The post-growth economy

A couple of months ago, Tim Worstall asked:

OK, put together a few simple things.

1) Per capita GDP growth pretty much comes from productivity growth.

2) We know from Baumol that increasing prductivity in services is much more difficult than in manufacturing (or agriculture).

3) Services have been growing as a portion of the economy, manufacturing falling.

4) Trend growth rates are now lower than they were 30-50 years ago.

It seems pretty obvious to me that 4) is in part caused by 1-3.

So, has anyone actually tried to measure this? Luis? Chris?

Both Luis and Chris replied with this study by the University of Toronto, which found that:

[S]ectoral labor productivity differences and the structural transformation they produce account for more than 50 percent of the fast catch-up in aggregate productivity observed in less developed economies and all of the stagnation and decline observed in more developed economies in recent decades.

In other words, much of the reason for the relatively high growth in productivity in emerging economies and the relatively low growth in mature economies is because the former have large manufacturing sectors and the latter have large service sectors. In service dominated economies productivity increase is slower simply because, for reasons I explained here, it is harder to improve productivity in service organisations.

It would therefore be unreasonable to expect the more service-based mature economies to grow at the same rate as the manufacturing economies of the postwar period. Yet many of us seem to assume that they will.

After the Second World War, our economy grew at 3 percent per year until the early seventies. Subsequently, although punctuated by more frequent recessions, the growth rate during the boom years was similar.

We have based a lot of our assumptions about the post-crisis economy on the previous half-century. Once the present troubles are over, we tell ourselves, years of 3 percent growth will once again power us out of recession and debt. Just like they did before.

But what if that doesn’t happen? What if the developed economies are no longer capable of generating that sort of growth?

Chris Dillow has gone back over the productivity data for the last 150 years and reckons that the postwar period might be something of a blip:

If we split annual peacetime productivity growth into distinct periods we get:

1856-1913 = 1.3%
1920-1939 = 1.7%
1947-1973 = 3.1%
1973-2011 = 1.9%

What stands out here is the fast productivity growth during post-war period. The last 40 years of weaker growth look normal compared to the pre-war period.

As I’ve said before, the reason that we were able to simultaneously increase public service provision and shrink our debt-to-GDP ratio was because our economy grew so rapidly after the war. As long as the economy was growing faster than the debt and the cost of public services, we were laughing.

Now, though, it is the other way round. Our debt is increasing and the cost of our public services will rise rapidly as our population ages. If the great boom was simply due to a manufacturing-led postwar productivity catch up, then it was a one-off. Could it be, then that the slow growth predicted for the next few years is as good as it’s going to get for the next decade or so?

American economist Robert Gordon reckons that economic growth in the USA might be pretty much over:

There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.

His central theme is that “innovation does not have the same potential to create growth in the future as in the past”. While there is still some innovation, it is not the sort that will drive productivity:

Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it.

What little productivity growth there is, argues Gordon, will be constrained by six ‘economic headwinds’ – demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. This could, he says, reduce US economic growth to less than 1 percent per year for decades!

These factors are not unique to the USA. If there is an innovation slowdown, and there is some evidence to suggest that there is, it applies to all developed economies.

A report on the Eurozone published by Ernst & Young last week uses the same ‘headwinds’ terminology and predicts an average growth rate below 1 percent for the next five years. Uncertainty, says E & Y will probably reduce investment and stifle innovation, leading to a lost decade for the Eurozone.

If growth in the USA and Eurozone is to be sluggish over the next decade, that of the UK will be too. According to McKinsey, to maintain the sort of growth rates we have been used to, northern European countries would have to increase their productivity 33 percent faster than they have managed for the past two decades. Unless somebody discovers some miraculous new productivity-boosting technology, that is very unlikely.

PwC’s John Hawksworth remarked:

It seems likely that we have entered a ‘new normal’ period where growth will be relatively subdued by historic standards for some years to come.

Some of this would probably have happened anyway. As western economies became more service-based, they were bound to struggle to achieve postwar levels of productivity growth. Ageing populations were always going to put more pressure on public finances. It was unlikely that innovation would drive enough productivity growth to compensate.

The trouble is, on top of all this we’ve had the worst financial crisis in living memory which has knocked the stuffing out of the world economy, slashed tax revenues and pushed up government debts.

For the most of the period since the foundation of the welfare state, economic growth was increasing and debt-to-GDP levels were reducing. That’s why we were able to expand the role and scope of the state without having to worry about it too much. Now, the trend seems to be moving in the other direction. If the state continues to provide current level of services, the cost will increase faster than the economy is able to grow. This means that the state will take up an ever larger proportion of national income, estimated in some scenarios to reach 52 percent of GDP by the end of the next decade.

