A confluence of trends will reduce economic growth in the United States to half — or less — of the rate that has prevailed for the past 150 years, argues Robert J. Gordon, an economics professor at Northwestern University in a new paper published by the National Bureau of Economic Research, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.”
Successive waves of technological innovation — steam/railroads, electricity/internal combustion engine, and microchips — unleashed tremendous productivity gains that led to higher living standards. There is nothing remotely comparable on the horizon, Gordon contends. Indeed, the U.S. economy faces strong headwinds that will drag long-term growth to half or less of the 1.9% average annual rate that prevailed between 1860 and 2007.
The picture looks even worse for average Americans. While the Top 1% of income earners may continue to benefit from globalization, 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.”
If Gordon is correct, the implications are profoundly unsettling. Not only will living standards for most Americans stagnate for decades, there will be zero chance of whittling down the burden of the national debt by reviving economic growth. While Gordon does not explicitly say so, if his arguments are correct, America’s entitlement state is unsupportable. Dramatic revisions to the social contract between government and the governed are all but inevitable.
Gordon’s paper largely buttresses my Boomergeddon scenario for U.S. government finances. Indeed, in my book, I made the argument, for very similar reasons, that economic growth will be slower than the 10-year forecasts that underpin Obama administration and Congressional Budget Office forecasts of spending, revenues and deficits. If slow economic growth constricts tax revenues, the nation faces $1 trillion-a-year deficits as far as the eye can see…. until the system finally breaks down.
As gloomy as I am about the short- to- mid-term future, however, I am less pessimistic than Gordon for the long run. As it happens, I am currently reading “The Physics of the Future” by Michio Kaku, who provides a fairly nuanced view of the technological changes we can expect within the near future (by 2030), midcentury (2030 to 2070) and the far future (2070 to 2010). Continued advances in computing power, artificial intelligence, robotics, genetic engineering and nanotechnology will continue to drive material progress. By giving short shrift to the impact of coming waves of technological innovation, Gordon is unduly dour over the long run.
Nevertheless, the six mega-trends that Gordon highlights are reason enough for alarm. In a nutshell they are:
The demographic dividend is now in reverse motion. In the late 20th century, the mass migration of women into the workforce propelled U.S. economic growth. That trend has spent itself. Now baby boomers are retiring en mass. Hours of work per capita are declining. Less work means less output.
The plateau in U.S. educational attainment shows no sign of ending. The U.S. is slipping in international rankings in the percentage of population that has earned a college degree. A key barrier — much discussed in this blog, though not in “Boomergeddon” — is the surge in the price of tuition, which deters people from attending college. Particularly worrisome is the persistent achievement gap between Asians/whites and Hispanics/blacks.
Continued growth in income inequality will hold down gains for the 99%. Between 1993 and 2008, the 1% captured more than half the income gains during that period; the 99% shared the other half. Gordon sees no reason to think that trend will change.
Globalization will continue to outsource middle-class jobs. Inexpensive foreign labor competes with American labor not just through outsourcing but through imports. Emerging nations enjoy the advantage not only of lower wages but growing technological capabilities.
Energy and the environmental constraints will dampen growth. In 1901 the environment was not a priority. The population’s willingess to accept pollution allowed the economy to grow faster than it otherwise would have. We no longer have that luxury. Meanwhile, economic growth in India and China means greater competition for petroleum and other raw materials, which will drive up prices. (Gordon does not address the fracking revolution and what it means for long-term energy prices. I missed the significant of this trend when writing “Boomergeddon.” But that was more than two years ago — there is no excuse now.)
Rising government debt will slow growth. Accumulating consumer debt propelled economic growth for many years. The gradual pay-down of consumer debt has knocked out one of the props from the economy. Government has made up for the lost buying power by increasing its debt, but that increase is unsustainable. “As a matter of arithmetic the ratio of government debt to GDP can be reduced by a mix of higher taxes, lower expenditures, and lower entitlement benefits (including higher retirement ages). But the same arithmetic implies that higher taxes and/or lower transfers reduces the growth rate of real household disposable income relative to that of real GDP.”
For the most part, I agree with Gordon’s appraisal. One mega-trend that I identified and Gordon neglected was the impact of growing government control over the economy through direct spending, regulation and manipulation of credit markets. The morphing of the economy from innovation-driven capitalism to crony capitalism squanders resources on a massive scale. This is easily as important as any of the problems he mentions.
Bacon’s bottom line: We had a good run for 150 years. Absent fundamental reforms to our economic and political systems — reforms for which Americans have no stomach — the U.S. will enter a slower growth trajectory. We cannot support our the entitlement state with its massive unfunded liabilities. Adjusting to reality will be very, very painful.
— JAB
