Why America’s Economic Growth May Be (Shh!) Over: a New Marketplace Podcast

With the Presidential debate finished, we are officially in the final lap of America’s second-favorite spectator sport. (Yes, football is better than politics.) Of all the talking that Barack Obama and Mitt Romney will do by Nov. 6, you can bet that a great deal of their breath will be expended on economic matters. Because that’s what the President of the United States does, right — runs our economy?

Well, actually, no. The President has far less influence over the economy than people tend to think — as we’ve pointed out not once, or twice, but three times.

That, of course, won’t stop the candidates from talking about their plans to “fix” or “heal” or “restore” our economy — all of which imply that we are in an economic doldrums that is sure to pass. But what if it doesn’t? What if the massive economic growth the U.S. has experienced through most of our history is a thing of the past?

That’s the topic of our latest Freakonomics Radio on Marketplace podcast. (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above in the post, or read the transcript below.)

It is largely based on a recent paper by the Northwestern economist Robert J. Gordon, called “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” (abstract, PDF). It is an impressive and interesting piece of economic history; among the writers who have taken note of it are David Warsh and Tim Harford.

Gordon argues that we have essentially experienced three different Industrial Revolutions over the past couple centuries. The first (1750-1830) gave us steam power and railroads. The second (1870-1900) gave us electricity and all that went along with it; the internal combustion engine (and all that went along with it), running water and indoor toilets, communications, and much more. And the third, the digital revolution, has of course brought us computers, mobile phones, and the like.

Gordon’s central argument is that, as impressive as this third revolution has been, in terms of productivity and other concrete economic gains, it cannot hold a candle to the electric revolution:

GORDON: If you think about the great inventions of the last ten years, you think of iPods, you think of the iPad, iPhones, but each of those is an incremental improvement on what we already had. We had portable music in the form of CD players, that’s been replaced by the iPod. You can carry a lot more music in your pocket on an iPod than you could on a CD player, but it’s the same music. So that’s an incremental, small-scale improvement. We had garden-variety cell phones before that. We had pay phones that you had to walk up to and put a quarter in. And now smart phones combine computer power with the ability to make a telephone call. But we’re taking things that had already been invented and we’re just repackaging them in a more convenient form. So that’s the sense that these are not fundamental inventions on the scale of things like electricity or inventing the motor vehicle.

You’ll also hear from recurring guest Tyler Cowen, whose recent book The Great Stagnation echoes much of Gordon’s argument. But Cowen is more optimistic than Gordon that the U.S. can recapture its economic momentum, as the subtitle of his book spells out: “How American Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better Again.”

Audio Transcript

 

Kai RYSSDAL: It’s that’s moment every couple of weeks, we talk to Stephen Dubner.  He is the co-author of the books and blog of the same name.  It is the hidden side of everything.  Dubner, welcome back, man.  I missed ya.

 

Stephen J. DUBNER: I missed you, too, Kai. Thanks for having me.  I’m guessing you’re going to be in front of your TV tonight for the debate?

 

RYSSDAL: I am, yes.  Of course I am.  In point of fact, also live tweeting and it’s on marketplace.org.  So, if you’re lonely, you know where you can go. 

 

DUBNER: Very good.  You know the focus of this first presidential debate as you know is domestic policy.  So I am assuming we’re going to hear an awful lot about the economy.  Yes?

 

RYSSDAL: One would certainly hope, right?  That’s what we’re waiting for – for these two men, who want to be the most powerful man in the world, to help us fix the American economy, right?

 

DUBNER: So, Kai, let me say two things about this. The first, which I have said on your program before -- and will probably say again --  is that the U.S. President has much less influence over the economy than we actually think.

 

RYSSDAL: Yeah, but we have to pretend.  Right?  Come on.

