🚀 Faster, Please! Week in Review+ #17
Shrek's Law vs. Moore's Law; what a US recession might look like; why you might never see a Moon colony. Also: Q&As with economists Michael Strain and Thomas Philippon — and a bit more!
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Miss a little, miss a lot. So much spectacular Substack content this week (IMHO), as you will see below. I covered a wide range of subjects in the essays, Q&As, and micro reads on Monday and Friday, as well as the paywall-free issue on Wednesday. Enjoy the Saturday summaries, recaps, as well as a bit of new content (usually)!
Melior Mundus
In This Issue
Essay Highlights
— What 'Shrek' has to do with Moore's Law and the US growth downshift (06.20.22)
— Here's what the (likely) upcoming US recession will look like (probably) (06.24.22)
— Why you might never see a Moon colony (06.26.22)
Best of 5QQ
— Economist Michael Strain on the state of the US economy
— Economist Thomas Philippon on productivity growth: additive or exponential?
Q&A with journalist Philip Coggan on the history of the world economy
Essay Highlights
📉 What 'Shrek' has to do with Moore's Law and the US growth downshift | Shrek’s Law, a riff on Moore’s Law, refers to how regular improvements in processor operating speed enabled ever-more realistic depiction of the green ogre from the four-film DreamWorks franchise in the 2000s. But Shrek’s Law hit a roadblock when Intel announced it was shifting away from boosting performance through faster clock speed. in favor of “multicore” chips. This shift eventually forced a big change by the Shrek animators to re-write large parts of their animation code to take advantage of the change. Three conclusions I draw from this story: First, innovation doesn’t just happen. It can accelerate, but it can also stall out. Second, there are huge gains to be had for nimble companies — and countries that are home to these companies — that can take advantage of tech advances. Third, the American innovation ecosystem — university, government labs, Silicon Valley — matters. And not just to Americans.
🔭 Here's what the (likely) upcoming US recession will look like (probably) | I’m less interested in guesstimates of recession probabilities than I am in the severity of the approaching downturn. In a recent analysis, the economics team at Goldman Sachs takes a similar view: “We are not particularly concerned about [a financial crisis] or more broadly about major financial imbalances that would need to slowly unwind in a recession because private sector balance sheets remain robust.” Two problems here: First, even a mild recession is still an economic contraction that will cause job loss. And those losses might feel particularly painful given that we just experienced a mini-depression. Here’s what “shallow” recessions have looked like in the past, according to GS, providing some idea of the severity of a similar downturn today:
We could be looking at an unemployment rate back over 6 percent, if history is a semi-reliable guide. Kind of a bummer, although the lack of a financial shock would hopefully mean the eventual recovery would not be a slow and grinding one. I’ll take rapid and robust. We need to get the New Roaring Twenties going! Faster, please!
🌙 Why you might never see a Moon colony | In a depressing piece earlier this week, Berger writes that Ars Technica has obtained NASA internal planning documents for its Artemis program. Berger’s bottom line: “Given the near certainty that there will be more delays, the Artemis Program is probably at least 15 years from having a semi-permanent habitat on the surface of the Moon. That is just about long enough to be “never” in spaceflight terms, and it would push Mars exploration into the 2040s or 2050s.”
So what are we doing here? Well, what we are not doing is building a lunar base or approaching such a task with any sense of urgency. Let’s set aside the geopolitical factors of the sort that drove Space Race Classic with the Soviet Union. Current US space policy offers a pretty good rationale. The Trump administration’s 2020 “"National Space Policy of the United States of America," says that "by establishing a permanent human presence on the Moon, and, in cooperation with private industry and international partners, develop infrastructure and services that will enable science-driven exploration, space resource utilization, and human missions to Mars." A recent analysis by Citigroup estimates that by 2040, mining the Moon could be worth some $12 billion in annual sales. Initial geological surveys show it contains three crucial resources: water, helium-3, and rare-earth metals. Moon mining would be a great proof of concept for asteroid mining, something with potential for far more value. And, of course, proof of concept for Mars.
Best of 5QQ
Michael Strain is the director of Economic Policy Studies and the Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute, where he oversees the institute’s work in economic policy, financial markets, international trade and finance, tax and budget policy, welfare economics, health care policy, and related areas. Dr. Strain is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
1/ I'm worried about a recession. What is the case that the Fed will be unsuccessful in a soft landing and we'll end up in some sort of recession?
