The Great Stagnation in Australia
Is the developed world in the midst of a “Great Stagnation?” That question has several parts:
1. Is growth in living standards slowing?
2. Is growth in RGDP/person slowing?
3. If the answer to #2 is yes, is it merely because of the recession?
I’d like to examine questions 2 and 3 by looking at Australia. As far as I can tell between August 2006 and August 2013, Australia’s population will grow from 19.855 million to about 23.1 million, up 16.35%. Real GDP will grow from $1.112 trillion in 2006 to $1.376 trillion in 2013. Thus per capita GDP will grow by about 6.3% over 9 seven years, or roughly 0.9% per year.
Here’s why I find the Australian growth rate interesting:
1. Australia avoided the recession, so it should give some sense of the sort of long term growth rate one can now expect in a fully developed and relatively successfully managed economy. The unemployment rate did increase very slightly, but on the other hand there was a huge and probably unsustainable mining boom. So if anything, I’d guess 0.9% is a slight overestimate of Australia’s long term RGDP/person growth rate.
2. In the US there has been almost no change in RGDP/person since 2006, but that’s partly due to the recession. Suppose we look at RGDP/employed person. Employment fell a total of 0.2% between February 2006 and February 2013. RGDP rose 6.6% between 2006:1 and 2013:1. So RGDP/worker rose 6.8%, or just under 1% per year, pretty close to the Australian rate. But the jobs lost have been disproportionately low-skilled, so again the trend rate of RGDP/person growth may be even lower.
3. What does this mean about living standards? You can argue it either way. Maybe a lot of this growth is simply imputed quality changes, which don’t make people happier. So actual real GDP is even less than estimated.
4. Or maybe growth in living standards (that elusive “utility”) is much faster than estimated, because there’s lots of fabulous free stuff on the internet, and medical science is reducing problems like depression.
Here’s the bottom line in my view. The way our modern society is structured, businesses will keep innovating and reducing costs, and this will lead to 0.5% to 1.0% per annum rise in measured RGDP/person. But that number is no longer very important. Instead the key issue will be how well society addresses the unpredictable challenges that will come our way courtesy of scientific advances—good or bad. Will there be genetically manufactured viruses that do all sorts of damage? Or will we find a way to stop the aging process? Or invent happiness pills? Will we genetically program our babies to have high IQs? When you think about the unexpected challenges over the next few centuries, it really doesn’t matter very much whether RGDP is growing a bit more or less than 1%. Something very, very big is coming along.
PS. I’m not a fan of the “robots will take our jobs” meme. A similar theory was very popular during the 1930s (for obvious reasons), and it will fade from view when the recession ends. I have an open mind on the “robots will create inequality meme.” It’s too soon to say. If it does we might want to weaken intellectual property laws, or redistribute consumption (not income.).
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1. June 2013 at 10:00
This post cannot have been written by Professor Sumner? Happiness pills? Robots? Future genetically modified super babies? Surely futurologist Noah Smith has ghost written this post.
1. June 2013 at 10:20
“Thus per capita GDP will grow by about 6.3% over 9 years, or roughly 0.9% per year.”
Over 7 years, not over 9 years.
1. June 2013 at 12:05
Robots are going to take our jobs.
Then that will free me up to take on a new job.
Everything I currently produce will be produced plus whetever I produce in my new job. In the aggregate this can be nothing be good for the world.
Yes, there will be a few unfortunate souls who do not find a new job. But it should be no problem feeding them.
1. June 2013 at 12:25
“If it does we might want to weaken intellectual property laws, or redistribute consumption (not income.).”
Communist!
1. June 2013 at 12:42
The problem sumner is that the old-fashioned marxists that say the prophesy that in the capitalism system the robots will take our jobs” say that almost a century ago and the only thing that happen is the fall in the cost of production and now the poor countries have low literacy rate than ever before thanks to technology.
1. June 2013 at 12:44
Over on my side, I’ve got a post in progress to the effect of, “No, the decline in employment hasn’t been caused by robots taking your jobs, if that was true then Germany and Australia wouldn’t be adding jobs, probably due respectively to labor market changes and good management of NGDP. Sure, in the *future* we may get an intelligence explosion, but the future cannot be the cause of the past, so that can’t account for employment stagnating right now.”
1. June 2013 at 12:46
You’re out of my serious economics blog list…
1. June 2013 at 13:10
Fifty years ago, the computer industry was tiny. It was able to expand because we no longer had to have so many workers connecting telephone calls. So many job descriptions exist today that didn’t even exist 15 or 20 years ago. That’s only possible when technology makes workers more productive.
