Summary: Experts have a wide range of forecasts for America’s economy. Rapid growth, leading to the singularity. Slow growth, the muddle-through economy. An no growth. Each of these poses different challenges for America. All of these look plausible. Here we look at the darkest of three these scenarios, sketched out by Jeremy Grantham. At the end are links to more information.
Excerpt from “On the Road to Zero Growth”
By Jeremy Grantham
GMO Quarterly Letter, November 2012
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Summary of the forecast
The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.
Population growth that peaked in the U.S. at over 1.5% a year in the 1970s will bob along at less than half a percent. This is pretty much baked into the demographic pie. After adjusting for fewer hours worked per person, man-hours worked annually are likely to be growing at only 0.2% a year.
Productivity in manufacturing has been high and is expected to stay high, but manufacturing is now only 9% of the U.S. economy, down from 24% in 1900 and 15% in 1990. It is on its way to only 5% by 2040 or so. There is a limit as to how much this small segment can add to total productivity.
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Growth in service productivity in contrast is low and declining. Total productivity is calculated to be just 1.3% through 2030, if we use current accounting methods.
However, current accounting cannot accurately handle rising resource costs. Spending $150-$200 a barrel in offshore Brazil in the future to deliver the same barrel of oil that cost the Saudis $10 will result perversely in a huge increase in (Brazilian) GDP. In reality rising resource costs should be counted as a squeeze on the balance of the economy, as they lower our total utility.
Measuring the non-resource balance of the economy produces the correct effect. The share of resource costs rose by an astonishing 4% of total GDP between 2002 and today. It thus reduced the growth of the nonresource part of GDP by fully 0.4% a year.
Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify.
The price rise might even accelerate as cheap resources diminish. If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system. It would take just 11 years before the economic system would be in reverse! If, on the other hand, our resource productivity increases, or demand slows, cost increases may decelerate to 5% a year, giving us 31 years to get our act together. Of course, with extraordinary, innovative breakthroughs we might do even better, but we certainly shouldn’t count on that. (Bear in mind that we don’t even know precisely why the prices started to rise so sharply in 2000.) Excessive optimism and doing little could be extremely dangerous.
For a few years fracking will add helpfully to growth: my guess is that the benefit will peak at about 0.5% within five years, but be modest over longer periods. The key concept here for understanding growth is to know when the maximum upward push will occur. (See Appendix A.)
Increasing climate damage, reflected mainly in food prices and flood damage, is going to increase. With any luck this will not be severe before 2030 (we allow for a 0.1% setback) but it is very likely to accelerate between 2030 and 2050. A great deal will depend on our responses.
The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050 (see table on Page 16). This is all done presuming no unexpected disasters, but also no heroics, just normal “muddling through.”
GDP measures must be improved so that they begin to measure output of real usefulness or utility. The current mish-mash of costs and of “goods” and “bads” produces poor and even damaging incentives.
Accurate measurements of growth must eventually include the full costs of running down our natural assets. True income (said Hicks) is meant to allow for sustained productive capacity, which our current measures clearly do not. If they had done so the developed countries might well have been in reverse for the last 20 years.
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This is a follow-up to Has America grown old, and can no longer grow? Or are wonders like the singularity in our future?, 28 November 2011.
About the Author
From the GMO website:
Mr. Grantham co-founded GMO in 1977. Prior to GMO’s founding, Mr. Grantham was co-founder of Batterymarch Financial Management in 1969 where he recommended commercial indexing in 1971, one of several claims to being first. He began his investment career as an economist with Royal Dutch Shell.
Mr. Grantham is GMO’s chief investment strategist and is an active member of GMO’s asset allocation division. He is a member of the GMO Board and has also served on investment boards of several non-profit organizations. Mr. Grantham has been featured in Forbes, Barron’s and Business Week and is routinely quoted by the financial press. He earned his undergraduate degree from the University of Sheffield (U.K.) and an M.B.A. from Harvard Business School.
