The Rise and Fall of Growth

SAN FRANCISCO – It was just two years ago that Thomas Piketty directed economists’ attention to rapidly rising degrees of inequality with his weighty tome Capital in the Twenty First Century (Harvard, 2014). We know too much to return to the single-minded preoccupation with distribution exemplified by nineteenth century pioneers such as Malthus, Ricardo, and Marx.  A series of industrial revolutions has seen to that.

The growth of knowledge has made room on the planet for the lives of billions of persons, and dramatically raised longevity and living standards among them around the world. But what if the rate of improvement has slowed?  The first installment in the dystopian film saga The Hunger Games rolled out four years ago.

Piketty is right, of course, that institutions and policies are central to whatever happens next, and that we require a much clearer picture of the distribution of income and wealth to guide social decision-making in the future. That was one of the reasons the Swedes awarded the Nobel Prize in Economic Sciences last autumn to Angus Deaton, of Princeton University. As Deaton noted in his prize lecture, “In a world in which you work entirely in averages, if you look at the macro economy, things like inequality and poverty are simply not legible.” Without the details of individual choices, they disappear. “Even if you are only interested in the aggregate economy, distribution clearly matters for aggregate economic activity, and certainly for any serious analysis of well-being.”

Hence the depictions of Deaton working with a microscope, devising comparisons of, for instance, what it means to subsist on dollar a day. It’s a matter of “honest scorekeeping,” he says, among competing measures designed to improve individual well-being. Some of them work and some don’t. Piketty’s empirical work, with Emmanuel Saez, of the University of California at Berkeley, and Sir Anthony Atkinson, of Nuffield College, Oxford, on the concentration of wealth in nineteenth- and twentieth-century societies has set a high standard. Nicholas Bloom, of Stanford University, made headlines  at a session of the meetings of the American Economic Association here last week with a new study, Firming Up Inequality, extending the analysis to industrial organization. Individuals’ inequality with their coworkers has changed little over the past three decades, he and his co-authors found; it is inequality among firms that is increasing. Workers with good corporate jobs therefore experience little growing inequality.

But as Philippe Aghion, a former Harvard professor who last year bested Piketty in competition for an appointment to a permanent professorship at the College de France, pointed out in a talk at the meetings, it is by no means clear that the potential for growth has been exhausted. Pro-growth policies remain important; they must take account of several different yardsticks of inequality, not just concentrations at the top, but measures of social mobility as well. Innovation is indisputably a source of top income inequality, Aghion said, but it differs from others sources: for example, consider the difference between Steve Jobs, who created the smart phone, and Carlos Slim, who gained control of the cellular market through political influence, first in Mexico, and then in eighteen other countries. Aghion and several coauthors spelled out the argument for fostering innovative growth last summer in an article for Vox EU.

For that reason, it seems to me that the most important development at the meetings was the appearance of another big book, in many ways the perfect complement to Piketty’s treatise. The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (Princeton, 2016), by Robert J. Gordon, of Northwestern University, also arrived with a intimidating thud: Rise and Fall weighs in at 762 pages, vs. 685 pages for Capital in the Twenty-first Century.  (My enthusiasm for his research program played a minor role in his expanding an article into the book.)

Not that Gordon’s book is heavy-going. It’s just the opposite.  A poet of the Sears, Roebuck catalog for his 1990 monograph, The Measurement of Durable Goods Prices, Gordon went on to co-edit a landmark NBER volume, The Economics of New Goods, in 1997. (The book included an essay by William Nordhaus, of Yale University, on the historic costs of lighting a room at night that is as close to a decisive experiment as is to be found in all of economics.) The inspiration for the present book, Gordon writes, dates from a chance encounter in a bed-and-breakfast with Otto Bettmann’s 1974 book, The Good Old Days –They Were Terrible.  Bettmann, a German émigré, founded the Bettmann Archive of historically interesting photographs, in 1936. Gordon has boiled down the story to analytic narrative.

