Atanu Dey On India's Development

Is the US Economy in Long-term Decline?

February 20, 2011 by Atanu Dey | 7 Comments

My friend Veer asked me to comment on what is posted at this site — 10 Economic Charts That Will Blow Your Mind. OK, my mind is blown away. One thing is apparent to me. The US is in economic decline. But it is not clear whether that decline is long-term or not.

And here is my answer. I am a pessimistic about the US in the short-term but I am optimistic about it on the long-term. In about 10 to 20 years, the US will have figured out a new energy source through research and development in biotechnology. Once the energy problem is solved, the rest will be easy.

My friend Keith Hudson had a very interesting post on a related matter a few days ago on his blog. He wrote

My own view is that, in the coming years, the energy technology that will steadily take over from fossil fuels as they decline in quantity and go up in price is the production of hydrogen from synthetic bacteria, probably hybridized from existing natural bacteria. This immensely complex research is being led by the iconoclastic Carl Venter and the Nobel Laureate, Hamilton O. Smith, The principal technology will move from engineering (metal-based or electronics-based) to biology.

What effect will that have on the present growing divide between an elite class and the majority of the population? Or the present unequal divide between countries? Of course, this question begs the other question of whether the masses will survive at all. In future years, governments might not be able to pay welfare benefits to most of their populations. Besides, of their own volition, the masses might follow the present trend of Western parents in not replacing themselves with sufficient numbers of children.

But whether it’s the masses-plus-elites or the elites alone that will survive in the further future, it is the nature of the productive process itself that has the major effect on the structure of governments and their relative military powers. Karl Marx first said this—and it’s been about the only thing he got right. However, the new H-bacterium technology will have radically different effects from now because its inputs are far more equally dispersed over the face of the earth than fossil fuels are at present. The necessary ingredients, carbon dioxide, nitrogen and solar energy are freely available from the air and water is abundant. (There will probably be two major variants—H-bacteria fed by freshwater and that fed by seawater.)

Thus a great equalization is likely to occur between the economies of different populations.

I wrote a brief comment on his blog, which I quote here in full.

Keith,

I agree with much of what you write. However, I do not see the great equalization happening. Here’s my intuitive reasoning, not backed by anything at all.

From the largest scales to the smallest in the universe, there is a trend of greater differentiation. What began as a plasma soup condensed into clumps such as galaxies, and within them into stars and planets. On earth, life started off as single-celled entities and evolved into an almost infinite variety of living organisms. The diversity of stuff in the universe increased with time — clearly a process with a strong bias towards un-equalization.

Narrowing our focus to the economic sphere alone, I note that as human civilization has progressed, the inter-group and intra-group inequality has increased monotonically. Hunter-gatherer groups were not as unequal as any group (village, cities, states) today. Our technological society accentuates the differences among people, and these accumulate over the generations.

In primitive societies, a man with a spear and strong arms would have been more powerful than another with a weaker build, but not by a few orders of magnitude. Today a person with the right sort of equipment can destroy a city full of people just by the push of a button.

Previously, say a couple of centuries ago, a rich person would have had a more comfortable life compared to that of a poor person but both would have been powerless to deal with even simple medical problems. Today the rich have access to medical procedures and technologies that are not available to the poor.

You can arbitrarily expand the set of examples which show that the world has become more unequal with time. This increase in inequality will only accelerate with time because of the speeding up of the rate of technological change.

I imagine a time in the not too distant future when poverty as we understand it today — lack of basic nutrition, education, entertainment — will be over. But I feel that the divide between the rich and the poor will only continue to widen. The poor will always be with us.

BTW, for high quality content that will make you think, I recommend Keith’s blog.

  • MJ

    It is difficult for the US to decline because 1) they have very favorable geography (and hence no geo-political and resource issues, except oil in the short-term). 2) The demographic issue is not a problem either because they have as many teenagers as 60+ year olds (unlike China and Europe). They can also tinker with their immigration policies. 3) They will always have large export markets like India/China to export to – granted India/China will make most of what they need themselves, nevertheless, there’s always something to export to such large countries like India/China.

