Economist Robert Gordon on The Rise and Fall of American Growth

Robert Gordon is the Stanley H. Harris Professor of economics at Northwestern University with a particular interest in unemployment, inflation, and both the long-run and cyclical aspects of labor productivity. He is the author of a textbook in intermediate macroeconomics, now in its 12th edition, and has completed a new book, The Rise and Fall of American Growth, which was published by the Princeton University Press in January, 2016. He is a Fellow of the Econometric Society and the American Academy of Arts and Sciences. In 2014 he was elected as a Distinguished Fellow of the American Economic Association in recognition of a long career of outstanding contributions to scholarship, teaching, public service, and the economics profession. For more than three decades, he has been a member of the National Bureau of Economic Research’s Business Cycle Dating Committee, which determines the start and end dates for recessions in the United States.

He was kind enough to talk with us about his recent book as well as his take on various issues holding back growth in the United States.

EW: For anyone not too familiar with your book, your main thesis is that the inventions that propelled growth to never before seen levels between 1870-1970, electricity, indoor plumbing, modern chemicals and pharmaceuticals, the internal combustion engine, and modern communication systems, were all one-time events that can never be repeated. As a result, we have to get used to slower growth in the future. It’s almost as if you can think about the global stock of knowledge, and once we reach a certain level it gets harder and harder to grow from the larger base. Is that a fair characterization?

RG: You need to think about this phenomenon in three separate dimensions. First, there’s speed. We went from the boat and the horse to the car and jet plane in a very small space of time. Second, there’s temperature. We went from being at the mercy of the weather to controlling heat and cold indoors. Finally, there’s the urban/rural dimension. Peoples migrating to urban areas from rural areas made them more productive and gave them greater access to modern life and conveniences.

But, innovation is not a continual process. It’s not guaranteed to occur at a steady and smooth rate. Along all three dimensions there is an obvious limit. More than 100% of the population cannot live in cities. We went from 1% of the speed of sound to 80% in a small time. So, these unbelievable changes cannot just continue to occur at a regular rate.

EW: So, it’s as if we bumped up against an innovation speed limit?

RG: Well, we continue to get better. Let’s just stay with vehicles. The internal combustion engine can’t be invented a second time, but we continue to get better and better at making internal combustion engines. It’s just that the improvement is more evolutionary than it is revolutionary.

Even the big improvements that people are foreseeing in the near future won’t be enough to transform lives in the same way as past inventions. We may end up with self-driving cars, but for people in urban environments, that spend a lot of time looking for parking spaces and running errands, the self-driving car has limited appeal.

EW: Was there an “a-ha” moment in the course of your research where the ideas you write about really clicked?

RG: I talk about that somewhat in the preface to the book. I conducted research as part of my Ph.D. thesis that looked at growth in output between 1920 and 1950. The fascinating thing about that period is that there was a big growth in output, but not much growth in capital.

The real catalyst was when I happened to discover a book called The Bad Old Days about how terrible life really was in the 19th century. How miserable life was without the things we take for granted.
Those two insights were put together for a paper I wrote in 2000 called “Does the New Economy Measure Up to the Great Inventions of the Past?” It’s still the most cited paper that I’ve written. The basic idea of what became The Rise and Fall of American Growth was there, but I had not completed a lot of the primary research on economic history that composed a large part of the book.

EW: What has been the general feedback you’ve received from the economic community regarding your paper and your book? Do they feel you’ve been too pessimistic?

RG: The general view is that the history is very enjoyable and many people have said they learned something new about a specific period of history or a certain fact that escaped them before. But, more criticism on when I move into the application and they think that I’m being way too pessimistic on my future growth projections.

EW: Do they cite any specific reasons why they feel that way?

RG: It’s a lot of unfounded optimism. People see modern technology and the get mesmerized. Things like Artificial Intelligence make people take the leap that a duplication of yesterday’s productivity gains are in the cards. I see articles every now and again about how X% of our jobs today will be eliminated in the next twenty years. But, if that’s the case, no one can explain why it is that we have been stuck at basically no productivity growth for seven years now.

EW: You also cite four factors that you could call structural factors that exacerbate the innovation slowdown. Those are demographics, education, debt, and inequality. And I believe that the innovation and structural factors combined, lead you to conclude that growth in living standards will recede back to the level of 0.2% per year. Is that accurate?

RG: Not quite as bad as 0.2%. That figure comes from a study of growth in the United Kingdom before the Industrial Revolution.

There are still some things that are a little unclear. For example, I can’t say whether or not inequality will continue rising in the next twenty years or not. Interestingly, almost no one takes me on when I discuss inequality, but although we did see a big spike in inequality, since the late 1990s it hasn’t changed much. So, I can’t say whether the problem will get worse or better in the future.
The figures that I cited as my best estimates are for productivity growth of 1.2% per year and income per capita growth of 0.8%. The difference between those figures is due to changing demographics and in particular the retirement of baby boomers which will leave a lower percent of the population in the labor force.

EW: I think post-recession growth has been about 2% per year. Do you think the 1.2% rise in productivity combined with a growing labor force and make 2% sustainable into the future?

RG: No, it’s not. And that’s because part of the 2% growth has come about from a falling unemployment rate. That can’t happen forever. There’s a limit where unemployment is not going to decrease any further. My prediction for long-run growth in output is about 1.6%.

