OpinionAre the days of rapid economic growth over?
The conventional wisdom driving long-term budget projections is very likely to be wrong
The great bulk of the economic commentaries you read in the papers are focused on the short run - the effects of the "fiscal cliff" on US recovery, the stresses on the euro, Japan's latest attempt to break out of deflation. This focus is understandable, since one global depression can ruin your whole day. However, what do we know about the prospects for long-run prosperity? The answer is: less than we think.
The long-term projections produced by official agencies, such as the Congressional Budget Office, generally make two big assumptions. One is that economic growth over the next few decades will resemble growth over the past few decades. In particular, productivity - the key driver of growth - is projected to rise at a rate not too different from its average growth since the 1970s. On the other side, however, these projections generally assume that income inequality, which soared over the past three decades, will increase only modestly looking forward.
Given how little we know about long-run growth, simply assuming that the future will resemble the past is a natural guess. On the other hand, if income inequality continues to soar, we're looking at a dystopian, class-warfare future - not the kind of thing government agencies want to contemplate.
Yet this conventional wisdom is very likely to be wrong.
Professor Robert Gordon, an economist at Northwestern University, created a stir by arguing that economic growth is likely to slow sharply - that the age of growth that began in the 18th century may well be drawing to an end.
Gordon says long-term economic growth hasn't been a steady process; it has been driven by several industrial revolutions. The first, based largely on the steam engine, drove growth in the late-18th and early-19th centuries. The second, made possible in large part by the application of science to technologies such as electrification, internal combustion and chemical engineering, began circa 1870 and drove growth into the 1960s. The third, based around information technology, defines our current era.
As Gordon notes, the pay-offs to the third industrial revolution are far smaller than from the second. Electrification was a bigger deal than the internet.