Three charts to make you a techno-optimist permabull
Lately we’ve seen a few popular economists embrace “techno-optimism,” the idea that new technology is the “final frontier” that will endlessly improve humanity’s future.
This would seem an odd position, given we live in the age of “doom scrolling.” When Paul Krugman embraces something, you might pause for a moment. What do economists know about technology anyway?
I was an economics major, which turned out to be useful and useless at the same time. I learned that if unemployment levels are low, inflation picks up. That turns out to be completely untrue. I also learned that increases in the money supply cause inflation, which has (so far) also proven untrue! Once again, it seems all my money spent on tuition was wasted.
Newer Models
Economics is built around models, and many of the popular models - Keynesian, Solow, etc - were created for an industrial economy. But in my last year of college, we came on what I found was the most useful takeaway: the Romer model, an economic theory built for the Information Age.
It’s a macro model not based on the usual “the economy is a product of capital [e.g. factories] and labor” but that also includes “knowledge” in its equation:
Luckily, I won’t spend much time on this rather unintelligible math equation.
But what does it have to do with techno optimism or being bullish on stocks? Take out the math and the main takeaway from Romer is that the primary driver of economic progress is investment in R&D. Ideas matter more than factories, in particular because ideas can be used an infinite number of times (e.g., Facebook’s algorithm) while capital (e.g. a truck) cannot. And that’s reflected in the stock market today - most of Amazon’s market capitalization comes not from its massive logistics and ecommerce operations, but AWS - a set of virtual services that occupy far less physical space or cost.
Three Charts
The first point I’ll make about techno-optimism is that if we live in an R&D world, then the number of college and PhD graduates is a huge factor in future growth.
Here’s a chart of the share of the US population with a college degree:
Source: Statista
The good news is it’s basically a straight line up. Graduation rates have also been steadily increasing, meaning less wasted debt and resources. College costs had increased for years, but much of that was the huge increase in demand for colleges due to the deer-in-the-python of early 90s millennial births. Since 2010, the rate of tuition inflation has been steadily falling, thanks to an oversupply of seats (all those new dorms!).
One way to look at it is that in the 1990s and 2000s the US invested a lot in education - K-12, undergraduate, and graduate. That should start yielding significant returns this decade and continue to do so for another ten to fifteen years.
This trend is fairly true not just in the US, but worldwide. The current global median age is a shade under 31. Although economists and demographers often write with alarm about a quickly graying world, that is still far in the future. For now, most of the world is actually in its peak productive age, and will be for some time.
The huge cohorts of youth in the developing world - which led to revolutions like the Arab Spring, for instance - are now maturing into older, more stable populations.
My last positive chart is high wage occupation growth. We can see that nearly all of the jobs created in the last couple decades were in “high wage” sectors.
To me, this proves the Romer model: that we can have endless growth in the information economy. There is lots of demand for ideas, and the supply of young, educated people to supply brainpower is strong and will remain so for decades.
The Massachusetts Permabull
Unfortunately, in the short term the implication of the third chart is growing inequality. We are in the middle of a shift from the old industrial economy to the new, knowledge economy. Industrial workers are being displaced, creating huge displacements among older, rural groups and widening inequality. This bumpy transition - to put it mildly - has created dark times (e.g., the last four years) that seem to forebode darker ones.
Instead, we can imagine what the US might look like given the 3 charts above. What might the country look like when college attainment hits 50%, and you can throw a rock and hit a STEM PhD?
I know one state that might help us complete the picture...
Thanks to its leadership in higher education, Massachusetts has been at the forefront of many of recent technological booms - from the growth in software to today’s biotech revolution, including those life-saving vaccines from Moderna.
The Romer model and the worldwide trend of a young, educated population taken together suggest a long runway for the current economic boom. Not only will progress likely continue, but the rate of progress will move faster as our investments in ideas grow. We live in a world of infinite ideas to keep that engine running.