1. June 2013 at 13:13
Japan is one of the most developed countries when technology is about has full-employment even with their deflation problems.
1. June 2013 at 13:14
[…] But anyway, for some reason the idea of the world entering a “Great Stagnation” era has become prevalent. And Scott Sumner today titled his post “The Great Stagnation in Australia”. […]
1. June 2013 at 13:27
Thanks Jonathan, I fixed it.
Eliezer, That’s right.
Robert, And you are out of my serious commenter list. Tell me something I don’t know.
1. June 2013 at 13:32
If technology is so bad that you’re making the possibility that in the future we have to weaken intellectual property laws and embrace marxism why the most developed country when technology is about has full-employment (Japan)?
1. June 2013 at 13:40
You can’t be right when all the empirical shows the opposite.
1. June 2013 at 13:48
Anybody think 30 hr work weeks are just around the corner?
1. June 2013 at 14:20
Robert, You said;
“If technology is so bad that you’re making the possibility that in the future we have to weaken intellectual property laws and embrace marxism why the most developed country when technology is about has full-employment (Japan)?”
I said I DON’T think technology causes unemployment.
And I’m a libertarian, not a marxist. Otherwise your comment is fine.
1. June 2013 at 16:12
I don’t buy the “robot job stealing” thing either, for the same reason as Eliezer: Germany’s got many more robots than us (and introducing more, like automated lawn-mowers), and they aren’t struggling with a job crisis. In fact, the “robot density” in the German work force is more than twice that of the US.
The robot debate in general annoys me, because it seems like so many people are forgetting that opportunity cost determines exchange, and therefore who does what and where. The robots could be literally more productive at making any particular thing than a human with machine assistance, and we might still use the human because the opportunity cost is lower. And human beings are still quite versatile, and we’ll probably have all manner of future machines to help compensate for our issues down the line.
As for inequality, that’s tricky. I could see a further bifurcation of the market into a smaller “rich” consumer group and a vastly larger “cost-conscious” one, since we’re seeing that now. But to sell anything to that second group, the robot factories would need to make goods and services that they can actually afford with those incomes. You might get decreasing real income and decreasing real prices for goods and services (nominal of both would still go up). But I’m inclined to think that even that won’t happen, and we’ll just see people become absolutely richer in the long-term even if the rich are becoming ultra-rich.
1. June 2013 at 16:55
A couple points on the Australian data.
The comparatively weak growth in GDP has been noted for a while and has reflected relatively weak productivity growth. One explanation for this is the massive run up in mining investment which has driven up costs but not output – yet. To the extent that this explains the low productivity one would expect it to be a temporary slowdown which should end when the investment returns to normal levels and mining output increases.
An alternate measure of activity worth considering is GDI which has been much stronger over the past decade. Though this is in part due to its sensitivity to out ToT which I suppose you are trying to abstract from…
A couple points on the Australian data.
The comparitively weak growth in GDP has been noted for a while and has reflected realatively weak producutivity growth
1. June 2013 at 18:07
“The way our modern society is structured, businesses will keep innovating and reducing costs, and this will lead to 0.5% to 1.0% per annum rise in measured RGDP/person. But that number is no longer very important. Instead the key issue will be how well society addresses the unpredictable challenges that will come our way courtesy of scientific advances””good or bad. Will there be genetically manufactured viruses that do all sorts of damage? Or will we find a way to stop the aging process? Or invent happiness pills? Will we genetically program our babies to have high IQs? When you think about the unexpected challenges over the next few centuries, it really doesn’t matter very much whether RGDP is growing a bit more or less than 1%. Something very, very big is coming along.”
Businesses economically calculate whilst innovating and reducing costs.
Inflation positively hampers this process and reduces growth, ceteris paribus.
Australia is stagnating because it did not allow sufficient corrections to occur post-2008.
1. June 2013 at 18:19
Typical nonsense from Geoff, “corrections” mean catastrophic unemployment
1. June 2013 at 18:42
Typical nonsense from Edward, “catastrophic” means suffering less in the present, than suffering more in the future.
Zero rationalism. Only “avoid short term pain at all costs”.
You’re like a child.
1. June 2013 at 19:27
Slightly off-topic (but inspired by the “If it does we might want to […] redistribute consumption (not income.)”:
I understand, Prof. Sumner, that you oppose income taxes, for deep philosophical and economical reasons, and favor a progressive consumption tax.
