Will technology keep delivering higher living standards? It is a huge question and a vital one, for at this moment there is something of a crisis of confidence in the West as to whether our children and children’s children will have as high a living standard as we do. Ten years of stagnant living standards in most Western democracies give us a taste of the pressures that may lie ahead.
But right now we are seeing practical examples of technology racing onwards. We have just had the two new games consoles, the Sony PlayStation 4 and Microsoft’s Xbox One, and the new iPhone software. There will be more, much more, as the year moves on. Now you may say that more advanced ways of playing computer games are hardly the stuff that improves the well-being of society, and that there is nothing wrong with the present iPhone software. Why, you might ask, is not all this technical energy going into reducing the cost of healthcare or improving pensions? But if people signal that this is what they want by buying the kit, well, that is what they want. In any case, technical advances in one area have spin-offs in others. Look at the way mobile access to the Internet is transforming the media.
The bigger point here is that if the developed world is to carry on increasing living standards, it has to carry on increasing productivity. The emerging world can improve living standards by adopting what has already been developed by countries further up the technology chain – as China, largely, is doing now. But while the world as a whole can get richer by disseminating existing technology more widely, the advanced countries have to innovate to do so.
They have to do so against headwinds. I have just been looking at a paper by Professor Robert Gordon, of Northwestern University, near Chicago, where the headline says it all: “Is US economic growth over: faltering innovation confronts the six headwinds”.
His thesis is that growth will be much harder to sustain in the future than in the past because innovation speeded up from about 1750 to the middle of the last century, but has been slowing ever since. His headwinds, slightly simplified, are: ageing populations, rising inequality, competition in services from lower-waged countries, poor educational standards, environmental regulation, and the debt overhang – an overhang evident even before the 2007/8 banking crisis.
Some of these, he argues, are uniquely American, while some apply to other developed countries. Innovation will continue. But taken together they mean that future growth in income per head will be slower than at any time since the end of the 19th century and that the growth in income of the poorest 99 per cent of the population will be slower still.
It was an important paper and, as you might imagine, it caused something of a stir. A key element here is that it is wrong to blame the banking crisis for the pressure on living standards, for all these forces preceded it. But if the conclusions appear gloomy, they at least give a blueprint for action. For example, we can – in some measure – cope with ageing by changing retirement ages and reshaping jobs to enable older people to contribute. We can apply new technologies to improving educational standards. We can have better-targeted environmental regulation. And so on.
But the most fascinating question is surely: can the new technologies be better deployed to improve not just living standards conventionally defined, but human well-being? How do we move from more sophisticated computer games to more thoughtfully organised societies?
Low bond yields won’t last forever
The world’s stock markets are proving true to the adage that investors should “sell in May and stay away” but the more important story (and less widely reported) is actually happening in the bond markets. After all, some reaction was always on the cards, and notwithstanding recent falls, the FTSE 100 index is still 9 per cent higher this year.
But bond markets have moved more radically. A year ago, the UK government could borrow for 10 years at less than 1.7 per cent; a month ago, it could borrow at 1.9 per cent; now the rate is nearly 2.2 per cent. Of course, the market may reverse itself again but, given the focus on the eventual ending of quantitative easing in the US, there is a general awareness that in the medium-term rates are likely to rise.
That will change politics. Instead of politicians being able to feel that they can borrow freely, they will start to be aware – or be made aware – that markets may again start to enforce fiscal discipline. The about-turn by Ed Balls, citing the need for “iron discipline” on fiscal policy, is consistent with that.
By any long-term standards, bond yields are still very low. But it is quite plausible that come the next election long-term interest rates will be back to where they were at the last one, when that 10-year gilt yield was 3.8 per cent. Savers will be getting a slightly less bad deal and about time, too, you might think. But governments will again be aware that the cost of servicing the national debt will be biting into monthly tax receipts. Iron discipline indeed.