Economic Growth in the Internet Age
Are you keeping up with our theme this week, dear reader?
We’re having a hard time ourselves…
First the news, then we’ll come back to… The Lost Century.
Yesterday, the stock market retreated – 80 points on the Dow. Still no clear direction… So let’s return to our story for the week.
So far, this 21st century has been a delightful flop. A washout. At least, for Americans. At least, from an economic point of view.
Here’s the evidence in a nutshell:
There are no more full time jobs in the US today than there were when the century began.
In terms of per capita wealth, Americans are now worse off than they were when the century began.
The value of US houses, for example, is about back where it was when the century began.
And household earnings, adjusted for inflation, are lower.
And America’s industries, businesses, and enterprises too are worth not a penny more today than they were in 2000.
And now…the background.
First, we admit to a keen interest in this sort of thing. Here at The Daily Reckoning, we are connoisseurs of disaster. And no disaster is more delicious than one smothered in a sauce rich in irony.
So, you will recall that when the century began, most people thought it was the most promising period in history – especially in the history of the United States of America.
The Soviet Union had ceased to exist. China had joined the capitalists.
And George W. Bush told the graduating class of the Naval Academy in Annapolis that America was the world’s “only surviving model” for a successful system.
It was so successful, in fact, that Francis Fukuyama thought it signaled an “ end of history.” What more work had history to do? Perfection had already been attained. The US was dynamic and flexible. Its democratic political system could adapt to whatever changes and challenges it confronted. Its capitalistic economic system could push ahead on every front. And its scientists and innovators were discovering new things at a breathtaking rate. History could pack up and go home.
You remember Moore’s Law? It told us that computing power would double every 18 months. And with computers came not just a new world…but a better world. Innovators could innovate faster. They had all the world’s knowledge at our fingertips. There would be no more reason for error…darkness and sin would be banished from planet Earth. We would all be smarter, richer, healthier…for ever, and ever. Amen!
What could go wrong? Well, so far, everything.
For starters, in 2001, a tiny group of fanatics brought down two NY skyscrapers and caused the Pentagon to panic – a very self-serving panic, we should add; defense contractors have made billions in profits out of the Pentagon’s hysteria. Since then, the US has spent $1 trillion fighting ‘terrorism’ – easily the worst military investment in world history. For every single ‘terrorist’ killed, the US spent billions, to say nothing of the soldiers and civilians who died.
Then, the digital revolution was a flop too. An enormous flop. Millions of people may be using the worldwide web…looking at photos of Congressional crotches, for example. And hundreds of people may have become billionaires by selling Internet stocks to the masses. But how much has the Internet contributed to the wealth of nations? Apparently, not a damned thing.
At least, as measured by the results.
Nowhere was the Internet revolution more focused than in the USA. Nowhere did people have higher hopes for it. And nowhere were the results more disappointing. The typical teenager now spends half his life…not just half his waking hours, but more than half a day on some sort of electronic device. Does it make him smarter? Richer? More civilized? More coherent? Not so’s we’ve been able to detect!
Not every technological advance results in an increase in standards of living. Take Twitter, for example. Or nuclear weapons. Or dozens of other innovations and inventions.
The Internet, like TV before it, is a great entertainment device. It is also very useful, improving productivity in a vast number of industries. But it has not speeded up GDP growth or improved living standards.
Great boosts in living standards have been driven by big increases in energy use. The discovery of fire, for example, surely increased standards of living for ancient man…and enabled him to broaden his territory enormously. Human populations increased.
The really big boom came in the 19th century when we learned how to use the earth’s stored-up energy – in coal…and then in oil. GDP growth rates – which had been negligible for thousands of years – soared above 5%. Human population bulged too.
European countries – and their colonies – were on the case first. The use of stored energy allowed them to spurt ahead of their competitors in Asia. Over the course of the 19th and 20th centuries, Europeans came to dominate the world.
Now, the ‘emerging markets’ are catching up. They’re using oil too – lots of it. And they’re registering growth rates above 5%.
Meanwhile, growth rates in the developed world have declined… In real terms, as mentioned above, US growth in the 21st century seems to have fallen back to medieval levels. Why?
Who knows? We will guess that it is a combination of things. Most important, the US is in a period of debt consolidation. After 60 years of credit expansion, it is time to reduce debt. That alone could be responsible for the failure of growth and material progress.
But why was there so much debt? Because the economy failed to produce real growth. After 1973, wages, for example, adjusted for inflation, went nowhere. How could families continue to increase their standards of living? The Fed, the dollar-based monetary system, and the financial industry encouraged households to go into debt.
Will debt be reduced back to 1974 levels? Maybe… If so, it will take another 5 to 10 years…or maybe 20.
The Great Correction could be a bigger, grander…longer-term phenomenon. Perhaps the boom phase of the energy revolution is behind us. Trains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity – fired by coal, oil…and later, atomic power – made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental…with diminishing rates of return from innovations.
The Internet did nothing to change that. It was not a ‘game changer.’ The game is the same as it has been since the steam engine was first developed, with the big leaps in technology and material progress already behind us.