But what about property taxes? Empirically, they seem to be one of the less economically unfavorable taxes (perhaps even less damaging than consumption taxes). But philosophically, there is a large degree of double-taxation involved (after all, real estate is usually bought with after-tax income). I looked around on your blog and did not find a post where you took a strong stance on this issue. Did I miss it? Or are you undecided about this issue?
1. June 2013 at 20:49
“Medical science is reducing problems like depression”
Really?? I thought rates of depression were rising at a staggering rate, and people are being chronically overmedicated with poor results.
You didn’t cite your studies, so I won’t cite mine. But I’ve read enough to know these things are true. I’ll leave it to you to deny them.
1. June 2013 at 23:20
Because I admire your work Scott, it always disturbs me when you get issues to badly back-to-front.
Australia is a weakness of yours in this regard. There is substantial evidence of dutch disease (high: ToT, AUD, PrivInv, PrivFinanProfits; low: govInv, productivity, unemp, int.rates). There is continuing evidence that the resources boom is coming to an uncomfortable end, with all the modern stagnation unpleasantness we’ve come to expect.
We have a wonderful example of a macro issue that is ill-able to be managed by NGDP stabilisation. The country has substantial sectoral imbalances, is heading towards the zlb, a decreasingly stable political environment and is about to experience a devaluation shock (which will exacerbate the imbalances).
10 gets you 1 that the RBA’s NGDP stablisation was in fact a series of ‘put’-writing activites, to be uncomfortably cashed in against future NGDP. And not, necessarily, good economic management.
2. June 2013 at 02:38
You’re absolutely right that robots won’t take our jobs: http://bit.ly/10qeNos
The situation in which that happens is by definition impossible to maintain. The “utopia-dystopians” that argue this make certain utopian assumptions but then ignore others, which makes it an untenable position.
I thought the comment on “happiness pills” was ironic. Because we’ve been spending trillions on an (ineffective) war against them.
When it comes to living standards and consumer surplus, I find the question of dogs very interesting. We have a lovely pet daschund, and because of competition we would not have paid more than $1000 to buy him. We paid $800, so that’s $200 in surplus.
But today, if the government threatened to keep him lest we pay n dollars, I know we’d pay many, *many* multiples more. That’s a huge increase in surplus from attachment.
Maybe it’s nothing important, but it’s always fascinated me.
2. June 2013 at 03:51
I think the concern (at least my concern) is not that “robots will take our jobs” but rather that the benefit of robot technology will accrue disproportionately to a rent-seeking elite.
We already see things trending this way today in the bloated financial sector and in a regulatory state that seems to work to the benefit of big established companies that can “invest” in lobbying, an army of IP lawyers, etc.
To me, a big appeal of NGDPLT is that can allow us to put the “destruction” back into “creative destruction”. That is, we can allow companies and investors who make poor decisions to suffer the consequences while minimizing collateral damage. Rather than our current policy of bailing out any systemically important institution.
2. June 2013 at 04:33
“I think the concern (at least my concern) is not that “robots will take our jobs” but rather that the benefit of robot technology will accrue disproportionately to a rent-seeking elite.”
Michael, this is something I consider in my post above, but see as a rather small possibility:
“But to the extent Drum’s suppositions are true – i.e. that robots replace most wage labor – production has, largely, been solved. (Drum’s whole point is there isn’t much work to be done in “running” the robots, material production will be on auto-pilot). The vast amounts of capital income would lend themselves to more redistribution, and I doubt that standard of living would fall much at all. Remember, the capitalists who own all the robots won’t have any profits without a huge and growing consumer base. Falling cost of production implies increase in supply, and hence more surplus – consumers included. I cannot emphasize this point enough – without healthy consumption, robots are useless. I’ve read comments that the rich would “use” the robots “for themselves”. This is highly unlikely for a plethora of reasons but, if it comes to pass, will mean everyone else can create their own, relatively labor-intensive economy. Problem (kinda) solved. Capitalists paying huge sums for fixed quantities, like land, make a new Ricardian tax program a perfect choice.”
2. June 2013 at 05:38
Antipodean economist, Good argument, but I’m skeptical. First of all, the link I provide shows mining exports soaring over the last decade. So the results have come in. And second, the implication of your post is that GDP growth is soon going to rise sharply in Australia, and yet I doubt the average Australian economist believes that.
Ciceron, I support taxes on land, on the basis of area, not value. The rate should vary by zip code.
I support taxes on homes, because that’s part of any consumption tax.