It's hard to predict with precision how monetary policy will affect the economy. Monetary policy takes some time to kick in, and the effects of interest rate increases or the effects of reducing the Fed's balance sheet affect the economy differently in different times. And so it's hard to know with precision what effect an interest rate increase in 2022 will have on the economy several months later in 2022.
The way that we would get a recession in that case is very simple: the Fed would reduce demand more than is necessary to cool the economy. They'll actually reduce demand to the point where you don't have a cooling economy, you have an economy that's going in reverse. The Fed's goal is to reduce GDP growth to one half of 1 percent per year. The Fed might go a little too far and end up reducing GDP growth to the point where the economy is shrinking, rather than just growing very slowly. And the line between growing very slowly and shrinking is, in some sense, a fine line.
Another way that that might happen is that the economy may be slowing on its own faster than the Fed understands under the weight of higher prices. [Last week] we had new data on retail sales come out, and that data showed that consumers spent less on retail purchases in the month of May than they did in the month of April. And they actually spent less in April than the official statistics had previously estimated. This is because prices are high. Inflation-adjusted average wages are falling at a faster rate than they have in 40 years. Household income is falling, and when people have less income and when the purchasing power of their wages drops, they buy less stuff. How much less? That's a hard question to answer, but that matters quite a bit, too, in whether or not we'll have a recession. … I think a recession at some point in the next year and a half is much more likely than not.
Thomas Philippon is the Max L. Heine Professor of Finance at New York University’s Stern School of Business. In a recent working paper, “Additive Growth,” Philippon argued that total factor productivity growth is linear rather than exponential, as is often assumed. (I wrote about that paper in a previous issue of Faster, Please!)
1/ You note that textbook economic growth models assume exponential total factor productivity growth. Why was this assumed to be exponential in the first place?
For three reasons: convenience, limited data, and confusion between TFP and labor productivity. The first reason is convenience. When you assume exponential TFP growth, then not only TFP, but also labor productivity, the capital stock, GDP per capita, all grow at constant rates. That makes it really easy to characterize what we call the balanced growth path.
The second is the timing of the data. When Bob Solow wrote his famous 1956 and 1957 papers his data covered 1909-1949. The year 1930 is therefore right in the middle of his sample and this is when TFP growth accelerates. So TFP will look exponential to the naked eye around this time.
The third is that linear TFP (as I argue) does not predict linear labor productivity, let alone GDP per capita. Labor productivity will be convex in time because TFP improvements are multiplied by capital investments. The fact that labor productivity is convex does not say anything about whether TFP is exponential or linear.
Q&A with journalist Philip Coggan on the history of the world economy
Phillip is a business journalist, news correspondent, and author who has written for The Economist since 2006, where he writes the Bartleby column covering management and work. Before that, he worked for The Financial Times for 20 years. His latest book, More: A History of the World Economy from the Iron Age to the Information Age, was released in March of 2020.
1/ Pethokoukis: What have been the key developments that enabled the global economy to transform from one of widespread poverty to the unprecedented wealth we have today?
Coggan: I think the underlying mechanism is connections between people. Long-distance trade expanded in the 15th century, which expanded our diets and enabled us to exploit technological innovations. Thanks to technologies like printing and transportation improvements (i.e., sailing, steamships, and trains), these innovations could be spread all over the world, further spreading connections throughout the global economy.
Innovation and connections go together because the more people you have involved in a network, the more the chances that one of them will have a bright idea and spot something that the others haven’t seen. Then the others can be made aware of that idea and exploit it themselves. It’s the ability to make connections with the other billions of people around the planet that has made us more prosperous.
2/ A lot of people think the United States went off track when we opened up to more trade and immigration — that our openness has been a bad thing. Do you disagree?
Yes. Look at the difference between American attitudes post-1918 and post-1945. After 1918, America moved into isolationism, withdrew from the League of Nations, and enacted tariffs once things started to go wrong. So we had the Great Depression in the 1930s.
Meanwhile, after 1945, American bestrode the economic world like a colossus, and it made the far-seeing decision to offer Marshall Plan aid to Europe, realizing that this would create an enormous market for American goods. The result was 25 to 30 years of fantastic economic growth around the world. And America also took part and safeguarded Europe from the threat of communism and the Soviet Union — an incredibly wise piece of altruism.
