I don’t see things in quite the same way as Robert Samuelson does, at least as expressed in his most recent column, reproduced at RealClearPolitics. I agree that there was a “special century” between 1870 and 1970:
We all know what happened. Primitive conditions gave way to modern amenities and technologies. In 1870, there were no homes with electricity, and few — if any — with indoor plumbing or central heating. By 1940, about 40 percent of homes had central heating, 60 percent had flush indoor toilets, 70 percent had running water and 80 percent had electricity.
But in some ways, we succeeded too well, suggests Gordon. The spectacular advances conditioned us to believe that rapid technological progress is an inherent feature of our economic system. Invention and innovation can be dialed up to solve any problem: reversing sluggish economic growth, curing cancer or combating global warming.
Not so, says Gordon. Rapid advances are not assured. What he shows is that technology-driven growth has varied substantially over time. It was fastest between 1870 and 1970 — a period he calls a “special century” — and slower both before and after.
How do you explain the growth in the 1990s? It wasn’t an illusion. Here’s my explanation.
Between 1980 and 2000 American businesses engaged in an enormous amount of capital investment and got very little out of it. First, they put computers on every desk. Then they committed to replacing those computers every few years. Then they networked the computers together. During all of that they received very little return for their investment.
But then in the mid-1990s there was a tipping point, synergy. The result was the Internet as we know it today with lots and lots of efficiencies, greater reach, whole new industries.
But today’s managers don’t remember the lean years of the 80s and the early 90s and all of that capital investment. Today’s businesses are very risk-averse.
The difference between today and 1900 is that we’ve picked the low-hanging fruit. There will be future technological breakthroughs but they will take even more capital investment, betting on the future rather than looking for a sure thing in the present.
I also think that some of the factors involved in the extraordinary risk-aversion we’ve seen over the last couple of decades is the growth of mammoth retirement funds and sovereign wealth funds, both groups pushing managers to avoid risk. They’re sowing the seeds of their own destruction.
“Today’s businesses are very risk-averse.”
Today’s large businesses… The return on investment to lobbying and regulatory capture is so much greater and safer. Warren Buffet wants to maintain monopoly for his railroad? Kill the pipeline.
“….some of the factors involved in the extraordinary risk-aversion we’ve seen over the last couple of decades is the growth of mammoth retirement funds and sovereign wealth funds, both groups pushing managers to avoid risk.”
I’m not sure where you are coming from there. I can’t speak to the sovereign wealth funds, but I know the other pools of capital quite well. Starting in the 90s the portfolio allocations to the riskiest asset class, alternatives, rose dramatically (as in doubling to quadrupling) and remain there today. Further, I recall no such conversations or directives, ever. The only example I know of is the insurance companies, who desire relatively safe equity investment profiles simply as a way to goose the returns to their mezzanine debt funds.
As to the larger point, dramatic technological innovations don’t run on a train schedule. I’d be leery of declaring the end of breakthroughs.
Well, to paraphrase something in another of today’s post I think that the large retirement funds and sovereign wealth funds want risk without risk. They probably see it as return without risk but it’s the same thing. And, yes, I know insurance companies better than other large organizations these days.
A lot of small businesses don’t even see what they’re doing as risk. IIRC it costs about $50,000 to bring even a fairly trivial app to market and almost none of them make any money. That’s risk.
1970
The early 1970’s seem to always crop up, but like the proverbial elephant in the room, nobody seems to notice. It is as if some major event caused an inflection point in financial and monetary matters. What could it have been?
I know – disco and 100% dacron polyester, snag-free, sans-a-belt trousers. If anything could turn Milton Friedman’s brain into mush, that would do it. Well, a few lines of coke at Studio 54 wouldn’t hurt, but hey, it’s not freebasing or anything.
Masters of the Universe full of blow and loaded with unbacked dollars, what could possibly go wrong? At least Sen. Dodd & Rep. Frank have put an end to that nonsense.
With Barney Fife and Goober to save the day, what could possibly go wrong?