Lilian, A few years ago I read that the US suicide rate had been falling due to anti-depressants. I see that’s turned around in the last few years, so I don’t know what to believe. In any case, I was really making that claim, just pointing to the sort of thing that, if occurring, would not be picked up in GDP data. You may be right.
LJ, I don’t quite see how I “got it wrong” when not a single one of your points is in conflict with what I’ve said. Can you provide a specific example of where I “got it wrong?” I think all your claims are quite plausible.
Ashok , You said;
“We have a lovely pet daschund, and because of competition we would not have paid more than $1000 to buy him. We paid $800, so that’s $200 in surplus.”
That’s not really how one calculates consumer surplus, but I see your point.
Michael, That’s your concern, but as I said there are many others who have a different concern.
2. June 2013 at 05:46
“That’s not really how one calculates consumer surplus, but I see your point.”
Isn’t the difference between equilibrium price and reservation the individual’s consumer’s surplus?
2. June 2013 at 05:57
Nihil sub sole novum, there is nothing new under the sun has been a popular phrase for thousands of years, it seems every few years someone else predicts that we have picked all the low hanging fruit after an eye blink of time(with respect to history) in which there is not any major innovations. I am thus skeptical of Cowen’s well thought out and well presented claim, I am of course not smart enough to see the future, but I don’t think anyone else is either.
Instead of loosening intellectual property we should instead promote equality of consumption, innovation(monopoly pricing alters the mix of goods new that are created meaning we spend too many resources developing substitute technologies), and efficiency by transitioning to a prize system with auction pricing.
2. June 2013 at 09:16
Why doesn’t immigration figure into the calculation of RGDP growth per head? I thought that Australia has high levels of immigration. So it seems to me that a wealthy nation that welcomes a whole lot of immigrants from developing nations and still manages consistent RGDP growth per head implies a much stronger economy than this post implies. The gains in world RGDP may be very large.
2. June 2013 at 10:13
Essentially, there are two ways countries can compete in the current enviroment. One can compete with China in manufactures. Korea, with GDP / capita in the $20k range has done alright, primarily by competing against upscale manufacturers like the US for things like HDTV and smart phones. But some of key Korean industries–like shipbuilding, HDTV, and even smartphones–are going to be facing heavy competition from the Chinese in just the next 4-5 years. For most other countries, however, competing with Chinese manufactures has been tough. Median income has not been moving up in the US or much of elsewhere in the OECD.
The other competitive strategy is to export raw materials to China. Those involved in this trade–Brazil, much of sub-Saharan Africa, OPEC, Australia, Norway, and Canada–have done either well or very well.
The US is in the middle, with increased gas and oil production leading to import substitution, and therefore “net exports” to China. I think it’s telling that US GDP diverged from European GDP just as WTI diverged from Brent.
So, there has been no Great Stagnation in emerging economies. The Great Stagnation and the related financial crisis have been enitrely limited to the advanced, non-commodity (and in particular oil) exporting OECD economies. There’s a reason for that.
2. June 2013 at 11:12
I was looking at some data and apparently China uses 53% of the world’s cement, 47% of the world’s iron ore, 47% of the world’s coal, 45% of the world’s steel, 40% of the world’s zinc and aluminium, and I could go up, but the point is clear. Using natural resources at those kinds of levels puts enormous strains on a country’s environment and for a non-developed country whose population is one sixth of the world to use those resources at those levels is clearly unsustainable. Countries like Brazil, Russia, Australia, and Canada have been importing natural resources to China and this has created an unsustainable mining boom(as you pointed out). On top of this, the Chinese banking system is expanding at a massive, and ever increasing rate while the GDP growth they’re getting is less and less and less. When China can’t keep expanding its banking system, that will be the time when Australia and Canada both experience demand side issues.
I also think that Australia and Canada have massive real estate bubbles. I think the trigger to when credit stops growing in Australia and Canada will be when their mining booms go sour.
3. June 2013 at 00:15
The mining industry us playing a long game. Exports have been higher for the past 7 or so years but these mines have an expected lifetime of decades. I would expect the short burst of investment from the boom, since 2006, to generate a lot of extra GDP. But this increase will be spread over the next 50 years, so while it’s overall impact on output will be larger it will be much less spectacular.
3. June 2013 at 05:24
Ashok, The phrase “because of competition” is the problem. In consumer surplus calculations you assume the seller has a monopoly.
Rob, Given that Tyler’s theory has been TRUE of 99% of human history, that’s not much of an argument against, is it?
