The world today looks almost identical to the world of the 1960s because there have been very few important innovations since then. But you will leap to reply — the internet! Alas, electronic technology does not seem to noticeably increase output of stuff. The Internet affects our quality of life in many ways, but not our standard of living.
The Internet was more or less fully built out in the US in the year 2000. All of a sudden, knowledge from all over the world…and from all of history…was available. Information could be accessed and questions could be answered at the speed of light. People could collaborate on a global scale, across borders and time zones, innovating, creating, critiquing, and elaborating new ideas of breathtaking scope.
In the 1990s, many people believed that this electronic hyperactivity would eliminate the “speed limits” on growth. Analysts advised investors that they could pay almost an infinite price for start-up Internet companies. Growth would be fast. And it would not require capital inputs, they said.
And certainly, there are many Mercedes 500 automobiles on California highways that owe their existence to the Internet. Many entrepreneurs, software developers and “app” creators have gotten very rich. But based on growth rates, wages and household incomes, the Internet does not seem to have led to a general uptick in prosperity. Since 2000, household income in the US has actually fallen. So have wages. And stripping out government expenses and redistributed income shows negligible real growth in the private sector economy over that period. GDP minus government spending was $9.314 trillion in 2001 and only $9.721 trillion in 2010. At that rate, it would take 167 years for the GDP to double. By comparison, GDP doubled twice between 1929 and 1988.
Over the last 20 years, the top 10% of earners are the only ones to have added to their wealth. Everyone else is even…or worse. At the bottom, among the lowest quarter of the population, people are poorer now than they were 20 years ago.
What went wrong? Why didn’t the Internet make us richer?
According to The Financial Times the world spends 300 million minutes a day on a single computer game: Angry Birds. Millions more are spent looking at videos of puppies or kittens. People spend 700 billion minutes per month on Facebook. The typical user spends 15 hours and 33 minutes on the site each month. The YouTube viewer spends 2.9 billion hours per month on the site.
You get the idea. You don’t need the government to waste time; you can do it yourself!
Even when you’re not using the Internet to waste time, you’re rarely using it to add to GDP. Instead of going out to shop, you can shop on the worldwide web. You will find much greater selection at generally lower prices. You save the time and energy of going shopping at a mall. Likewise, entertainment is much easier and more convenient. Instead of going to a strip club, you can watch as much pornography as you want in the comfort of your own home.
In industry too, the Internet is primarily a cost-cutting, efficiency-enhancing technology. It permits better fleet management for trucking companies. It helps retailers avoid unnecessary inventories. It allows you to save time and energy in countless ways, such as checking in for flights on-line…reading widely without going to the library…sending massive files, graphics and reports with the press of a button. These things make life more fluid, and perhaps more easy and agreeable, but they do not add significantly to GDP.
The Internet cannot create GDP growth.
Growth is what you get when you use more energy, or use the energy you have better. Growth — more GDP…more jobs…more revenue…more people — is also what every government in the developed world desperately needs. Without it, their deficit spending (all are running in the red) leads to growing debt and eventual disaster.
Not only is the rate of growth in the developed world declining, so is the speed of recoveries. Here’s Harvard professor Clayton M. Christensen:
In the seven recoveries from recession between 1948 and 1981, according to the McKinsey Global Institute, the economy returned to its prerecession employment peak in about six months, like clockwork — as if a spray of economic WD-40 had reset the balance on the three types of innovation, prompting a recovery.
In the last three recoveries, however, America’s economic engine has emitted sounds we’d never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance. After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels — and it’s not clear whether, when or how we’re going to get there. The economic machine is out of balance and losing its horsepower. But why?
Why? The obvious reason: we’ve reached the point of diminishing returns on energy inputs. I use the word ‘energy’ in a broad sense — to include our intellectual energy, and our time and attention, as well the energy you get from fossil fuels. Returns on investment have gone down to marginal levels.
In 2012, the Congressional Budget Office helpfully looked ahead and saw an on-coming train. If federal spending remains on its present course, the US would add another $10 trillion in debt over the next 10 years. Congress, reacting to the emergency, passed a law which, if left unchanged, would reduce the additional debt to $8.7 trillion. The downside train kept coming.
