Is US Economic Growth Over?
By Robert J. Gordon, Professor of Economics at Northwestern University (this article first appeared at VOXEU)
Global growth is slowing – especially in advanced-technology economies. This column argues that regardless of cyclical trends, long term economic growth may grind to a halt. Two and a half centuries of rising per-capita incomes could well turn out to be a unique episode in human history.
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 1953) – 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 it 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].
12 Comments
Meh, even wih 0% growth, $80,000 per capita income ain’t bad.
it’s unfair to separate the US from the global economy. off-shoring, increased buying power, and such
Well, steady long-term exponential growth is a quite silly concept when you think about it. Some sort of stair-shaped model seems more likely to me.
Quick, no more than ten words: what does economic growth actually mean?
Forget dollar GDP. The fundamental currency of any economy is work. As in physical, mechanical and electrical work, infinitely measurable in kilojoules. Economic growth is simply achieving a positive rate of return on work invested. There is nothing mysterious or unique about the explosion in growth achieved by the Industrial Revolution: it was technology (work) that liberated rich energy from previously untapped fossil fuel sources that in turn powered even more work.
So the key to continued productivity is to simply apply this formula to assess the value of any economic endeavour. Finance= bad (yachts and Suffolk county zip codes in exchange for paper shuffling: negative RR). Biomedical research=bad (decades and millions of dollars supporting the livelihoods of thousands of scientists, only to extend human lifespan by a nonproductive couple of years: negative RR). Renewables=bad (generous subsidies allow the industry to leech off the actual fossil fuel economy, thus obscuring its true energy cost and letting it get away with negative RR). Is it any wonder the world’s post-industrial economies are ‘stagnating’?
What can tether the economy back to a sound energy/work-centric mode? As with anything, we need a free-market system that allows the correct price signals to emerge. Problem is most free-market economies are based on a fiat currency that produces apparent wealth from nothing-NOTHING-making it as unexpected as the dawn that economic activity would flock to the centre of this vortex: the private banking leviathan, and political activity to its complicit but clueless government enablers.
Until we get rid of this competing economic centre of gravity, stagnating economies and misguided economic projects are completely predictable. A fiat currency may have been the correct initial response to a burgeoning global economy that all the world’s gold could not back, but the consequences of untethering it from its true energy fundamentals are coming home to roost. This site has produced admirable work in explaining the mechanism of a fiat currency system, but I see it as only the first step in re-anchoring the economy to what it is actually built for: the production of useful work, measured in unpretentious, universal kilojoules.
But growth what does it mean ? What kind of growth ? When you have a house, a decent car suitable for the daily movements, computers, phones, hifi, a giant tv box, internet access to endless multimedia contents… what do you really need ? Working harder for a bigger house you don’t need or a bigger SUV to go to the supermarket… or time for leasure, to appreciate what you already have, read a book, listen some of the thousands FLAC music files you’ve just downloaded from the net, or you can go to the hills for running or biking with your dog or your children. What’s we really need if not having more time to enjoy our own life ? So for me this is the reason because growth expressed in term of aggregate demand is at end in the west. But growth in terms of quality and contents of life has a lot to run.
But how is all this leisure time going to be supported when the electronic products that make it possible are all actually made in China? Eventually, the real cost of outsourced manufacturing will come home to roost.
Economic growth in the US has slowed, for sure. As Alberto above says, once you have a productive ‘work’ force, and you also have a nice house, nice cars, good schools, giant TV with almost unlimited content, unlimited supply of food and water, endless variety of food and liquids, etc, what more do you need? Of course not everyone here has those things, or not near the quality of those things desired, so there is always improvement. Maybe one form of ‘improvement’ is the knowledge that if you are middle class here in the US, you have all the “things” you need. What comes next, perhaps, is the spiritual growth required to realize more “things” do not increase your happiness (or whatever it is you’re after), in this life. Perhaps while the rest of the world works to achieve what the average American already has, we conclude we only lack for mental and spiritual knowledge and progress. Maybe we also come to the very real possibility that the 1% who own 90% of the world’s wealth are actually quite ill. After all, they don’t seem to be able to sate their appetites with worldly wealth.
