Many, including myself have worn a fresh collared shirt every day for a very long time. Once that meant a cost of three of today’s dollars every day for the laundry. Now if we buy only permanent press shirts they go to the washing machine, not to the laundry. If I have a favorite shirt that is not permanent press, and plan to wear it seventeen more times, it costs nothing to throw it away and buy a brand new wash-and-wear shirt for fifty dollars or less.
Think for a minute how such a simple change in technology gets reflected in economic statistics and in my standard of living. The new shirt usually costs no more because it is permanent press, but its value is equal to that of an old technology shirt plus an income stream to me of three dollars for every day it is worn. Since inflation is measured as a loss in the value of currency, new technology shirts are exceptionally deflationary. Without any new money coming in they add $900 to my annual spendable income. Since productivity is defined as value produced per unit of cost, the manufacturer of these shirts has significantly increased productivity even if he produces the shirt for the same price and at the same cost as an old technology shirt. The added value I receive from my new shirt is not reflected by changes in inflation or income or productivity statistics. My new found $900 each year to spend on stuff other than shirt laundering is invisible to economists.
This little story reminds us of a basic truth about statistics. Statistics are most useful when they are used to examine or compare consistent data sets. Think of the root of the word. Statistics explain a static world. Dynamic statistics is an oxymoron. No amount of adjustments can make it otherwise.
My permanent press shirt is just one of thousands of examples. How does one adjust for the change in value of a car that needs routine maintenance only every 20,000 miles or uses less fuel or can save your life? When I use a government subsidy to install solar panels on my home, and as a result buy less electricity, I am clearly better off. I end up with more money to spend, but my income does not go up and the unit cost or price of electricity does not go down. According to economic statistics there was no return on the investment made for my solar panels.
How does one adjust inflation statistics to reflect lower cost and higher resolution of digital medical images? To our lives, these can be huge improvements. Statistically they may be inflationary only because early diagnosis and treatment are more expensive than later diagnosis and quicker death.
How do we count the time and parking savings from using Uber, and where do we find 400,000 Uber drivers around the world in employment statistics? All of them have sufficient capital or credit to own or lease a modern automobile. Virtually none of them are, statistically speaking, employed as Uber Drivers. Perhaps we can find many of them in discouraged worker or poverty statistics.
As inadequate as statistics may be, our brightest economists, central bankers, pundits and politicians constantly use economic statistics to persuade us they understand our dynamic world and we are loosing ground. To grasp the scope of their error, we need look no farther than Moore’s Law.
In 1965, Gordon E. Moore, the co-founder of Intel Corporation published a paper predicting that the capacity of integrated circuits would expand exponentially, doubling in power at constant size and cost every two years for at least a decade. At the time, the integrated circuit had only been in commerce for seven years. While this was initially an observation of a trend, it quickly became ”Moore’s Law”, a goal and mantra for the electronics industry. The innovation of electronic design and manufacturing costs, including the placement of whole “systems” on a single chip, miniaturization of all electronic devices, and the seamless integration of electronics into the fabric of our daily lives are outcomes from the continuous innovation embodied in this goal for over five decades.
Surely you know what happens to a dollar when you double it 26 times, once every two years for 52 years. To save you the arithmetic, that single dollar becomes $33,554,432. If Gordon Moore had projected forward his “Law”, he would have predicted that the computing power of his UNIVAC costing $2 million in 1965 would cost just 6 cents today. If, in 1965, he could have visualized a $900 I-Phone he would predict it to have about 15,000 times the speed, storage and bandwidth and use .0067% of the power of a $2 million 1965 UIVAC. In fact, the I-Phone has overshot these expectations.
Moore’s law accurately describes this torrid rate of innovation across the entire electronic sector, including the pace of price-performance, miniaturization, and improvement in processing speed, memory, storage, digital networks, and image resolution all growing exponentially while controlling cost. None of this is controversial at all. Nearly everyone wonders that it has gone on for so long, and for how long it can continue.
How might Gordon Moore have visualized life in America today? One half of the population owns a computer 15,000 times as powerful as the most powerful computer available 50 years ago, carries it and its power supply in their pocket and interacts by voice or touch in high resolution color and high fidelity sound with computers around the world including digital libraries containing all the accumulated knowledge of mankind. Could he have imagined the added productivity and value that would bring to each of our lives? What is the value of all the information in the world at our fingertips, the value of being able to comparison shop for anything from our easy chair, the value of a high resolution color scanner and image transmission at our fingertips, the value of free video-phone calls worldwide, the value of high resolution color medical images and life extending medical devices from pacemakers to hearing aids? Could he have imagined, when the first cells were installed in 1972 or when smart phones were invented in 1996 that two and a half billion smart cell phones would be in use around the world in 2017? When Pong, the first two-dimensional black and white video game was released in 1972, could anyone possibly imagine today’s videogame or movie industry? Could Amazon or Netflix have been invented with logistics and communications capabilities available in 1965, or even in 1985? Could Gordon Moore have imagined what you mean when you speak of “artificial intelligence” or “electronic shopping” or “streaming video” or “mapping DNA?”
