Economic storm clouds are gathering

Everyone bar the greens wants more economic growth. Growth means jobs, incomes and ever increasing living standards. We are used to an ever growing economy. We freak when there is talk of a recession, which is simply the absence of economic growth. Is future economic growth guaranteed?

One of my favourite writers is the English lord, Matt Ridley. He blogs on matters of technology, innovation and the environment, but is best known for his book The Rational Optimist. I am off to see him speak in Melbourne in a few weeks. Apart from his scepticism – I would say realism – about dangerous, man-made climate change, he argues mostly about the future, and regularly debunks the pessimism of those who think we are running out of resources and are therefore doomed. He fundamentally believes in human innovation and technological progress and is optimistic that we will find solutions in the future to our evolving challenges.

Yet is his optimism warranted? One of his assumptions is that our economies will keep growing on the back of innovation, and that this growth will allow us to tackle future problems. I generally share his optimism. But I spent the weekend reading a number of economists who think we might have peaked in terms of innovation's capacity to drive further economic growth. And the economic future they describe is not pretty. Their focus of observation is the USA, and what they have to say doesn't even factor in the GFC and its impacts.

Robert Gordon is an American economist whose work I discovered at the National Bureau of Economic Research, courtesy of The Australian's wonderful economics editor and great blogger Judith Sloan. Gordon believes that the big gains in productivity that have driven economic growth are largely over. That's right. The thing that supports our standard of living, an expanding economy, might be running out of gas. Gordon sees three periods of industrial revolution, of innovation. The most recent, the internet and e-commerce revolution, has simply not delivered the big productivity dividend that we thought it would. Certainly, the gains have not been as great as those of the previous revolution, which delivered indoor plumbing, electricity, communications, the growth of cities, and fast transport. He is not saying that all the devices and gadgets we now cannot do without have not improved our living standards. It is just that the earlier range of innovations did more to lift productivity and drive economic growth, and (he suggests) the impacts of these innovations were largely one off and have now ended. Gordon doesn't see any current innovations that will drive future productivity gains and doesn't see where the next generation of innovation will come from.

Then he talks about six daunting "headwinds" that we are facing. I won't even go there, except to say that he includes environmental regulations and taxes as one of the barriers to future growth. It is the combination of current barriers and the end of the innovation dividend that makes Gordon so pessimistic about our future prospects.

This is interesting stuff. And sobering. To put it in perspective, remember the talk of catastrophe from the previous Government in 2008 about going into recession. The Rudd Government basically put our immediate future into hock simply in order to avoid a recession. In other words, stopping economic growth is a very bad thing. Hence the importance of what Gordon is saying.

Gordon's paper is great economic history, more of which, incidentally, should be taught in our schools and universities. I digress. If we are running out of innovation gas, we are basically stuffed as an economy, and we had better get used to reduced standards of living.

Tyler Cowen is another terrific American economist. His recent bestseller, The Great Stagnation, also deals with the low economic growth future. He talks about low hanging fruit, that is, the easy things to do to grow the economy, and argues that as economies, we have already picked most of the low hanging fruit. In the case of thee USA, he identifies abundant land, technological breakthroughs, and smart uneducated children (whom we have now mostly educated). So, his conclusions are very similar to those of Gordon.

The arguments of both Gordon and Cowen flies in the face of much of the pumped up talk of the knowledge economy and of the "increasing returns" that flow from ideas and innovation.

The third leg of my depressing weekend reading was Joel Kotkin, who I regularly dip into for getting a feel for economic development trends. Joel talks at length about the hollowing out of the American middle class and the huge loss of middle skills and middle income jobs. The US statistics show it all very clearly. High end incomes and jobs have grown, as have low end service jobs. This is not just the GFC at work. It is a long term trend, since the 1970s. We of the middle class have basically grown our wealth and our lifestyle on the back of credit and house price increases since 1990, not on the back of growing incomes. And we have all seen what the GFC has done to paper housing and superannuation wealth in Australia, let alone the USA.

What has all this good cheer to do with our little neck of the woods? We certainly know all about the need to discover new growth drivers. When, oh when, will this region have a serious discussion about innovation? Well, recently we had the Queensland Plan summit and we continue to build regional plans and strategies on woolly assumptions about our distant future that maybe wildly off the mark. Let's focus on the present and drop the comforting motherhoody words and visions and get to work on the huge problems to which Gordon, Cowen and Kotkin have alerted us.

I remain a rational (I hope) optimist about innovation and its role in driving economic growth. I do not think we have hit a forever technological and innovation plateau. There is much more to be invented, adopted and honed, in the service of economic development. But we need some clear thinking, certainly in government, but also in business, about our future prospects and about addressing the big Australian problems – hyper regulation, debt, government spending, our perverted education system and the one thousand and one ways that we stifle innovation. I don't think any of the pessimists were actually saying, "give up on innovation".

On another matter entirely, I am the co-editor of a new book on Australian politics,