Hard Times Come Again Once More?

I keep a couple of books on the shelf above my desk to remind me of how much things have changed over the past hundred years. One is Only Yesterday: An Informal History of the 1920s, by Frederick Lewis Allen, which first appeared in 1931. The other is The Great Leap: The Past Twenty-Five Years in America, by John Brooks, published in 1966. Some crackerjack journalist is surely working today on a similarly successful treatment of the as-yet hard-to-characterize years since 1966. In the meantime, The Good Life and Its Discontents: The American Dream in the Age of Entitlement 1945-1995, by Robert Samuelson, takes the story forward.

The really interesting question, though, has to do with what to expect in the next twenty years.

One thing that Yesterday and Leap have in common, a characteristic that in all likelihood will be shared by the book that eventually joins them, is that there are hardly any numbers in them – nothing to link together the two  epochs, or to foreshadow the future.  Measurement is the province of economists. Compelling journalism seldom has time.

Therefore I have been reading, with special interest (and a certain dread), Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds, by Robert J. Gordon, of Northwestern University.  In fact, I read it last summer, even before it was a National Bureau of Economic Research working paper, since Gordon is a friend. It’s a short report (25 pages) on an ambitious work in progress. (Available too, free, from London’s Centre for Economic Policy Research).

Beyond the Rainbow: The American Standard of Living Since the Civil War, a book version of the article, already long in preparation, will be anything but brief when it’s finally done. It will, however, be the definitive survey of American living standards over the last 150 years. (Think Carmen Reinhart and Kenneth Rogoff, This Time Is Different, on the history of financial crises.) It will formulate an educated guess about the future as well.  And since that prediction has implications for anyone following the election campaign (and more than just them!), there is good reason for considering it now.

The standard assumption is that, after the disruptions of the financial crisis, and once various fiscal imbalances have been resolved (pensions, health care obligations, etc.), the United States will resume the real per capita GDP growth of around 2 percent a year that we’ve enjoyed since 1929.  In the immediate aftermath of the crisis, I toyed with it myself.  Technology, the growth of knowledge, will see us through.

What if it won’t?

Usually we get our forecasts of technological progress from magazine writers and futurists; they come and go. Gordon, on the other hand, is a well-regarded economist, author of a popular introductory macroeconomics text now in its twelfth edition; a historian of the Phillips Curve; member of the NBER business cycle dating panel; editor, with Timothy Bresnahan, of The Economics of New Goods. In recent years Gordon has turned towards economic history: his current project goes back to Interpreting the “One Big Wave” in U.S. Long-Term Productivity Growth; he teaches a popular freshman seminar, Did Economics Win  the Two World Wars?

There are two sides to Gordon’s argument, cosmic (by economists’ standards) and concrete, both of them rooted in standard practices of growth accounting. After a windup on the “super-long run” since the year 1300, he settles down to the analysis of three industrial revolutions that have occurred since the eighteenth century. These clusters of innovation should be understood as a series of discrete inventions, he says, adopting a familiar schema, followed by incremental improvements which ultimately tap the full potential of the original breakthrough

Thus the first industrial revolution, between 1750 and 1830, created steam engines, cotton spinning and railroads.  The second, with its three central technologies of electricity, the internal combustion engine and running water with indoor plumbing, occurred in the relatively short interval of 1870-1900.  And the third, associated with the computer and the Internet, began around 1960 and reached a climax in the late 1990s.

In each case, the innovative process brought improvements that, by their nature,  “could only happen once.” The first two revolutions required about a hundred years each for their full effects to work their way through the economy, says Gordon; the benefits of the second industrial revolution were still producing gains in the 1950s and ’60s, in the form of air conditioning, home appliances and the Interstate Highway System. Only in the 1970s did productivity growth slow.

The third revolution, based on information and computer technology, happened more quickly, according to Gordon. Computers took over much clerical labor in the ’70s and ’80s; since 2000, attention has centered on smaller and smarter devices for communication and entertainment, but not ones that contribute the kinds of gains in labor productivity associated with earlier surges in the standard of living.

The audacious idea that economic growth was a one-time-only event has no better illustration than transport speed. Until 1830 the speed of passenger and freight traffic was limited by that of “the hoof and the sail” and increased steadily until the introduction of the Boeing 707 in 1958. Since then there has been no change in speed at all and in fact airplanes fly slower now than in 1958 because of the need to conserve fuel.

Other one-time-only changes included the transition from animal to machine propulsion that freed the city streets from disease-causing animal waste; from outhouses to indoor plumbing; from housewives carrying buckets of water, coal, and wood into the house to the modern world of running water and sewer systems; from interior cold and heat to uniform indoor temperatures made possible by central heating and air conditioning; and many more one-time-only inventions. This may seem obvious about horses, outhouses, speed, and temperature, but once you accept that, you’re drawn into the central theme of this article: economic growth may not be a continuous long-run process that lasts forever.

