Monday, November 26, 2012

End of Growth?

Could the rate of economic growth permanently slow down?

"The headwinds include the end of the 'demographic dividend;' rising inequality; factor price equalisation stemming from the interplay between globalisation and the internet; the twin educational problems of cost inflation in higher education and poor secondary student performance; the consequences of environmental regulations and taxes that will make growth harder to achieve than a century ago; and the overhang of consumer and government debt.
The audacious idea that economic growth was a one-time-only event has no better illustration than transport speed. Until 1830 the speed of passenger and freight traffic was limited by that of 'the hoof and the sail' and increased steadily until the introduction of the Boeing 707 in 1958. Since then there has been no change in speed at all and in fact airplanes fly slower now than in 1958 because of the need to conserve fuel.

Other one-time-only changes included the transition from animal to machine propulsion that freed the city streets from disease-causing animal waste; from outhouses to indoor plumbing; from housewives carrying buckets of water, coal, and wood into the house to the modern world of running water and sewer systems; from interior cold and heat to uniform indoor temperatures made possible by central heating and air conditioning; and many more one-time-only inventions. This may seem obvious about horses, outhouses, speed, and temperature, but once you accept that, you’re drawn into the central theme of this paper: economic growth may not be a continuous longrun process that lasts forever."
Certainly, nothing can grow at 3.5% annually forever. It would be consuming all the energy in the universe after only a few thousand years. In fact, on a much shorter timeline the heat from the entropy related to that growth would boil the oceans!


Stagflationary Mark said...

For what it is worth, my long standing death of real yields theory (since 2004) is/was directly tied to the death of real growth.

December 11, 2007
Larry Kudlow on Real Interest Rates

It turns out that inflation-indexed TIPS are highly correlated with the stock market and the economy. Declining investment returns, sinking stocks, and falling economic growth are all captured in declining real TIPS yields. Ten-year TIPS, for example, have dropped to roughly 3% today from nearly 4.5% eighteen months ago. - Larry Kudlow, October 4, 2001

To which I said...

As of today, we're looking at a mere 1.76%. Better hope the stock market and economy don't "highly correlate" soon.

The 10-year TIPS yield is now just 0.0%. What does that imply about our growth prospects over the next 10 years? Nothing good!

I don't think it is possible for us to grow like we once did, if for no other reason than this failed exponential growth chart.

TJandTheBear said...

Tainter's got this covered.

CP said...

8% perpetual stock market growth is preposterous too.

That's 2200x in a century. Good luck!

Stagflationary Mark said...


8% perpetual stock market growth is preposterous too.

It is! You know what is even more preposterous?

Some pension funds still assume 8% growth! It's especially preposterous for those with a 50/50 blend of 8% stocks and 1.66% 10-year treasury bonds.

That math don't hunt! ;)

CP said...

Yea, that's crazy.

I just saw a Calstrs memo saying they are lowering the return assumption slightly.