While Americans may regard a rising standard of living as their birthright, a provocative new academic paper suggests economic growth may be a thing of the past.
The paper, by Robert Gordon, a professor at Northwestern University and research fellow at the U.K.’s Centre for Economic Policy Research, argues that it is incorrect to assume that economic growth is an indefinite, continual process. To the contrary, Gordon asserts there was no economic growth from the year 1300 to 1750, and therefore suggests it is possible there will be none in the centuries ahead.
Americans can be forgiven for assuming the persistence of economic growth because it has coincided with most of our history. But, according to Gordon, that growth has been fueled by technological innovation, and we may now be at a point of diminishing returns from those gains.
Gordon, who declined an interview with AdvisorOne, is a member of the National Bureau of Economic Research's committee that determines start and end dates for U.S. recessions, and therefore has considerable experience tracking economic cycles.
His key insight is that U.S. growth phases are linked to three “industrial revolutions,” whose innovations fueled a period of productivity growth that would eventually dissipate. Many readers would be surprised to learn that the last of these revolutions—the computer and Internet revolutions—has been relatively weak in its contribution to economic growth, fueling a mere eight-year growth spurt.
Writes Gordon: “The computer and Internet revolution…began around 1960 and reached its climax in the dot-com era of the late 1990s…Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars or indoor plumbing changed it.”
It was the second industrial revolution, which brought airplanes, air conditioning, interstate highways and indoor plumbing, that fueled the biggest gains in economic growth, but whose benefits were quite finite.
“Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tons of water,” writes Gordon. He added that the invention of running water and the spread of indoor plumbing in urban America a century ago was the key milestone in women’s liberation, and that the full effects of this revolution in productivity terms lasted about 100 years.
The first industrial revolution, Gordon writes, “centered in 1750-1830 from the inventions of the steam engine and cotton gin through the early railroads and steamships, but much of the impact of railroads on the American economy came later between 1850 and 1900.” This revolution, he writes, would play out in terms of productivity gains over 150 years.
The income effects of these revolutions may be the most interesting, even disturbing, findings of Gordon’s study. In the period between 1957 and 1988, income per capita doubled—in just 31 years. The biggest growth occurred in the period between 1929 and 1957, when income doubled in just 28 years, hardly slowed by the Great Depression and World War II. In contrast, it took centuries for income to double before 1800, and Gordon hypothesizes that it could take a century for income per capita to double in the years to come.
Gordon conjectures that diminishing gains from previous revolutions combined with current economic headwinds may bring the U.S. back to the 0.2% economic growth rate experienced by Britain in the four centuries from 1300 to 1700.
Those headwinds include unfavorable demographics, with retiring boomers reversing gains brought by women entering the labor force; declining educational attainment, which has now logged two decades in international comparisons and is likely to be worsened by the “cost disease” of college tuition rising in comparison to other goods; rising income inequality, which Gordon expects to substantially suppress economic growth; globalization, which suppresses U.S. wages via outsourcing; environmental problems, which Gordon sees as necessitating a growth-suppressing carbon tax; and finally, the overhang of consumer and government debt, which he says will reduce disposable income relative to real GDP.
“The particular numbers don’t matter, and there is no magic in the choice of 0.2% as the long-run growth rate. That was chosen for “shock value” as the rate of growth for the UK between 1300 and 1700. Any other number below 1.0% could be chosen and it would represent an epochal decline in growth from the U.S. record of the last 150 years of 2.0% annual growth rate in output per capita.”