Would you rather have indoor plumbing or an iPad?
For most of us the choice is obvious. With all due respect to Steve Jobs and Mark Zuckerberg, the freedom to avoid midnight visits to a foul-smelling outhouse matters a lot more than logging into our Facebook accounts.
Robert Gordon, a professor of economics at Northwestern University, likes to challenge audiences by asking them to choose between technology invented pre-2002 and post-2002. His point is simple: The past decade has been less than sizzling in terms of life-changing productivity improvements. Any one of several innovations from years past – indoor plumbing, say, or electrical lighting – looms much bigger in our day-to-day existence than everything invented in the past decade.
The past 10 years may be merely a slow patch in society’s relentless climb to a richer standard of living, but Prof. Gordon thinks a more long-lasting trend is beginning to make itself felt. In a recent paper entitled “Is U.S. Economic Growth Over?” he argues that the pace of GDP expansion, at least in the United States, is slowing down permanently. The tepid growth of the past few years is not a blip, he argues, but a foretaste of what will lie ahead for most Americans for decades to come.
To most economists, this is a heretical notion. From 1860 to 2007, U.S. GDP per capita expanded 1.9 per cent a year and most forecasters assume a return to that trend. Prof. Gordon, however, thinks a combination of factors will cut the rate of expansion in half.
Plodding growth is actually the norm, he says. For most of history, there was no economic progress at all for the average person. Living standards began to accelerate only with an outburst of crucial inventions in the middle of the 18th century.
The first industrial revolution took root in the U.K. and propelled humanity into a new era with innovations such as steam engines and railways. A second wave of creativity between 1870 and 1900 bolstered growth with three more life-changing inventions: the internal combustion engine, electricity and running water.
It took nearly a century for both waves of innovation to be fully absorbed by the economy. Since 1970, Prof. Gordon says, the pace of productivity growth has been slowing despite all the much touted advances in computers and telecommunications.
The U.S. economy now faces a headwind as it finds that many of the factors that drove productivity over the past generation cannot be duplicated. The enormous move of women into the work force? It was a great boost to output, but cannot be repeated. Similarly, the baby boom is unlikely to be duplicated. And you can only educate a population once; the U.S. now appears to have hit a plateau in terms of its schooling.
It’s easy to take issue with Prof. Gordon’s analysis. Maybe there’s an outburst of technological innovation just around the corner that we can’t foresee. Or maybe a surge of immigration – something Prof. Gordon urges – would help alleviate the demographic challenge.
But it’s not just Prof. Gordon who sees slower growth persisting. Fixed-income investors are now willing to buy U.S. bonds at rates that essentially guarantee no real return for the next 20 years. A lot of people, it seems, are betting against any rapid return to the old days of heady growth.