Economic growth (as the U.S. knew it in the 20th century) is over

Economic growth as we know it is over, argues Northwestern University economist Robert J. Gordon. It hasn’t ended completely, but the United States will never again see living standards double in a few decades, as they did between 1957 and ’88. Indeed, Gordon calculates that it will take a century for the U.S. economy to achieve a comparable improvement. Not only have the most important growth-generating innovations already occurred, but the United States faces powerful “headwinds” that will dampen the progress that does take place.

There have been three industrial revolutions in U.S. history, Gordon observes. The first occurred between 1750 and 1830, when steam engines, cotton gins, and railroads transformed manufacturing and transportation. The second (1870–1900) produced electricity, the internal combustion engine, running water, and indoor plumbing. We are still in the midst of the third revolution, involving information technology, which began in the 1960s and reached its climax three decades later.

Not all industrial revolutions are alike, however. The digital age has made the lives of many Americans easier, but its influence on productivity has been pitiful in comparison to that of previous breakthroughs. No, not because office workers spend their days watching cat videos on the Internet. Information technology’s contributions to productivity don’t hold a candle to innovations such as running water and indoor plumbing, which freed men and particularly women from countless hours of work hauling water and sewage.

Gordon says that U.S. labor productivity increased nicely between 1996 and 2004, when businesses embraced the Internet and other computing technologies, but after 2004 the pace of improvement slowed. In contrast, the effects of the second industrial revolution elevated U.S. labor productivity for 81 years.

The 20th century’s unceasing climb in living standards could very well be a one-time event, Gordon says. At its onset, the United States, with 75 percent of its population living in the countryside, was primed for an industrial makeover. That opportunity won’t be repeated. Few future advances will be as fundamentally transformative as air conditioning and the car.

Innovations will occur, Gordon acknowledges, though they will face a gale of “headwinds” including high levels of government and household debt, climate change, the globalization of industry, and weak secondary education. If U.S. economic growth slows as he predicts, these headwinds could flatten the per capita real GDP growth rate to a dismal 0.2 percent per annum by 2100. 

To those who doubt his argument about the limited impact of today’s technology, Gordon poses this question: Which would you rather have: an iPad or indoor toilets?

THE SOURCE: “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” by Robert J. Gordon, in NBER Working Papers, Aug. 2012. 

Photo courtesy of The National Archives