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The Drivers of GDP Growth

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September 17, 2012 – Comments (0)

Board: Macro Economics

Author: yodaorange

A lot of the talk from politicians and the Federal Reserve is about how to get the economy aka GDP growing again. The theory being that a rapidly growing GDP cures all ills. Sometimes the drivers of GDP growth are well understood. For example automobiles and housing have a well known effect on both growth and job creation. Sell more autos and houses and GDP will grow.

I am going to bring a different perspective to the “How much will the Iphone5 add to GDP” argument.

Raise your hand if 10 years ago, you forecasted Apple would be selling a gazillion iPhones and we could even have the debate about its impact on GDP. I don’t see many hands. Give credit to Apple and the late Steve Jobs for creating a device with that kind of economic growth.

There are a lot of other pioneering technologies that led to growth that were NOT forecasted well in advance. Today the Wall Street Journal had a brief but excellent article on one of the main technology drivers of the last 50 years: disk drives. [1] This is the 60th anniversary of the disk drive that IBM developed. A few points:

1) Often times, you have NO idea that a simple idea will have such long term economic impact like hard drives and floppy drives. Without hard drives, the technology world as you know it would NOT exist today. (It would take a long separate post to explain this.)

2) If companies like IBM had NOT funded wild, speculative research like disk drives, we have no idea how long it would have taken for someone else to invent it. IBM and Bell Labs used to have huge R&D budgets that funded wild, low probability of success projects like this. The great majority of them failed, but every once in a while a diamond emerged.

3) If companies do NOT fund wild, speculative research, then the probability of inventing a new, high growth industry go way down. Stated differently if you build it they might come. If you do NOT build it, they definitely will NOT come.

4) A tremendous amount of high tech startup time, energy and money is spent working on iPhone/iPad applications instead of “hardware” based companies. Stated differently everybody wants to be the next Facebook or Zynga. Nobody wants to be the next Intel. It takes too much time and money.

5) The two largest private funders of R&D for many decades (ATT/Bell Labs and IBM) have dramatically reduced their R&D budgets as a percentage of sales. We cannot count on them to invent the next “disk drive” in the future

6) Ironically, the compensation for inventors has dramatically changed. Jack Kilby who co-invented the integrated circuit at Texas Instruments received the princely sum of ~ $300 for his patent. Contrast that to the mural painter at Facebook that received stock worth $200 million. [2] The IBM disk drive inventors probably received a few hundred dollars per patent. In the grand scheme of things, which contributions will be larger to long term GDP growth?

This raises three questions:

1) Are iPhones/iPads/apps capable of driving “high” GDP growth over the long term, say decades?

2) Are companies, big and small, adequately investing to find the growth drivers for the next few decades?

3) As a country, does the US even understand what drives long term growth rates and do we have policies in place to encourage them?

Personally I will be spending more time on these questions instead of trying to calculate how much GDP growth will come from the iPhone5.

Thanks,

Yodaorange

[1] Wall Street Journal article on history of hard drives
Google this phrase to retrieve the article”Remembrance of Computer Disks Past”

[2) Facebook mural painter receives $200 million payday
http://www.csmonitor.com/Innovation/Horizons/2012/0203/Faceb...

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