 

DUBNER: We have to pretend.  My second point is actually more heretical than that. My second point is this: There are people out in the world, who will argue with you that that the Great Age of American Economic Growth is … just … over. Here’s Robert Gordon, an economist at Northwestern:

 

Robert J. GORDON: We had a century of relatively rapid productivity growth between, say, 1870 and 1970. And then it slowed down. And a major puzzle for the economics profession was to figure out: why did it slow down?

 

RYSSDAL: OK.  A) Did they figure it out?  And B) what about computers and automation and technology and increased productivity?  Hello?

 

DUBNER: Excellent question.  So here’s the way Robert Gordon explains it.  There have been three Industrial Revolutions over the past couple of centuries. The first one was steam power and railroads.

 

RYSSDAL: Yeah, that was the Industrial Revolution.

 

DUBNER: That was a big one.  But the second one, that we’re most thankful for, included electricity, the internal combustion engine and the fuels to run it; clean water.  And his argument is that the computer revolution is just not as potent as the ones that came before it.

 

RYSSDAL: Hello!  Has this man never heard of the iPhone?  That changed my life, and there are people who will be amazed to hear me say that.

 

DUBNER: I’m glad it changed your life.  It has changed my life, too.  But his argument is this: what a lot of technology does is make things that already existed more portable and more flexible – our entertainment, our communication.  Obviously, we’re all thankful for that, but when you compare that to things like mass transportation and electricity, heating and air conditioning, the computer era does not produce those kind of gains.

 

RYSSDAL: OK, so not to get all downer on you here, but if the iPhone and all that it represents is what we have now to propel us forward, are we fundamentally doomed?

 

DUBNER: No.  And nobody’s saying that. What you are starting to hear, is that America’s Golden Age of Growth may have been exactly that – a Golden Age. Which, by its nature, cannot last forever. OK?  Tyler Cowen, an economist that you’ve had on this program before, has coined a name for the current U.S. economy.  He calls it “The Great Stagnation.” That said, Cowen is a big believer that new technology -- artificial intelligence, for instance -- will lead to further growth. He thinks that Robert Gordon’s prediction therefore is probably a little bit too grim:

 

Tyler COWEN: I think our ability to forecast future growth has never been all that great.  So, about the future I’m actually fairly optimistic.

 

RYSSDAL: Which is great.  But what if, Dubner, right?  What if Gordon’s right?  And what if you’re right?  And the greatest growth is behind us?

 

DUBNER: Well, look -- it may be.  Again, these are predictions.  And you know how I feel about predictions – they’re mostly worthless.  It may be, however, time to start thinking about the U.S. economy not so much in terms of never-ending growth, which we’ve been trained to do.  But in terms of a different word – which is sustainability, essentially. Which isn’t necessarily the worst thing in the world.            

 

RYSSDAL: And of course that’s what we’re going to hear the president and Governor Romney talking about tonight, right?  Not about growth at all?

 

DUBNER: Are you kidding me?  No.  First of all, they both need to preserve this fiction that the President controls the economy. But, beyond that, to get on TV and say, “My fellow Americans, our Great Age of Growth was wonderful.  And it’s over; welcome to the new Season of Sustainability.”  I do not see that as a big vote-getter. They will do what politicians always do -- they will promise a bigger and brighter economic future. Because if there’s one thing politicians are really good at, it’s making promises that they have absolutely no ability to keep. 

 

RYSSDAL: Stephen Dubner.  Freakonomics.com is the web site.  We will talk to you again in a couple of weeks.

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 38

View All Comments »
  1. AJS says:

    I haven’t read the Gordon’s article, just the excerpt here, but it’s preposterous that he would use the ipod as the pinnacle of the digital revolution. Perhaps he would find the Digital Revolution less outclassed if he focused on more transformative technologies. Global communication has become an effortless afterthought. Anyone with an iphone can access more information than the sum of the world’s libraries from a decade ago. You have algorithms that can process enormous amounts of data and find connections and patterns that would have taken someone a lifetime to find. 3D printing and rapid prototyping are going to transform manufacturing. Material science and nanotechnology are making the fantasical possible (youtube levitating semiconductors!). I’m a fan of iPod, but if I were looking for recent tech to compare to the combustion engine, I might pass up my little music player.

