The world has changed a lot in the last 40 years, and we have innovation to thank for almost all of it.
Consider what life was like In the 1970s. In those days, the bottom 10% of earners weren’t just poor, they were dirt poor. They couldn’t afford a car, a TV, an apartment…anything.
Today things are different. No matter how poor you are, you can afford all sorts of things — two TV sets, a car, an Xbox, two computers air conditioning, and still be in the bottom 10% on the economic scale.
The data says that incomes haven’t really increased at all, but our buying power has increased dramatically over the years. This is sometimes referred to as “consumer welfare,” the value you’re gaining in excess of what would be classically in GDP.
GDP and growth are measured in terms of, I’m spending more so I’m getting more.
But what about value? If I’m getting more and more for what I’m spending, I’m getting more value, more consumer welfare, out of every dollar I spend.
That $10,000 desktop computer my parents bought in 1977? The $200 phone in my pocket right now is infinitely more powerful and efficient, and pretty much every person the planet has one.
Businesses like Amazon are bringing additional value to the marketplace that’s not being effectively captured in our GDP numbers. Cheaper and cheaper goods delivered right to your door.
If you could properly measure this kind of excess value, some economists say that actually the growth we’re seeing is about 5% or 6%.
A misunderstood economy
Looking at stocks, a classical economist would probably say we should have seen the stock market collapse by now.
A lot of what has driven the market recently is the financialization of the stock market — large corporations buying back their stock, people rotating out of mutual funds and into ETFs and that sort of thing. There’s a supply and demand problem and these investors can’t get enough securities, so that’s bid up the market a bit.
Not really fundamental economic growth, and not any of the policies we’ve implemented since 2008.
So the question is, why haven’t we seen the stock market come down? Won’t this run out of gas at some point? It’s because the economy is actually running about 5% or 6% growth, because of those innovations I mentioned before.
Facebook, Google, Netflix, Amazon and the like — the FANG stocks — are delivering value to our lives that’s not being captured in a classical economic sense, but it will show up in the marketplace over time and eventually accrue.
There’s one emerging school of thought that says what’s really driving the market from a Keynesian standpoint (and what will eventually cause it to revert) is excess production. We’ve got too much production capacity and not enough demand.
There’s a lot more demand being generated out there through consumer welfare, not measured in GDP, but driving growth.
The trouble with robots
But innovation isn’t always pretty.
Think about the robots that we’re now seeing come on the scene. People are worried that they’re going to take away jobs.
Well, they’re right.
Robots really are going to take jobs away from the classical economy.
But how much this “damages” the economy depends on how many new industries are created for people to work in. How many new innovations are developed.
We didn’t have an RNA clinical diagnostic industry a few years ago. Now we do, because some very smart people created new tools and processes to make that a reality.
The same is true for vertical farming, alternative proteins, immunotherapy and much more.
There are all new things, new industries, that nobody understood before. We didn’t even know we needed these things, but now that they’re here we’re realizing that we can’t live without them.
That’s good, because the robot economy is removing the old career path where you’d graduate from school, go work for a company like Boeing or IBM or Amazon and spend your career creating work that meets particular criteria and looks a particular way. Robots can do those jobs.
But most new job creation is coming from companies that are five years old or younger for a reason, and those companies are still desperate to find talent.
So, even though the robots are taking over the secular economy, we actually are getting more growth out of this than we think.
We need to drive yet more growth.
We need to leverage more of what we already have to promote more innovation.
The deflation effect
We have two options for growing the economy: We go to the Fed and they pull some levers and they sort of energize the secular economy, or we decide that no one cares about the secular economy and we let innovation take over.
For every dollar you pour into the innovation lane, you’re going to get four, five, six dollars back in growth, in jobs, and a whole bunch of things.
That’s great, but there’s no Fed policy that can be applied to impact that.
That economy is immune from Fed policy. It’s creating things that the Fed can’t comprehend, from a standpoint of measuring GDP.
And that’s what I mean when I say that innovation is deflationary. It’s because new discoveries, and new industries and the new companies that they create can have a much larger and important impact on the economy than many people think.
Unlike inflation, deflation concentrates the money supply within the economy, boosting purchasing power and wages and making life better for all of us.
In these uncertain time where a lot of monetary policy is up in the air, there is one thing that we can count on in the economy, and it’s the power of innovation to move the needle. The question now is will we step up and support it.