    What is an issue is that education has become more expensive and young people have been dropping out at a greater rate. Inequality is higher, leading to social discontent and threats of class warfare (look at the recent debate over tax policy). Prison occupancy is high to the extent that they have 25% share of all worldwide prisoners. California in 2007 planned to spend more on its prisons than its public universities. They are also dropping on some HDI metrics. They take on great challenges by embracing change at a relentless pace (leading to rapid outsourcing of manufacturing and then services). While history has always shown that to be beneficial in the long term, at times it leads to difficult short term situations. Its not always clear that they will tide over these problems. Some of them point to very deep issues. Until recently, I would have been confident of their ability to resolve problems. But increasingly, the US is behaving like a dinosaur on important issues.

  • http://honestlynagpur.blogspot.com/ kautilya

    dang! u make it so easy. nice dissection and explanation sir!

  • Sid

    I too do not believe that decline is long term for a different sets of reasons. In my view, reasons are:
    1)Empires do not fail to an outside enemy, they weaken themselves first – American empire (it is an empire, whom are we kidding) has not weakened itself, it has certain challenges but there is nothing to suggest that those challenges will persist in long term. The bigger thing is that they recognize that they have challenges and they need to work to meet them. This realization alone tells me that they have not been weakened otherwise they would believe that there is nothing serious going on here.
    2) Debt is not a serious issue – They have a large debt but the entity (PRC) that can call on that debt can not live without a strong and prosperous America willing to import their products. The only two scenarios that can eradicate this dependency are to have a strong internal demand or another large and prosperous nation willing to enrich PRC. That alternative nation does not exist and stronger international demand would require better income distribution inside the country. This last factor would require the workforce to be paid better which will take away the cost factor fast. In summary, US of A and PRC are like junkies and dealers, they can not exist without each other.
    3) Military decline is only temporary – Their system provides some variant of mandatory participation in the army. Regardless of how Obama’s war will end, it is unlikely that American morale or military might would be severely compromised by a bunch of desert dwelling morons screaming Allahu Akbar.
    4) Oil is indeed a serious issue – but an alternative may be a matter of two-three years given the amount of money, promotion and talent have been invested in that area in past couple of years.
    5) There is no other nation that can be an alternative – find a nation (or even a currency) that can replace them.
    6) Culture – It is their practical, utilitarian and hard-working culture that I have a lot of respect for. This is something that we Indians should have learnt from them, but we instead copied cultural junks like Valentine’s day. That culture has not changed much, they are still prepared to work hard. With the amount of large scale business and innovative business models that can be found there, it is very hard to see why they can not get past their challenges.

  • Ungrateful Alive

    “Oil is indeed a serious issue – but an alternative may be a matter of two-three years.” — Atanu, is there a prediction market for betting on this? E.g., Sid bets 100 EUR (no USD or INR please) that civilization-saving clean replacement for oil will arrive in 2015. I bet 103.34 EUR that it won’t. Whoever loses deposits the money in a Swiss—cancel that—Julian Assange’s private piggybank.

    PS: There is no question that clean and renewable energy will become a reality. The only question worth discussing is, at what world population (not when) will that happen. My bet is, fewer than two billion.

  • larissa

    I recently met with oil engineers and they seemed to think they have a bright future. Oil will be big for at least another 30 years….

  • RC

    Price of Oil is in a bubble (along with precious metals and other commodities) When the bubble bursts oil price will come down to a much reduced more reasonable level which will be beneficial to developing world.
    However, as Chevy volt and Nissan Leaf start selling in bulk, in less than 10 years more than 20% of cars sold in the US are expected to full or hybrid battery EVs.
    There are major innovation in the energy field happening right now. Bill Gate’s major investment in is such a game changing technology. It works on nuclear waste and produces hitherto unimaginable amounts of energy.

  • TiredProf

    “Price of Oil is in a bubble along with precious metals” — Sure, as is industrial civilization itself. The oil and civilization bubbles will pop within a few years of each other. When, in absolute terms, is hard to say. We can make both last a bit longer by behaving a little better.