The left may attack Ed Miliband for saying he would not reverse public spending cuts, Ed Balls for promising a line-by-line review of all public spending and Stella Creasy for demanding a re-design of the state but these politicians are just being realistic. When the economy was growing we could give public services higher than inflation budget increases. Now, with rising costs, rising debt and negligible growth for the forseeable future, there is very little room for governments of whatever political colour to manoeuvre. Unless the public sector is radically reformed (or the British suddenly discover an appetite for paying much higher taxes) many of its services will just stop functioning over the next decade.

Some of the low growth (or no growth) predictions may be over-pessimistic but if they are even half-right, things will be very different over the next few decades. Without some dramatic new productivity-boosting innovation, it is unlikely that we will see the sort of economic growth rates we enjoyed during the last half of the Twentieth Century.

We will probably be in a low growth world for some years to come. We have built our world on the assumption that continued economic growth is a given. A sustained period of low growth has implications for politics, for work, for the postwar social contract and, especially, for public services. Combine low growth with rising public service costs and the nature of the state will inevitably change – either by design or default. Like everything else, the post-growth state will look very different from the one we’ve been used to.

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29 Responses to The post-growth economy

  1. An excellent survey/post, stuffed with research and data. Unfortunate, then, that the piece hinges on a bald assertion “it is harder to improve productivity in service organisations.” I have to disagree with this fundamentally, your referred-to post notwithstanding. Vanguard UK, amongst others, show that significant improvements in productivity in service organisations are possible, once the nature of the challenge is recognised. The path to improved productivity in service organisations lies in management innovation, rather than e.g. operations or production innovation.

    - Bob

  2. Pingback: The post-growth economy - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  3. John D says:

    One way to increase productivity in the service sector is to worsen the employment conditions of people employed in that sector – and there are indications that this is beginning to happen. I am not at all surprised by the fact that productivity and output are declining. The GDP figures are predicated on a rate of increase over time. But it must be apparent that any activity cannot continue to increase and expand indefinitely. For other reasons, Japan appears to have reached the point of maximal economic activity, with the result that their economic activity has been flat-lining for the last decade or more. We must expect a similar situation here unless – as Rick points out – new forms of technology emerge which substantially increase output of existing and new products at lower cost. One example might be 3D printing technology, which offers differentiated product offer as opposed to mass production which cannot meet the exacting standards which consumers have come to expect. Rick also mentioned that the services being provided by the state may have to be funded in future through higher taxation. I believe this to be the case in the Scandinavian countries. We need to stop pandering to greedy selfish people who want to pay themselves and their chums on remuneration committees ludicrously high salaries and hugely unwarranted bonus packages and who then live as tax exiles, thereby depriving our welfare state of the resources it needs. If they don’t like it, let them go and stay permanently in Monaco or Andorra for the rest of their lives. Good riddance, I say ! I have now been alive for 67 years and I have seen a lot in my lifetime. One thing that has struck me, though, is that many of the confident forecasts of a new lifestyle which were made in the 1950s, 1960s and 1970s have largely not come to fruition. There are many interesting technological developments taking place at present but we will have to wait and see if they are converted into the kind of products and services which are beneficial to all in society. At the end of the day, the quality of life is far more important than economic output indicators.

  4. It’s possible to take the analysis further.

    From Baumol again we know that market based economies are better at this innovation (or increased productivity, same thing) than planned economies. We might therefore assume that moving parts of our economy which are currently planned to market basis will increase future innovation/productivity.

    Like, oooh, just as as examples, education and health care.

    We might also take the lesson of the Nordics. From Scott Sumner we get the lesson that underneath the high tax rates they are some of the most economically free nations on the planet. The thought being that the only way they do manage to have growth under such tax burdens is that they are red in tooth and claw underneath. A high tax, high redistribution, society has to have a classically liberal economy underneath in order to still be able to produce growth.

    Another, again from the Nordics, this time via Lane Kenworthy. While their tax systems are indeed voracious they are also efficient in terms of deadweight costs. Low corporate and capital taxation, high consumption taxation. Yes, this is regressive: the Swedish tax system is, famously, more regressive than that of the US. But if you want that much money to flow through the State then that’s the way you’ve got to do it: if you still want to have growth. This particular idea can be taken even further: the lowest deadweight cost tax is something like land value taxation. Other things equal, moving to such a system would thus allow a larger state than any other form of taxation. If, as always, you still want to have room for more growth.