    Well-loved. Like or Dislike: Thumb up 33 Thumb down 5
  2. Mike B says:

    The information revolution is as real as any others. The productivity gains that can be had from low cost sensors providing low cost data to low cost processors with low cost storage is staggering. For example our manufacturing sector produces a third more in the real value of its goods than it did a decade ago, yet it uses fewer em0ployees and agriculture is getting similarly efficient. If there are going to be any problems is that new technologies are finally making is possible to replace whole horizontal classes of less skilled jobs whereas before they were simply displaced. If anything kill economic growth it will be because we don’t find a way to manage the massive wave of unemployment that will follow.

    The industrial and electrical revolution replaced the human hand and the human muscle. The information revolution replaces much of the human mind in the workplace. There’s not much that workers have left to trade on.

    Thumb up 4 Thumb down 2
  3. mmm says:

    Let’s break this down:

    “We had portable music in the form of CD players, that’s been replaced by the iPod. You can carry a lot more music in your pocket on an iPod than you could on a CD player, but it’s the same music. So that’s an incremental, small-scale improvement.”

    First, this argument doesn’t even start at the right place. Before CDs we had cassettes, before that 8 tracks, and before that plain old radio as means to have “portable music.” I’m ignoring the 10 year qualification because mp3 players pre-date the ipod — the first entered the market in 1997.

    Second, the author is using a really funny points of reference: “but its the same music” and “electricity” and “inventing the motor vehicle.” That doesn’t make sense. That’s basically like saying, “oh the telephone isn’t a huge advance because it’s the same voice” or “plastic isn’t such a huge advance because it’s just a petroleum product.” The differences may appear small from the perspective of the content or paradigmatic inventions, but not so much so from the point of the underlying technology.

    “And now smart phones combine computer power with the ability to make a telephone call. But we’re taking things that had already been invented and we’re just repackaging them in a more convenient form.”

    Miniaturization is a hugely important enabling technology. The fact that the smartphone I have in my pocket is orders of magnitude better than the technology of my first computer isn’t just a repackaging.

    So that’s the sense that these are not fundamental inventions on the scale of things like electricity or inventing the motor vehicle.

    Perhaps we haven’t seen earth breaking fundamental inventions in the electrical engineering department, but that work is certainly happening in the biological engineering departments. But the funny thing about this whole proposition is that the basic idea of a fundamental invention is that it gives rise to entire areas.

    To use a more classic example, the civil engineer. Arguably, the pinnacle of civil engineering happened in Roman times with aqueducts and roads. We haven’t seen any massive fundamental changes in those technologies since we still have running water and still have streets! The world must be in decline!

    Well-loved. Like or Dislike: Thumb up 14 Thumb down 2
    • Mearl says:

      I think his point is larger than that, and maybe he’s not making it too well in this one quote. The invention of electricity, steam power and motor vehicles brought with them entire infrastructural changes that affect every aspect of life. We had to build roads, rails, bridges- aside from the growth created from these things alone, think of what followed them- towns, stores, shopping, shipping, mass production, assembly lines, communication, different types of construction, etc. There is just no comparison between the changes these things brought along and the way the country grew in the 20th century and what will happen in the 21st. We are talking about the growth produced from moving from a mostly small, rural area to a completely industrialized area – and this is before you add all the money that came in from winning WW2 without any local destruction. Go out and talk to someone who grew up outside of a major city in the 1930s. The growth was unprecendented.

      We will never have that again- at least not in our lifetimes. The digital revolution has been cool, but it hasn’t changed things so fundamentally- it’s just enhanced things that were already there.