But the train is far bigger and more powerful than the CBO thinks. The real federal deficit for 2012 is not $1.1 trillion as widely reported. Include unfunded Medicare and Social Security obligations and it is more than $7 trillion. GDP increased during the same period by about $320 billion. In other words, debt is going up 21 times faster than the economy that supports it. Already, if you reported the liabilities of the US government correctly, according to GAAP rules, such as every corporation is required to do, it would show a hole $86 trillion deep. And at the rate deficits accumulate, it will get twice as deep in the next ten years — to more than $150 trillion, or nearly 10 times the size of the economy.
Another way to look at this is to think again about how modern democracies finance themselves. Since the days of Bismarck, they take in money from citizens and pay much of it back, in the form of various social spending programs. The successful politician allows spending to outstrip revenues as much as possible, but not so much that he appears irresponsible. The more benefits he can plausibly promise to the voters, the more likely he is to gain power…and the more resources he can also shift to favored groups.
Growth over the last hundred years — in population, GDP, wages, prices — made it possible to expand government spending greatly, anticipating larger, richer generations that would support their smaller, poorer parents.
The mathematics of this system held up fairly well — until recently. Now, population growth rates are falling everywhere in the developed world — including the US, with a huge bulge of baby boomers preparing to retire and voting themselves the most lavish benefits in history. Without growth, this system of public financing is doomed to spectacular failure. More spending will not be better; it will be calamitous. The more dry debt tinder on the ground, the bigger the blaze.
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
This is not as dire as you think. Governments will inflate out of these liabilities. Savers who hold bonds will be forced to sell them at a loss when interest rates are permitted to rise. Retired persons will see their monthly incomes from pensions and annuities do not buy much with much higher prices for food, energy and healthcare. Rich boomers will have their lifetime savings stolen by the estate tax. Our kids will not pay these debts. The market rate for their labor will $500,000 per year instead of $50,000 per year. Their $2 million home will have 1500 square feet. Do not fret about trillions; think about quadrillions. Dollars are worthless coupons. Trade them immediately for something of value.
As a boomer I haven’t voted for any lavish benefits. I have however paid the Federal INSURANCE CONTRIBUTION act many, many FRN’s. And because of ZIRP my savings won’t cut it. I will have to work until I pass on… And because of ‘easing’ my savings are losing their spending power every day.
The off shoring of production, the never ending wars ,greedy banksters and power hungry politicians might have something to do with the revenue shortages,,, just maybe?
They promised me a flying car… and all I got was this lousy Facebook.
Without internet, we won’t be reading your post! I am not sure if internet has increased efficiency or wages but they are not the only indicators of improved quality of life. But then, depends on what “quality of life” means to each one of us. To me, internet is both a lot of noise with signal embedded in it. Its up to you to be able to figure out the signal from the noise. Its like the noise from CNBC that overwhelms the signals from what Bonner, Mauldin, Puplava or Marc Faber have to say.
OK I am awake now, you said “if you reported the liabilities of the US government correctly, according to GAAP rules, such as every corporation is required to do, it would show a hole $86 trillion deep”
Maybe that is why a number of folks running organizations have told me the government has been late paying them what was promised to them. The money is owed to them but the checks have been getting later and later. This is not everyone but far more than I have seen in the past. Ten years ago I never heard about this sort of thing.
So you are saying the federal system may start to look like Illinois at some point, perhaps being late with my pension check at some point. Good article I would like a bit more on where folks have gone in the past when this has happened. An insightful article.
Too much of the internet, especially facebook, is turning-out to be tweeting; i.e, penny post-card chit-chat, and not much more than that.
Obviously a lot of people(including myself) waste a lot of time on the internet, going on you tube, facebook, etc. I dont know if I would consider it a dud though, in my opinion government is hindering growth much more than the internet. If you think about the massive amount of wealth the governments extracts from the economy, and how it props up industries like the housing and “defense.” It is hard to know what our situation would be like if this massive extraction of wealth did not take place, where would this money go if it was placed back in the hands of the private citizenry? This is essentially what Hazlitt was talking about.
Hammers don’t make nails. Nail makers do.
Your criticism of the internet is quite odd and I’m not sure what kind of parallels you’re trying to draw here. The fact that you believe that very few significant innovations have passed by us in the last 50 years is… I’m lost for words… beyond bizarre.
Lets start from the beginning. Should the internet result in a greater output of stuff? What is stuff? Is it only physical?
Since we are analysing a tool (the internet) lets outline the basic premise of why we want tools.
Tools can help us to meet ends more efficiently if they are good tools. An increase in efficiency means more resources that were dedicated to the task at hand are now freed up to be used on other tasks.
