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2012 November 17 Saturday
Downshift In Productivity Growth: Why?

In his book Launching The Innovation Renaissance: A New Path To Bring Smart Ideas To Market Fast economist and Marginal Revolution blogger Alex Tabarrok explains by how much the rate of growth in labor productivity in the United States has slowed in the last few decades.

...if productivity had continued to grow along the 1947-1973 trend then wages today would be more than 50% higher than they are now. In terms of innovation, if productivity had continued to grow along the 1947-1973 trend then we would be living today in the world of 2076. The post-1973 period has been called the Great Stagnation.

Alex is referring to Tyler Cowen's book The Great Stagnation. Tyler's arguments are a subset of the various reasons I've presented here for why economic growth has slowed in the developed countries and why it will slow further.

Why is 1973 such a turning point? See figure 4 in Gail Tverberg's post on the future of oil production. Right around 1973 the rate of annual growth of world oil production downshifted from 7.9% to 4.0%. It has since gone thru 2 more downshifts to 1.3% in the early 1980s and then to 0.1% starting in 2005. Oil has become much more expensive to extract. Higher prices for oil have increased the cost of economic activity. That's a real limit to growth. Keep that in mind when reading about trends in living standards.

When oil prices rise due to slow oil production growth the market diverts more investments toward making more energy-efficient equipment. That diversion of investment causes slower growth in productivity. Economic growth slows because more innovation must go toward civilization maintenance. This means that the rate of innovation has not slowed by as much as the downshift in measured growth in labor productivity.

Jørgen Randers, in his book 2052 - A Global Forecast for the Next Forty Years, outlines a future where natural resource limitations and ecological problems cause living standards to decline in the developed countries. Greater competition for remaining resources is creating a zero sum game where Asian industrialization means lower living standards in the OECD countries. I realize the views of one of the original authors of The Limits To Growth are anathema to many who have great faith in the free market to solve all problems. But look around you. The world makes much greater use of market forces today than it did 50 years ago. Yet innovation is not keeping up with the rising demands on natural resources and declining concentrations and quality of remaining ores.

Alex Tabarrok suggests a number of policy innovations aimed at accelerating the rate of technological innovation. He makes very reasonable recommendations regarding patent policy (e.g. make patents last longer if the innovation costs are higher). But I'm skeptical of his ambition to raise American educational outcomes nearer to those of Germany. He's ignoring demographic problems that make that an unattainable goal. Also, while I strongly support the need for policy innovations to speed technological innovations at best I expect such policy innovations to reduce the slope of the coming economic decline.

Share |      By Randall Parker at 2012 November 17 09:23 PM 


Comments
Mthson said at November 18, 2012 7:43 AM:

Great post. Typo should be: "...then we would be living today in the world of 2076."

Engineer-Poet said at November 18, 2012 9:17 AM:

Also, the NRC was established in 1974 and put the brakes on the replacement of coal-fired electric power by nuclear (which was cheaper to build and run than coal under the AEC rules).  This engineered scarcity raised prices in the electric markets, and also continued the external costs of pollution from coal.

Randall Parker said at November 18, 2012 9:41 AM:

E-P,

A few points:

We are agreed on the large external costs of burning coal.

Those external costs from coal are not, however, why living standards have stopped rising for a growing fraction of the American public. We aren't feeling those costs today (though the Chinese are).

Some of the external costs of burning the coal will only start to be felt in the 21st century. So those costs are going to become an additional weight on living standards.

The NRC's effects on electric power prices aren't a major reason for stagnant living standards. In this time period of cheap market prices for coal and natural gas we have cheaper electric power and yet living standards are being held down by rising costs for liquid fuels. Our current problem is the liquid fuels cost problem. We might also be facing a future problem of higher electric power costs too. But right now wholesale electric power costs are very low, lower than a few years ago.

Aside: I happen to read the financial news on utility stocks in order to choose which ones to buy. Not currently a holder of any utility stock. But as a result of this reading I'm aware of how much the drop in wholesale prices has hurt the profits of, for example, Exelon. New nuclear would be twice as expensive as new natural gas base load at current natural gas prices.

Randall Parker said at November 18, 2012 9:43 AM:

Mthson,

Thanks. Fixed it.

