If the USA is the most innovative nation on Earth, then how can it suffer long-term economic decline?

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com, or follow me on Twitter.

(Note: In this post, I am not asserting my own opinion about the USA’s economic future.)

A lot of very intelligent people seem to be struggling with the idea that the USA might face a protracted period of economic decline, despite the fact that it is an innovative powerhouse (see this thread on Hacker News). It’s actually very simple for a country to be both innovative and in decline.

To achieve clarity I will offer a simple model. Remember, I’m not commenting on the future of the USA – I’m simply trying to show that a country can have both highly innovative industries, and yet still face protracted economic decline.

Imagine a country that has just 2 industries. One industry is old and bloated and bureaucratic and in permanent decline. This industry makes up 80% of the economy. The second industry is highly innovative and nimble and forward looking. This industry makes up 20% of the economy.

The dying industry is shrinking at 10% a year. The growing industry is growing at 10% a year. The economy for this nation is the combined output of these 2 industries.

This is what the decline of the dying industry looks like:

This is what the growth of the innovative industry looks like:

Put them together, and here is the economic history of the country for 21 years:

Please note that by any of the usual ways of measuring these things, this history would be viewed as a complete catastrophe by any modern Western democracy. In my hypothetical story, the nation undergoes a recession that lasts 7 years and its economy shrinks by 23%. It also takes 15 years just to get back to where it started from. And this is despite the fact that this country has an industry that is rapidly growing the whole time.

The numbers:

Declining industry:

80
72
64.8
58.3
52.5
47.2
42.6
38.3
34.4
31.0
27.9
25.1
22.6
20.3
18.3
16.5
14.8
13.3
12.0
10.8
9.7

Growing industry:

20
22
24.2
26.6
29.3
32.2
35.4
39.0
42.9
47.2
51.9
57.1
62.8
69.0
75.9
83.5
91.9
101.1
111.2
122.3
134.5

National output:

100
94
89
84.9
81.8
79.5
77.9
77.2
77.3
78.2
79.8
82.2
85.4
89.4
94.3
100.0
106.7
114.4
123.2
133.1
144.3

You might want to argue “Well, hey, 10% growth isn’t really a hot growth rate. If the industry was really innovative it would be growing at 50% a year, like some web startups do.” That is fair, but then, I could counter by saying “20% is a huge chunk of the economy. Web startups make up less than 1% of the economy of the USA.” If you would like, we could imagine an ultra-fast growing industry that starts off very small, but grows very fast. For instance, maybe this industry grows at 50% a year, but starts off as only constituting 1% of the economy – then the results are still 10 years of very bad news:

1
1.5
2.3
3.4
5.1
7.6
11.4
17.1
25.6
38.4
57.7
86.5
129.7
194.6
291.9
437.9
656.8
985.3
1477.9
2216.8
3325.2

In this scenario, the future is bright, but it takes a long time to get there. If these are the 2 industries in the country, then the country faces a period of very serious decline. In this scenario, the end result looks like this:

The numbers, combined, of the 2 industries:

100
90.6
82.4
75.5
70.0
66.1
64.0
64.4
68.2
76.8
92.2
117.6
157.7
219.8
314.6
458.3
675.2
1001.8
1492.8
2230.2
3337.3

Here you see a picture of a nation in long term economic decline, despite having an ultra-innovative industry that is growing at 50% a year. The future is rosy but it takes 12 years to get there.

I offer this as a simple model to explain how a country can be both very innovative and yet in long term decline. So when someone like Steve Blank suggests that the USA is at the beginning of an “entrepreneurial revolution” it is important to realize that he might be 100% right, and yet the USA might still face an economic catastrophe. These are not mutually exclusive. Rather, radical innovation and dramatic decline are perfectly compatibile with one another.

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