdotal evidence, which suggests that the disruption to economic activity was far less pronounced.
This means that the recent stagnation in living standards has not been experienced since the recovery that followed the recession of 1927, which was rudely interrupted by the abrupt decline in economic activity that would subsequently become known as the start of the Great Depression. Only those with a relatively limited and naïve take on economic history could possibly argue that economic growth is back on track.
In reality, the less-than-stellar recovery from the “Great Recession” should come as no surprise to anyone by now, and even some of the diehard believers in the ability of central bankers to turn water into wine, have reluctantly accepted that monetary policymakers cannot solve all the world’s ills.
Better late than never, it could well be argued, but the debate has more than moved on, as respected academics have begun to question whether the cyclical disturbance to income levels precipitated by the “Great Recession” could be followed by secular growth effects arising from a dearth of new, productivity-enhancing ideas.
Prof Robert Gordon of Northwestern University is the latest academic to join a growing chorus of pessimists, who believe that the halcyon days of economic growth as observed over more than two centuries, and subsequently enshrined in conventional wisdom, is at an end.
The views of the renowned productivity guru follow close on the heels of other respected minds, who have reached the same conclusion. Tyler Cowen, a columnist at the New York Times and economist at George Mason University, penned the must-read, The Great Stagnation last year, in which he declared that, “we are at a technological plateau”.
Cowen’s particular take on the world found company in the hands of another deep thinker, Niall Ferguson of Harvard University, who writes: “The harsh reality . . . is that the next 25 years (2013-2038) are highly unlikely to see more dramatic changes than science and technology produced in the last 25 (1987-2012).”
Gordon, and those of the same opinion elsewhere, believe that we are reverting to a scenario in which economic growth does nothing more than accommodate the increase in population.
The argument is premised on supposed fact, and the historical evidence that demonstrates stagnation in living standards was the norm for most of human history – until an evolution of ideas that culminated in human progress that can be traced to the north of England three centuries ago.
James Hargreaves’ “Spinning Jenny” marked the beginning of Britain’s Industrial Revolution, and what followed is more than evident in living standards. Unfortunately, productivity gurus such as Gordon believe that our best days are at an end. Even the much-revered Martin Wolf of the Financial Times has been seduced by confused arguments that seem right, but are so wrong.
Human endeavour has always been centred on the elimination of time and distance, which underpins the spread of ideas. In this vein, it is easy to see that human ingenuity is not an accident of history, and stems from advances long before the Industrial Revolution.
Indeed, the seeds were sown with the invention of the printing press by Johannes Gutenberg in the 15th century, which was followed by the first European university in Bologna several years later.
The Nobel laureate, Robert Lucas, concurs and writes that growth stems from, “a flow of new ideas”. Could the advance in living standards underpinned by human ingenuity and communication, that extends from carrier pigeons to the internet, really be at an end?
The answer is no, as information is freely available like never before. The economy is undoubtedly victim to disturbances that last several years, but long-run growth trends are intact.