Engineer-Poet said at November 18, 2012 10:59 AM:
Those external costs from coal are not, however, why living standards have stopped rising for a growing fraction of the American public.
A falling price of electricity and increasing peak/off-peak differential would have improved American standards of living and increased the arbitrage between petroleum and battery-electric.  If you take a look at the Toyota HSD (essentially identical to the Ford hybrid transmission), you realize that there is nothing mechanical in there that couldn't have been handled with 1970's motors and electronics.  This could have gotten hybrids and PHEVs into showrooms by the 1980's.

Moving PHEV technology up by 3-4 decades would have saved money elsewhere, by reducing the sophistication required from engine pollution controls (and thus their cost); it is much easier to control emissions when the engine does not need much in the way of transient response, and a fat battery can even pre-heat a catalyst bed to light-off temperature before the engine cranks.  Electrifying the drivetrain and substituting electricity cuts petroleum demand.

A shrinking market for steam coal would have promoted other uses.  CTL using nuclear process heat is a possibility.  Of course we really don't want to use coal at all, but if the PHEV had been a market force for 3 decades already we'd both be less carbon-intensive and not have much in the way of resistance to complete de-carbonization.

Randall Parker said at November 18, 2012 2:06 PM:

E-P,

Okay, sure, if we'd had rising CAFE mandates back in the 1980s we'd be further along today with vehicle battery technology and we'd have less demand for oil. I do not see how that would have caused a shrinking market for steam coal though. I would have expected the opposite case as PHEVs and EVs would have increased the demand for whatever is the cheapest supplier of baseload electric power. That would have been coal.

Engineer-Poet said at November 18, 2012 2:51 PM:

But without the NRC, nuclear would have remained cheaper than coal.

Randall Parker said at November 18, 2012 4:20 PM:

E-P,

First, are you sure?

Second, it is my impression that:

A) Nuclear projects were overrunning their budgets before 1974.

B) NRC regulations got substantially tougher only after TMI.

C) Nuclear wasn't really safe and really needed better (and more expensive) safety systems.

D) TMI did not cause the end of nuclear power station building. The repeated cost overruns doomed nuclear.

Engineer-Poet said at November 18, 2012 7:54 PM:

Yes, I'm sure.  Start with COSTS OF NUCLEAR POWER PLANTS — WHAT WENT WRONG?.

My impression of your list is

  1. Almost every sort of industrial project can have cost overruns, but nuclear had nothing out of the ordinary pre-NRC.
  2. TMI Unit 2's meltdown was substantially caused by failure of an instrument mandated by the NRC, combined with very bad human-factors engineering also driven by NRC mandate.
  3. The USA hasn't had a single meltdown of a pre-NRC plant, and TMI Unit 1 recently recieved a 20-year license extension.
  4. The cost overruns were caused by court- and NRC-forced construction delays during a period of 15-20% annual interest rates on construction loans.  The NRC's abuse of authority was critical here; I understand that ONE new NRC regulation was responsible for one plant under construction going from 85% complete to 65% complete.
The NRC's applicant-financed application process makes it effectively impossible to license anything other than a LWR today.  We can make a molten-salt reactor that is almost literally idiot-proof, but it would take a decade and a billion dollars to train the NRC regulators before they could begin processing the license paperwork—paid by the applicant.  If we judge results rather than rhetoric, the objective of the NRC's creators was to kill the nuclear industry.  I suspect that if we looked back at the bill's main authors and sponsors, we'd find they were either "no nukes" ideologues or captive to coal interests.

Sam said at November 19, 2012 11:18 PM:

Ha. You're all wrong. Mass third world immigration. No productivity enhancement needed when you can throw cheap bodies at it. U.S. productivity came from lack of labor. See ""Engineering Reminiscences contributed to 'Power' and 'American Machinist' ", John Wiley & Sons, 1908".

http://www.classicsteamengineering.com/index.php?topic=226.0

http://books.google.com/books?id=WwxLAAAAMAAJ&printsec=frontcover&dq=Engineering+Reminiscences+contributed+to+%27Power%27+and+%27American+Machinist%27&hl=en&ei=h8aKTa_bC8a_tgfw5YDvDQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC8Q6AEwAA#v=onepage&q&f=false

PatJ said,"Porter succeeded in redesigning his stone facing machine, and he set up a business where produced 600 sq.ft. of facing ashlar (stone used to face buildings) per day. This was the same amount of finished stone produce by 30 stone masons, and the machine had no broken stone waste."

