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50 Economics Classics: The Rise and Fall of American Growth

50 Economics Classics: The Rise and Fall of American Growth

The Rise & Fall of American Growth

Robert Gordon

In The Rise and Fall of American Growth, economic historian Robert Gordon argues that, compared to the technological advances in the period 1870-1970, the advances of the post-1970 era have not been as great.

Most of the innovations have been in communications, information processing and entertainment, not in areas that materially improve our lives. As a result, the growth rate of the past 45 years has been less than half that enjoyed between 1920 and 1970.

Gordon’s thesis is that ‘some inventions are more important than others’, and that the fast-growth century after the American Civil War was made possible by a unique clustering of these ‘great inventions’.

'The economic revolution of 1870 to 1970 was unique in human history,' he writes, 'unrepeatable because so much of its achievements could happen only once.'

From 1920 to 1970, total factor productivity growth was triple what it was between 1870 and 1920, and triple what it has been since 1970. Why? There was ‘one big wave’ of innovation, with advances including:

  • • Antibiotics, x-rays and modern cancer treatments, which saved millions of lives.
  • • Big improvements in city air quality, and large declines in the number of people smoking.
  • • Fewer fatal car crashes.
  • • Radio, which brought live, free, constant entertainment and news into living rooms.
  • • A universal postal service, connecting even remote areas of the US to the rest of the country and world on a daily basis.
  • • The telephone, which brought people together socially and commercially.
  • • The talking movie, which created a sizeable industry. Television also established itself.

The almost-decade 1996-2004 saw a spike in productivity thanks to the diffusion of computers, but that boost lasted just eight years. The period 2000-2014 brought the slowest growth in productivity in any decade in American history.

Could supercomputing, artificial intelligence and robotics create a similar wave of growth to the one that occurred between 1920 and 1970?

Gordon’s responses are as follows:

• Medical advances will continue, but only at an incremental rate, held back by over-regulation.

• If machinery, including small robots, really does supplant human labour, Gordon asks, why is the unemployment rate today not 25% or 50%, instead of 5%? Machines do not just substitute for labour, but complement it.

• 3D printing will certainly help designers of new products and entrepreneurs create new things at low cost, but is unlikely to have a big impact on mass production.

• So far, advances in big data and artificial intelligence have not brought a productivity boom. The algorithm is no match for the mass production assembly line or even the self-service supermarket in terms of productivity or customer well-being.

• The benefits of driverless cars will be minor ‘compared to the invention of the car itself or the improvements in safety that created a tenfold decline in fatalities per vehicle mile since 1950’.

Gordon calculates that if productivity growth between 1970 and 2014 had been as strong as it was between 1920 and 1970, real GDP per person in America would be almost $100,000, not the $50,000 it currently it is.

There are four demographic and political factors which he thinks make it unlikely that the United States will suddenly get back onto a higher growth track:

• Inequality: since the late 1970s there has been a steady increase in the proportion of US national income going to the top 1% of earners.

• Demography: the labour force participation rate of working age people aged 25-54 has declined since 2000, making the nation far less productive.

• Fiscal: if current social security and tax entitlements stay the same, there will be an increasing ratio of US federal debt to GDP in 2015-35. This is likely to mean that taxes increase or benefits are reduced, but if either happens there will be a fall in disposable income, which will damage the economy.

Final comments

The title of Gordon’s book would seem to suggest a story of success followed by failure, but this is not his meaning at all.

The theme is not that the US has lost out (indeed, it has been the productivity leader among rich countries for over 100 years), but that it is remarkable how fast America’s growth rate was between 1920 and 1970.

This superfast growth slowed ‘not because inventors had lost their spark or were devoid of new ideas, but because the basic elements of a modern standard of living had by then already been achieved’.

Copyright © Tom Butler-Bowdon, 2017. The above is an abridged extract from 50 Economics Classics by Tom Butler-Bowdon, published by Nicholas Brealey Publishing.

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