What about the biomedical revolution that seems to be in the offing?  We are a long way from being able to measure the effects of these transformative technologies – other economists call them general purpose technologies, or GPTs – much less predict their arrival.  But even without the technological forecast, the prospects for US growth are somewhat daunting. New technologies take root quickly around the world, though various nations face different impediments to their adoption. The US is facing its own particular combination of “headwinds” of its own.  Gordon lists six:

1. A “demographic dividend” that boosted measured growth between 1965 and 1990 as women entered the workforce is now reversed.  Baby boomers are retiring, and with hours per capita declining, output per capita must grow more slowly than productivity.

2. A stubborn plateau in educational attainment is slowing growth. As the cost of education increases disproportionately, low-income people stay away from college altogether.

3.  Rising inequality is becoming a serious problem having to do with “us” and “them.”  The top 1 percent captured 52 percent of the income gains from 1993 to 2008, he notes; the other 99 percent saw its household income grow just .75 percent per household per year, or nearly 0.5 percent less than reported growth for the economy as a whole. Never mind the happy few:  slower growth for the 99 percent is slower growth.

4.  The interaction between the information and communications technology revolution and globalization is especially damaging to the US.  Outsourcing will continue.  Jobs tend to flow to where wages are lowest.

5.  Coping with climate change will take a toll. Higher carbon taxes will mean less consumption, while China and India continue to grow.

6.  Paying down all that debt, household and government, will constitute a drag on normal growth as well.

To what does all that resistance add up?  Gordon undertakes some simple but alarming arithmetic – an “exercise in subtraction,” he calls it.  He begins by bracketing the first half of his article – the proposition that there may be no boom on the horizon with the productivity-enhancing heft of the Internet to give us growth anything like that of the last twenty years.  Instead, he takes the record of the years since 1992 – 1.8 per capital real GDP per year – and supposes that it somehow will be repeated.

Then he subtracts the estimated effect on that growth of each of his headwinds.  Two-tenths here, each, for demography, education, globalization and climate; five tenths there (that dramatic increase in inequality); three-tenths for paying down debt: all that adds up to 1.6 percent less growth per year over the next twenty years than in the past, or a shocking 0.2 percent per annum.  What kind of US politics will that make?  (Gordon’s remedies mostly have to do with dramatically opening up immigration.)

Not everyone who has heard Gordon’s analysis is persuaded – or even intrigued. Not everyone loves a growth accountant. And Gordon acknowledges that technological change is notoriously difficult to forecast.

But the “one big wave” analysis of Gordon’s Beyond the Rainbow project is slowly growing more persuasive. Its implications for the future seem dire, totally at odds with the Tea Party’s Club for Growth or the George W. Bush Institute’s Four Percent Growth Program (let’s just have 4 percent real growth for a dozen years or so: here’s their blueprint). David Brooks, of The New York Times, pressed for time, last week pulled a Bloomberg Businessweek off the pile and wrote a column (Temerity at the Top: in praise of the top 1 percent)  about how serial entrepreneur Elon Musk (Paypal co-founder, SpaceX commercial rocket buff) is working on something he calls a Hyperloop. “a tube capable of taking people from downtown Los Angeles to downtown San Francisco in thirty minutes” and hopes, too, to open a space colony on Mars “in ten for fifteen years.” Brooks concluded: “A few ridiculously ambitious people can change an economy more than any president.”

In his NBER paper, Gordon raises the specter of those four centuries of negligible growth that unwound before the first industrial revolution rescued Great Britain from a Malthusian crisis. That’s a little remote for my taste. When I was done with his article, I settled for the McGarrigles’ rendition of a Stephen Foster song about the years before America’s Civil War, “Hard Times Come Again No More.” (The lyrics, worth reading, are here.)  If Gordon is right, the hard times are just beginning. They are manageable; the US is a rich, sturdy and good-hearted nation. But the 4 Percent fantasy must be dismissed first.

3 responses to “Hard Times Come Again Once More?”

  1. A few observations your column brings to mind: Perhaps we should think about how to maintain a decent standard of living w/o required large, continuous growth? Models for “success” seem to count on continually growing — but when things slow down a bit, the cart hits the stopped horse in the rear. The good news about a slowing economy (if shared by India, China, Brazil) may be that it buys us all a little time to figure out political as well as scientific solutions to climate challenges. I fear we may feel some effects in productivity from the brain drain of many well-educated,experienced yet comparatively underpaid Boomers retire

  2. On the demographic dividend, perhaps women entering the workforce was a one-shot, but the increasing availability of meaningful and interesting work to senior citizens is a huge opportunity. Perhaps necessity being the mother of invention as poorly prepared financially as this cohort seems to be… I suspect this demographic dividend depends on uptake of technology amongst our elders, and here I see reason for optimism, and some very interesting startups coming on the horizon.

  3. A fourth Industrial Revolution has been jumping up and down and yelling at us to get on board, but entrenched interests and general ignorance are preventing it from happening: a renewable energy-powered economy and society.

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