Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds by Robert J. Gordon questions the belief that economic growth is a never ending phenomenon. He presents a history of economic growth and demonstrates how periods of expansion are driven by industrial revolutions. He states that the first industrial revolution started around 1750 with the development of steam power and the railroad. The second began in 1870 and was brought forth by electricity, the internal combustion engine, and running water. The third and final revolution was instigated by computers, cell phones, and the internet. He makes the point that before first industrial revolution, there was almost no worldwide economic growth, and that since that time, the global economy has expanded at a tremendous pace which causes many to believe that growth is the norm in a modern economy. Gordon however, ponders the idea that the past two to three hundred years have been the exception rather than the rule. He observes that the most recent industrial revolution inspired a much shorter period of growth than the first two. The first and second lasted for around a century while the most recent had an effect for only around thirty years. By inspiring growth, Gordon means that once a groundbreaking technology is developed, it is modified and applied to different areas until it its usefulness to the economy is exhausted. For example, the discovery of electricity led to lightbulbs, television, refrigeration, etc. Gordon believes that the third revolution’s time was so short because of the emphasis placed on entertainment rather than changes in productivity. Thus, he believes that the next revolution, whatever it may be, will also be short lived.
Gordon also presents six reasons why American growth will be difficult to achieve even if we experience long periods of innovation. These reasons include: the end of the demographic dividend (females are already integrated into labor markets and baby boomers are retiring), stagnating educational attainment, income inequality, globalization, environmental policy, and household and government debt.
My main concern with this article is the premise that “innovation does not have the same potential to create growth in the future as in the past.” This claim is based upon the observation that the third revolution did not lead to as long a period of growth as the first two. However, one occurrence is not a trend and trying to anticipate the scope of future innovation is an impossible task. Just as a person in the 1940s could not foresee the internet, readers of this paper in 2015 cannot predict what technology will be available in 2090. It could be a relatively minor development when compared to the invention of electricity or the railroad, or it could completely revolutionize the way the world works. We have no idea. That is why I think his “six headwinds” are a stronger rationale for why growth will be lower in the upcoming years than his comparison of the three revolutions. We can at least see that those problems exist.
Graph for comments:
For air travel CPI see series CWUR0000SETG01 vs all items CUUR0000SA0. The CPI has a longer series, but it moves the same.