Evidence is mounting to support the proposition that the global economy has entered a period of secular stagnation. As distinct from cyclical downturns and crises such as the Great Depression and the Great Recession of half a dozen years ago, secular stagnation entails a long-term slowdown in economic growth. Those warning of it point out that multifactor productivity growth, reflecting technological progress and managerial skill levels, began slowing since the 1990s and has failed to recover. Here in Australia, multifactor productivity is below the level of the early 2000s: we are less productive now than we were more than a decade ago.
Maybe some of this is a measurement problem. After all, multifactor productivity is what’s left over after account is taken of labour productivity and capital productivity. If only the world were experiencing a secular downturn in the quality of statisticians. But statisticians are getting better while multifactor productivity is getting worse.
Australian material living standards – as measured by gross national income per person – are lower now than they were in 2012. No longer can we rely on income from high mineral prices pouring into Australia. Jobs are being lost in the resources sector, replaced by lower-paid jobs in retail and personal services. While this transition is positive for overall employment levels, workers simply aren’t earning sufficient incomes for a consumer-led recovery.
Nor can we count on an investment-led recovery. Private investment in the non-resources sectors of the economy is not picking up the slack left by the fall-off in resources investment. This feeble investment effort in Australia and in the rest of the developed world might be structural. The world’s great investment phases in the modern era were associated with landmark innovations such as railways, electrification, manufacturing, highways, airlines, sewerage and megacities. Economists worry that there have been no big innovations in the last decade. Smart phones and iPads are fabulous consumer items but they are not in the same league as the sewering of cities and the electrification of the countryside.
Yet a wave of useful innovations is building. A defining feature is that, unlike the great investment-intensive innovations from the beginning of the Industrial Revolution, these breakthroughs require little new investment. Many, in fact, make better use of pre-existing capital. Airbnb utilises the existing housing stock and Uber the existing car fleet. Renewable energy generators such as solar panels can utilise otherwise declining grids as transmitters of electricity in excess of local requirements. Other innovations, such as 3-D printing, advanced robotics and genomics for the diagnosis and treatment of genetic illnesses, are rich in intellectual capital but less so in physical capital.
Will the coming generation of innovations be enough to lift material living standards for the lower and middle classes of the developed world? Probably not. In the United States, considered to represent the global productivity frontier, real wages at the bottom end are lower now than at any time in the last four decades. Donald Trump’s popularity is but one manifestation of the shattering of the American dream. Muslims and Hispanics are convenient scapegoats in a system offering low wages. Australian real wages are at best flat lining with no improvement in sight.
Yet without the adoption of disruptive technologies the situation will be worse. They are breaking down barriers to entry, unleashing fresh competition in industries not very familiar or comfortable with it. Those who have invested heavily in old technologies will have an interest in maintaining the value of their assets by creating pretexts for government intervention to block the introduction of disruptive technologies. Warnings of risks to health and safety might warrant sensible regulation but beware the neo-protectionists.
At the National Reform Summit, the ACTU offered to sit down with the government and employer groups to discuss an industrial relations system designed for a high-skill, high-wage future. Instead, the public debate to date has been all about cutting Sunday penalty rates. Is this as good as it gets?
Accommodating disruptive technologies should be at the heart of Australian innovation, competition and industrial relations policy in 2016. These technologies might not be the panacea for lifting material living standards as measured by talented statisticians but they can improve the quality of life and in the end, that’s what matters. Have a positively disruptive New Year.