    OK, sure, I’m rather riding a hobby horse here. But the more we find that there are severe constraints to future growth/innovation/productivity then the more I think we need to shift the system to allow the most of it that we can get. To a classically liberal economy. Which is what I always argue for anyway so that’s no surprise.

    But the argument should, although it doesn’t, have more force for those who want that Nordic style high tax and high redistribution economy. The reason you want it all red in tooth and claw underneath the redistribution is that that’s the only way you can manage to pay for it all.

    What this means in actual action: take labour rights for example. Instead of arguing for incumbent workers having greater rights to stay in the jobs they already have one should argue in favour of the Danish system. Near no such rights at all, but high retraining and unemployment benefits.

    Contracting out? 70% of Denmark’s fire and ambulance is provided by a private company (used to be part of G4S actually). National taxation rates? 3.76% in Denmark, with a top rate of 15%. It’s the commune (can be as small as a parish ward in the UK, 10,000 people) which levies, collects and then spends the 25-30% tax.

    Yes, I know, hobby horse time. But there is a very strong argument indeed that in order to have the supposedly desired end state, that Nordicness, then the UK left has to start arguing against nearly all of the actual detailed policies that it currently proposes. For you can’t get from here to there on that road. You actually want something much closer to laissez faire which you can then skim to do the redistribution.

    • Rick says:

      Agree that the Nordics are an interesting model and often mis-represented but Danish employment law is not that different from ours.

      Denmark still has unfair dismissal and TUPE laws. Also, 3/4 of the workforce is covered by collective agreements and, once covered by such an agreement, it’s difficult for an employer to get out of it.

      Danish employment law may be more flexible than many places but ‘fire at will’ it ain’t.

  5. Needs2Cash says:

    Hankering after the good old days when our work added value by bashing metal makes no sense when others deserve this work because they do it better than us. Lifelong learning enables more of us to add value to other inputs such as data and people.

    That is unless we are told we might as well give up.

    Now we are short of customers with unmet needs and money to spend. Thankfully we’ve stopped making people feel rich by inflating the value of their houses. Let us learn and earn by adding value to result in services and other products we need without making life unsustainable.

  6. The extent to which technological developments enhance quality-of-life is neglected in GDP stats, I think. There has been a total shift in the availability of everything – anyone can now get hold of almost any information, in almost any format, that humanity has ever recorded. That doesn’t have the measurable-in-factory-productivity shift of, say, steam engines to electric motors, but it means that despite no (or even negative) growth in associated economic output, the general level of utility has been raised. Even excluding illegal activities, things like iPlayer and JSTOR have massively enhanced life, but don’t really show up in the data, apart from reducing pounds spent at HMV and in commuting to the British Library.

  7. The decline in productivity growth has coincided with the growth in management, professional and technical jobs (now 43% of the working population). As productivity is still measured using a manufacturing paradigm (i.e. x workers produce y widgets in z time), this gives a misleading impression of actual worker productivity. As capital replaces labour (i.e. technology-driven productivity growth), the “drag” of overhead and backoffice roles on aggregate productivity increases as a simple ratio. Adding a corporate social responsibility manager to a company’s headcount reduces productivity absolutely, regardless of any indirect ROI.

    This effect is more obvious in service industries (and the public sector, by definition) than in manufacturing, though it should be noted that the latter is increasingly made up of premium services, such as maintenance and consultancy. Outsourcing or offshoring this overhead does not tend to improve productivity beyond the short-term because of the countervailing need to invest in additional contract management, supplier management, legal and accountancy services. There is a strong class bias to this. Capital has no interest in subsidising labour, but middle-class managers have a strong interest in ensuring there are roles for their offspring. This is a form of economic rent.

    This rent-seeking gives credence to the popular techno-pessimism trope, the idea that we’ve stopped innovating and that this is what is causing low growth. Though it is often couched as a lament for the non-appearance of flying cars, the real beef is that technology does not appear to be replacing labour. The reality is that we are experiencing strong technology innovation, but the fruits of this are not being seen in the labour productivity stats. If they were, and we’d maintained management and professional roles at the rate seen in the past, we’d have much higher levels of unemployment now. In practice, we have offset a lot of productivity growth by growing white collar roles: more accountants, corporate lawyers and IT business analysts. Some of this is driven by complexity and need, but most of it is not.