Most startling of all, if he could visit us here today, how would Gordon Moore react to economists or pundits who assert: “The middle class has not increased their standard of living for two generations”?
He would be likely to recognize that when mail is replaced by e-mail or pay phones are replaced by cell phones or magazines are replaced by websites or cars get self driving features or software implementation becomes less costly or shoppers get smarter there is no way for the statisticians to keep up with their “adjustments” to the value of currency. He would surely note that it is computer technology that allows Amazon to reduce delivered prices on so many products while list prices remain constant or rise. In thousands of ways our economic lives have become better while income statistics say we have not improved our lot. And as long as that is true Gross National Product as measured by economists will understate Gross National Value that is delivered to each of our lives. As long as Moore’s Law continues to describe the pace of innovation in both electronics and now in biotechnology as well, this disparity of economic statistics from reality will continue to increase.
How good is this? It says our economy is far stronger than it seems. It explains that inflation is low because the value and quality of many things we buy is increasing faster than the prices we pay for them. This is not just American news. This is deflation at its finest. It is good news for the entire world. Technology and its benefits have no respect for borders.
The point of this discussion is that we are all better off than we think; we are far richer and have more opportunity and share our wealth more broadly than economic statistics admit. The pace of innovation in our society is the reason we are better off, and also the reason it is hard for statistics to describe our progress. Reflect on the world without integrated circuits into which everyone over 55 years old today was born. Everyone over 25 years old today was born into a world without a commercial internet or e-mail or smart phones and everyone over 20 years old today was here before touch screens on phones or the first mapping of DNA. How can we not appreciate that every day our lives are invaded and enriched by this innovation? At the same time “we” is a very large group. All of us, young and old, rich and poor Americans and all citizens of the world enjoy many fruits of this innovation every day.
The downside to all this innovation is that our world is becoming more dynamic and more complex. The people in charge of keeping our growth stable, especially governments and central banks have no compass. Their models do not predict well because it really is different this time. Never in history has conventional wisdom been based on the quicksand of recent data that no longer represents approaching reality.
In 2016 and 2017 Janet Yellen several times publicly wondered why inflation is so stubbornly low. Of course she should wonder because her models say that all of the liquidity pumped into the world economy, all the debt and debasing of currencies around the world should cause rampant inflation. But since her models do not see the torrid pace of innovation as deflationary, she and other central bankers and economists do not see innovation as an antidote for our profligate fiscal behavior. Using these models, Jerome Powell and others on the Federal Reserve seem intent on steadily raising rates to the “old normal.” We need to ask them to hit “pause” and ask, ”What is it that we want in the new normal?”
Our trading partners have debased their currencies through easy money, excessive debt and trade restrictions resulting in hugely unbalanced trade. We are no different except as the world’s reserve currency we cannot manipulate against ourselves and we have the lowest tariffs and the fewest trade restrictions in the world. The United States is the ultimate sponsor and personification of free trade. Our reward has been a half-trillion dollar annual trade deficit.
So, lets check our logic…. Do we need to raise interest rates because outdated models do not account for the power if innovation to fight inflation? Should we or can we re-calibrate the models? Do the models say we need not be afraid that increasing rates will throttle down investment, even though it surely will? Do the models say we need not fear the inevitability that that higher interest rates will strengthen the dollar and produce the same result as a tariff on all our exports and a discount for all exports to us, while we pay for both? Do the models say we need not worry that a stronger dollar and higher rates on our debt will sap our economic strength to square up trade relationships while giving our trading partners, friend and foe alike, a winning hand in a currency war?
If we blindly follow a path focused only on past charts and old models for interest rates, historians will not write about its wisdom, only that misguided policy resulted from failure to recognize the deflationary power of innovation. What is needed are policy makers who at least recognize how little they really know and who take care to give interest rate changes a little time to work and let the rest of the world catch up before running too far.
Granddad’s Dictionary: Reflections on Life in America
by Michael Moffitt
ISBN: 978-1-4908-2916-6 (sc)
Published April 7, 2014