22. Growth over?

A prominent economist, Robert Gordon from Northwestern, wrote a paper suggesting growth in the US may be over. By extension, this would also mean the end of growth in other developed countries (but not in China, India and other developing countries).

Economic growth, as we know it, is due to innovation.The paper looks at big waves of innovation (industrial revolutions): IR1 (steam and railroads, 1750-1830), IR2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum, 1870-1900) and IR3 (computers, the web, mobile phones). He argues that the second industrial revolution was most important, and since its effects spread throughout the world (for example cars, air travel, good hygiene) the potential for future innovation is not as high.

He also argues that even if the pace of innovation has not decreased, there are six factors that would slow economic growth in the US in the future. Here is their list, with the contribution, in his opinion, to the slowdown in the rate of economic growth for the bottom 99% of the US population:

Without slowdown - assume that growth continues at the rate of 1.8%, the 1987-2007 average. Note that the Great Recession is not taken into account - rightfully so as it would dominate the numbers. The Great Recession is an unusually severe, one time (hopefully) event and so should not be included in discussion of long-term growth

Slowdown factors and how much they will reduce the growth rate (in percentage points):

1. baby boomer retirement: -0.2%
2. slower progress in educational attainment (it is already very high): - 0.2%
3. rising inequality: - 0.5% (he assumes that income inequality will continue to increase at the the same rate as in the past, lowering growth for the bottom 99%) 
4. globalization: -0.2% (more outsourcing, fewer good middle class jobs)
5. energy prices and environmental costs: - 0.2%
6. effect of high consumer and government debts: -0.3%

After taking all this into account, growth will slow down to 0.2% per year.

Gordon does not say it will happen, nor does he say his estimates are precise. He treats the estimates as a thought-provoking warning.

For Canada, factors 1,2, 4 and environment are similar; inequality has risen slower than in the US; we benefit from higher energy prices since we are an exporter; our consumer debt is higher and government debt is lower. So perhaps the effect on Canadian growth would be smaller, but not much smaller.

This is a long paper which you can download at the university from NBER. For your convenience I copy the abstract below.

If you do not want to read the whole paper, from this address you can download a long summary;
A shorter summary with graphs is here.
A much shorter summary by a well known Financial Times writer (with his opinion) is here.

Robert J. Gordon

NBER Working Paper No. 18315
Issued in August 2012
NBER Program(s):   DAE   EFG   PR

This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. The paper is only about the United States and views the future from 2007 while pretending that the financial crisis did not happen. Its point of departure is growth in per-capita real GDP in the frontier country since 1300, the U.K. until 1906 and the U.S. afterwards. Growth in this frontier gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing down since. The paper is about “how much further could the frontier growth rate decline?”

The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is, 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 – urbanization, transportation speed, the freedom of females 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.

Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, 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 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.