    The productivity growth spurt after WW2 was due to the massive capital destruction during the war. The quickest way to boost productivity is through new plant and tools. Developing countries offer a tabulas rasa for capital formation, hence they initially experience fast rates of growth. They also benefit from a smaller middle class, which means less pressure to create overhead roles. As time passes, they start to experience the same pressures as the developed economies: capital formation gives way to upgrades, an expanding middle class drives the creation of overhead roles, and automation and further offshoring represses working class wages. You can see this happening today in China.

    • Needs2Cash says:

      Managers exist to get things done by others. They add value (or not!) to organizations and their processes and people.

      We should need no more than 10% of this type of worker.

      Professional and technical workers work add value to ideas, data and people. This part of the economy grows as Britain finds its place in the global market.

      Consequently, even more working class parents aspire to raise middle class kids.

      Make believe jobs may exist or will emerge as the market changes. Just as the buggy whip manufacturers and the miners of the “cheapest deep-mined coal” learned we must be prepared to ensure our work adds value for a paying customer.

      Knowing this we should see investment bankers and other workers with outdated or oversupplied competencies investing in their learning so they can earn a living.

      Ever wonder how many coal miner families of the 1980′s are now middle class?

      Instead of GDP, can we measure the productivity of all organizations (public and private) and the country in terms of value added ($ per millisecond)?

      • Imagine a company of 10 people: 1 manager and 9 non-management workers. The management overhead is 10%. The manager introduces new technology that boosts productivity. The gain is realised by maintaining output while reducing headcount, from 9 to 6. The management overhead is now 14% (1/7). This figure will keep on rising, even without giving the manager’s daughter a made-up job. This in turn means that the rate of productivity growth (as a factor of employees vs output) will inevitably slow as a firm approaches maximum efficiency – i.e. full automation.

        While productivity can obviously be achieved in management operations as well, it is worth remembering that management is itself a “service”. In other words, it is less amenable to productivity gains in comparison to regulated operations (e.g. a production line worker or a call centre operator) for the reasons outlined by Baumol’s Cost Disease.

        The challenge facing advanced economies is that we have passed the point of full employment. We now have more workers than we need. A planned response to this would be to divide up the available work across all willing workers. This would mean remitting future productivity gains in the form of time, i.e. reducing working hours, rather than cash.

        The market response is to let workers compete with each other for access to the available jobs, however this is not a fair fight as those responsible for allocating work are biased by social norms and class loyalties. This leads to wage repression at the lower end of the scale and bonuses at the top end. It explains why firms are vigorous when it comes to cutting blue collar jobs, but indulgent when it comes to white collar ones. It also explains the persistence of poor vocational training, the demand for fewer GCSE A*s, unpaid internships, tuition fees etc – all attempts to ration access.

        The labour market is increasingly polarising, between high-pay/high-status jobs (i.e. management and their friends) and precarious low-paid jobs, and there is evidence that this polarisation accelerates as we come out of recessions.

        • Needs2Cash says:

          Reducing the head count is not the objective. The objective is to create more successful customers. This the manager can help the workers do by improving marketing, design, sales and billing instead of just squeezing waste out of production.

          In terms of flow the value chain or core process is meant to be fire hose with no constrictions. Keeping the flow in balance is a key role for managers.

          It is not about jobs. It is about work processes adding value faster than the competition.

          I agree that leadership and management is a service. Leaders and managers ensure the system helps all it workers to create more successful customers. If they find they have to downsize they have not fulfilled their responsibility to the other workers.

          • You will often find (I certainly did from 25 years of BPR) that the best way to get the kinks out of the fire hose is to remove management from the process, as they generally introduce unnecessary hand-offs. However, we are reluctant to make them redundant, converting them into “centre of expertise coaches” or “process owners” instead.

            Very few managers would recognise their objective as being to create more successful customers. The over-riding objective is to increase their firm’s profit (or “shareholder value”, if you prefer), and it’s easier to do that by reducing costs (and headcount is usually the biggest factor) than by expanding sales, as the latter presumes a growth in demand, which is outside your direct control.

          • Needs2Cash says:

            Fortunately, the leaders recognise their objective as being to create more successful customers. Tragically, for the workers, the others (many managers) continue their race to the bottom; cutting their way to greatness while the Company Directors ignore the other stakeholders contrary to he 2006 Companies Act. Some management system consultants try to change that mindset though I will admit that few organizations disband their departments in favor of their processes. It all takes time to evolve or die.

  8. @Tim Worstall, “You actually want something much closer to laissez faire which you can then skim to do the redistribution”. I think you’ll find that’s what Blair and Brown were doing.

