Why has the U.S. economy grown so lethargically over the past few years? Economists have ladled out all sorts of diagnoses. Maybe this is just your run-of-the-mill hangover after a financial crisis. Or perhaps the Federal Reserve hasn’t been aggressive enough in stimulating demand. Maybe it’s Obama’s fault. Or Congress’s fault.
Yet there’s another, more controversial theory making the rounds these days. It’s possible that our expectations for future economic growth are just too high. Perhaps the last century or so of strong economic growth in the United States was all just an aberration that’s now coming to an end. Before the Industrial Revolution took off in Great Britain, after all, the world barely experienced any economic growth. Then we got a whole bunch of nifty, life-changing technologies — from electricity to cars to airplanes. But what if that process has run its course, and we’re now entering another low-growth phase?
That’s an unnerving possibility raised in a recent NBER paper by Robert Gordon, an economist at Northwestern University. He’s offering a shorter version of his theory at VoxEU Tuesday: “The paper is deliberately provocative and suggests not just that economic growth was a one-time thing centred on 1750-2050, but also that because there was no growth before 1750, there might conceivably be no growth after 2050 or 2100. The process of innovation may be battering its head against the wall of diminishing returns.”
Doom and gloom. And if prefer your doom and gloom in chart form, we’ve got you covered. This graph below shows how growth rates in the United States peaked in the early and mid 20th century and have dropped ever since. If this trend continues, hypothetically, we’ll be back to zero growth by 2100:
But what would explain this great slowdown? Technological stagnation, maybe. Gordon divides the world’s technological progress into three phases. In the first, between 1750 and 1830, we got the basic fruits of the Industrial Revolution — steam power and railways. That was… okay for growth. In the second phase, between 1870 and 1900, we got a whole pu-pu platter of life-changing inventions, from electricity to oil to the combustion engine to running water. The 20th century boom in the United States and Europe came from reaping the fruits of these inventions. But many of the improvements they wrought were one-off events, from urbanization to freeing up women from household drudgery.
Once all those inventions had been fully exploited by about 1970 — once we’d built all our highways and air conditioned most of our homes — productivity growth in the United States sagged again. Growth picked up again in the late 1990s thanks to a few new inventions (computers, the Internet, mobile phones), but Gordon suggests that we may have already wrung as much growth out of those inventions as we could. By 2004, productivity growth has gone flat again. Even before the recession, we were slowing down.
In his NBER paper, Gordon offers more reasons for a perpetual U.S. slowdown in the years ahead. For one, the United States has already boosted the number of women in the labor force as far as it will go. Two, our educational levels have flatlined. So we can’t expect many more growth dividends from those factors. Three, U.S. inequality will continue to increase, thanks in part to countries like China and India holding down middle-class U.S. wages. That will hurt growth. Fourth, rising energy prices and climate change will impede growth. Fifth, the United States will continue to encounter large deficits it can’t grow out of.
And that’s how we’ll go from growing an average of 1.8 percent per year between 1987 and 2007 to… growing a mere 0.2 percent on average:
Yikes. So is Gordon being too pessimistic? In his VoxEU essay, he concedes he’s being “deliberately provocative.” So let’s run through several critiques that have been provoked by his paper:
1) John Cochrane argued that some of the constraints in Gordon’s graph above may lower the level of U.S. GDP, but they won’t necessarily throttle the growth rate. What’s more, some of these obstacles are self-imposed—in theory it’s possible for policymakers to boost U.S. education further and reduce debt levels. Cochrane also says that there’s more to life than U.S. economic growth alone: “Suppose we cede the frontier to, say, China, as the UK ceded the frontier to us… But as long as we still use China’s ideas and technology, and they grow at 2.5 percent, so do we.”
2) Karl Smith also thinks that Gordon’s wrong. Smith suggests that the ongoing slowdown in U.S. productivity might be due to the fact that technological progress is actually speeding up right now. If true, then we should see a spurt of productivity growth and a rapid boost in wages sometime in the near future. It’s always darkest before the dawn! That sort of thing. Ryan Avent has similar thoughts, pointing out that current productivity advances might be harder to appreciate than they were in the Industrial Revolution.
3) Matt Yglesias wonders if Gordon is underestimating the ability of current information and communications technology (ICT) to transform our lives in the ways that the automobile, penicillin, and running water all did:
[T]o really transform the economy as a whole you need to be able to transform health care, education, or the housing/transportation nexus. … And thus far, ICT has made only a modest difference. But does anyone really doubt that it will? Schools have poured a ton of money into ICT and tech-focused startups are circling the education sector aiming to disrupt it. Something’s going to change here. IBM built a supercomputer that can win at Jeopardy which is cool but useless and now they’re trying to turn it into a medical diagnostic engine. Computer-driven cars are already a real thing. Right now, price is a big barrier to adoption but if there’s anything we know about ICT hardware it’s that the price will fall.
4) Noah Smith dreams even bigger and argues that Gordon is underrating future technologies: “There are many hypothetical technologies that have the power to transform the human experience even more profoundly than any that have gone before. … For example, personality upload (also called “brain emulation”). Why spend all your wealth rearranging the world we live in, when you can just create your own? An even bigger one is desire modification. Why spend all your wealth creating a better world, when you can make yourself like the one you’re in?”
5) At the Economist, M.C.K. argues that stagnation arguments like Gordon’s always pop up when the economy’s souring: “In the late 1930s, Alvin Hansen was one of America’s leading economists. He claimed that the United States was doomed to endure a “secular stagnation.” Like Mr Gordon, he believed that his country’s past prosperity was due to a series of favorable developments that could only be exploited once.”
6) On the flip side, if you want to get really pessimistic, check out energy analyst Gail Tverberg’s related post. She focuses more on the energy and natural resources side of things. We’ve reached the point where it will be exceedingly difficult to feed the world as the global population swells to 10 billion. The quality of the world’s oil resources are declining — we’ve exploited much of the cheap and easy crude and are now moving on to harder-to-extract (and pricier) oil. That could constrain global growth in the years ahead. Plus, there’s always climate change, which at the extreme end could put a major crimp on growth.
7) Also on the pessimistic side, Chris Dillow points out that politics in the United States and Europe could get ugly in a world without growth: “Traditionally, growth has helped resolve two conflicts. One is resistance to taxation versus the demand for public services; economic growth funds increases in the latter without excessively onerous taxation. The other is between rich and poor; people might tolerate the rich getting better off if they too are getting better off, if only at a slower rate. But what if the rich get richer as the poor get absolutely poorer? On both counts, stagnation would increase political conflict.”