Economics, Pethokoukis

My counter: Why U.S. economic growth doesn’t have to come to an end

First, a summary of a fascinating new paper from economist Robert Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” (which I blogged about earlier today):

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.

This is a paper meant to provoke, as the author admits. I view this as sort of a Ghost of Christmas Yet To Come sort of thing — a possible future but not a predestined one. A warning. Here is why:

1. The U.S. is doing so many things wrong, policywise, that there is a huge upside from doing things right. Regulation, tax, education and entitlement reform could all boost growth. Heck, here is a whole list from McKinsey of stuff government could do:

2. And here are a few more ideas, some of which I gleaned from two of  last year’s best economic policy books, Race Against the Machines and Launching the Innovation Renaissance:

1. Pay teachers more but get rid of tenure so the bottom five percent of teachers can be replaced by even average ones.

2. Encourage more high-skilled immigration.

3. Reduce regulatory barriers to new business creation.

4. Replace payroll taxes with more economically efficient ones.

5. Phase out and eliminate pricey and market-distorting subsidies like the mortgage interest deduction.

6. End Too Big To Fail.

7. Eliminate the tax code’s bias against investment.

8. Move toward market-friendly entitlement reform like Wyden-Ryan.

9. Create a patent system with the length of legal protection depending on the cost of innovation and imitation.

10. Establish more innovation prizes.

11. Have fewer kids in college getting liberal arts degrees, more in business-run worker training programs.

12. More investment in basic research, not in crony-capitalist, industrial policy schemes like Solyndra.

3. Am I to assume that there won’t be another incredible wave of innovation — genetics, robotics, nanotech, AI — over the rest of the century? I would bet there will be as long as entrepreneurs and innovators are rewarded and respected, and government does well the basic things it should: infrastructure, rule of law, defense, basic research. Another Industrial Revolution? There may be several, with the cycles accelerating.

4. As Asia and Africa catch up to the West (including Japan) economically, we will have billions of additional educated minds focusing on science and technology. It matters less where the innovation happens as long as societies are open to accepting those innovations and the creative destruction they bring. The more economic freedom the better.

Bottom Line: Low or no growth does not have to become the Permanent New Normal unless that is the path we  actively or passively choose as Americans and as a global society in the 21st century. If nothing else, Gordon’s paper should serve to jolt us awake to that reality and the risk that confront us.

4 thoughts on “My counter: Why U.S. economic growth doesn’t have to come to an end

    • Allow me to interject and offer some ideas:

      Stuff government could do:

      1. Get out of my way

      2. Get out of your way

      3. Get of THE way

  1. The “Governments Can Pursue…” chart is screwed up.

    It contains, in its lowest category for government, three items that have no place in government:

    1. “Establish and track key productivity metrics by sector”

    2. “Set retirement incentives to reward staying in the workforce”

    3. “Set evolving energy efficiency standards”

    None of these three is any of the government’s business. (No pun intended.)

    Regarding tracking “metrics” (I hate that word – used by pretentious types too often, as is the word “methodology”), I don’t see why. First of all, government (and some academic) figures are to be taken with a grain of salt. Or a handful. Maybe a bucket. For example, had you noticed that we haven’t had any significant inflation over the past ten or so years? No, I mean, here, on Earth. Because there seems to be a “discrepancy” between the rate at which money is coming out of my checking account and figures quoted in the CPI. Maybe they’re tracking inflation on Mars. At least that would establish some comprehensible purpose to the enormous cost of yet-another-Mars-rover.

    Second, (still on the tracking “metrics” thing), didn’t the first post-war governor/administrator/whatever-they-called-it of Hong Kong, John Cowperthwaite, forbid the collection of economic statistics by the government? Wasn’t it because he didn’t want a bunch of government and academic busy-bodies trying to micromanage economic activity there? How’s their GDP rate of growth going, say….in comparison with…I dunno…ummm….OURS? The “policymakers” and their staffs who would create new government programs, agencies, laws, taxes, and regulations on the basis of such statistics are not solutions to economic problems but rather the source of both exacerbation of existing problems and the creation of entirely new ones. Put down as against the tracking “metrics” thing.

    Regarding the setting of retirement incentives, I’m more in favor of government getting out of the retirement business. I think people ought to handle that themselves. There should be no setting of retirement incentives by government because there should be no government in the funding of retirement.

    With regard to “energy efficiency standards” there should not be any. At all. Whatsoever. None. If people and businesses want energy efficient stuff, they’ll favor such products and services in the market. If they don’t favor it in their purchasing decisions, then obviously they don’t care about it. I’m an example. I don’t care about it. At all. Whatsoever. All of you who joined the AGW cult or decided to move to the intellectual doldrums of Peak Oil Jonestown are, in my opinion, idiots. Hopefully temporary idiots who will come back to reality at some point (Betty Ford clinic?), but for now, idiots nonetheless.

    With regard to the blog post author’s list, I would scratch “investment” (it’s called SPENDING, not investment) in basic research (at least at the federal level – if the states want to, I don’t care), and I wouldn’t try to control what kinds of degrees college students want to pursue. (However, I’d stop guaranteeing their student loans. You want a degree in Ethnomusicology, that’s fine, but pay for it yourself.)

    There is no magic government solution to the economy other than government just getting out of the way.

    Government has some legitimate roles: national defense, protection of individual rights, enforcement of contracts, and peaceful resolution of disputes. Management of the economy – not so much. (Recent discussion of monetary policy largely irrelevant to discussion of command economics, cronyism, and socialism.)

    The government, however, reflects the (badly disturbed) childlike nature of society. Jealousy, fear, and a bizarre willingness to submit and enter dependency are the agents of rot underlying the current and inevitable future problems here. I don’t have the foggiest idea how you get rid of them.

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