Monday, March 13, 2017

Economy: How Realistic Is A Four Percent Growth Rate?

(Drivebycuriosity) - Economic growth has been disappointing in the recent years. After the 2008 recession the USA experienced the weakest recovery since World War II (wsj ). Growth had been hold back by high taxes and a lot of regulations. Both worked as a brake and have been slowing down investments, production & consumer spending. If the new government fulfills her promises by cutting taxes and reducing regulation these brakes could be lifted giving way for more growth.

Economic growth also would be rekindled if America would follow the European role model and would privatize state owned enterprises like airports, harbors,  mail & railways (here my post driveby). The proceeds could be used to invest into the infrastructure (streets, railways) which is in a lamentable condition. Privatization and a better infrastructure could lift the American productivity and inspire more investments.


                                                High-Tech Revolution 

If the government policy gets more business friendly - and will avoid a global trade war - we should experience another prosperous period like the epoch 1985 through 2000 which was partly inspired by Reagan´s economic policy. I  think that there is a good chance that we will get 4% annual growth for a decade and more because there are strong fundamental tailwinds:

The US economy - and the rest of the world - is benefiting from a high-tech revolution. There is a deluge of technological innovations, creating a lot of positive tailwinds for the global economy in the coming years (driveby).

We are seeing rapid advances in:

- Robotics: Companies are using more and more robots to reduce costs and to respond more flexible to the demands of their customers. For instance robots are welding car parts together and are varnishing them & Amazon is using robotic systems in her gigantic fulfillment centers. The automatization process leads to cheaper & better products and raises the productivity.

- Self-driving cars & trucks will reduce the number of accidents and lower costs of transportation, which leads to cheaper consumer goods. Because they are efficient they waste less fossil energy - curbing the greenhouse effect.

- 3D printing: Software controlled machines are literally "printing" parts of other machines and devices by using computational power, lasers and basic powdered metals and plastics. Soon companies & persons can produce almost anything exactly bespoke for individual tastes with low costs.

- Nanotechnology: The creation of new materials, built at the atomic level, could revolutionize  everything from chemistry to aeronautics, like creating new medicines, new fabrics and building material. For instance scientists are working on a new material which is much stronger & lighter than steel (economist).

- Biotechnology: Companies and university scientists develop new vaccines and cures by adapting or exploiting processes found in living organisms which could lead to a longer & more healthful life for all of us.  Altering plants by genetic engineering makes them more resistant against pests and more tolerant of temperature changes and droughts. Food gets more affordable and could be enhanced with vaccines against cancers and other diseases.  

- Health technology: Sophisticated machines improve the quality of healthcare through earlier diagnosis, less invasive treatment options and reductions in hospital stays and rehabilitation times.  So these technologies improve life quality and productivity.

 - Mobillization of Internet: Smartphones, tablets and other devices allow everybody permanent access to the world wide web. So we can organize our life better, like better shopping, improving leisure time, traveling, dating, eating out and more.

- Internet of Things: Devices like thermostats,  TVs, refrigerators, household appliances are or will be soon connected to the world wide web which will make our life  easier and create new markets for a lot of companies. Smart watches for instance can be used for 24/7 medical observation and health monitoring to prevent heart attacks and to discover other medical problems.

- Cloud computing:, IBM, Apple, Google and other companies offer data storage and processing either for free or for low fees, giving everybody access to a network of supercomputers. Companies & persons can process and store huge amounts of data without spending much money for own data centers.

                                                               Falling Information Costs

In general the Internet - including the "cloud" - increases the flow of information and reduces the costs of data. Data can be gained, processed and stored faster & cheaper. New ideas can spread faster, encouraging discoveries and inventions and boost the technological progress. Falling information costs are creating more markets and are expanding existing ones.

Restaurants, shops, movie theaters and a lot of other companies are gaining more customers because they can be more easily found and can advertise better for their products & services. Applications and recommendations from friends or unknown reviewers on, Facebook and other websites can gain interest for many products & companies which would have stayed unknown without the Internet. I believe that the falling information costs foster economic growth because they lift the productivity of  companies & persons.

Examples: Internet based travel networks like Airbnb - a website for people to rent out lodging - give people additional income by temporarily leasing or sharing their flats. Their customers can reduce costs for vacations or business travels which fosters tourism. Uber, a transportation network company whose mobile apps connect passengers with drivers of vehicles for hire and ride-sharing services, enables car owners to earn an additional income, their customers reduce their travel costs. Big data processing companies like Hopper are helping people to find cheap flights (hoppertravel). I reckon that in the coming years many other new companies will appear using the Internet to create new industries and markets.

                                          Positive Feedbacks

Many of these technological advances are working together, amplifying their impulses. These innovations are lifting the productivity of the economy significantly and are creating new markets & incomes. And it looks like that the technological progress is accelerating. Almost daily new products and companies with interesting business ideas appear. All these developments are adding up and accelerate the economic growth rate.

The technological progress is also reducing the price of oil and curbing the power of Opec. Today oil is abundant again and relatively cheap. It will stay so thanks to innovations like fracking which are reducing the costs of oil production continuously. Low energy costs are giving consumers world wide more money to spend for other goods & services. They also translate into low transport costs which curb the prices for food and other goods. Cheaper energy also restrains the costs to produce steel, cement and many other energy intense goods. Today´s situation reminds me of the mid 1980s. Then the oil price also collapsed and commodities stayed cheap through the year 2000. Cheap commodities in combination with falling interest rates and a technological revolution (Internet) lead then to a period of prosperity (with the exception of 1992 as the first Iraq war caused an oil price spike which lead into a mild and short-lived recession), the longest boom in U.S. history (factcheck). In this period the Dow Jones climbed from 1,000 points onto 10,000 points.

A business friendly government policy in combination with technological progress & cheap oil could create a new epoch of strong economic growth.


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