Check it Out said at November 20, 2012 4:55 PM:

You just wait and see Sam. There's more of that feared mass immigration coming to a neighbor near you, and there's just nothing anybody in this country or even in this world can do about it. So might as well face it and learn to live with all them immigrants.

In fact there's nobody in this world who can restore law and order back into this world.

Engineer-Poet said at November 20, 2012 6:59 PM:

The only reason we've had the mass immigration is because the "force of law and order" has been taken over by the cheap-labor lobby, which prefers the law flouted rather than obeyed.

The public hasn't liked that since forever, and when TSHTF, those immigrants are going to find things mighty unwelcoming.

Sam said at November 20, 2012 10:56 PM:

It's more than just the "cheap-labor lobby" forcing immigration. You're right there's no law anymore. I knew it before but it really sank in when Corzine stole more than $1 billion in customer money and got away with it. My focus is on trying to find the absolute cheapest way to live through the coming storm. parapundit.com even just about has me convinced that energy peak is occurring. Even if we have plenty you not allowed to exploit it.

Check it Out said at November 21, 2012 4:32 PM:

Well immigration is the result of foreign relations and being included in the international community. So welcoming immigrants that come to make an honest living and are not criminals is part of complying with the law and order. Check out the constitution. Do you want to change those laws? Be my guest, but as long as we're a country of laws, part of an international community and which has a foreign policy besides invading other countries, there will be immigrants one way or another, period.

It says "A government of the people, by the people and for the people" whoever "the people" might be. It doesn't say of, by and for the "citizens", "residents" or "foreigners"

I'm not sure that's the way it's supposed to be, but that's the way it's written. So if we want to change some laws, be my guest.

Engineer-Poet said at November 22, 2012 5:34 AM:
It says "A government of the people, by the people and for the people" whoever "the people" might be. It doesn't say of, by and for the "citizens", "residents" or "foreigners"
You realize that at that time, the franchise was restricted to White male property owners?

If you truly adhere to your universalist definition of "the people", you have to accept all the consequences which fall out of that.  For instance, I get some thousands of my friends to come to your municipality and set up a tent city, outnumbering the previous residents.  We all register ourselves to vote, run our own slate of candidates for public offices, and take over the government.  We then pass massive property tax increases and spend all the funds on contracts with companies we just happen to own.  After looting your town, we move on to do it somewhere else.

"The people" is not synonymous with anyone who finds a way to show up.  The Constitution is not a suicide pact.

Sam said at November 22, 2012 5:11 PM:

@Engineer-Poet. Ha Ha . Very good! If immigration is a part of the international community why don't the Japanese have mass immigration? China? Africa? Why only White countries? The constitution says nothing about having mass immigration. The MAJORITY of people in this country want mass immigration stopped. Why is it not? At one time I was a patriotic American. No longer. I'll never display the stars and stripes outside my house again. The constitution is dead. It's not being followed.

Now I do said at November 22, 2012 7:10 PM:

"The MAJORITY of people in this country want mass immigration stopped. Why is it not?" Because in this country the rule of the majority doesn't exist no more, haven't you heard? The majority of the people are blind sheep whether they want more immigration or not. There's no such a thing as the will of the people. Think about it.


Definition of "people" is: Humans considered as a group or in indefinite numbers. That's all, and it is so for whatever purpose of argument.

"In fact there's nobody in this world who can restore law and order back into this world." Dream on...

Engineer-Poet said at November 22, 2012 8:54 PM:

Mass immigration continues because the big-money interests which control both major parties want it to.  This control extends to NGOs such as the Sierra Club, which was for ZPG early on but is reputed to have been bribed to stay silent on immigration through the influence of one well-heeled supporter.

I can see two things which might defeat this:

  1. Some third party gains popular support through popular positions, and refuses the support of big money and its consequent corruption.  That's an uphill battle.
  2. Something happens to change the position of big money on this issue.  I can't think of anything big enough other than serious threats to their interests or even their persons; these people are very well insulated from the concerns of the 99%.


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