EW: Some of these problems are out of our control. But, are there policy changes you advocate for that can help the situation?

RG: There is a list of things that I advocate for in the book. I think higher tax rates on the super-rich would be helpful and boosting the minimum wage, both to soften income inequality.

I place a lot of emphasis on education and I think there’s a lot that can be done there. We should have more options for poorer students. You don’t see the educational system that we have in our inner cities in other developed countries. The level of education that is received shouldn’t depend on your family’s income.

And then for college, we have a growing group of students with unmanageable debt loads and I strongly endorse a system that’s similar to the United Kingdom and Australia, where debt is more manageable. Some programs are already starting to be implemented, such as income based repayments.

EW: This isn’t meant to be a political interview, but when you read about Trump’s recent budget and advocates that claim that through lower taxes and less regulation we can get back to 3%-4% growth, what is your reaction?

RG: Trump’s budget has been roundly condemned by every serious economist. There is no focus on the fundamentals. I’m not really sure there’s been an adequate explanation for how growth will return.
There is some limited potential for decreasing regulation to alter the rate of growth, but a good deal of that regulation is at the state and local levels. So, I’m not even sure that changes in federal regulation will make much of an impact.

EW: For some time now we have also seen a drop in investment. The growth rate of capital stocks has been weak in the United States since, I think, around 2000. Do you see that as being linked to slowdowns in productivity growth? In other words, has the lack of productivity growth meant that business are finding less of a return on investments they make?

RG: You’ve put your finger on the nature of that relationship. There is always something of a “chicken and the egg” problem when discussing investment and productivity. If productivity is not there, then returns are lowered and investment drops. But, without investment, productivity tends to be lower.
We have also seen some meaningful structural changes in the economy. Back in the 1990s there was a lot of investment from retailers expanding and the creation of the “big-box” retailers. That’s all largely done and with online retail growing, we don’t need more retail space. So, that’s a factor too.
Among the other basic problems with investment, are that a huge amount of investment was needed to create the personal computer/internet revolution. A lot of that investment is also over.

EW: So, is it just a problem, not just of low returns, but even if businesses wanted to invest funds at a low rate of return, there’s just nothing to invest in?

RG: That’s right. If you look at the workplace, you can see broad changes in how we live and progress. People are sitting at basically the same desks and the same computers for a little while now. For probably 10-15 years. During the 1980s and 1990s there were incredible changes in how people worked while the technology revolution was in full swing.

EW: It seems there’s also been structural changes in the way businesses are managed. Back in the 1960s and 1970s there was a conglomerate boom, and now with the rise of management consulting and private equity we see business much more focused. Has that impacted investment?

RG: Yes, there’s been several widely cited articles about that. Businesses have moved from a stakeholder approach that takes multiple constituencies into account to one that only looks at shareholder returns. It’s created a lot of short-term thinking and shareholder gains as well as an enormous rise in CEO compensation.

EW: Are there potential changes in corporate governance that could be accretive to growth?

RG: I’m not familiar with any set of proposals that could effectively counter the current incentives to short-term profits. It’s not really my focus. But, there are some international corporate governance systems, such as in Germany and Japan that might help American corporate governance move in a different direction.

One thing they do in Germany that’s really great is they have apprenticeship programs, so young people of college age that might not go to college can get skills as a mechanic or computer developer.

EW: One thing that we haven’t talked about, but that will have a big impact potentially on growth is health care. What are your thoughts on the state of the American health care system?

RG: The single payer system is so obvious, there’s no question it’s a better system. Other countries pay 10% of GDP compared to 17% in the United States and they get better outcomes. Health care in the United States is a monumentally inefficient system that relies on too much testing and too much bureaucracy. Why can’t we just move to a single payer, Medicare for all system? It’s mostly because there are private interests that are being protected.

EW: Are there any risks to innovation from a single payer system?

RG: There doesn’t have to be. There are reforms that you can introduce to overcome that fear. For example, there are critics of the FDA – they say their approval process is too inefficient and cumbersome. You can make improvements in areas like that to make sure there is plenty of incentive for innovation.

EW: Obviously you focus primarily on the United States in your research, but would you say that there is still plenty of opportunity for emerging economies to have strong growth as they adopt practices developed in the West?

RG: Absolutely. There are enormous opportunities for emerging countries to catch up to the West. There are limits and there are reasons why the per-capita income in China and India may never be as high as in the United States. But, there is still a lot of opportunity for places like those to continue seeing increases in their standard of living at a much higher rate than the United States.

EW: What advice do you give your students for coping with the environment we’re now in? Is the only option now to lower expectations for the future?

RG: My advice would be different to different people. I’m lucky to be able to teach at a place like Northwestern where the undergraduates, in general, are highly intelligent and motivated and are likely to do just fine in the economy. Although some will do better than areas if they decide to pursue engineering or business as opposed to literature.

It’s definitely tough for a lot of young people starting today. There simply are not as many college level jobs as there are college graduates. There’s been a hollowing out of the middle and we’ve moved into an era of imbalance in the labor market with low skilled jobs.

EW: Can we ask you about your current research and whether or not you plan on publishing anything soon?

RG: Yes. I’m starting a project to investigate low productivity in certain sectors of the economy. I’m trying to figure out why certain industries have perpetually low productivity. Right now I’m still in the data gathering phase and trying to bring in as many databases as possible.

EW: We’ll look forward to that research and thank you very much for giving us some of your time today.