Is US Economic growth over? A discussion from innovations perspective

A fab paper by Robert Gordon of Northwestern Univ. I cannot locate a free version.

He looks at the US growth story from the innovation cycle angle. He points to three phases of innovations in US. Each of these phases led to growth in US economy. Some innovations had a much larger and longer impact than others.

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.

However, there are tremendous headwinds ahead:

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.

Due to lack of time not discussing the paper in details. But is a great reading for those who say Indian growth story can be built on mobiles and software…Most innovations which led to growth in US economy were basic things like inhouse toilets, running piped water and good connectivity roads. These basic innovations then (we see them as a given now) led to much of the rise in productivity and growth in the US history. I think same would apply to other countries as well which have managed to grow.

Superb stuff..

 

3 Responses to “Is US Economic growth over? A discussion from innovations perspective”

  1. PopularEconomics.com Says:

    Am happy he included inequality component, since 90 percent of consumers power most economic growth. The slow eroding wealth of middle class since 70’s directly contributed to slower GDP growth. Have we forgotten role of aggregate demand? The rise of corporate, 1 percent wealthiest have created an Oligarchy that has siphoned off wealth from those who could grow effective, or aggregate demand, so of course less innovation will follow!

  2. Editor Says:

    Also note Prof. Gordon puts all his horses in innovation race, as a free market, rational expectations guy, but forgets to note that innovation benefits must pass on to those wage and salary earners, which hasn’t happened since his supply-side colleagues brought in R Reagan and government-is-the-problem, which has severely depressed aggregate demand, needless to say.

  3. Michael Webster Says:

    Here is a link to the free version:

    http://faculty-web.at.northwestern.edu/economics/gordon/Is%20US%20Economic%20Growth%20Over.pdf

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