Currently filling column inches is Robert J. Gordon’s The Rise And Fall Of American Growth. Mr Gordon describes a golden age of invention, from 1870 to 1970, which revolutionised the world’s largest economy and led to increases in economic output and living standards that will likely never be repeated. He devotes a large part of this major study discussing the frontiers that were crossed in the first 70 years of that century: transcontinental rail, electrification, sanitation, the two-stroke combustion engine and ‘networked’ homes with heating, clean water and drainage.
These inventions, and the huge step forward in machinery and human output that they made possible, conspired with government policies such as the New Deal, the necessities of World War Two and the rise in personal credit, to ramp up US productivity. But it couldn’t last. Growing by an annual rate of 2.8 per cent between 1920 and 1970, the rate has since slowed to an average of 1.6 per cent, and just 1.1 per cent over the past decade.
What of the information revolution since 1970? The reader can be forgiven a gut feeling that Twitter cannot really compare to the automobile. There is an ongoing debate about whether the rise of the robots will boost productivity - and replace jobs - by automating many processes. But Mr Gordon argues that this job destruction will continue at its current slow pace, and that the information age only really delivered a sustained fillip to productivity between 1994 and 2004 as the price of computer speed and memory reduced substantially, while state spending on information and communication technology rose. In the years since, the introduction of smartphones and tablets has yet to make a big contribution to office output.
The book depicts a bleak future. “There is little room for growth at all,” concludes Mr Gordon, after taking into account the biting effect of inequality, as well as that of reducing government debt and paying for the baby boomers, and domestic challenges confronting the US education system. With much further analysis of quotidian realities not captured in the official measure of gross domestic product, Mr Gordon argues those in the next generation could see a standard of living lower than their parents.
Many of these arguments can be traced onto the UK’s experience. The think tank New Economics Foundation has published a useful podcast ‘The End of Growth?’, which lines up his innovation theory against Larry Summers’ idea of secular stagnation - that the increasing propensity to save rather than spend is suffocating growth. It also explains inequality as a suffocating force, by concentrating income among wealthy elites that are more likely to save than spend.
These theories are not mutually exclusive, and it is reasonable to expect - short of a major step in the information technology revolution or policy change to improve equality - lower growth for longer. But what will the impact be on public equities? Interestingly, a 2010 paper by the London Business School’s Elroy Dimson, Paul Marsh and Mike Staunton concluded there was “no clear relationship” between changes in real GDP per capita and stock market performance. This could be because a country’s company growth represents just a part of its GDP growth; or in the UK because most of our largest companies are multinational in nature. That provides more of a lesson for buying ‘growth’ economies in the expectation of stock market outperformance that is not supported by the data at the time - and certainly the emerging markets experience of recent years.
But growth is far from irrelevant. “The prosperity of companies, and the investors who own them, will clearly, at any point in time, depend on the state of both national economies and the global economy,” the paper argued. To support the point, it demonstrated a statistically significant correlation between quarterly US GDP changes and domestic stock market levels. Private investors will need their own answers to these questions.
