The View

The rise and fall of American economic growth

The arrivals of economic populists Trump and Sanders on the US political scene lies in stagnant economic growth after 1970 and rising income and wealth inequality after 1980

PUBLISHED : Tuesday, 29 November, 2016, 2:08pm
UPDATED : Tuesday, 29 November, 2016, 10:44pm

Why Donald Trump? Why, for that matter, Bernie Sanders? Why did two economic populists from outside the American political mainstream set the tone for the recent presidential election?

Part of the answer lies in stagnant economic growth (after 1970) and rising income and wealth inequality (after 1980).

And those two trends are painstakingly outlined in a latest book on US economic history.

Robert Gordon’s The Rise and Fall of American Growth (2016) shows that US labour productivity was at its peak during 1920-70, but fell off significantly during 1970-2014, despite the information technology revolution.

The fast growth of labour productivity from 1920 to 1970, at 2.82 per cent per annum compared with periods before (of 1.50 per cent per annum) and after (of 1.62 per cent per annum), is due mainly to total factor productivity, which represents innovation and technical change.

Gordon tells us economic progress occurs much more rapidly in some eras than in others. There was virtually no economic growth for millennia until 1770, only slow growth in the transition century before 1870, and remarkably rapid growth in the special century of the second industrial revolution from 1870 to 1970.

That century was notable for its radical improvement in working conditions and those in the home, and unprecedented economic growth. It was unique in human history, unrepeatable because the inventions could happen only once.

The master innovations of this period were electricity and the internal combustion engine, which transformed not only working conditions but also entertainment and public health and life expectancy. By 1970 a newborn infant could expect to live not to age 45, but beyond age 70.

Growth has been slower since the 1970s because the advances have tended to be channelled into a narrow sphere of human activity involving entertainment, communication, and the collection and processing of information.

Most of the economy only realised a one-time benefit from the Internet and Web revolution, but since then methods of production in other sectors have changed little, reflected in today’s lower rates of productivity.

Gordon concludes the US is likely to remain there for the near future and he is now the first economist to be unimpressed by today’s digital technologies.

George Mason economist Tyler Cowen was one of the first to warn that apps and social media were having limited economic impact.

But Cowen argues more modestly that the technological future is simply unknowable: There is no firm empirical basis for either optimism or pessimism.

Other economists have contested Gordon’s pessimism as misplaced and believe advances in artificial intelligence and digital technologies will create new products and services that lead to higher economic growth.

The biggest problem with Gordon’s book, however, is his belief that he forecasts future economic and productivity growth rates.

He cites the mediocre American educational system, rising income inequality, government debt, and low levels of population growth, among other factors, as unfavourable headwinds buffeting the US economy.

[Another detailed examination of how US income and wealth inequality declined starting in 1930, but rose steadily again after 1980, is Thomas Piketty’s Capitalism in the Twenty First Century (2014).]

Although these are very real problems, there are other, more positive factors at play that Gordon is too quick to dismiss and that make predicting the future of economic and productivity growth a very difficult business.

Consider the technological breakthroughs that are just on the horizon, such as significant new ways to treat mental health; strong and effective but non-addictive painkillers; artificial intelligence and smart software that could eliminate many boring, repetitive jobs; genetic engineering; and the use of modified smartphones for medical monitoring and diagnosis.

Moreover, thanks to greater political and economic freedom all over the world, more individual geniuses today have the potential to contribute to global innovation than ever before, for example, from China – something Gordon never considers.

Gordon’s book does serve, though, as a powerful reminder that the US economy really has gone through a protracted slowdown caused by stagnation in technological progress. Some of his arguments also have particular significance for the politics of 2016.

The great transformation recounted by Gordon has left a deep imprint on American public and private life. Generations have grown up expecting that their material circumstances would improve –– that they would be better off than their parents. This is now changing.

Stagnation and inequality have created the political discontent that Trump and Sanders, the two insurgent populists, tapped in their presidential campaigns.

That discontent will remain a force in American public life for many years to come.

Richard Wong is the Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong