The near-term outlook for the global economy and most developed markets is moderate at best, but both look stronger in the longer term, according to Joe Davis, global chief economist at Vanguard and head of its Investment Strategy Group.
The reason: productivity growth. It will expand through the global sharing of ideas and collaboration, said Davis, who spoke at the Inside ETFs conference underway in Hollywood, Florida.
This is not just wishful thinking on Davis’ part. Economist Paul Romer was awarded a Nobel Prize for his theory of the Economics of Ideas, which focuses on the snowball effect of ideas, especially in technology, leading to stronger growth.
Davis, along with the rest of Vanguard’s global economics team, studied more than 2 billion records from over 33,000 research publications across 1,000 industries in search of a leading indicator for innovation, tracing every idea from its beginning, where and who they came from, and screening for the most influential ones.
What they found was what he calls the “Leading Idea Multiplier” to measure how many additional ideas each good idea generates, leading to innovations five to seven years in the future.
The multiplier was 40:1 in 1980, nearly doubled in the 1990s, reached about 200 in 2003 and stayed there for years, suggesting the slower growth or “new normal” that has prevailed for about a dozen years. But in the past 18 months it has soared to 400, suggesting that contrary to conventional wisdom “globalization is actually accelerating” and will eventually lead to increased innovation, like the innovation seen in telecom and technology in the 1990s, said Davis.