Friday, December 28, 2012

The Dismal Political Economist Tips His Hat to a Real Pessimist – Robert J. Gordon Explains Why Future Growth Will Be Far Less Than Past Growth

The Proof – The Lower Growth Rate Trend Has Already Started

Americans of the current age are used to each year bringing an improvement.  There is a raise in salary, a better house, a newer car and more money for discretionary pleasurable events like the ball game, or eating out at a nice restaurant.  This increase had been taking place for over a century.  It is coming to an end.

The decline in growth rates is nice documented by Robert Gordon in a nicely written article in the review section of the Wall Street Journal.  Here is the gist of what he is saying.

Between 1891 and 2007, the nation achieved a robust 2% annual growth rate of output per person. Unfortunately, the evidence suggests to me that future economic growth will achieve at best half that historic rate. The old rate allowed the American standard of living to double every 35 years; for most people in the future that doubling may take a century or more.

The causes are clear, a lack of massive innovation opportunities and the aging of a population which has moved to a service dominated economy.  Here is a good example of why past advances will not be present in the future.

The profound boost that these innovations gave to economic growth would be difficult to repeat. Only once could transport speed be increased from the horse (6 miles per hour) to the Boeing  707 (550 mph). Only once could outhouses be replaced by running water and indoor plumbing. Only once could indoor temperatures, thanks to central heating and air conditioning, be converted from cold in winter and hot in summer to a uniform year-round climate of 68 to 72 degrees Fahrenheit.

Notice that this inevitable trend is independent of economic policy.  There is no such rule that progress has to come every year.  It is true that Conservative policy will make things worse than they need to be, as Europe is now finding out, but even correct policy will not offset the fact that a population that is stagnating and becoming ever more dominated by the elderly will not produce vibrant growth.

Even if we assume that innovation produces a cornucopia of wonders beyond my expectations, the economy still faces formidable headwinds. The retirement of the baby boomers and the continuing exodus of prime-age males from the labor force, sometimes called the "missing fifth," are reducing hours worked per member of the population. American educational attainment continues to slide ever-downward in the international league tables, due to cost inflation at our universities, $1 trillion in student loans, abysmal test scores and large numbers of high-school dropouts.

What this largely means is that individual goals will change.  They will not be centered on personal economic growth, but on holding on to what one has.

Have a nice day everyone. 


  1. Dr. Krugman 'splains some of this:

    Then he reminds US it could all be "...boring science fiction."

  2. Krugman's position is that innovations will continue and will produce economic growth, but that the growth will accrue to capital and not to labor, exacerbating the level of income inequality and causing further deterioration in the economy along with lower funding for payroll driven programs like Medicare and SS.

    Even if he is correct, the end result is the same, lower growth, possibly negative growth.

  3. That is indeed Krugmans current position, however this article may provide some insight into the confusion, or not: