This is an interesting hypothesis ("Why Productivity Boost is Needed to End the Recession")...
What's it going to take to get the economy out of its rut? Tax cuts, says the right. Public investments, says the left. Some of both, says the center. But after listening to a recent discussion about the recent and distant history of innovation and growth between White House economic adviser Lawrence Summers, former Fed chief Alan Greenspan, and Harold Evans, author of They Made America: From the Steam Engine to the Search Engine, I began to think that tax cuts and stimulus spending may be secondary. If history is any guide, in order to get the economy back to the level of growth that we'd all like to see, we're going to need a substantial boost in productivity. And prolonged periods of high growth have always been spurred by a game-changing megatrend that ultimately touched every segment of the economy: the steam engine, electricity, railroads, the availability of credit, the microchip, and most recently, the Internet, globalization, and cheap money. Finally, when you're dealing with an economy the size of the United States, you need a pretty powerful lever to create meaningful growth. Having a boom in a few sectors likely won't be enough.
So it looks like we're in trouble. Right now, it's difficult to sense the Next Big Thing. (Of course, that's usually how it goes. Back in 1992, when the economy seemed mired in the mud, President-elect Clinton summoned the nation's best economic minds to a summit in Little Rock, Ark. In the voluminous briefing papers prepared for the event, the words the Internet likely appeared rarely, if at all.)
... but how can it be right? How can something new be needed to get us back to the full unemployment we had just a couple of years ago? One explanation is that we may have been "living off our capital," failing to do the business investment needed to keep our economy at the level we were at, incurring too many debts to foreigners, while doing things we thought were investment-- building homes, getting educations-- but that were really a waste. But it's hard to quite believe that.
I have my idea for what the Next Big Thing will, or at least could, be: giant cargo airships. Of course most people who think they know the Next Big Thing are wrong, but I could make the case for it. I won't do so as well as I could in this space, for lack of time and also because of some lingering proprietariness associated with the work I did on this in the summer of 2007. But the idea is that giant cargo airships could, among many other functions, carry people and goods long distances, and particularly over oceans, a lot more cheaply than airplanes, and a lot faster than ships. A "roadless revolution" in transportation could accelerate the international division of labor, while reducing pressure on energy supplies, since airships are fuel-efficient because they use fuel only for propulsion and not for lift. They could open up a new, cheaper "Greyhound of the Skies" alternative in international travel, too.
To do all this would require mobilizing huge amounts of capital. Which, in a way, makes it even more timely, considering trends like this:
A Time magazine cover this spring featured a glass jar partially filled with coins labeled "The New Frugality."
Months earlier, BusinessWeek featured a red cover cinched by a black belt. It declared the recession had pushed us into "The New Frugality" age.
A new survey by the Pew Research Center's project on social and demographic trends found that 60 percent of all younger and middle-aged adults say they are doing more shopping at discount stores or avoiding more expensive brands.
Pew said nearly a quarter of younger adults say they plan to plant a "recession garden" to trim their food bills.
Another Pew study released in April found that from the kitchen to the laundry room to home entertainment, consumers are paring down the list of things they can't live without. I loved the title of that report: "Luxury or Necessity? The Public Makes a U-Turn."
Is this dawning age of frugality here to stay?
I'm not so sure. Frugality isn't like your basic black dress that is always in vogue. Frugality is a foul-weather trend quickly replaced by rampant consumerism the moment the economy begins to pick up.
I'll be counting the number of months it will take before people forget this recession and return to their wasteful ways.
I doubt that. I think people have gotten a deep scare about their economic security, which will alter behavior for a generation. People thought they could count on the US economy to buoy them up. Now they want much bigger cushions of what economists call "precautionary saving." Policymakers, still caught in the errors of Keynes, think saving is the enemy:
Betting on a quick global recovery? Think again. Yes, the Federal Reserve saw recent signs of organic economic growth in the U.S. economy—"tentative signs of improvement," as the Washington Post phrases it this morning—in deciding last month to hold off on dramatic interventionist measures. But the global picture looks much more bleak. As the Wall Street Journal reports, Germany, Japan, and Mexico—three of America's largest trading partners—have reported "steep declines" in economic output in recent days with Mexico reporting yesterday a staggering 21.5 percent first quarter GDP drop. You can add Singapore to that list, too; it reports this morning a whopping 15 percent plunge in GDP in Q1, the Associated Press says. These are some of the worst economic performances in generations. For Japan, a country that's experienced very little growth in the past decade, you have to go back to 1955 to match such a poor performance.
Simply put, America's main trading partners are tanking because Americans are cutting back on purchases of autos, software, and other goods made abroad. "For the first three months of 2009, U.S. merchandise imports declined about 30% to $352.5 billion compared with the same period a year earlier," the WSJ reports. And the boomerang effect will hurt here, too. "The decline in output overseas reduces the market for U.S. exports and opportunities for investment," the newspaper adds. Even the same Fed officials who were making hopeful remarks about "stabilization" at home have reason to think we're a long way from recovery, speaking of the global financial system as being still "vulnerable to further shocks," Bloomberg reports.
But savings need not slow the economy if they are converted into investment. Investment looks for a payoff in the future, short-run or long-run depending on the nature of the investment. Short-run investment is unlikely to revive amidst so much volatility. This would be a good-time for long-run investment, but for political risk. Suppose you pitch the idea of building giant cargo airships to a multi-billionaire investor right now. I suspect he'll be thinking, But how do I know all my profits won't just get confiscated, with the US government prospectively so desperate for revenues?