How rich are we?

Arnold Kling makes some good points:

…after a crash it is very tempting for people to believe that the previous prosperity was false. However, there is a good economic case for presuming that it is a recession that is an aberration, not prosperity. For example, a graph of long-term GDP growth shows a steady upward trend, to which we return even after severe recessions.

We still have the capacity to produce the output we produced in 2006. Therefore, to a first approximation, we should still be able to consume what we consumed in 2006.

I have a few responses:

1. The problem is not in reattaining the 2006 level per se, but rather that people in 2006 expected an entire future path of growth which now appears further away.  They made plans based on these expectations and we are not yet in a position to make comparably luxurious plans.  Ireland is an extreme example of this point and do note that their capital stock has not been destroyed.

2. As I've written elsewhere, I remain an optimist about the future path of utility, though perhaps not gdp.  Many of today's innovations improve people's lives directly, without necessarily generating much revenue or employment.

3. This problem also resembles the equity premium issue.  Each crisis there is some probability that "this time is different" and upward growth will not resume or at least not for a long time.  Until that expectation is cleared away (if indeed it is cleared away), the real living standard is genuinely lower, most of all in expected value terms.

4. I'm still an optimist about the much longer run, whether for utility or gdp.  In fact the greater the current labor market troubles, the greater the long-run "human capital dividend" from reallocating resources.  Sooner or later, we'll have another burst of important innovation, comparable to that of 1870-1940.  We just don't have it now.

Comments

In the long run we are all dead, and our children are being left with massive government debt, silly regulations, a worse health care system, and less economic freedom. But I should be optimistic?

Utility without much employment means higher productivity, which is good, correct?
The same amount of utility with lots of employment is not as good?

How much of US GDP growth in the past 70 years has come from increasing worldwide demand for dollars and how much from actual increase in productivity? What would happen if nobody wanted our green pieces of paper anymore?

> We still have the capacity to produce the output we produced in 2006. Therefore, to a first approximation, we should still be able to consume what we consumed in 2006.

Can you address this directly? It's a seductive claim.

"The problem is not in reattaining the 2006 level per se, but rather that people in 2006 expected an entire future path of growth which now appears further away."

This seems tangential to what you're addressing.

"How much of US GDP growth in the past 70 years has come from increasing worldwide demand for dollars and how much from actual increase in productivity? What would happen if nobody wanted our green pieces of paper anymore?"

How would humans and human civilization have evolved in we breathed water and ate gold? I'm constantly amazed at the number of people who have a deeply ingrained belief that "it's all an illusion," and that everything (for us - not for other people) will come tumbling down if only people saw the real reality as they do.

This is Jerry Seinfeld economics. It's about nothing --key concepts are vague enough to be able to say anything; underlying theories are not explicit and articulated; relevant and reliable evidence has yet to be produced. We may thank Jerry, Elaine, George and Cosmos Kramer for a good time but that's all folks.

> Sooner or later, we'll have another burst of important innovation, comparable to that of 1870-1940.

Why is it certain or even likely? What evidence is there against default hypothesis that growth will be about as slow as in the last three decades?

Regarding the possibility of another 1870-1940 period of innovation, maybe John Horgan with his End of Science is right, and we have figured out most of the important scisntific facts, with not much particularly dramatic left in the way of fundamental tech breakthroughs.

"We still have the capacity to produce the output we produced in 2006" No, not really. The manufacturing base has had 4 more years of moving offshore. Going back decades, St. Louis used to be "first in shoes". TVs were made by "Radio Corporation of America". Are any shoes or TVs made in the U.S. any more? From American parts? There's less change in 4 years, but the same dynamics are still at work.

"How would humans and human civilization have evolved in we breathed water and ate gold? I'm constantly amazed at the number of people who have a deeply ingrained belief that "it's all an illusion," and that everything (for us - not for other people) will come tumbling down if only people saw the real reality as they do."

It's not an illusion, dingus. It's money. People demand it as a means to consume across time. There is a coordination game wherein the Nash equilibrium is the emergence of a single good whose value is dominated by its use *as* money. At least since WWII, the US dollar has grown as the international currency. In other words, international demand for dollars is increasing the price of dollars in terms of other goods. Well, what if they decided to save in another good? Demand for dollars would fall. The price of dollars would fall. The price of imports would rise. Huge numbers of people in finance would be out of work. It would suck.

Do you think this scenerio is impossible? The dollar will always be the worlds reserve currency no matter how much it is diluted? History isn't over, you know.

it was a huge transfer to the government for them to waste on building up more promises that will have to be paid out of capital and productivity. The rich shouldn't have been getting richer, but they were by selling us stuff made by the jobs they moved overseas, so that made the poor feel like they deserved a piece of the pie.

Most of the early to mid-20th century GDP growth probably had more to do with the massive redistribution of the population into more efficient uses of individual skills and abilities than anything directly attributable to innovation (although the redistribution was enabled by technology). This redistribution is essentially complete.

Why 1870 - 1940? Even bigger changes occurred 1800 - 1870. The telegraph might have been the biggest, enabling world-wide communication at the speed of light, but steamships and railroads, increasing the speed and decreasing the cost of moving people and goods by something like ten times, also had a profound effect unmatched by anything since. Except for airplanes, all of our communication and transportation is done at 1850 speeds.

"Sooner or later, we'll have another burst of important innovation, comparable to that of 1870-1940. "

Ever wondered if any physician or chemist chared this pov ?

"Sooner or later, we'll have another burst of important innovation, comparable to that of 1870-1940. We just don't have it now.†

There is no period in history which experienced medical, agricultural, computational, and communications innovation comparable to what we've realized the past 60 years. No period comes even close. Are you asserting that medical, computational, communications, and agricultural innovations we've realized were not important?

"Except for airplanes, all of our communication and transportation is done at 1850 speeds."

I could not disagree more. Today I can send a 50 page document, complete with charts and pictures, across the country in seconds for a fraction of a penny. Such transmissions were unthinkable in 1850 at any cost.

UPS and FEDEX today deliver packages in a 2 to 3 days to any building with an address in the 48 continental states - without those packages ever being loaded on an airplane. Such delivery required weeks on average in 1850, as packages had to be transferred from boats to trains to stagecoaches. The revolution of the past 50 years has not been speed of the transportation device but rather the utilization - through computerized logistics - of the device.

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