Is robust American growth a thing of the past?

In election year, Edward Luce wonders whether activist government may hold some of the answers
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The Rise and Fall of American Growth: The US Standard of Living Since the Civil War, by Robert Gordon, Princeton University Press, RRP£27.95 / RRP$39.95, 784 pages

Concrete Economics: The Hamilton Approach to Economic Growth and Policy, by Stephen Cohen and Bradford De Long, Harvard Business Review Press, RRP$28, 240 pages

As the baseball legend Yogi Berra allegedly said, it is tough to make predictions — especially about the future. The economist Robert Gordon clearly wasn’t listening. His book, The Rise and Fall of American Growth, makes a startling forecast that is unlikely to go down well in Silicon Valley. The future is not what it used to be, he says. The peak age of high growth and disruptive technology is behind us. Forget the power of the iPhone. Stop exulting about Google’s driverless car. Such wonders pale beside the changes felt by earlier generations. They are unlikely to be matched by our age.

Gordon’s thesis is not entirely new. The economist Tyler Cowen made a similar argument in 2011 with his sparkling monograph, The Great Stagnation (ironically published first as an ebook). Nor is it as counter-intuitive as it sounds to our app-crowded, WiFi-saturated, 21st-century brains. Gordon points out that for most of history, growth was absent. Between the fall of the Roman empire and the Middle Ages there was basically none. England’s per capita income doubled between 1300 and 1700 — a rate so slow as to be imperceptible. Life for most people was unimaginably stunted. Only in the 19th century did that change. Growth, in other words, is a recent historic blip, not a constant.

Picture the typical American household in 1870. It was rural, and often isolated. Almost one in four of its children could be expected to die in infancy. The rest would live to 50 if they were lucky. They would spend much of their short lives fetching water from wells, gathering wood for the stove, making clothes out of crude cloth, and suffering from whatever incurable diseases struck them. Travel was by horse for the most part. A quarter of all US agricultural land, worked by no fewer than 8.6m labourers, was given over to producing horse feed. Communication was by letter for those who could read. Light came from whale oil or kerosene. “The fruits of their labour were at the mercy of droughts, floods, and infestations of insects,” says Gordon. There was little, in other words, to mark out the squalor of daily lives from countless generations before.

Then came the great leap forward. Commercial electricity, the internal combustion engine, penicillin, synthetics, refrigeration and the telephone — to name just a few of the new wonders — turned life inside out. Land was freed up to produce food for humans. The stench of horse manure was cleared from the streets. Piped water and gas entered the home. Thomas Edison paved the way for the skyscraper powered by electric lifts. By 1950 only one in 100 American children died in infancy. The rest could expect to live to 70 or beyond. By then almost all of them were literate. Journeys were reduced from weeks to hours. Within the blink of a historical eye, life went from nasty, brutish and short to pleasant, bright and relatively lengthy. For those who still believe our age’s disruptions match what happened after 1870, ask yourself which you would first give up, your iPhone or the flush toilet? Laptop or antibiotics? If you have trouble answering those, ponder life without electricity. It is a measure of our solipsism that we take for granted what went before.

As an economic historian, Gordon is beyond reproach. His book meticulously lays out the growth effects of the second industrial revolution (the first one, in the 1700s, was the steam age; the third is today’s information technology and communications). Between 1870 and 1970 — the century of greatest change — per capita incomes grew at many times the rate of what went before. They also exceeded anything we have seen since. With the exception of the 1990s, when the digital revolution hit our desktops, productivity growth has slowed sharply in the past half century. It dropped from an average of 2.7 per cent a year in the 1950s and 1960s to below 1 per cent in the last decade. As a result, income growth has also slowed. The median US household income in 2014 was $50,600. If we had maintained pre-1970 productivity growth, it would have been $97,300. We are already well into a slowdown that, in Gordon’s view, is likely to slow further.

