The Internet Is a Dud

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The world today looks almost identical to the world of the 1960s because there have been very few important innovations since then.

But you will leap to reply – the Internet! Alas, electronic technology does not seem to noticeably increase output of stuff. The Internet affects our quality of life in many ways, but not our standard of living.

The Internet was more or less fully built out in the US in the year 2000. All of a sudden, knowledge from all over the world…and from all of history…was available. Information could be accessed and questions could be answered at the speed of light.

People could collaborate on a global scale, across borders and time zones, innovating, creating, critiquing, and elaborating new ideas of breathtaking scope.

In the 1990s, many people believed that this electronic hyperactivity would eliminate the ‘speed limits’ on growth. Analysts advised investors that they could pay almost an infinite price for start-up Internet companies. Growth would be fast. And it would not require capital inputs, they said.

And certainly, there are many Mercedes 500 automobiles on California highways that owe their existence to the Internet. Many entrepreneurs, software developers and ‘app’ creators have gotten very rich.

But based on growth rates, wages and household incomes, the Internet does not seem to have led to a general uptick in prosperity. Since 2000, household income in the US has actually fallen. So have wages.

And stripping out government expenses and redistributed income shows negligible real growth in the private sector economy over that period. GDP minus government spending was $9.314 trillion in 2001 and only $9.721 trillion in 2010.

At that rate, it would take 167 years for the GDP to double. By comparison, GDP doubled twice between 1929 and 1988.

Over the last 20 years, the top 10% of earners are the only ones to have added to their wealth. Everyone else is even…or worse. At the bottom, among the lowest quarter of the population, people are poorer now than they were 20 years ago.

What went wrong? Why didn’t the Internet make us richer?

According to The Financial Times the world spends 300 million minutes a day on a single computer game: Angry Birds. Millions more are spent looking at videos of puppies or kittens. People spend 700 billion minutes per month on Facebook. The typical user spends 15 hours and 33 minutes on the site each month. The YouTube viewer spends 2.9 billion hours per month on the site.

You get the idea. You don’t need the government to waste time; you can do it yourself!

Even when you’re not using the Internet to waste time, you’re rarely using it to add to GDP. Instead of going out to shop, you can shop on the worldwide web. You will find much greater selection at generally lower prices.

You save the time and energy of going shopping at a mall. Likewise, entertainment is much easier and more convenient. Instead of going to a strip club, you can watch as much pornography as you want in the comfort of your own home.

In industry too, the Internet is primarily a cost-cutting, efficiency-enhancing technology. It permits better fleet management for trucking companies. It helps retailers avoid unnecessary inventories.

It allows you to save time and energy in countless ways, such as checking in for flights on-line…reading widely without going to the library…sending massive files, graphics and reports with the press of a button. These things make life more fluid, and perhaps more easy and agreeable, but they do not add significantly to GDP.

The Internet cannot create GDP growth.

Growth is what you get when you use more energy, or use the energy you have better. Growth – more GDP…more jobs…more revenue…more people – is also what every government in the developed world desperately needs. Without it, their deficit spending (all are running in the red) leads to growing debt and eventual disaster.

Not only is the rate of growth in the developed world declining, so is the speed of recoveries. Here’s Harvard professor Clayton M. Christensen:

‘In the seven recoveries from recession between 1948 and 1981, according to the McKinsey Global Institute, the economy returned to its prerecession employment peak in about six months, like clockwork – as if a spray of economic WD-40 had reset the balance on the three types of innovation, prompting a recovery.

‘In the last three recoveries, however, America’s economic engine has emitted sounds we’d never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance.

‘After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels – and it’s not clear whether, when or how we’re going to get there. The economic machine is out of balance and losing its horsepower. But why?’

Why? The obvious reason: we’ve reached the point of diminishing returns on energy inputs. I use the word ‘energy’ in a broad sense – to include our intellectual energy, and our time and attention, as well the energy you get from fossil fuels. Returns on investment have gone down to marginal levels.

In 2012, the Congressional Budget Office helpfully looked ahead and saw an on-coming train. If federal spending remains on its present course, the US would add another $10 trillion in debt over the next 10 years. Congress, reacting to the emergency, passed a law which, if left unchanged, would reduce the additional debt to $8.7 trillion. The downside train kept coming.