He divides the fifteen core chapters into two periods, 1870-1940 and 1940-2015, speedup in one era and slowdown in another, hence  “one big wave,” the sobriquet by which Gordon’s thesis has been known since it first appeared as a journal article, in 2000.  The great inventions of the past could happen only once, he argued then.  Wondrous as they are, he says, microprocessors and the packet-switching of the Internet do nor rival the invention of electricity, the internal combustion engine, or flight. (Many young economists are unconvinced by this last claim. )

Thus chapters in the first period include “The Starting Point: Life and Work in 1870”; “What They Ate and Wore and Where They Bought It”: “The American Home: from Dark and Isolated to Bright and Networked”; ”Motors Overtake Horses and Rail: Inventions and Incremental Improvements”; “From Telegraph to Talkies: Information, Communication, and Entertainment”; “Nasty, Brutish, and Short: Illness and Early Death”; “Working Conditions on the Job and at Home”; “Taking and Mitigating Risks: Consumer Credit, Insurance, and the Government.” (I would have mentioned fewer titles except they convey so clearly the argument of the book.)

Chapters after 1940 include “Fast Food, Synthetic Fibers and Split-level Subdivisions: the Slowing Transformations of Food, Clothing and Housing”; “See the USA in Your Chevrolet or from a Plane Flying High Above”; Entertainment and Communications from Milton Berle to the iPhone”; “Computers and the Internet from the Mainframe to Facebook”; “Antibiotics, CT Scans, and the Evolution of Health and Medicine”; and “Work, Youth and Retirement at Home and on the Job.”

In the business end of the book, Gordon trades his role as historian for that of macroeconomist and growth accountant.  He reprises his three key papers, including “Inequality and the Other Headwinds: Long-run American Economic Growth Slows to a Crawl,” the essay that gradually grew into the book.  What are these impediments to growth?  The first is rapidly growing inequality itself, which Piketty, Saez, and others have documented.  With incomes of the bottom 90 percent of the population growing much more slowly than the top ten percent, there simply won’t be enough spending to fuel the growth of median income at more than barely half its historic rate. Rising costs of education and its declining quality constitute a second headwind; demographic factors, chiefly the impending retirement of baby boomers, are a third; bourgeoning government debt is a fourth. Lesser frictions include globalization, global warming, and industrial pollution.

Through a relentless process of adding-up and subtraction, Gordon concludes that, for decades, “the future growth of real median income per person will be barely positive and far below the rate enjoyed by generations of Americans dating back to the nineteenth century.”  He adds a brief postscript describing measures that might boost productivity and accelerate somewhat the rate of future growth: a more equitable and efficient tax system; a better education system; less incarceration; drug legalization; more immigration; a federal fiscal reckoning that today seems quite out of reach.

Recently Gordon has been bogged down in debates with techno-optimists, the MIT duo of Erik Brynjolfsson and Andrew McAfee; and Gordon’s Northwestern colleague, Joel Mokyr, a distinguished historian of technology.  “Nobody debates the headwinds.  Instead they debate technical progress,” Gordon laments. The meetings, at least, provoked a spirited discussion among a panel of distinguished economic historians: Gregory Clark, of the University of California at Davis; Nicholas Crafts, of the University of Warwick; Benjamin Friedman, of Harvard University;and Noam Yuchtman, of the University of California at Berkeley Haas School of Business, a proxy for James Robinson, of the University of Chicago, who was unable to attend.

The real debate is with the assumptions embedded in various Congressionally-mandated forecasts of future growth.  What’s the difference between the official 2.2 percent GDP growth in the Budget Data Projections of the Congressional Budget Office and Gordon’s estimate of 1.6 percent (corrected from an erroneously typed 0,5 percent)?  The difference between halcyon days and sustained disappointment. For the present, at least, growth accounting dominates the center ring of policy economics. The taboo on facing up to its implications hangs over the presidential primaries.

Richard Thaler, of the University of Chicago, Booth School of Business, gave the presidential address; president-elect Robert Shiller, of Yale University, organized the meetings.  John Campbell, of Harvard University, gave the Ely Lecture, “Restoring Rational Choice: the Challenge of Consumer Finance.”  Bengt Holmström, of the Massachusetts Institute of Technology, gave the Joint AEA/AFA Luncheon Address, “Why Are Money Markets Different?”, with Patrick Bolton, of Columbia University Graduate School of Business presiding. Some 13,300 members of more than fifty Allied Social Science Associations registered for the meetings, a record.

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