According to Robert Gordon, growth in the future won't be pretty.

Back in August 2012, Northwestern University professor Robert Gordon published a controversial paper titled "Is U.S. Economic Growth Over? Faltering Innovation Confronts The Six Headwinds." He argued that people are overestimating how innovation will power the U.S. economy in the future and underestimating the threats posed by structural changes in the economy, such as slowing rates of educational attainment. The argument drew intense criticism, with many people arguing that Gordon was making a spurious case that technological advancement was slowing and that it would translate into slower growth over time.  

Then last week Gordon published a second paper on the subject in an effort to rebut those arguments and clarify that he wasn't making any suggestions about future growth. Rather, he was forecasting the pace of innovation that's occurred over the past 40 years and focusing especially on the new headwinds facing the economy. What follows is a recent conversation with Gordon. (The transcript has been edited and condensed for clarity.)

Zachary Goldfarb: Why did you decide to write the follow-up to your first paper?

Robert Gordon: People had leapt on the pessimism about innovation, and people completely overlooked the fact that, by far, the biggest contributor to future growth is about headwinds. I am not making a major new claim about the rate of innovation. The slowdown began 40 years ago, and I don’t see it as any slower in the future than it was in the past 40 years.

The productivity slowdown (Robert Gordon)

Z.G.: You list four key headwinds: demography, education, inequality and the national debt. Let’s talk about those, starting with demography. Where do you see evidence of that headwind?

R.G.: The core of this is the decline in the labor force participation rate. The fact that the employment-to-population ratio has not risen during the four years of the recovery is incredible. The decline in the unemployment rate has been completely offset by the decline in the labor force participation rate. Baby boomers are being forced to retire. The rest of it is prime-age males and females and young people who can’t find work.

Z.G.: Could we see things turn around?

R.G.: There could be a turnaround. Instead of falling, the labor force participation rate may level out. And the employment-population ratio might rise if the economy grew faster. But that doesn’t bring it back to 2007. We are so far below where we were in 2007. If you asked how many jobs would have to be created to get the employment-to-population ratio back to 2007, the new number is still around 11 million jobs.

Z.G.: Why are you pessimistic about education?

R.G.: First, a third of the recent college graduates are working in jobs that do not require a college education. And second, there is this enormous and growing amount of student debt, which is changing people’s lives after they graduate. Meet your indebted barista and taxi driver.

We have low international ratings on test scores and high school completion and high school dropouts. People who get GEDs have social and economic statistics like dropouts. And the vocabulary gap between poverty and non-poverty children is massive.

Z.G.: Are you heartened by the last few years, when we’ve had rising educational attainment?

R.G.: Over the 20th century, the rise of educational attainment mattered a lot. Every expert on economic growth attributes a third to a half of a point of our overall productivity growth to it. That’s why it’s of a great concern that these things are happening now. We had the top ranking in college completion up to 15 years ago, and we’ve been steadily sliding down in the international rankings.

Z.G.: You’re also quite concerned about rising inequality. Why would that affect the country’s overall economic growth?

R.G.: I’m making a simple statement: To the extent you care about the bottom 99 percent, as opposed to the future economic growth of the entire country, then you have to knock something off what is going to happen. The story of rising inequality -- there has been vast amounts written about it. Naturally with all of the gains or most of the gains going to the top, the future growth of the bottom 99 percent or the bottom 95 percent or the bottom 99.5 percent is going to be slower than the overall national average.

And you have to ask if it’s going to keep getting worse at the same rate it has in the last 20 years. I see all sorts of reasons why it will, including the direction of foreign investment to right-to-work states. The latest thing is the Volkswagen plant where the union vote was held. Workers there are paid $14 to $18 an hour, while workers doing the equivalent in Germany are paid more than $50 an hour.

Z.G.:  Your final headwind is the rising national debt. Deficits have come down lately. Why are you so concerned about that?

R.G.: It’s based on the [Congressional Budget Office] projections. If you have a rising debt to GDP, and you don’t allow it to rise to infinity, you will either have to raise taxes or reduce benefits, either of which slows the growth of disposable income. I’d also call attention to the most serious fiscal problem facing particular states and cities, with several cities, including Chicago, heading down the road of Detroit.

Z.G.: How much do you see the headwinds causing the slowdown in economic growth versus the innovation problem?

R.G.: About a third of the slowdown has to do with innovation, and all of that recognizes the slower innovation that we’ve had since 1972. Everything that I say that sounds pessimistic about robots and data is an aside.

Z.G.: Do you have a proposed solution to the demographic problem?

R.G.: There are two obvious solutions to the demographic problem. One is to raise the retirement age and index it to life expectancy. And the other is to greatly raise the legal immigration quota, so we have more people to pay taxes.

I would not want to suddenly raise the retirement age. For the last 30 years, we should have been indexing it to a life expectancy. If life expectancy has gone up three or four years over the past four decades, we should have been raising it at the same pace. Our current system simply responds to advances in health and rising life expectancy by shifting the balance of people’s lives toward a longer period of leisure in retirement, and somebody has to pay for all that leisure.

Z.G.: Are you surprised by criticism your first paper got?

R.G.: I think the first paper invited criticism with its unwise choice of “faltering” innovation in its subtitle. It wasn’t clear at all that I’m really making this story about the last 40 years continuing. That paper made it sound like we’re going over a cliff, toward innovation disappearing, and this new paper makes it clear that’s not what I’m focusing on.

Z.G.: We’ve had past periods where we bounced back. The 1980s weren’t great, but the 1990s were. Why not again?

R.G.: The period of the 1990s was so unique compared to the last 40 years. My view is that the invention of the Web, e-commerce and the Internet was a big thing just like any one of my favorite inventions from the late 19th century. But in the late 19th century, we had five or six dimensions, and in the late 1990s we had one invention or, at the most, two: e-commerce and communications.

Z.G.: What could lead you to brighten your outlook about the future? Are there things we could do as a society to improve our chances?

R.G.: Policy recommendations are explicitly prohibited from NBER working papers. But when I give a speech, I can have my list of policy improvements.

For demographics, index the retirement age and drastically raise legal immigration. Get rid of the problem of illegal immigration by just letting more people into the country. I like to talk about the late 19th century as a model when there were no passports at all. That’s demographics.

On education, I think the first thing you can do is to change the financing of higher education -- and to do so with a nationwide value-added tax.

I don’t list the medical care problem as one of my headwinds, but going to the single-payer model would directly raise productivity in the U.S. David Cutler at Harvard has estimated that if we had the same medical care to GDP ratio as Canada, we’d have another trillion dollars a year. That’s a lot of money.

On inequality, I think it’s very intractable. But as long as it’s there, at least go back to the capital gains and dividend tax rates that we had in the early Clinton years.

And on the government debt, slow Social Security spending by raising the cap of taxable wages and raising the retirement age, and cure the Medicare problem by switching to a more efficient health-care system.

That’s not on the table realistically. But if you ask what are the things we can do to turn this around, they may not be politically realistic, but it helps put things in perspective. As a society, we’ve made these choices, but they have side effects.

Z.G.: If you had to argue against your own points, what would you say?

R.G.: Some of these numbers are guesses, and some of the numbers are rough approximations based on the past and they don’t have to continue. Maybe we reached the limits to the shift toward higher management power and giving CEOs such high pay and beating up on workers. Maybe that’s going to turn around.

And on the debt, maybe there’s no reason not to let the debt rise forever.