Posted by: Michael Mandel on April 21
This is the opener in my week of optimistic posts. And it’s a good time to do it, given the multifaceted surge of pessimism. One branch of pessimism is environmental/natural resources. This morning we had Paul Krugman writing a column entitled “Running Out of Planet to Exploit”
where he talked about the soaring price of food, oil, and commodities, and the limits to growth. He ended the column by saying “Don’t look now, but the good times may have just stopped rolling.”
The second branch of pessimism, of course, comes from the financial crisis, which in my view is a reflection of the slow growth of real incomes for most households. Americans took on tons of debt to support a lifestyle which their incomes did not justify—an extra $3 trillion, by my calculations. Now Wall Street and the banking system is choking on all that debt.
The third branch of pessimism is demographic and budgetary. It comes from the aging of the industrial countries, and their continued inability to get medical costs under control. If current trends continue—which they can’t—then medical costs will eat up a larger and larger share of government budgets and indeed the whole economy. The latest long-term forecasts from the Congressional Budget Office call for Medicare and Medicaid to go from 4.1% of GDP today to 18.6% in 2082. These are all imaginary numbers, of course, but they are very worrisome to a lot of people.
As I go through the week, I will deal with each of these in turn, plus whatever else might come up. But just as I showed the “scariest” chart ever a few weeks ago, today I’m going to show the “most important chart ever today”.
This chart shows the sources of private nonfarm business productivity growth since 1987, as calculated by the Bureau of Labor Statistics here. What the BLS calls "multifactor productivity," I have given its correct name--increase in knowledge, broadly construed, including both business know-how and technology.
Why is this chart so important? It says that increases in knowledge--technology and new ways of doing things--represent roughly half of productivity gains since 1987. In fact, this pattern reaches back far longer...when I get some time later, I will splice together the numbers since World War II. This is one of the great regularities of economics...the fact that roughly half of productivity growth is driven by intangible improvements in knowledge, rather than tangible investments in physical and human capital.
The flip side: Reverend Malthus and the forces of dismalness always win, in the absence of technological change and improvements in knowledge. Without technological advances, the walls always close in, the disasters never stop. We get a meek and meager existence which we cannot outrun.
So what we will be looking for, in the rest of the week, are technological or knowledge advances that will help get us out of the box we are in. Tomorrow: Healthcare.
Note: Take a look at an essay written by a good buddy of mine, Chris Farrell, entitled "The Age of Scarcity?
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.