For More Information
About the Singularity:
- Good news: The Singularity is coming (again), 8 December 2007
- The Singularity is in our past, 29 March 2009
- Has America grown old, and can no longer grow? Or are wonders like the singularity in our future?, 28 August 2012
Forecasts of America’s future economy:
- What will America look like after this recession?, 18 March 2008 – More forecasts. The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
- Some thoughts about the economy of mid-21st century America, 12 January 2009 — Thoughts about future from one of the 20th century’s greatest minds
- A look at our future, when our $promises$ to ourselves come due, 25 March 2010
- America on its way from superpower to banana republic, 28 March 2009
- A look at the future of the world’s political and economic order, 4 June 2010
- Important: Recovering lost knowledge about exhaustion of the Earth’s resources (such as Peak Oil), 21 January 2011
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FM ridiculed my earlier statements of fact that America uses a disproportionate amount of the world’s resources per capita, and that if all 7 billion inhabitants of planet earth were to try to live at an American standard of living, we would need far more than the resources available on this planet. Moreover, FM also ridiculed my earlier remarks that economic growth requires increasing use of energy and resources, and that in order to sustain economic growth on a planet with 7 billion people, we would need far more resources than exist on earth.
But the evidence is clear:
“Americans consume a disproportional amount of the world’s stuff. (…) We make up 5 percent of the global population, but use 20 percent of the world’s energy. We eat 15 percent of the world’s meat. We produce 40 percent of the world’s garbage.”
If everyone lived like an America, we would need 4.1 earths. Unfortunately we don’t have 4.1 earths — we have only one.
The solution therefore seems obvious: just make our technologies more efficient, right?
Wrong.
Jevons’ Paradox and Baumol’s Cost Disease provide asymptotic upper limits to what efficiency increases can do for us.
This does not mean that we face a hopeless Mad Max future where Lord Humungus, the Ruler of the Wasteland and the ayatollah of rock and rollah, is our ruler. It does suggest that we need to reorganize our societies so that our economies operate effectively in a zero-growth (also near-zero-waste) mode, where almost everything gets recycled. We also desperately need to reduce world population, which appears to occur naturally as societies’ living standards rise.
Tom,
(1) I’m calling you on this. Let’s see some evidence for “FM ridiculed my earlier statements of fact that America uses a disproportionate amount of the world’s resources per capita.” I think you’re either making that up, or grossly misinterpreting what I said.
(2) “FM also ridiculed my earlier remarks that economic growth requires increasing use of energy and resources”
As stated like that, as a fixed fact for all time and space, you must be speaking ex cathedra. You have not the slightest idea as to the technology of 2100 AD, let alone the distant future. Plus, there are good odds that the population will start to fall sometime after 2050 (earlier if plague or war hits one or more of the rapidly growing, already overpopulated third world nations) — and we have no idea how far it will fall. That would allow economic growth without increased resource use (even with stable tech).
Also, facts trump you economic theories.
Speaking of the United States, your statement is already false. Per the EIA’s Energy Perspectives, per capita energy has been falling (irregularly) since it peaked in 1979 at 359 million BTU. It was 312 mBTU in 2011, a 13% decline despite per capita real GDP up roughly 45% (per the World Bank).
Energy intensity of GDP (energy use per dollar of GDP) has been falling for a long time. It was 17.35 thousand BTU per dollar GDP (2005 dollars) in 1949 and 7.30 in 2011. That’s a decline of almost 60%.
So US energy growth results from population growth, not economic growth. In fact, total primary energy consumption has started to decline even as population grows. It peaked in 2004 at 86 quadrillion BTU, was 80 in 2011 — despite real GDP rising by aprox 7.5% during that period.
Guessing, these trends are probably also true of some other developed nations (eg, Japan or in Europe) who have greater energy efficiency.
And I suspect your statement is false with respect to some (many?) other resources — such as some industrial minerals. For example, copper consumption per capita was flattish from aprox 1974 to 1998 — despite massive growth in per capita (and total) GDP (see figure 14.8 here). Then China came on stage, with its incredible and inefficient use of resources. When that ends, which it will one way or another, the previous trend will probably resume.
Jeremy Grantham has written some fantastic commentary in the past, but this seems too pessimistic to me. I believe commodities are in a bubble caused, primarily, by Chinese over-investment in infrastructure. I also believe that technology advances will bring down the cost of energy – solar is now cost competitive with fossil fuels in sunny climates, and costs are falling rapidly. This will have the added effect of combating climate change.
Productivity growth has been remarkably consistent for hundreds of years – at about 2% per year. I see no reason for it to change.
