What if Robert J. Gordon is correct? What if one of the heavyweights of the U.S. economics profession has it right about the economic future of his country? If he is right, forget the campaign promises and airy assumptions of Mitt Romney and Barack Obama. And if the analysis is proven out, Canadians should get ready for a tougher future as a country whose economy will always be tied to that of the United States.
Prof. Gordon was educated at Harvard and Oxford. He taught at MIT and Chicago before settling in at Northwestern, perhaps because unlike the Chicago School economists, he doesn’t think the market is always so rational. There are market failures aplenty and governments sometimes have to come to the rescue. Call him a New Keynesian.
Call him a pessimist, or more accurately, a realist. Here, put simply, is his thesis from a recent essay in Policy Insights: Growth is going to be slower in the United States, and for a long time, than most people imagine and every politician promises.
There were massive leaps in technologies and stunning innovations in the past that propelled increases in growth of incomes. These are unlikely for the foreseeable future. Even the high technology revolution, to the surprise of many, has not produced a productivity boom.
In the past eight years, 2004 to 2012, labour productivity has returned to the level of 1972-1992. The productivity blip of the IT revolution lasted eight years: Most IT today is not about labor-saving innovation, but entertainment and communication through smaller machines.
If big productivity gains are hard to find, growth will putter along at slow rates. Worse, the U.S. economy faces what he calls “six headwinds” that will make growth gains even harder.
First, the “demographic dividend” has gone into reverse. The huge surge of women into the labour force is over. Instead, the baby boomers are retiring, which means the total number of hours worked per capita in society will shrink, while more people demand more public services.
Second, educational attainment in the U.S. plateaued 20 years ago. U.S. students, taken as a whole, do miserably on standardized international tests, and a “cost disease” afflicts higher education.
Third, inequality is rising. The top 1 per cent of American society captured 52 per cent of income gains from 1993 to 2008. He argues (correctly) that “the most important [reason] in holding down growth of our future income is rising inequality.”
Fourth, globalization means outsourcing jobs to countries with lower wages which, over time, narrow gaps with richer countries whose wage rates stagnate, as has been happening for many Americans for a long time now.
Fifth, the proper way to deal with global warming is to put a tax on carbon – “the consensus recommendation of economists” – but if this is done without other countries (notably India and China) following along, it will impede growth in the U.S.
Sixth, households and governments are substantially in debt. Eventually, debt reduction needs higher taxes and lower government transfers to people, which will reduce the growth rate.
Of course, some of these assumptions/predictions might not materialize. There is no appetite in the U.S. for a carbon tax. Maybe the federal government, in due course, will attack inequality, although no appetite exists for such an attack now. Maybe educational reforms will pull up U.S. students’ results, which have been sliding for some time.
Maybe, maybe. But some of these “headwinds” look hard to avoid, especially globalization, which, as Prof. Gordon notes, is already forcing companies to impose, and unions to accept, “two-tier” wage settlements, with less money and fewer benefits for younger employees than they would have received under previous contracts. The loss of union jobs, or lower wages for new employees, increases inequality.
Critics of this kind of pessimistic/realistic future insist that America’s greatness has always resided in innovation. Who knows where the new great leap forward in technology will come? Hasn’t the United States always been in the forefront of discovery? A country that can reach Mars and produce the iPad will always be a world leader with a brighter future.
It’s a plausible rebuttal. But the rebuttal doesn’t deal convincingly with the six “headwinds,” all of which, except for the poor educational performance of students, apply to Canada.