Bottom line is economic growth seems to have limits and for the most part, we are closer to those limits than much of the rest of the world.
Isn’t Japen already at zero? Inspite of their lack of resources and natural disastors, they still have a healthy economy by all measures other than growth.
Pretty soon we are going to have automated lights out factories, robotic tractors, and perhaps even a leap forward in the biolgical sciences e.g. gene therapy. It is not a streatch to consider that a form of artificial intelligences via our machines (robots) comes true, making human labor even less important.
At that point, we don’t measure productivity the same any more, we measure it as the others have mentioned, as a quality of life indicator.
If you went back to 1945 and told them about our information revolution, they would have said, “gee you must have real leisure lifestyle.” Then we would have to tell them, No, we actually work more than you do and are going into debt peonage.
So, the money system is the most important thing, especially for the future that is fast approaching. If we want good outputs, then our debt money system should be scrapped.
It seems somewhat obvious that Germany is already implementing the solution to the growth question: work sharing, profit sharing and resource conservation. The two ends of the continuum are the economy works for the people or people work for the economy. Profit sharing will allow the industrious to be properly rewarded.
This article says absolutely nothing about the economist Walt Rostow, who began working on the problem of technology waves over fifty years ago. He’s widely read outside the United States but is often suppressed as a heretic in American graduate programs, which isn’t surprising given how theological classical economics has become. Since Gordon appears ignorant of this literature, he appears to fall into several traps.
If I remember my coursework with him twenty years ago, Rostow categorized the development waves into four groups (with the relevant networks for lateral trade in parentheses):
1) steam power (the river system)
2) railroads/steel (the rail network/telegraph)
3) airplanes/analog/electricity/cars/petrochemicals/phones/portable internal combustion engine (highways/phone network/radio/TV)
4) digital computers/lasers/semiconductors/advanced materials (the internet)
5) genetic engineering/nano machines (in the process of being born)
Rostow overlapped his work with Kondratieff waves in natural resource development and the fit was quite good at explaining events like the Great Depression and those projects that brought us out of it like the Tennessee Valley Authority (TVA).
Every technology wave has an arc of returns. They rise at the start and diminish at the end. Rail was running out of steam by 1929 and the new had not yet taken off. The curve is shaped like an S. Think of a stock chart on Intel or Microsoft (or the Shanghai index, for that matter – China’s been absorbing all of these previously suppressed technologies for the last twenty years so the effect is compressed and pronounced).
“Trees don’t grow to the sky,” Rostow was fond of saying. Towards the end of that arc, returns on investment peter out and you get all sorts of social, political and economic upheaval. He was fond of noting in class how this always lead to a resurgence of Malthusian thinking and articles about the “end of growth” just like this one from Vox.
I wouldn’t worry too much about our present depression. We’re probably on the verge of replacing petroleum with either solar cells derived from semiconductor lithography processes or cold fusion (NASA’s using it and a half-dozen firms are seeking patents on it, so it’s not as crazy as it sounds). Either one will be a lot more efficient than petroleum. We’ve about squeezed the last dramatic efficiency gains out of oil. If you don’t believe me about these trends, take a look at the efficiency curve of solar power over the last twenty years and compare it with a transistor count on CPU’s since 1974. Then compare it with a cost curve of oil.
(Hint from Rostow about winning arguments with monetarists: never admit the price of money is central to anything. Growth is all about the application of knowledge to resources whereas money is just points on a board.)
Solar and Thorium, maybe. The so-called “cold fusion” is mostly fraud. The hucksters (like Rossi) just want to sell stock to “accredited investors”. There may be some real unexplained phenomena, but there is no evidence of any nuclear process, and still no evidence that it is a viable energy source.