Monday, February 22, 2016

045. Prof. Gordon's Views About Productivity and US Futures

Robert J. Gordon is Stanley G. Harris Professor in the Social Sciences and Professor of Economics at Northwestern University. His research focuses on inflation, unemployment, and productivity. He is an adviser to the Bureau of Economic Analysis and a member of the policy advisory panel of the Federal Reserve Bank of Chicago. A “techno-pessimist,” he argues that the most transformative innovations are behind us, and continued weak productivity growth lies ahead.

For the total economy, productivity growth was 2.7% from 1920 to 1970, 1.6% from 1970 to 1994, 2.3% from 1994 to 2004 during what we call the dotcom era, and just 1.0% from 2004 to the second quarter of 2015.1 So the productivity growth of the last 11 years was not only slower than in the dotcom era, but even slower than in the so-called slowdown period beginning in the early 1970s.
The reason for the slowdown after 1970 is straightforward: we simply exhausted the productivity benefits of prior innovations. In the late 19th century, hugely important “general purpose” technologies, like electricity and the internal combustion engine, were invented. Then there were major developments in entertainment and communication in the form of the telephone, telegraph, radio, motion pictures and television. We made major breakthroughs in health. And we vastly improved working conditions. All of that came together between 1920 and 1970. The last three spin-offs of the great inventions—interstate highways, commercial air travel, and air conditioning in most businesses—were also largely complete by 1970. So at that point we had run through the productivity payoffs.

We have also now run through the payoffs of the digital revolution that followed. Between 1980 and 2005 there was a total transformation of business practices from paper and filing cabinets to flat screens and search engines. But that transition is over. And the temporary revival of productivity during the dotcom era was uniquely concentrated in a very short span, with remarkably few gains in productivity growth since. We’re using software and computers now that are very similar to the ones we used ten years ago. So it is no surprise that productivity growth has been slower over this decade.

Inventions of the century from 1870 to 1970 utterly changed human life in a way that now is taken for granted. When you consider the immense progress in getting rid of disease, filth, manure; the advances in health with antibiotics and treatments for heart disease and cancer; the liberation of women from the chores of doing laundry with a scrub board; the transition away from steel workers working 12 hours a day, six days a week, there really is no comparison with the inventions taking place today. Smartphones and social networks are entertainment and not basic to human life. But “best” is subjective. Some people may think it is more important to have a social network than indoor plumbing.

There are four main headwinds to economic growth. The first is rising inequality. Our winner-take-all society provides very high payoffs to the top rock stars, CEOs, lawyers, and so forth. And at the bottom, we have machines gradually but steadily replacing workers, and an erosion of manufacturing jobs from globalization and trade. So the gap between the very top and the mass of people in the middle and the bottom continues to widen inexorably.

The second headwind is the end of the great expansion of education that brought Americans from completing only an elementary school education in 1900 to a great majority having a high school education by around 1970. There has been a gradual increase in the share of young people going to college, but the United States has fallen from its previous position of leadership in global education and now ranks about 16th among nations in the percentage of its young people completing a four-year college degree program.

The third headwind is the demographic shift I mentioned of baby boom retirement pushing down overall hours worked. And the final headwind, also related to aging, involves federal government expenditures on Social Security and Medicare increasing faster than the shrinking workforce’s ability to provide the tax revenue to finance these benefits. This will eventually necessitate tax increases and/or benefit reductions, which will cause people’s after-tax disposable income to grow even more slowly than their pre-tax income.

CONCLUSIONS: Prof. Gordon has offered the best cogent analysis of US prospects and should be used as guidelines for making long range projections of the economy.

Text from Goldman Sachs Global Investment Research, http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.

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