Innovation And Your Income

The standard financial advisor lecture, either related to your 401(k) or your private portfolio, always has "The Chart".  The Chart illustrates the last 100-years or so of returns for a particular index to the U.S. stock market.  It always ends the same way - - it averaged 10% over the last 100-years with the implicit assumptions that it will average 10% for the next 100-years.  And these last 100-years?  Probably the greatest 100-year period in terms of innovation.  Look at transportation - - from the horse and buggy to train to car to airplane to jet to rocket to spacecraft.  From a horse ride to the market to a trip to the moon.  This is a key reason for the 10% return per year over the last 100-years.

But look at income in the context of innovation.  The income numbers for Americans reflect a slowdown in growth - - growth in innovation that moves median incomes upwards.  From 1947 to 1973 - - a period of just 26 years - - inflation-adjusted median income is the U.S. more than doubled.  But is the 31 years from 1973 to 2004, it rose only 22 percent.  And, over the last decade, it actually declined (this has not happened since a ten year period associated with the Great Depreciation).  To be fair, the U.S. is not alone.  Most developed countries have experienced this same problem.

Many of our most noted and productive inventions are getting long in the tooth.  Today, no huge improvements for the automobile or airplane is in sight, and the major struggle is to limit their pollution, not to vastly improve their capabilities (my grandfather's first car, a Model T, and my Dodge Ram 1500 get the same gas mileage).  The Internet is seen as an innovative development in which it might produce new explosive growth.  But the Internet has not been a huge macroeconomic hit.  In terms of macroeconomic growth, is Facebook a replacement for automobiles, jets, and nuclear power?  Is a platform for Twitter and video games really going to boost median income?

We had better either become much more innovative in the areas that move median incomes or collectively development the temperament that can live with much slower growth and fewer alternatives.  The government fundamentally faces a fork in the road moment.  Either do the things that produces innovations -- education investments and strategic R&D or do the things that manages temperaments.