For example (in the case of tools) when our business started up we were using good old pens and paper to write up sales of our goods. It was laborious, time consuming and an insecure method of data tracking. Many work-arounds needed to be used to offset the inefficiency of the method. But it was still better than the tool we had before; human memory.
Once we had switched to an automated sales system (sales software) this immediately changed.
Our time was drastically freed up, our operations ran smoother and we had access to a navigable sales history. All of the work-arounds we had needed were made obsolete and our productivity (ratio of effort to sales) dramatically increased.
No doubt pen & paper sales might have dropped in the local area, and if enough other people had made the same move we had then it’s reasonable (but not absolute) to assume that the market would compensate by reducing output of pens & paper in response to the shift in demand.
But the world is not static and tools do not outstrip their technologically inferior parents to such a degree as to render them to a state of “no ounce of demand.”
An output matching the level of demand will remain, and that is a good thing. That is efficiency.
(Technological extinction is incredibly rare, I challenge you to find an old piece of technology (obscure as you want) and see if there is a producer now. You’ll find… well, why ruin the surprise.)
Why did we use pens & paper to begin with? Well, they suited us to put it simply.
Praxeologicaly; they were cheap and did not require a detailed training process – they limited their scope of error by limiting their scope of potential. That was the value of the tool that made it desirable to us.
Now it’s not unreasonable to assume that as we moved out of the pen & paper method someone else moved into it. This is not a laurel of business practice that any industry can rest on, and the ones that keep doing business don’t. They innovate as best they can, they give you bang for your buck on that pen & paper baby. Until it’s not enough, until the features are outclassed and the customer finds they can afford more.
So tell me, did output of pens & paper increase or decrease? Vain as it may sound, did not our increased efficiency benefit the market? Did our course not reallocate or even increase production of some other good that facilitated our operation or was a result of it?
Or even more mind bogglingly, perhaps a long term result of our efficiency had a positive effect on our economy and let more people take up primitive tools as they could finally afford their foray into business and needed some stuff to help them, like pens & paper.
I can’t measure that accurately and neither can you. The only one who can is Mr Market and he let’s his actions do the talking, which can make it kind of hard to hear what he IS NOT doing. And the crux of my contention with your observation of the internet as a producer is that our capacity to measure the unseen is very very limited. Very.
That and the internet was not built to be a producer, but rather a facilitator of producers.
A tool, a hammer.
Not a nail factory.
Oh yeah, and those guys who’s software we use (Softline Pastel)… I think they’re standard of living is probably better (just a wild guess) than it would be without their company.
If you disagree then a regression of technology might be what you’re advocating.
In which case we can discuss this again once we reach the Stone Age.
Some dude on the internet.
Bill this is a very stupid post, I’m sorry to say. Quoting you:
“In industry too, the Internet is primarily a cost-cutting, efficiency-enhancing technology.”
“Growth is what you get when you use more energy, or use the energy you have better.”
The very definition of efficency is using energy better. So the internet uses energy better, thus increasing output. Your own logic fails you, Bill. How about this conclusion: The US GDP should have been contracting for years, and the increased output generated from the internet is what kept it (sort of) growing?
Bill, I totally disagree with you. Like with any new tool, yes there are some who use it for pure pleasure, but one cannot deny that the internet opened up massive avenues for new ways of doing just about anything. Whether it is purchasing something quicker and having it delivered faster, or completing research faster, or being able to allow people or business to navigate to any spot on the globe quicker with less error, that’s all down to the internet. (i.e. the increase the productivity of individuals, groups and businesses across the globe which in turn allow for increases in wealth ergo increases in real GDP). This time you’ve gotten it wrong!!!
The average web surfer, like me, has indirect benefits, such as access to DailyReckoning, which I really appreciate, and indirect costs such as ignoring family and friends in order to stare at that damn screen. There are also direct costs. Like monthly internet access fees. Or, when DR was started, everyone who was up-to-date was using Windows ME or 2000. In order to keep current through the years, they would have had to purchase XP, Vista, 7, and now 8, in addition to the time and expense needed to keep MS safe from assault or recover from a successful attack. It does not feel at all productive to put a computer back together, even when you have a good backup. Net result, it’s a wash, for me.
Next to come: deflation in the housing markets in the industrial states and even in and around Silicon Valley; and a shortage of workers for all jobs. Believe it or not, in Canada, there is hiring now in all cities for Canadian mounties, something I have never observed before. Everyone who applies with a clean criminal record gets a mountie job!
