Is U.S. Economic Growth a Thing of the Past?

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The U.S. and economic growth have consistently gone hand in hand. The country’s history has consistently been accompanied by economic progress, and since the end of World War II, the U.S. economy has averaged GDP growth of more than 3% per year.

Of course, that kind of growth doesn’t just grow on trees. The development of the U.S. has coincided with the most technologically impressive period in human history. The U.S. Constitution was ratified in the midst of an Industrial Revolution in England that would soon spread throughout world, and since that time the human race has witnessed such revolutionary inventions as electric light, indoor plumbing, the automobile, air travel, modern medicine, mass telecommunications, the computer and the Internet.

But is there reason to think that kind of technological advancement — and the resultant economic growth — will continue indefinitely? That’s a question that Robert J. Gordon, an economist at Northwestern University, posed in a recent working paper. Gordon argues that most of the economic growth in the U.S. has been prompted by three separate industrial revolutions: the first occurred between 1750 and 1830 and brought us steam engines, cotton spinning and railroads; the second, between 1870 and 1900, brought electricity, running water and the internal combustion engine; and the third, between 1960 and the end of the 20th century, brought computerization and the Internet.

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Though each of these revolutions bestowed unique and wonderful gifts upon the human race, the economic effects varied greatly, according to Gordon. Most significantly, he argues, the latest technological developments will simply not be able to sustain rapid economic growth for as long as the first two. Writes Gordon:

“The computer and Internet revolution (IR#3) began around 1960 and reached its climax in the era of the late 1990s, but its main impact on productivity has withered away in the past eight years. Many of the inventions that replaced tedious and repetitive clerical labor by computers happened a long time ago, in the 1970s and 1980s. 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.”

Gordon poses a colorful rhetorical question that he hopes makes his point about the relative importance of the second industrial revolution as compared with the inventions of the past decade:

“A thought experiment helps to illustrate the fundamental importance of the inventions of IR #2 compared to the subset of IR #3 inventions that have occurred since 2002. You are required to make a choice between option A and option B. With option A you are allowed to keep 2002 electronic technology, including your Windows 98 laptop accessing Amazon, and you can keep running water and indoor toilets; but you can’t use anything invented since 2002.

Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3 a.m. on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. Which option do you choose?”

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One need not ponder this question long to realize the fundamental importance of such inventions as indoor plumbing. It also illustrates the triviality of some of the advancements of the past decade. Indeed, the average growth rate of labor productivity in the U.S. has slowed significantly since 2004, giving credence to the idea that the dividends of the Internet have already been paid in terms of productivity, and that all the technological advancement of the previous decade has been in creating distracting baubles like social media rather than inventions that actually propel an economy forward.

At the same time, couldn’t one make the argument that you’d prefer the invention of, say, animal husbandry or the written word to indoor plumbing or electricity? In other words, aren’t fundamental technological advancements that come before necessarily more profound because they are the building blocks upon which successive inventions are created? Gordon ignores the entire idea that technology begets itself — that the tools we have today make it more likely that invention will move at a faster pace than it had in the past. And though labor productivity has slowed since 2004, it is probably a little too early to therefore conclude that all the benefits of the Internet revolution have been realized. There are plenty of reasons to believe that the Internet is still a young phenomenon that will continue to change the world in ways that we cannot anticipate. (When only 33% of the world has access to an invention, is it reasonable to say that its full impact has been felt?)

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Gordon ends his paper by listing six headwinds that he believes will, when combined with the effects of diminishing technological advancement, reduce our average yearly economic growth to a depressingly low 0.2%:

  • Demographics: the population is aging, and the onetime economic benefit of women entering the workforce has already been realized
  • The plateau of educational attainment: the U.S. is slipping in international measures of educational success, and it is becoming increasingly difficult to afford postsecondary education for many
  • Rising income inequality is restraining growth because there are fewer people with disposable income
  • Globalization is forcing low-skilled but high-paying jobs abroad
  • Any effort to cope with global warming will slow the economy
  • Both consumers and the government are overly indebted and paying down that debt will slow growth

All six of these headwinds are widely considered to be real threats to the American economy. And if Gordon is right about the Internet ultimately being a productivity dud, the U.S. may indeed settle into a period of the kind of slow growth that characterized much of the world before the first Industrial Revolution began in the 18th century.

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