(1) “Productivity growth has been remarkably consistent for hundreds of years – at about 2% per year. I see no reason for it to change.”
Perhaps. I believe it’s more logical to say that the rate of productivity growth will change. The only uncertainty is the director of change.
(2) “I believe commodities are in a bubble caused, primarily, by Chinese over-investment in infrastructure.”
We’ve got bubbles on the mind. We look around and see bubbles everywhere, probably a recency effect (see Wikipedia).
Commodity prices are volatile, and probably not well-described as a “bubble.”
Is China’s high levels of capex a bubble? Manufacturing? Residential? Commercial infrastructure? Public infrastructure? Everything? Lots of hysteria about this, but relatively little data. Citing the “ghost city” of Ordos a million times is not evidence.
In brief, due to overuse of the term I no longer think “bubble” is a useful term. It generates more heat than light.
True, “bubble” has been overused lately – I especially hate the term “education bubble”! But if you look at the volume of commodity futures trading, it’s pretty obvious there is a lot of speculation going on.
WRT Chinese over-investment, Jim Chanos has given some great interviews on the subject. Over 50% of Chinese GDP is infrastructure, while the contribution to GDP from Chinese consumers is actually falling. This helps explain why the Shanghai index is down significantly over the last few years even though reported GDP growth is consistently in the 8-10% range…
There is a great deal of good work on China’s high levels of investment. Chanos’ is not among them. Big publicity, very sloppy work. The usual relationship.
Chanos analysis of China seems pretty good to me, but if he’s wrong I would like to know. Do you know of anyone that has better analysis/commentary?
Michael,
That’s easily a best-of-thread-winner, an unusually sensible comment.
(1) A good starting place is this review of current literature: “China’s Economic Growth: A Different Storyline“, Timothy Taylor, 19 November 2012. He is Managing Editor of the Journal of Economic Perspectives. Two of the articles he cites are of special interest.
(2) “Understanding China’s Growth: Past, Present, and Future“, Xizodong Zhu, Journal of Economic Perspectives, Fall 2012 — Abstract:
The pace and scale of China’s economic transformation have no historical precedent. In 1978, China was one of the poorest countries in the world. The real per capita GDP in China was only 1/40 of the U.S. level and 1/10 the Brazilian level. Since then, China’s real per capita GDP has grown at an average rate exceeding 8% per year. As a result, China’s real per capita GDP is now almost 1/5 the U.S. level and at the same level as Brazil.
This rapid and sustained improvement in average living standard has occurred in a country with more than 20% of the world’s population so that China is now the second-largest economy in the world.
I will begin by discussing briefly China’s historical growth performance from 1800 to 1950. I then present growth accounting results for the period from 1952 to 1978 and the period since 1978, decomposing the sources of growth into capital deepening, labor deepening, and productivity growth. But the main focus of this paper will be to examine the sources of growth since 1978, the year when China started economic reform.
Perhaps surprisingly, given China’s well-documented sky-high rates of saving and investment, I will argue that China’s rapid growth over the last three decades has been driven by productivity growth rather than by capital investment. I also examine the contributions of sector-level productivity growth, and of resource reallocation across sectors and across firms within a sector, to aggregate productivity growth. Overall, gradual and persistent institutional change and policy reforms that have reduced distortions and improved economic incentives are the main reasons for the productivity growth.
(3) “Is China Over-Investing and Does it Matter?” by Il Houng Lee, Murtaza Syed, and Liu Xueyan, IMF Working Paper, November 2012 — Abstract:
Now close to 50% of GDP, this paper assesses the appropriateness of China’s current investment levels. It finds that China’s capital-to-output ratio is within the range of other emerging markets, but its economic growth rates stand out, partly due to a surge in investment over the last decade. Moreover, its investment is significantly higher than suggested by cross-country panel estimation.
This deviation has been accumulating over the last decade, and at nearly 10% of GDP is now larger and more persistent than experienced by other Asian economies leading up to the Asian crisis. However, because its investment is predominantly financed by domestic savings, a crisis appears unlikely when assessed against dependency on external funding.
But this does not mean that the cost is absent. Rather, it is distributed to other sectors of the economy through a hidden transfer of resources, estimated at an average of 4% of GDP per year.