No innovation, no growth

The author of the bestseller Rise and Fall of American Growth, which studies the past two hundred years of the American economy, says that the lack of significant engineering and scientific invention is the reason for the stagnating western economies. Robert Gordon strongly believes in the efficiency of the expansionary monetary policy of Fed and the other central banks that have been going on for years. The economist professor at Northwestern University sees other positive traits in America, for example, the process of extreme expropriation and concentration of profit, which has been generating social and political tensions, seems to come to an end. A growing portion of corporate profits are moving back to work and production, and there is also a higher demand for labour too. This way, wages are on the rise, and inflation seems to be starting. According to Gordon, it is absolutely not the right time to increase interest rates.

Péter Zentai: One of the worst problems of the world is that the American and the western economies, in general, cannot achieve stable growth, and for this reason, the standard of living of the middle class cannot remarkably increase. Is the technological revolution worth nothing?
Robert Gordon
: This revolution has been struggling in the past 10 years, or at least it does not significantly affect the economy, and its contributions to the growth are not worthwhile. There are no innovative breakthroughs.

What about the expansion of electric cars or the spreading of robots?
The west has not come up with anything that would result in significant and fast developments, such as flying or the invention of the typewriter was in the 20th century. Not to mention computerization at the end of the last century or the internet in beginning of the 21st century, both of which had a significant impact on the economy. Such innovations – that clearly influence GDP – have not been invented since 2003-2005.

Facebook, Twitter, and again, electric cars – especially now, that energy production starts leaning towards renewable sources…
Exactly. The applications that are making the life of people more comfortable are all based on innovations that were developed earlier. Social networks becoming more elaborate, applying electrical inventions in transportation that were born at the end of the last and the beginning of this century all do strengthen safety, but – as we showed – do not add much to economic growth. What we can see and predict is that in comparison to earlier expectations – despite the current recovery – the western world will change to electric cars only very slowly, so the technological barriers of its spreading can only be broken down in 15-25 years. Robots are significant only in certain service sectors – such as trading – and will remain in those fields for a while. We can expect them to significantly influence the efficiency of production, but only in two or three decade’s time. Self-driving cars becoming widespread in everyday traffic also requires about two decades of further development and marketing, and they do not show the potential to have a significant effect on increasing economic efficiency either. However, in the field of 3D printing and healthcare technology, there are rapid advancements. Directly or indirectly, but they can positively affect economic growth in the west.

Starting big infrastructural investments will help: for example, the whole American traffic and road network is in dire need of renewal, and it might be about time to revolutionize the railroad system too… Such investments have the potential to create millions of jobs…
Those are two separate things.  One side of the coin is creating jobs, while the question of economic efficiency and expansion is the other. There is no doubt, reconstructing the infrastructure requires new investments, which creates new jobs. However, implementation would be done with machines, methods, and technologies that were developed 30-40 years ago. Productivity and efficiency are not increasing and this is the main reason of the current relatively stagnant economy.

Is this why wages are not rising, and why people do not feel like they can actually move forward so they believe that life was better earlier?
This is indeed the reason – that the circumstances of production have not changed – why wages are still the same. This also explains why we feel ‘life used to be better 8 or 10-15 years ago’. The other reason is that since the early 2000s and especially since the great crisis, more and more of corporate profits from production started to move to capitalists, owners, and shareholders. It has become clear that the concentration of wealth was and still is at the expense of those who did the actual work.  This is a real source of tension in western societies and their politics.

Maybe Donald Trump is right: he says that America will become great and the economy work if production comes back from China and Mexico.
For decades, countless of studies and our everyday experiences prove that the globalization of production comes with mutual benefits. China and similar countries, such as Mexico, made the lives of Americans and the people of the west cheaper by importing our otherwise expensive production. In exchange, China became a significant purchaser of products of Boeing, which provides hundreds of thousands of jobs in America, which opened up a way for hundreds of millions of Chinese to become middle-class citizens – and this is only a symbolic example of the many. If Trump wants to impose duty on China or Mexico since these are the only two countries he attacks, then others, like Vietnam, Bangladesh, or Malaysia will take their place. However, if he forbade importing every foreign product, life would become expensive in the States, the American purchasing power would weaken, and the economy would plunge into recession.

What economic and monetary policies do you suggest?
Fed shall continue what it has been doing, because, slowly but surely, it will show its benefits. It is not true that there is a risk of a negative interest-rate environment in America. The returns of state bonds are well above zero, while inflation gets closer to the two percent, which is desired by Fed. The monetary easing that you described as artificial contributed to the decreasing of the withdrawal of corporate profits, and now a bigger part of them is reinvested in the expansion of production. However, it is harder to find the required skilled workforce. This way, wages can start to rise, which strengthens inflation but also keeps it under control. I belong to those economists, who warns Fed not to increase interest rates in the near future, and who thinks that the next government shall support consumption and the qualitative and quantitative improvement of production by a budgetary stimulus.

Original date of Hungarian publication: October 20, 2016