Is US economic growth over? Faltering innovation confronts the six

Robert J. Gordon 11 September 2012

a

A

It is time to raise basic questions about the process of economic growth, especially the assumption – nearly universal since Solow’s seminal contributions of the 1950s (Solow 1956) – that economic growth is a continuous process that will persist forever.

  • There was virtually no growth before 1750;
  • There is no guarantee that growth will continue indefinitely.

This column introduces my CEPR Policy Insight, which argues in detail that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history (Gordon 2012).

The data I use only concern the US and view the future from 2007 while pretending that the financial crisis did not happen. The focus is on per-capita real GDP growth in the frontier country since 1300, the UK until 1906 and the US afterwards. Growth in the frontier economy gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing since. The paper is about 'how much further could the frontier growth rate decline?'

Growth: The long view

Figure 1 takes the history of economic growth back to the year 1300. Clearly there was almost no growth through 1700, then a gradually accelerating rate of growth. The blue line in Figure 1 represents growth in the frontier country – the US after 1906 and Britain before because 1906 seems to be the consensus of modern growth data for the cutover.

The key point is the big peak in US growth between 1928 and 1950, the years that span the Great Depression and WWII. Leaving aside the debate about what could have caused a concentration of economic growth in a period dislocated by depression and war, the remaining conclusion of Figure 1 is that growth has steadily declined in each interval plotted since 1950.

Figure 1. Growth in real GDP per capita, 1300-2100

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. Indeed, this is already evident in much of the innovation sector.

To taunt critics, Figure 2 superimposes on the actual growth record a green line that starts at zero growth in 1300, peaks in the middle of the 20th century, and then floats down to 0.2% by 2100. Figure 3 translates the growth rates into levels.

  • Before 1800, it took centuries to double income per capita;
  • Between 1929 and 1957, US incomes doubled in only 28 years;
  • Between 1957 and 1988, doubling took 31 years.
  • The pessimistic view adopted here suggests that it may take almost a century for income per capita to double between 2007 and 2100.

Figure 2. Growth in real GDP per capita, with actual and hypothetical paths

Figure 3. Actual and hypothetical levels of GDP per capita, 1300-2100

Phases of growth

The analysis in my paper links periods of slow and rapid growth to the timing of the three industrial revolutions:

  • IR #1 (steam, railroads) from 1750 to 1830;
  • IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and
  • IR #3 (computers, the web, mobile phones) from 1960 to present.

It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity 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. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once – urbanisation, transportation speed, the freedom of women from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.

Figure 4 translates the abstraction about the three industrial revolutions into the data on US growth in labour productivity over selected intervals in the postwar era.

Figure 4. Average growth rates of US labour productivity over selected intervals, 1891-2012

  • The ongoing benefits of IR #2 maintained rapid productivity growth through 1972.

Then diminishing returns set in – air conditioning was here and the interstate highways had been largely completed. The US entered the “dismal age” of slow productivity growth between 1972 and 1996. After being the mysterious 'Missing in Action' component of growth, computers and their brethren the internet and world wide web, pushed the growth of productivity in Figure 4 upwards, but only for the eight years 1996-2004.

  • IR #3 appears to have lasted only eight years, compared to the conjectural 100 years for IR #2.
  • Since 2004 productivity growth has been almost as slow as in the previous dismal period of 1972-96.

Inventions are not all created equal

The paper explains this history by a simple proposition. The great inventions of IR #2 were just more important than anything that has happened since. The speed of transportation was increased from that of the 'hoof and sail' to the Boeing 707. The temperature of a room was wildly variable in the 19th century but by now is a uniform 70 degrees year round. The transition from rural to urban in the US could only happen once. Only once could electricity be invented and create rapid transit, machine tools, consumer appliances, and the entire electricity-dependent set of entertainment devices from the radio to the TV to the internet and its multiple spin-offs such as the iPod, iPhone, and iPad.

The loss of the impetus of IR #2 inventions makes a big difference in the future of human wellbeing. Figure 5 shows that if the 1948-72 productivity trend had continued, the level of productivity would have been 69% above what would have occurred if the 1972-96 trend had continued. The actual outcome shown in Figure 5 is that the benefits of actual productivity from the IR #3 internet revolution only closed 9% of the 69% gap created by the end of the IR #2 inventions.

Figure 5. US labour productivity from 1948 to 2012, with trend growth rates over selected intervals

Even if innovation were to continue into the future at the rate of the two decades before 2007, the US faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9% annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalisation, energy/environment, and the overhang of consumer and government debt. A provocative 'exercise in subtraction' suggests that future growth in consumption per capita for the bottom 99% of the income distribution could fall below 0.5% per year for an extended period of decades.

The exercise in subtraction is shown in Figure 6, but this is just a suggestion. All the numbers could be altered, but the big point is that each of these subtractions is a number, whether 0.05 or 0.1, or 0.2, that reduces the future growth of consumption per capita for the bottom 99% of US households.

Figure 6. Exercise in subtraction: Components of growth, from 1987 to 2007

Concluding remarks

This paper is deliberately provocative. The numbers in the 'exercise in subtraction' have been chosen to reduce growth to that of the UK for 1300-1700. The outcome may turn out to be much better than that. But the point of this article is that it is likely to be much worse than any epoch of US growth since the civil war.

References

Gordon, Robert (2012). 'Is US economic growth over? Faltering innovation confronts the six headwinds', CEPR Policy Insight No 63.

Solow, Robert (1956). "A Contribution to the Theory of Economic Growth". Quarterly Journal of Economics 70 (1): 65–94 [3].

a

A

Topics:  Productivity and Innovation

Tags:  US, growth, technology

Robert J. Gordon

Stanley G. Harris Professor in the Social Sciences and Professor of Economics at Northwestern University; CEPR Research Fellow