This is where his thesis becomes controversial. Scholars divide into three schools. There are the techno-optimists, such as Erik Brynjolfsson and Andrew McAfee, who believe the future is accelerating and will generally bring happy results. Their book, The Second Machine Age (2014), argues that intensifying automation will free up labour for more interesting pursuits — and leisure. Theirs is a vision of abundance. Then there are the techno-pessimists, such as Martin Ford, whose book Rise of the Robots (2015) envisions a jobless future in which only those who own the machines will live in abundance. The rest will cease to be viable. What the two have in common is a belief in rapid technological change. They diverge on whether its impact will be good for most humans. Gordon and Cowen belong to a third group that believes today’s changes are exaggerated. The age of rapidly advancing productivity is over. We are reverting to the historic pattern.

Which view is correct? The short answer is nobody knows, although some think they do. I recently heard a well-known Silicon Valley investor dismiss Gordon’s thesis as nonsense. He pointed to the efflorescence of tech “unicorns” — private start-ups valued at more than $1bn — that are working on virtual reality, artificial intelligence, gene splicing medicine and the like. At least one will be as transformative as the iPhone, he said.

This is where Gordon’s thesis is liable to be misread. His economic prognosis makes ample room for the emergence of virtual headsets, driverless cars and robotic disruptions. Technology will continue to change in dazzling ways, he says. But if the iPhone did not lift productivity rates, what could? Perhaps 3D printing? Or a cryonic leap into immortality? Today’s medical progress is only adding to economic stagnation, he argues. Most recent advances are in the treatment of physical ailments. So far there have been no comparable breakthroughs in tackling mental illness. The cost of prolonging lives is therefore likely to grow.

My hunch is that Gordon is a little too adamant. Perhaps we will come up with a cure to Alzheimer’s disease. Maybe androids will take over all the low-paying jobs. But even if he is right, there are things we can do that would lift the pessimism that pervades most people’s outlook (if public opinion offers a guide to the future, Gordon’s thesis wins hands down). The embittered US presidential primary battle offers a case study of what happens to politics when people’s economic hopes are dashed. Donald Trump’s success did not suddenly appear from nowhere. His rise owes a great deal to the frustrations borne of a generation of stagnation.

For an antidote to Gordon’s fatalism, turn to Concrete Economics. This short book, by the economists Stephen Cohen and Bradford DeLong, is light on data and high on readability. What it shares with Gordon is the view that today’s economy is not serving most Americans well. Growth has slowed and inequality has risen. Unlike Gordon, however, Cohen and DeLong believe that Americans have the power to do something about it. The key lies in better understanding their history.

If you ask Americans to identify the elixir of their country’s success, most would say something about freedom and entrepreneurship. Government would not feature. Their answer, in other words, would be ideological. A more accurate response, in the authors’ view, would be to draw on America’s creed of pragmatism. Franklin Roosevelt called it “bold, persistent experimentation”. Alexander Hamilton — perhaps the most modern of the founding fathers, and the only one who has a rap musical about him running on Broadway — developed the “American system”. Cohen and DeLong make a plea for Americans to abandon the “ideological incantations and abstract obfuscations” that have held since the late 1970s in favour of “whatever works” economics.

They make a persuasive case. From Hamilton’s infant industries to Abraham Lincoln’s Homestead Act, the federal government played a guiding role in the American success. “The invisible hand was repeatedly lifted at the elbow by the government and replaced in a new position where it could go on to perform its magic,” they write. If Lincoln had auctioned off land in the west to the highest bidders rather than parcelled it out to families, the US would have developed along Latin American-style lines. Government was behind many of the technological leaps that Gordon writes about. Even in the ideological era, government has prodded the market to go where it decrees. But it has taken wrong turns. Huge chunks of the US economy are devoted to financial trading, healthcare claims processing, real estate transaction and other “busy but useless” activity.

It is within America’s scope to reclaim its pragmatism, say the authors. Theirs is a lyrical manifesto. It is a million miles from Gordon’s techno-determinism and a different universe to Trump’s vision. It is also a corrective. Read Gordon and weep. Then perk yourself up with Concrete Economics. Some things are beyond our power to foresee. Others are within the realm of the possible.

Edward Luce is the FT’s chief US commentator and author of ‘Time to Start Thinking: America and the Spectre of Decline’ (Little, Brown)

Photographs: Reuters

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