I couldn’t agree more that the internet is a dud as far as GDP primer. It has surely reduced GDP by eliminating the vast network of humans involved in most pre-2000 transactions. A lot of those humans would be at the lower end of the pay scale, the couriers, the warehouse workers, the admin staff etc.
Worse than that is the effect on financial norms that have existed since financial norms were invented, e.g. I have something you want, you give me something I want and I let you take it. This site is a perfect example, the total sum of profit generated from my visiting your site adds up to exactly zero dollars (although my phone company does make a £14/month and my computer manufacturer likewise got a slice of my money).
Following 2000 and the current “financial crisis” the world of work and employment is fundamentally weakened by the internet. The weakening of the purchasers purchasing power by the magnitude of the digital revolution is going to make it very hard to find “recovery”. Many of the jobs, and profit streams, that existed prior to 2000 no longer exist.
Internet regulation will see the internet delivered over to the usual corporate controllers in the not to distant future. The internet has destroyed more – of human worth – than it’s created.
In order to make the 21st C. economically viable, somehow more energy has to be produced than we are producing now. More energy especially means: more natural gas, up-graded oil, more synthetic oil, more “clean” (as possible) coal, more atomic energy, more hydro-electric energy and maybe tidal-electric energy, too.
More energy would mean: more jobs, more industry, more growth, and a higher standard of living. Energy turns hopes and dreams into realities; it always has.
And let me continue with a few more statements that may not be politically correct around here, nor around university campuses to-day where the environmental movement has influenced student curriculum and student thinking until now.
We would not be in a lingering miserable Great Recession now if the Sierra Club, Greenpeace, and their EPA would have been told that the world requires cheap bountiful energy, regardless of what the supposed externalaties to the environment may be—- because there are certain things we can not live without and one of those most important life-sustaining things is affordable (cheap) energy.
Here are some of the messages from the so-called “progressives” in the New Left at the University of California in Berkeley in the late 1960s when I was there almost half-a-century ago. The world can thank us for the rise of the religious-right, and the political success of Reagan-Bush.
Here are some of the ridiculous issues that drew the attention of the New Left: a.) marijuana; b.) LSD; c.) hooka pipes for pot-smoking; d.) pot stores; e.) San Francisco hippie rebellion and hippie culture; f.) saving SF Bay; g.) saving the whales; h.) saving SF Bay bayshore; i.) saving wetlands and open space, especially in the SF Bay Area; j.) opposing urban growth and urban sprawl, especially in California; k.) opposing freeway construction and road improvements, especially in California; l.) saving the desert ecosystem in Death Valley; m.) opposing the construction of atomic power plants; n.) opposing the mining of coal; o.) opposing the drilling for oil and gas; p.) opposing the construction of hydro-electric dams; q.) opposing Isreal and supporting radical Islamists and their Al Jazeera propaganda machine.
In 1956, the science fiction author James Blish predicted this to occur in about 2013. In the prelude to his novel, “Cities in flight: they shall have stars”, Corsi speaks (in the 1956 novel) in 2013:
“Scientific method works fine while there are thousands of obvious facts lying about for the taking – facts as obvious and measurable as how fast a stone falls or what the order of the colours is in a rainbow. But the more subtle the facts to be discovered become – the more they retreat into the realms of the invisible, the intangible, the unweighable , the sub-microscopic, the abstract, – the more expensive and time –consuming it is to investigate them by scientific method …
…We don’t need a newer, still finer measurement of electron resonance one-tenth so badly as we need new pathways, new categories of knowledge. ”
“The easy equation—science equals engineering equals consumer yummies”, identified by Gregory Benford in his novel “Timescape”, has applied to many scientific discoveries. The discovery of electromagnetism by Oersted and Faraday led to the electrical revolution of the 19th century with electrification of industrial processes and electrical consumer goods. Quantum physics and relativity theory led to electronics, which transformed communications, and also nuclear power.
However, since quantum theory there has been no major discovery in physics so, not surprisingly, there are no fundamentally new consumer yummies from that source. Iphones, laptops and even the internet are merely developments of existing technologies.
The exception is the discovery of DNA which finally explained genetic inheritance. Here is a scientific discovery which is already producing “consumer yummies” in the form of DNA profiling in crime detection. DNA has also been used to store data. Therefore future technological and economic growth will be based upon the manipulation of DNA.
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