From 1947 through 1973, real median household income grew by 2.1% a year, but just 0.1% annually since. (These numbers come from a new Goldman Sachs research note, and for now let’s take them as is.) So will the future look more like the immediate postwar decades or more like the last decades of the 20th century and first one of the 21st?
One of the gloomier prognosticators is economist Robert Gordon. As he writes in his new paper, “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections”: “Future growth will be … 0.4 percent for real income per capita of the bottom 99 percent of the income distribution, and 0.2 percent for the real disposable income of that group.”
Aack! Gordon’s reasons for New Normal pessimism: (a) lower labor force participation, due in part to demographics; (b) stagnating educational attainment; (c) income inequality; (d) higher taxes to deal with rising debt; and (e) continued weak productivity growth.
But Goldman Sachs economist Jan Hatzius is much cheerier:
Our conclusion is that real income growth for the majority of US households should be better in the next four decades than in the past four. The uncertainty is substantial, but we believe 1%-1½% is a reasonable base case. … If so, the next four decades would show significantly faster household income growth than the last four, though the progress would fall short of the postwar “golden age.”
Why does Hatzius disagree with Gordon? For starters, he’s more positive about education (still a favorable cost-benefit to getting a four-year degree) and labor force participation (some of the decline is cyclical, and eventually the boomers will have completed their workforce exit, stabilizing employment). In addition, Hatzius notes that even though government may need to raise taxes, that money will turn into Medicare and Social Security income transfers and feed into disposable personal income, Gordon’s income measurement of choice. So “the net effect on disposable income is zero.”
Hatzius also clips Gordon for simplistically extrapolating income inequality trends. For instance, Gordon takes the Piketty-Saez estimate that high-end inequality has reduced the 99%’s income growth by 0.5 percentage points over the past few decades and “extrapolates these numbers into the future without much discussion of why the trends must necessarily continue.” Yet, as Hatzius explains, inequality looks to be slowing: “There was a big increase in wage inequality in the 1980s and 1990s, but that increase has slowed since the early 2000s. In fact, wage inequality has been roughly flat over the past decade. While a renewed increase is certainly possible, it is far from a foregone conclusion.” Likewise, Hatzius expects the decline in labor’s share of income to stabilize or even reverse.
Gordon’s technopessimistic views have brought him a lot of attention, so let me quote Hatzius at length:
We are sympathetic to Gordon’s view that the total factor productivity (TFP) impact of the third industrial revolution (IT etc.) may continue to disappoint relative to the second one (electricity, automobiles, telecoms etc.). The second industrial revolution was unprecedented in human history, and may well remain unmatched. In that sense, Gordon’s study marks a useful counterpoint against the cliché of unprecedented and ever-accelerating technological change.
It therefore seems reasonable to use the 1972-2007 period—that is, the period after the second industrial revolution—as the starting point for a projection of long-term living standards. Over this period, labor productivity grew 2% in the nonfarm business sector and 1.6% in the overall economy. Our working assumption is that the average of coming decades will be similar. This is also broadly in line with the latest numbers from the Federal Reserve and the Congressional Budget Office.
But even without a statistical upturn in innovation and productivity – metrics which may not be providing effective measurement in America’s increasingly IT-centric economy – Hatzius still sees a much brighter future for American workers. While I wish there were greater discussion on the impact of automation and the differing sorts of innovation, the economist adds an enlightening perspective of the future of the US economy.