Last summer I went to the Aspen Institute, home of establishment wisdom, and found myself both bemused and bored by the narrow “managing chaos” focus of the pundits. What I long for is a conversation that questions some of the basic assumptions of the conventional wisdom. I find that in the writing of Jeremy Grantham, an extremely successful investor who is willing to question some of the basic assumptions of contemporary capitalism. Grantham’s new quarterly letter is titled “On the Road to Zero Growth” and it starts with a shocker to the conventional wisdom and then takes you on an amazing ride.
The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
Grantham puts up this chart that shows that 3% growth is a strange outlier that occurred for about 50 years in the last 1000 years, and may never return.
For the US, the limits to growth are part demographics and part “other stuff”, including productivity, inequality, reduced capital spending, resource restraints and ecological crisis. The demographics are the most ineluctable.
This of course is both good news and bad news. As manufacturing gets more productive with robots replacing humans, the number of jobs in the sector continues to drop. With tongue in cheek, Grantham points out where this is headed.
This headwind will continue into the indefinite future until one day, perhaps, we will reach what has been called a singularity. The last handful of humans engaged in manufacturing – all engineers and designers – are supervising intelligent robots making and designing yet another generation of even more productive and intelligent robots. On this particular day, R3142 sends the fateful silent communication to his fellow robots suggesting that their friendly human acquaintances, Fred and the boys, are beginning to get in the way. After which, there is no more productivity per man-hour at all, but only productivity per robot-hour or per unit of capital employed. This deepening of capital and technology almost guarantees that productivity will continue to be high in manufacturing even as the percentage of the total workforce employed there dwindles away toward zero. As the rest of us do each other’s art appraisals and investment management we can fantasize about productivity, but it will mainly represent hard to measure qualitative improvements. (On a hypothetical island where services are outlawed and only manufacturing exists, the final position is that automation, and thereby capital, produces everything while all of the mere mortals sit on the beach. And starve? The worthless unemployed who are obviously not carrying their weight? Ah, there’s the rub! Up the beach, in a protected, cordoned-off section is the capital owners’ club. There, a handful of equally “unemployed” owners sit, enjoying tea and the ocean. How material goods and sustenance are divvied up will determine the future of that island, for the unemployed will be 100 or 1000 times the number of dividend counters.) Is there not a growing element of this unfortunate hypothetical island in our current world, for basically the same reason? Capital deepening and technology (and offshoring) steadily replace manufacturing and farming jobs until one day perhaps there will be no manufacturing jobs at all.
Needless to say this inequality endgame is a few years off, but we are surely headed in that direction and only the inevitable decline of working age population will keep us from a revolutionary situation where the ex-workers over run the capital owners club.
But for Grantham (and for me), the larger issue is that measuring quality of life by GDP growth is a fools errand and if we don’t come up with another metric pretty soon, we will be royally fucked.
GDP is a mish-mash of costs and outputs of “goods” and “bads” indiscriminately jumbled up. Put more of your unemployed in prison and GDP rises. Raise your legal or consulting fees and the GDP rises. Hire more lawyers to sue and cover that risk with more insurance and the GDP rises. (Japan has only 1/16th of our lawyers per capita, one in 4,000 to one in 250. Makes you think!) Fight more wars, build more tanks, and have them blown up and the GDP rises. Have twice as many workers in a service industry like teaching than you might have had and … you get the point. But nothing shows the deficiencies of GDP measurement as clearly as the topic of a resource squeeze. Take oil. Today we are constantly pumping those wonderfully cheap, irreplaceable barrels of Saudi oil from their great oil fields (the likes of which have never been discovered since the 1970s or, one could argue, the 1950s) that begged to leap out of the ground with a lifting cost of a handful of dollars. In their place, to maintain oil production, we are preparing to deliver oil from deep and dangerous offshore Brazil. One-day daily flights of 300 miles, outside the range of current helicopters, will have to be made to supply rigs of incredible size, anchored to the ocean bed two miles below and drilling another two miles below that. They will need vast quantities of steel and other increasingly expensive commodities as well as large inputs of brains from the best Schlumberger types the industry can offer. The “good” that comes out is the same good that came out of the Saudi field – one barrel of nearly identical oil – but instead of a $10 lifting cost it will have costs of $120-$170 and counting, all of which will be accounted for as Brazilian GDP! So the more you torture the planet to produce oil, digging up tar sands and baking the oil to dribble out, the higher the GDP.
As I have said before, I think the United States is the one country capable of dealing with these problems. We have a flexible society that is not wracked by the religious and sectarian tensions of the Mideast, the authoritarian constraints of China or Russia or the crippling political system of the EU. But much of our response to Grantham’s challenge will be to abandon our obsession with GDP growth and try to create a sustainable economy where the quality of life improves for everyone, not just the capital owners club.