But the train is far bigger and more powerful than the CBO thinks. The real federal deficit for 2012 is not $1.1 trillion as widely reported. Include unfunded Medicare and Social Security obligations and it is more than $7 trillion.

GDP increased during the same period by about $320 billion. In other words, debt is going up 21 times faster than the economy that supports it. Already, if you reported the liabilities of the US government correctly, according to GAAP rules, such as every corporation is required to do, it would show a hole $86 trillion deep.

And at the rate deficits accumulate, it will get twice as deep in the next ten years – to more than $150 trillion, or nearly 10 times the size of the economy.

Another way to look at this is to think again about how modern democracies finance themselves. Since the days of Bismarck, they take in money from citizens and pay much of it back, in the form of various social spending programs.

The successful politician allows spending to outstrip revenues as much as possible, but not so much that he appears irresponsible. The more benefits he can plausibly promise to the voters, the more likely he is to gain power…and the more resources he can also shift to favored groups.

Growth over the last hundred years – in population, GDP, wages, prices – made it possible to expand government spending greatly, anticipating larger, richer generations that would support their smaller, poorer parents.

The mathematics of this system held up fairly well – until recently. Now, population growth rates are falling everywhere in the developed world – including the US, with a huge bulge of baby boomers preparing to retire and voting themselves the most lavish benefits in history.

Without growth, this system of public financing is doomed to spectacular failure. More spending will not be better; it will be calamitous. The more dry debt tinder on the ground, the bigger the blaze.

Regards,

Bill Bonner
for The Daily Reckoning Australia

From the Archives…

The Trade Deficit Dilemma That’s Alive and Well
14-12-12 – Greg Canavan

The Fed’s Poppycock Monetary Policy Targets the Unemployment Rate
13-12-12- Dan Denning

The Price of Risk in the Stock Market
12-12-12 – Murray Dawes

Recessions the World Over
11-12-12 – Dan Denning

A Victory Over the Zombies!
10-11-12 – Bill Bonner

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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6 Comments on "The Internet Is a Dud"

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Nexus789
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As you point out the Internet facilitated fast and easy communication and connection between parties. However, the reality is that these technological characteristics have also transformed the Internet in to a highly fragmented and disconnected environment that is largely frivolous. The result has been a profound dislocation of communities, businesses, corporates, governments and individuals from each other. The Internet needs to be re-purposed to build ‘value’ through so it helps us to use things (energy, resources, etc) more effectively. This required an Internet that is aligned with our real world and not one that is disconnected from our everyday lives… Read more »
SV
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The Internet surely increased prosperity. Just not in the USA, where its benefits have been offset by outsourcing of manufacturing offshore. First, and the biggest, productivity improvements came from better use of land through agriculture. Then from better use of energy. Then from cheaper labour. But while the cost of producing goods fell, the cost of distribution increased, even more so in Australia, which has the largest advertising spend per capita in the world. Most of this spend goes to mass media like TV and newspapers, that bombard the consumers with irrelevant ads. So when you lament the billions of… Read more »
Mikie
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The internet has made the world information-rich- in the developed world, most have more material baubles and trinkets than they can poke a stick at. What we need now are the true treasures: wisdom,education,health,environment,community, and gratitude-the best of these cost very little at all.

BoombeeShark
Guest

Interesting thought… but probably false and without substantiation. Why? Because CORRELATIONAL IS NOT CAUSALITY!

Just because the rise if the Internet corresponded to a levelling of incomes doesn’t mean the rise of the Internet CAUSED the levelling of incomes!

Don’t forget the level of debt in Western countries has steadily risen since the 60’s. This was correlated with an increase in wealth. But does an increased debt CAUSE the increase in wealth? Are there any limits? What about other conditions?

pravin
Guest

by far -easily the worst ever analysis of ANYTHING by bill .this is disappointing. why does he equate GDP to standard of life? it would have been better for DR readers if he had torn GDP to shreds instead.
“wasting” time on the net? who gets to define what is waste and what is not? central planners?

Gul
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I agree with Pravin and SV. I don’t think building big concrete malls in overcrowded cities like Mumbai, Delhi or Gurgaon increases the standard of living. I would rather spend my time productively at home – read a few ebooks, download a few songs and read DR than marvel at the bright lights and glass exteriors of shopping complexes. Equating GDP with standard of living is oh so 20th century type thinking…. Bhutan is a good example of a society that does not follow this model… Ancient India also is another example of a society that laid more emphasis on… Read more »
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