However, risk comes when you get an emerging power that challenges you economically, which China is doing now. The same thing happened if you go back to the early 20th century, with Germany emerging as both a military and economic threat to Britain. It’s less easy to be altruistic and keep the drawbridge down when you’re facing that kind of challenge. That’s the worry going forward.
3/ Was it a mistake for the West to usher China into the world economy? And is their version of authoritarian capitalism the future?
I don’t think it was a mistake. It could have been done differently — in a way that tied China more into obeying trade rules and respecting intellectual property. But a billion people came out of poverty in the last 20 years as a result of China opening up, so it’s hard to see that decision as a mistake. It’s also worth thinking about what has happened in the last 30 years: China has sold America a lot of cheap goods, and America has paid back China in debt (in dollars), which currently yields less than 1 percent for 10-year treasury bills in a currency that America controls. So you might argue: Who’s actually getting the worst of that bargain?
And while China’s authoritarian capitalism appeals to some countries, I don’t think it’s a better way. Great gains in growth are made when economies are developing, because you’re moving workers from low-productivity areas like agriculture into high-productivity areas like manufacturing. But eventually, you reach the stage where you’ve exhausted all the gains from moving people from agriculture into industry, and you’ve probably over-invested in some sectors and become inefficient. That’s when growth starts to struggle.
In the 1980s, we had similar concerns about Japan, and then they suddenly hit a wall. So at some point, China will run into its own problems too, especially since their workforce is aging quite quickly, unlike plenty of other countries in the developing world. It’s much harder to grow your economy when that starts to happen.
4/ I’m concerned that we’ll come out of this pandemic as a more risk-averse society, where we won’t be trying out as many new business models or innovating. But we might also be made less risk-averse by the pandemic because we see the importance of being a rich, technologically advanced society. At this point, which do you think is more likely?
It’s a very good question. Generally, crises tend to accelerate changes that were already trending. We’ve seen that already with online retailing, which has had a huge lift out of this crisis — as has the cashless society. The economy will also change from people’s discovery that they could work from home and be equally productive. If this continues, businesses will move to supplying people in their local area, rather than relying on them to commute into cities every day. So I’m hopeful, though far from certain.
It depends on the political reaction. If we say, “We imported this virus, so everything from abroad is terrible,” that will be really bad. But populism doesn’t necessarily grow exponentially. Look at populist governments around the world — Brazil has not handled the pandemic very well, for instance. So if you have signs that populism isn’t always efficient, then people might return to understanding that a good government involves cooperating with other countries.
5/ Are we in a period of “late capitalism,” or are we entering a period of transformation into something that will still be very recognizable to people who’ve been alive for the last half-century?
I think it’s the latter. I take that more optimistic view. I grew up in the seventies when we also seemed to face an enormous crisis with stagflation, strikes, terrorism, and two oil crises, yet that was followed by a renewal in the 1980s and the sudden surge in productivity in the late 1990s, which showed that we could generate more productivity despite people talking about late capitalism. So renewal can be done again, but the risk is that we turn inwards politically and stop that from happening — doing exactly the same as people did after 1914. So if I have helped people understand that trade is not a zero-sum game and that immigration has brought enormous benefits, then this book will have served some purpose.
Thanks for reading this far! Just a quick note for first-time visitors and free subscribers. In my twice-weekly issues for paid subscribers, I typically also include a short, sharp Q&A with an interesting thinker, in addition to a long-read essay. Here are some recent examples of those interviewees:
Economist Tyler Cowen on innovation, China, talent, and Elon Musk
Existential risk expert Toby Ord on humanity’s precarious future
Silicon Valley historian Margaret O’Mara on the rise of Silicon Valley
Innovation expert Matt Ridley on rational optimism and how innovation works
More From Less author Andrew McAfee on economic growth and the environment
A Culture of Growth author and economic historian Joel Mokyr on the origins of economic growth
Physicist and The Star Builders author Arthur Turrell on the state of nuclear fusion
Economist Stan Veuger on the social and political impact of the China trade shock
AI expert Avi Goldfarb on machine learning as a general purpose technology
Researcher Alec Stapp on accelerating progress through public policy