The market for economic apocalypticism is apparently insatiable. Doesn’t matter if times are good or bad. For example: smack in the middle of a generational Long Boom, economist Ravi Batra scored a best seller with The Great Depression of 1990.
Selling doomsday is a lot easier, of course, after a decade of stagnation that witnessed a near-depression and America’s worst financial crisis in a century — maybe ever — followed by a “recovery” in name only. New York magazine’s 2nd most emailed story right now is titled “The Blip” and it’s accompanied by this provocative sub-hed: “What if everything we’ve come to think of as American is predicated on a freak coincidence of economic history? And what if that coincidence has run its course?”
The piece, written by Benjamin Wallace-Wells, explores a gloomy 2012 research paper from Northwestern University economist Robert Gordon, “Is U.S. Economic Growth Over?” In the paper, Gordon makes two unsettling claims. First, technological innovation is unlikely to be as fast in the future as it has been over the past 250 years. And even if it does somehow keep pace, a range of headwinds – demography, education, inequality, globalization, climate change, and the overhang of consumer and government debt — means economic growth overall will slow. And almost all the gains will go to the top 1% of the income distribution.
But Gordon’s grander assertion, one Wallace-Wells call “almost literary in its scope,” is that the past 250 years of economic progress — when the West’s standard of living increased by more than 4,000% — was driven by one-off factors. The general-purpose miracles of the first (steam engines, cotton spinning, railroads) and second (internal combustion engines, electric power, public sanitation) phases of the Industrial Revolution will remain forever unmatched. Sorry, Internet.
And then Wallace-Wells goes all meta big think:
There are many ways in which you can interpret this economic model, but the most lasting—the reason, perhaps, for the public notoriety it has brought its author—has little to do with economics at all. It is the suggestion that we have not understood how lucky we have been. The whole of American cultural memory, the period since World War II, has taken place within the greatest expansion of opportunity in the history of human civilization. Perhaps it isn’t that our success is a product of the way we structured our society. The shape of our society may be far more conditional, a consequence of our success. Embedded in Gordon’s data is an inquiry into entitlement: How much do we owe, culturally and politically, to this singular experience of economic growth, and what will happen if it goes away?
Now, the “Are the good times really over for good?” debate has been running hot the past few years due to America’s economic troubles. In addition to Gordon’s paper, other notable works include economist Tyler Cowen’s The Great Stagnation and Race Against the Machine by techno-optimists Erik Brynjolfsson and Andrew McAfee of MIT. (Gordon and Brynjolfsson-McAfree have debated both in person and in print.) Consultancy McKinsey has released a series of papers examining how advanced economies can boost workforce and productivity growth to avoid a permanent slowdown.
Even the Obama White House has weighed in, putting maybe a thumb or pinkie on Gordon’s side of the argument. From its recent budget: “In the 21st Century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth initially due to the retirement of the post-World War II baby boom generation, and later due to a decline in the growth of the working age population.” (Hey, why didn’t we hear that in the 2012 campaign?)
My take on Gordon’s theory is this: US economic policy — and that of many advanced economies — is so horrifically suboptimal right now that there is tremendous upside to Washington getting its act together to create a better economic ecosystem for the private sector and American workers. (Here are a dozen promising policy ideas.)
And I side with Brynjolfsson and McAfee when they say that the first machine age “occurred when we harnessed steam and other energy sources to overcome the limitations of our muscles, and it transformed the world like nothing else ever has. This second one is about harnessing silicon and other materials to overcome the limitations of our minds. It will be similarly transformative.” Broad-based American economic growth is not predestined to end.
But the real problem with The Blip thesis is Wallace-Wells’ interpretation of Gordon’s other big point. The writer sees America as the accidental superpower whose ascendance was due to the cosmically lucky break of the US of A happening to exist when — for the first time in human history — economic growth started happening in a big way. And that growth is what created our open, market-loving, right-respecting society — not the other way around. American exceptionalism? Western exceptionalism? Please. We all started on third base and think we hit a triple, according to the writer.
Wallace-Wells has it completely backwards, however. Two hundred and fifty years ago, something amazing happened in Western culture, something that never happened, say, in Ancient Rome or dynastic China. The Dutch and British and then Americans began talking about and thinking about and treating the commerce class, the middle class, differently. The West became a business-admiring civilization that began treating innovators — and the creative destruction they unleashed — with respect and dignity.
When people treat the marketeers and inventors as having some dignity and liberty, innovation takes hold. It was so to speak a shift in “constitutional political economy,” as James Buchanan puts the point. People agreed on the meta-rule of letting the economy go where it will. This contrasted with the earlier mentality, still admired on the left, that treats each act of innovation as an occasion to go looking for its victims. Victims there were, but they were greatly outnumbered by winners. It was ideas, not matter, that made the winners, and brought our ancestors from $3 to over $100 a day. …
The Big Economic Story of our own times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy, and came to attribute a dignity and a liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth. The important moral, therefore, is that in achieving a pretty good life for the mass of humankind, and a chance at a fully human existence, ideas have mattered more than the usual material causes. …
The biggest threat, meanwhile, to our prosperity is not temporary recessions, but permanent reversions to old attitudes towards profit and progress. When making money is demonized, when innovation is stifled, that’s when we lose what Adam Smith called “the obvious and simple system of natural liberty.” Respecting capitalism has worked pretty well for the people for two centuries. I reckon we should keep it.
America succeeded because it embraced what McCloskey calls the Bourgeois Deal: let innovators — the folks who imagine, change, explore, create, and inspire – do their thing and get rich, and they will make the rest of society prosperous, too. Economic freedom, an idea, is the killer app of the modern world. Ideas created the West’s success, not the random, chaotic, meaningless occurrence of two industrial revolutions. And as long as America and the West hold to those ideas and make good on the deal they imply, our age of prosperity and opportunity won’t come to an end.