The Great Reversal

What we are witnessing in Europe — and what may loom for the United States — is the exhaustion of the modern social order. Since the early 1800s, industrial societies rested on a marriage of economic growth and political stability. Economic progress improved people’s lives and anchored their loyalty to the state. Wars, depressions, revolutions and class conflicts interrupted the cycle. But over time, prosperity fostered stable democracies in the United States, Europe and parts of Asia. The present economic crisis might reverse this virtuous process. Slower economic expansion would feed political instability and vice versa. This would be a historic and ominous break from the past.

It’s this specter that hovers over the U.S. election and the entire developed world, though it need not come true. Modern economies — especially the United States’ — possess great recuperative powers. Democratic traditions are strong. Still, a reversal can’t be excluded, because most advanced countries face slower economic growth, even if (hardly certain) they successfully navigate the fallout of the global financial crisis. Semi-stagnant societies can’t meet all expectations for jobs, higher wages and government benefits. Political institutions then lose legitimacy. Europe could foretell this dismal spiral.

Robert J. Samuelson

Samuelson writes a weekly column on economics.

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Demographics alone suggest slower economic growth. The aging of the United States, Japan and most European countries reduces the labor force growth, because there are fewer new workers compared with retiring workers. In the United States, average labor force growth is now reckoned by the Congressional Budget Office at 0.5 percent a year, a third of its post-1950 average. Elsewhere, prospects are worse. In Germany, the labor force is barely growing; in Japan, it’s declining. In the short run, a slowing labor force cushions unemployment. In the long run, it reduces economic growth.

From 1950 to 2011, U.S. economic growth averaged 3.3 percent annually, divided roughly equally between average labor force increases of 1.5 percent annually and productivity gains of 1.8 percent. (Productivity — efficiency — generally reflects new technologies, better management and more skilled workers.) With the labor force increasing more slowly, the pace of potential U.S. economic expansion would drop to 2.3 percent annually, assuming that productivity gains stay the same. Unfortunately, that’s an iffy assumption.

In a fascinating paper, economist Robert Gordon of Northwestern University speculates that productivity increases have peaked. Per capita income gains may gradually slow to half or less of their historical rate. Most economists, he writes, believe “economic growth is a continuous process that will persist forever.” It may not, he argues.

Gordon identifies three industrial “revolutions.” The first began in England around 1750 and featured cotton spinning, the steam engine and railroads. The second, dating from 1870 to 1900, was the most significant and involved the harnessing of electricity, the invention of the internal combustion engine and the advent of indoor plumbing with running water. These, he contends, triggered other advances: appliances, highways, suburbs, airplanes, elevators and modern communications (telephones, televisions).