The internet was fully functioning in America in 2000. Since then, it seems to have added nothing to GDP. It’s not really a game-changing innovation… at least not in that sense. It changes peoples’ lives…they can now travel, learn, live, and work in different ways. But it does not seem to do much for GDP.
US real output – the goods and services produced by the private sector, for the private sector – has gone nowhere in the last ten years.
And now the tech stocks – the major pillars of the internet economy – seem to be giving way. Damn! Young people were counting on them.
What does this mean?
We explained it to an audience in London last week. The economy of oil, coal… turbines and machines…is the economy we grew up with. It was phenomenally successful at making things and moving them around.
In two generations, the US economy went from one mostly powered by animal muscle to one mostly powered by machines. This economy was developed before we were born, and fully realised by the time we were young adults.
By the 1980s, there were more cars than drivers…more televisions than eyes to watch them…and more hamburgers than we could possibly eat.
Today, young people learn how to work with software programs…Twitter…and the cloud. But when we were young, we were bent over, under the hood of a ’58 Chevy, trying to rebuild the carburetor or clean the points. ‘Grease’ was the word.
Living standards…and GDP per person…rose sharply during our lifetimes. More stuff meant more wealth. At least, that’s how we saw it. And that’s how economists measured it.
And governments, businesses, and households came to rely on more wealth. The ’58 Chevy was replaced by the ’59 Chevy…and then by sleeker, faster cars from Europe.
Progress! Improvement! Wealth! We figured that it would always be that way. Next year, we expected to be richer than we were the year before. That’s the way it had been for generations. We saw no reason it shouldn’t continue.
And so, we soon got used to spending wealth even before we earned it.
This was made much easier when the feds switched to a pure paper currency. The amount of money and credit had been previously restricted by gold. Gold increased at only about the same rhythm as the economy itself. And creditor nations could ask for payment in gold. But paper money? You could create it by the boatload.
By some calculations, the amount of credit in the US increased 50 times since the monetary system was changed in 1971. We measure it as a 30-fold increase. Either way, it was a huge increase in the amount of spending power of the US.
Credit is not the same as money you have earned, however. Credit leads to debt. Salaries, wages…even capital gains…are a form of wealth you have already earned. Debt is a claim on money you haven’t earned yet. Debt needs to be paid back.
Debt rose. And nobody worried. Because everyone assumed that growth would continue. In fact, many thought growth rates would speed up now that the internet was on the job. Growth would allow us to pay off the debts…and continue spending.
But growth didn’t happen. The internet didn’t speed up output. It might be good for dirty pictures and Facebook stalking, but it doesn’t seem to produce stuff. And now economists tell us that the next generation cannot expect to live as well as we did.
In fact, with the weight of so much debt and so many promises made to the geezers, for the first time perhaps in American history, the next generation will be poorer than we are. The commentariat is calling it a “Lost Generation”:
‘New census data released today reveals that the recession has made American 20 to 30-somethings into a Lost Generation of unemployed and underemployed.
‘According to economists, this trend will continue through the decade, and when it’s over, it will take another decade for this generation to fully recover.
‘The dream of going to college, getting a degree, finding a job, and striking out on your own has dissipated, leaving only staggering numbers. Only 2.4% of college graduates find jobs that motivate them to move out of state. So they go home.
‘5.9 million members of The Lost Generation will leave college and return home to live with their parents, that’s 25% more than the last recession. Most of them are men.’
Fully recover? This generation may never recover. It may be lost all its life. Because you have to do certain things at certain stages in your life. You start a career when you are young, for example. Colleague Justice Litle comments:
‘What happens to college graduates who have gone years without notable work (other than making frappucinos or taking orders at the local drive-thru)… with résumés lacking experience, bank accounts crushed by student loan debt, and a sense of resigned bitterness over it all?
‘Not to mention those who never finished college… now discovering that ‘a bachelor’s is the new high school diploma’…
‘Call them generation jobless.’
Here’s another reason young people can’t get jobs. Older people won’t give them up:
‘The percentage of people over 60 in the workforce has climbed steadily over the past decade. Partly it’s about 60 being the new 50, but it’s also about rising costs of living, a lack of savings, and people clinging to jobs out of fear over disappearing pensions. Between 2001 and 2011, the employment rate for people between 60 and 64 years of age in OECD countries increased to 43.1% from 35.8%. For people between 65 and 69, it rose to 22.8% from 17.5%, over the same period.’
What little growth we’ve had in the 21st century has been mostly fraudulent. It was wrought by either further expansion of credit or by an expansion of the public sector. Increased education, health care and “security” spending by the government will show up as increases to GDP.
But none of it makes it easier to pay for past consumption; none of it makes it easier for the ‘Lost Generation’ to get its bearings. Instead, it makes it harder, since less money is left for innovations, factories, infrastructure, savings, businesses and wages.
‘I feel sorry for young people today,’ said a retired nurse at a wedding reception on Saturday. ‘They can’t get jobs; I guess that is at the root of it. But I’m not sure. They seem lost in a more fundamental way. They don’t get married, for example. They have lovers and children, but they don’t marry. And often they live at home. Or they have some not-very-serious job and a small apartment.
‘They don’t seem to know what they are supposed to do…or how to do it. It was very different for my generation. I was born during the war. We grew up knowing what we had to do. We had to get good jobs.
‘We had to rebuild the economy and the country. We had to get married and have children. That’s what everyone did. And we did very well financially. I mean, we are all now comfortably retired… depending on the government to take care of us for the rest of our lives.
‘Those early years were the best, though. We were young. We felt free… certainly much freer than we are today. And we still had a sense of purpose. We still had the structure of work and family that is so important.
‘But today’s young people – not all, of course, but I think I’m describing a substantial group of them – don’t seem to have those things to provide structure to their lives.
‘But maybe I’m wrong. Everything is so different. And I look at things through tired eyes now. Maybe I don’t see the structure. Maybe their lives look a little empty to me…but not to them.’
for The Daily Reckoning Australia
From the Archives…
China’s GDP Growth Ponzi Scheme
19-10-2012 – Greg Canavan
An Australian Property Boom and Bust all at Once
18-10-2012 – Greg Canavan
The Fed’s New Stooge
17-10-2012 – Bill Bonner
Discordian Religious Advice for the Investor
16-10-2012 – Nick Hubble
Electric Cars and Platinum Mines
15-10-2012 – Dan Denning