  9. “I think you’ll find that’s what Blair and Brown were doing.”

    If only they had been.

    Compare and contrast. When Ford tried to sell Saab the Swedish government said, well, if no one wants it, then close it down. When Rover….subsidies all round!

    • Nice diversion, but … it was the financial services “engine of growth” that Blair & Brown were skimming, for the obvious reason that this was generating far greater tax receipts than the auto industry.

  10. “Nice diversion, but … it was the financial services “engine of growth””

    Unconvinced. The City (ie, wholesale financial services) was around 4% of GDP. The wider financial sector, insurance, retail banks. the whole schlemiel, about 8%. Manufacturing still 14% or so.

    Yes, sure, corporation tax is nice to have but in the whole accounts it’s not much. VAT, income tax and NI are the biggies. And they don’t care where or what the economic activity is, just that there is some.

    • GDP share is not the same as tax receipts, manufacturing is not the same as the auto industry. Let’s stick to the point. Your original suggestion was laissez faire + skimming = distribution. That was the policy of New Labour, emblematically so in its accomodation with The City. It works for a while, and then it blows up in your face.

  11. Needs2Cash says:

    Baumol’s Cost Disease is twenty years out of date. It ignores the fact that the orchestra’s musicians have many more opportunities to earn a living than to play in one orchestra.

    Face to face teachers now have to compete with online learning. Nurses no longer care for every patient need as they make extensive use of low cost aides.

    Government workers may occupy jobs instead of adding value for customers. Who knows, the Internet may enable more of us to help ourselves instead of talking on the phone to someone who sits in a cubicle waiting for it to ring.

    Does anyone know if this research has been updated for the technological advances not anticipated by Baumol and his colleagues?

  12. Baumol’s Cost Disease is twenty years out of date. It ignores the fact that the orchestra’s musicians have many more opportunities to earn a living than to play in one orchestra.

    Err, yes, that’s the point of Baumol’s point.

    Technology changes that static point.

  13. Indy Neogy says:

    FATE is asking some of the right questions here. Labour productivity is not the only kind of productivity and given that we have not had full employment for a while, we should consider if it’s actually a meaningful measure of the economic activity we seek. Part of the reason

    It’s also worth noting how much there is a mixing up of different issues and concepts in the discussions of wealth and productivity. Imagine if you will (via nuclear, or wind, or your preferred option) that we actually fulfilled the old prophecy of electricity “too cheap to meter,” and not dependent on imports. How would that change what we could “afford” to do? And how would productivity figures reflect this?

    • Productivity appears to be an ideologically neutral concept (it’s just maths), but it is actually pure Marx as it concerns the production of a surplus. If with the same inputs I can produce double the output, I have increased productivity/surplus.

      I don’t buy the idea that “happiness” (however defined) is an adequate substitute for a decent wage, but the modern debate on wealth, and in particular the trope about the time poor vs the time rich, should give us an insight, allied to the productivity-surplus relationship, into what the alternative should be.

      In other words, increased productivity can produce a surplus of financial wealth (which may be unevenly distributed between labour and capital), or it can produce a surplus of time. But, by its very nature, the latter can only be remitted to labour, which may be why the working week has not significantly reduced in over a century.

  14. needs2cash says:

    We will not pay more and more for personal services from professionals or from government agencies.  We do not place an infinite value on our time.  At some price-point, instead of subcontracting childcare, we may see a return to one parent working outside the home while the other parent home-schools their children.  Either or both parent-workers may also add value to ideas, data or information by working for customers from home.  Mothers and fathers may resist this future step back as personal responsibility replaces government.  But we may be persuaded to pay people to raise children to support our old age.  I see a new equilibrium of online learning, smaller government, narrower healthcare specialisms, consuming less and long hair!

  15. John D says:

    I would be very careful about wishing for home-schooling. I know someone who did this and her children have never yet been able to acquire the social skills they should have developed while at a regular school. In the USA, home-schooling is used to indoctrinate children into holding sometimes quite extremist views. Some commentators raise a very interesting point when they refer to the fact that the working week has nor diminished in the last 60 years or so. If a new settlement were to be adopted where people only worked half-weeks – possibly for half-pay – we might then see a more happy and contented society. We have tried the other way – and it does not work. Why not try something new and different?

    • needs2cash says:

      No wishing for home-schooling here. Online learning will become the norm and parents would have to collaborate with neighbors to socialize children. These measures are a result of childcarers and face to face teachers charging more than the parents think their time is worth.

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