The End of Economic Growth in America

February 2, 2016, 8:07 PM UTC
NYC skyscrapers
Photograph by Masatoshi Aida—Getty Images/Flickr RM

The health of global economy has not been so uncertain since the end of the Great Recession. China’s growth rate is slowing, stock markets in Europe and the U.S. are suffering from losses and higher volatility, and many analysts see the depressed price of oil as exhibit number one in the case for a coming global recession.

But recessions are cyclical events that happen in every capitalist economy, and simply predicting that we will suffer a recession doesn’t also mean that the economy is fundamentally unhealthy. What if, on the other hand, our economic problems are far larger that the next downturn?

That’s what economist Robert Gordon asks in his new book, The Rise and Fall of American Growth, a work that details the history of economic growth in America and predicts that the future of the American economy will not be nearly as bright as its past. And given the struggles the American economy has had of late, there’s a chance that Gordon’s book could be this year’s version of Thomas Piketty, Capital in the 21st Century, another weighty economic tome that helped answer a central economic question of our time: the phenomenon of rising income inequality.

The central argument of Gordon’s book is that technological revolution, the kind that gave us indoor plumbing, the electrical grid, the automobile, and the Internet, is not a very common phenomenon in human history. As Gordon writes:

There was no economic growth over the eight centuries between the fall of the Roman Empire and the Middle Ages. Historical research has shown that real output per person in Britain between 1300 and 1700 barely doubled in four centuries, in contrast to the experience of Americans in the twentieth century who enjoyed a doubling every 32 years.

In terms of American growth, it was pretty slow and steady up until 1920. From 1920 through 1970, living standards exploded, after which the pace of growth has slowed steadily. This trend of slower economic growth, productivity growth, and income growth isn’t exactly news to modern observers of economics and politics. Economic anxiety is a defining trait of our age, and has been used convincingly to explain the political rise of once fringe figures like Donald Trump and Bernie Sanders.

What is novel about Gordon’s approach to this problem is that he doesn’t try to find political causes for our economic woes. “Economic growth is not a steady process that creates economic advance at a regular pace, century after century. Instead progress occurs much more rapidly in some times than others,” he writes. This fact would be much more clear to us, according to Gordon, if it weren’t for the IT revolution that boosted economic and productivity growth in the 1990s. This momentary blip has blinded us to the truth that the technological developments that occurred between 1870 through World War II are far more revolutionary than anything occurring today, and therefore bestowed more economic growth on the country than what we can expect going forward.

Innovation and technological development have always been difficult topics for economists to tackle. Economists have come to measure it the same way that physicists spot black holes—by looking at how it affects things we can see, like GDP growth. We know GDP growth is in part a product of the accumulation of capital—things like factories and equipment, plus the growth of the labor pool. But GDP grows faster than the combination of capital and labor. Economists have labeled the residual variable, “total factor productivity,” arguing that this figure describes technological growth and the development of business processes that enable workers to produce more efficiently.

As you can see from the chart above, TFP growth has been significantly lower since 1970, except for the period between 1996 and 2004. The purpose of Gordon’s nearly 750 page book is to explain why productivity growth has behaved this way. His argument rests on an exhaustive historical taxonomy of the material gains of the American economy from 1870 until the present. For the casual reader, this can be sometimes tedious, but you get the sense that Gordon feels the need to overwhelm specialists with historical detail in order to make his argument air-tight.

But some of Gordon’s critics will not be satisfied with his arguments regardless of how much detail he wields. For some economist, the argument that productivity growth is falling doesn’t hold water because they aren’t confident in the way economists account for it. As Google’s chief economist Hal Varian has argued, ““There is a lack of appreciation for what’s happening in Silicon Valley because we don’t have a good way to measure it.” These folks argue that it’s particularly difficult for us to measure productivity today because so much of the new services that are being offered, like most of Google’s products, are free, and therefore don’t appear in GDP data, which only counts goods sold at a price.

Gordon counters this line of attack with the argument that productivity has always been underestimated in one way or another. Just as we underestimate the growth of the economy because the GPS services, like Google Maps, are essentially free to use, so to did we underestimate the gains we received from reduced disease after the advent of the refrigerator, or the amount of work one was able to complete as light bulbs became brighter and safer to use.

It is quite astounding to ponder how primitive life for most Americans was in 1890. Less than 25% of the population had running water, while slightly more than 10% had an indoor toilet that could be flushed. Nobody in the country had electricity as their primary means of lighting or central heating. By 1940, a majority of Americans had access to all of these amenities, except for central heat, which didn’t reach the majority of the country until 1950. Gordon goes to great lengths to describe the economic toll that this lack of development had. Imagine the number of man hours that were freed, for instance, when water no longer had to be hauled from an outdoor well in order to cook a meal or take a bath?

More important for the modern reader is that these economic problems can only be solved once, which means that we can only get the economic and productivity growth from solving these problems once. And save for the information technology revolution that began in the 1970s, and which gave us the productivity boom of the late 1990s, there have been no similar technological leaps since the 1970s. Gordon admits that nobody can predict the future, but he sees it as unlikely that there will be any technological developments as revolutionary as the harnessing of electricity in the near future.

Furthermore, Gordon argues there are other headwinds, besides the absence of revolutionary technological development that will hold back the economy in the years to come, like rising income inequality, the need to protect the environment, and diminishing returns from further educating the public.

Though Gordon’s book is exhaustive and sweeping in scope, and novel in it’s thinking about growth, what will likely prevent it from the success that Piketty is how pessimistic it is. Piketty’s book came during a time when the left wing in America was already worried about growing income inequality, suspicious of the power of the global elite, and looking for solutions to those problems. Piketty offered rigorous analysis that reinforced these preconceived notions, but it also offered concrete steps that could be taken to counteract the what he sees as capitalism’s inherent tendency to concentrate wealth, like a global wealth tax.

Gordon has suggestions for promoting faster economic growth too, like increasing immigration and investing in universal pre kindergarten education, but his fundamental observation is that no matter what we do, economic growth is dependent on technological growth, and we can’t expect an industrial revolution every century as if it were clockwork.

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