Gordon's Challenge to Growth Believers

Imagine having to choose between two technological alternatives: A) You can keep everything invented before 2002, including your Windows 98 laptop, your Amazon account, and running water with indoor toilets, but nothing invented after 2002; or B) you can keep everything invented after 2002, such as your iPad and iPhone, Facebook, and Twitter, but you have to give up running water with indoor toilets. Which would you choose? Robert J. Gordon has posed this thought experiment to audiences in speeches, and he now reprises it in “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” a working paper for the National Bureau of Economic Research. Presented with the alternatives, audiences “guffaw,” Gordon says,

because the preference for Option A is so obvious. The audience realizes that it has been trapped into recognition that just one of the many late 19th century inventions is more important than the portable electronic devices of the past decade on which they have become so dependent.

Gordon’s provocative thought experiment is part of an even more thought-provoking analysis of the general arc of economic growth:

It questions the assumption, nearly universal since [Robert] Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.

What we think of as “the” Industrial Revolution, Gordon calls IR (Industrial Revolution) #1, with its main inventions between 1750 and 1830, including steam engines, cotton gins, and railroads. IR #2 lasted between 1870 and 1900, with its chief innovations being electricity, the internal combustion engine, and running water with indoor plumbing. But the effects of IR #2 extended for decades, with home appliances, air travel, wired and broadcast communication, and the interstate highway system still transforming the economy until around 1970. The iPad and Facebook are part of IR #3, beginning around 1960 and centered around the Internet, personal computers, and mobile phones. But Gordon believes “its main impact on productivity has withered away in the past eight years.” Gordon argues that IR #2

was more important that the others and was largely responsible for 80 years of relatively rapid growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before.

Long a skeptic of the growth potential of the “new economy” based on information technology, Gordon now believes that “the productivity benefits of IR #3 had faded away by 2004” — before the Great Recession. Labor productivity in the U.S. today is a mere 1.3% annually, the level it was between 1972 and 1996. But if productivity between 1972 and 1996 had matched the level attained between 1948 and 1972, the level would have been 69% higher. As for the “new economy” of IR #3, it “only made up for about 13 percent … of what we lost after 1972 due to the fading out of benefits from IR #2 and its many sub-inventions.” Of course the future cannot simply be extrapolated from the past; IR #1, IR #2, and IR #3 were “revolutions” precisely because they disrupted the preceding trend lines. But Gordon believes that innovation alone will not have the same potential to create growth in the future, particularly in the face of “six daunting headwinds” the U.S. faces:

1. The “demographic dividend” resulting from the movement of women and baby boomers into the workforce was a one-time-only event. As baby boomers retire, hours per capita decline, and output per capita grows more slowly than productivity.
2. Educational attainment has plateaued. The U.S. has steadily declined in international rankings of reading, math, and science, and cost inflation in higher education increases student debt and discourages low-income students from pursuing college degrees.
3. The growth in median real income has lagged the growth in average per-capita income. As income inequality grows, growth in per-capita consumption “could fall below 0.5% per year for an extended period of decades.”
4. Globalization and outsourcing have “a damaging effect on the nations with the highest wage level, i.e., the United States.”
5. Environmental regulation in the form of a carbon tax “will reduce the amount that, households have left over to spend on everything else.” This is “a payback for past growth,” since countries like China and India resist having regulations imposed on them that were not imposed on the U.S., Western Europe, and Japan during their periods of growth.
6. U.S. household and government debt continues to drag on growth. Consumers have been paying down their debt, but at the cost of less consumption, slowing down the recovery from the Great Recession. And the higher taxes and/or lower transfers needed to reduce government deficits likewise reduce “the growth rate of real household disposable income relative to that of real GDP.”

All of these lead Gordon to suggest that per-capita real GDP growth in the U.S. could slow to as little as 0.2% annually by the year 2100. Against the “inevitability” of this pessimistic conclusion, Gordon holds out only the mild hope that the “demographic turnaround,” which “seems on the surface to be the most inevitable” of his six “headwinds,” could “potentially be counteracted” through unlimited immigration of high-skilled workers. As for unskilled immigration, he points out that “unlimited immigration before 1913 did not cause mass unemployment…. They arrived when the economy was strong and postponed their arrival (or returned to their home countries) when the economy was weak.” Rather than offer solutions to the problem of growth he has identified, Gordon winds up with a question: What are “differences in environment, resources, legacy history, policies, and culture” that would lead a “Canadian or Swedish economist” to be less alarmed about the “past and future of his or her country” than he or she is about the prospects for the U.S.? Of course it may be that more than one “American economist” may also be less alarmed about the U.S. But Gordon’s provocative and troubling analysis gives a broader historical context to the debate over economic growth and America’s future.