Paul, That’s true, but that’s not the question I was addressing. I certainly agree that Australia generates lots of gains for the world as a whole.
Steven, I think everyone agrees that there is no stagnation in developing countries like China and India.
Suvy, Actually 1/5 of the world’s pop.
I don’t believe in bubbles.
3. June 2013 at 10:30
Prof. Sumner,
“Actually 1/5 of the world’s pop.”
Fair enough, but either way my point still holds. There’s no way a non-developed country should be using almost 50% of the world’s iron ore, 40% of the world’s aluminium, 40% of the world’s copper, 47% of the world’s coal, etc. Using resources like that will put enormous strains on a country’s resources. This also does create international issues if you have other countries whose economies are basically reliant on exporting to China. If one country in the chain faces a demand shortfall(China), all of them face a demand shortfall.
What’s going on in China is clearly unsustainable. I think it’s unsustainable that they’re growing at 7.5%. In 15 years, they’ll be growing at 0% because their population demography will literally fall off a cliff(it’ll make Japan look like Baby Boomer city). China is going to experience major issues over the next 15-20 years, problems of historic proportions.
3. June 2013 at 11:34
Suvy,
Yep. China’s GDP may actually be shrinking, when environmental costs and malinvestment are taken into account. Indifference to environmental degradation and intellectual property are their primary competitive advantages. Does anyone really believe the government figures? The whole thing reminds me of the days before the Asian currency crisis broke.
3. June 2013 at 17:17
Suvy, No, they’ll still be growing in 15 years.
TallDave, I believe the figures. I travel to China every three years, and see vast improvements in living conditions, despite the pollution. In Shanghai the life expectancy is now longer than in the US. Conditions overall are still bad (worse than Mexico) but they are improving rapidly.
3. June 2013 at 18:50
Scott,
While it might have been true that we very slowly grew for a very long long long time(indistinguishable from 100% of human history), but it is also true that the rate of technological innovation, and the way technology changes now is not even slightly comparable to previous times in history (so they are not the proper comparison from my view). I respect Cowen’s view quite a lot, I just don’t think it is the most likely truth, then again, I tend to be more of an optimist about most things than the majority of economists which I think will make me look bad in short run but be correct in the long run. Only time will tell.
3. June 2013 at 19:00
TallDave,
Visit China sometime and see if you hold the same opinion. If you still do ä½ çœŸçš„æ˜¯ç›²äºº. There is a lot of investment some of it could be considered “malinvestment”, but it is far from the majority, the scale of growth and change is something that is impossible to describe. Environmental quality has been actually improving lately, it is still really horrible though. Though still nothing like Edinburgh during the industrial revolution, just give them some time, I would place a really low chance it will still be very polluted in 50 years.
4. June 2013 at 07:41
Scott/Rob,
Chinese senior officials themselves (notably Li Keqiang) do not have place much faith in their numbers. There are a lot of incentives for local officials to overreport.
But don’t get me wrong — I certainly agree there have been enormous improvements in living conditions since Deng outmaneuvered the Gang of Four and began China’s veyr laudable economic liberalization. But that’s part of the problem: everyone keeps comparing China 2013 to China 1979.
China created a truly gigantic amount of wealth simply by moving away from basket-case communism. Unfortunately, their unbalanced political system also created all the classic problems of oligarchies extracting that wealth at the expense of the masses, in a manner that perpetuates their own dominance.
I’d like to see China move beyond catch-up growth, but I fear their institutions won’t allow competition that threatens state-owned enterprises, which will tend to ossify in the years ahead.
4. June 2013 at 07:52
Rob — pollution seems to be getting worse, not better.
Also, the proper comparison is to similar levels of GDP per capita, and China is considerably worse than Edinburgh circa 1950. Acemoglu would argue this is because China 2013 lacks the inclusive institutions of Scotland 1950, and I think he’d be right.
4. June 2013 at 11:54
Rob, I visit China quite often, but that case has nothing to do with Tyler’s claim. He’s talking about the US and other developed countries.
Talldave, Their institutions will change.
Some types of pollution are getting worse, some better.
5. June 2013 at 05:50
I hope so, Scott, I really do. The welfare of a billion-odd people is no small thing. But I don’t think the incentives are aligned that way…
25. July 2013 at 15:58
[…] to “Intelligence Explosion Microeconomics: Returns on cognitive reinvestment“, a paper recently referenced on Scott Sumner’s blog as relevant to this […]