“… I think that the large retirement funds and sovereign wealth funds want risk without risk. ”
Again, I’ve never talked to someone at a sovereign wealth fund in my life. But as far as the major endowments or pension funds….. I’ve spoken with the heads and staffs of the likes of Yale, Harvard, Williams, Commonfund, PSERS, Teachers, Howard Hughes Medical, MacArthur etc etc. All I can tell you is that I’ve never heard of such a thing. They are all CFAs for christsake.
Insurance companies are a different breed altogether, but they know who they are. They don’t want big risk, but they are OK with blended bottom to mid cap structure position returns.
Your last comment was interesting. I don’t know jack about software development. But it shows a difference in our orientation. Software development doesn’t even hit my radar when I think of risky business initiatives. But I can assure you they understand the risks of their investments.
Companies making investments other than IT that is.
Maybe another explanation works. Managers are rewarded for cutting costs and not increasing capital investment—a very short term view.
“Warren Buffet wants to maintain monopoly for his railroad? Kill the pipeline.”
He wouldn’t get much out of killing the north-south pipeline. If you follow oil (Hamilton’s blog is good) you know there has been a mismatch in refining capability and oil transport. What has really been needed is east-west pipelines.
Steve
What happened in the 70’s? The USA got out of the long term R&D business. Up to 1970 or so, the federal government spent about 2.25 % of GNP on R&D, much of it very blue sky stuff, while industry spent about 0.5% of GNP, mostly on near term research and development, In just a couple of years, the feds dropped back to about 1% of GNP, and industry took up the slack, basically by going to 1.5% of GNP, again largely focused on short run.
Richard Nixon gets a lot of the credit. Remember how thankful Americans are that that silly man-on-the-moon business is all over. But Democrats have a claim too — the “Mansfield Amendment” which got the DoD to drop all the R&D not immediately applicable to military needs. A handful of academics argued this was being shortsighted, that long range R&D did indeed pay off, but they were most Democratic economists and people in Washington knew not pay them attention.
And then the 1990s came around and economists decided R&D spending was basically pointless anyhow. Investment counted, however one wanted to define investment, and if you invested enough, you reaped innovation. Just like that! Spending on R&D just didn’t matter in the long run.
And in the 2000’s, the orthodoxy is that we’ve used up all the good R&D ideas anyhow — “the low lying fruit” — and really, it’s just fine. Of course, we’re running a bit low on investment these days, since businessmen are sitting on their cash, but that’s okay too, because fiscal and monetary policy are the real determinants of economic growth, and as long as the federal government keeps running those lovely deficits, investers will have something nice and safe to put their money into, and we will grow Grow GROW!
Uh ….
I think the R&D went to healthcare research. IIRC the War on Cancer began under Nixon. I have a vague recollection of his saying something very similar to what President Obama said in the SOTU except that the horizon was “in our lifetimes”.
Nixon changed the dollar into a fully credit backed monetary unit and made the dollar a free floating currency. In the previous system, 2 + 2 mostly equalled 4. In the new system 2 + 2 had a few constraints, but those few were knocked out over the next twenty-five years.
The financial industry has created some very innovative products, and if they were working within a semi-sound money system, it could be beneficial to the economy. What my friends on the right fail to grasp is that the money they use is not their money. It was created through financial illusion.
Like all illusionists, the financial illusionist requires a specific viewpoint (physical or mental), but once that viewpoint is broken, the illusion quickly dissolves.
The private sector creates money through lending, and the money it creates is redeemable for US dollars. These dollars are backed by the credibility of the US government and, if required, the taxing authority of the US government. US dollars, as a currency, are the sole property of the US government, and if they are to be “created out of thin air”, the US government is the only body with that authority.
The problem is that, contrary to popular belief, the government cannot create dollars fast enough. It has limited ability. By using the financial sector’s ability to leverage those few dollars, they can now get a “monetary multiplier” well beyond anything Lord Keynes could imagine.