      Thumb up 0 Thumb down 0
      • Dan Bryan says:

        Here is an analogy I think of often. Christopher Columbus arrived in the Americas in 1492. As of 2012, Cortez had not been to Mexico, Pizarro had not been to Peru, and Ponce de Leon had not been to the North American continent. Someone could have easily looked at the New World in 1512 and concluded that while interesting, the new discoveries were not earth-changing in any critical way.

        I mention those exact dates because 1992 was the first full year of the modern worldwide web. We have barely scratched the surface of what this will accomplish, and I predict that in 2032 anybody looking at our current time will see something noticeably less-evolved than what we will have then.

        Thumb up 0 Thumb down 0
  4. syym says:

    Genetics
    Robotics
    Articial Intelligence
    Nanotechnology

    revolution. end of story.

    Thumb up 1 Thumb down 0
    • Seminymous Coward says:

      I’m pretty sure we don’t have AI yet.

      Thumb up 4 Thumb down 3
      • mmm says:

        You’d be wrong.

        Thumb up 1 Thumb down 2
      • Seminymous Coward says:

        mmm: Would you care to provide a citation to a human-developed artificial intelligence? This is distinct from computer science advances based wholly or in part on ideas developed while researching the possibility of artificial intelligence.

        Thumb up 3 Thumb down 0
      • Bulldust says:

        Would planes and cars that largely fly/drive themselves be considered AI? How about a computer that beats the world best chess player(s) (this is old news) or beats the all-time Jeopardy champions easily (recently). I am sure people more familiar with the field could cite additional samples. There are probably Xprizes for AI-related fields. I think people are working on AI that out-diagnoses doctors as we speak (maybe it is already available). Moore’s Law is unrelenting and will continue to result in boggling advances. Note also that algorhythmic advances compound Moore’s Law growth even further.

        Anyone that suggests that technology/innovation is petering out right now simply does not understand the transformations that are happening as we read. I could toss out 3D printers (soon to be affordable and useful to the average household) as another example. I expect these to be hugely disruptive.

        OH BTW I read this morning that some news generated online had no human involvement … there was no way you’d pick the difference (a Forbes market report apparently). Are you sure this was written by a human?

        Thumb up 1 Thumb down 2
      • J1 says:

        Most of your examples involve situations (chess, for example) in which there is a fixed, limited, quantity of variables, or an ability to rapidly determine the answer to a question with a single answer and no real time variables. Moore’s law will certainly come into play, but whether that’s AI, or when the ability to handle a sufficiently huge quantity of variables becomes AI might be a matter of philosophy.

        Your airplane example is a good one. While an autopilot can perform almost every routine task an airplane does, it has great difficulty responding to rapidly changing variables or decisions that are essentially intuitive such as which choice to make in the event of multiple, conflicting TCAS RAs (a warning to alter the aircraft’s path to avoid collision with other aircraft) or where/when to land in event of, for example, a fire inside the fuselage (the most dangerous situation you can have in an airplane and still potentially survive). There will probably come a day when this isn’t the case, but right now the reason you have a pilot on you’re airplane is to 1.) make the ATC system work and 2.) get you back on the ground alive when something goes wrong. We’re a ways away from a computer being able to perform those tasks, but the day will come. When it does, will it be because of AI, or because we’ve simply settled on a fixed, finite list of variables?

        Thumb up 2 Thumb down 0
      • Paul says:

        Certainly we have “AI”. How many accountants can fill out taxes without software? How many can do double entry accounting?

        An F16 can’t even be flown without the on board computer. (It is too unstable, and requires a computer to make all the necessary adjustments to go where the pilot wants to go).

        The point is that “Big AI” that is equal to a person isn’t the same as “AI”. We are building intelligence into nearly everything. The little bit here and the little bit there is absolutely huge in total. To the point that a loss of all computer systems would result in the death of half or more of the world’s population.

        Thumb up 0 Thumb down 3
      • James says:

        “Certainly we have “AI”. How many accountants can fill out taxes without software?”

        I don’t know about accountants, but I do my own without software. Nor is there any artificial intelligence in the software: it just performs computations on input according to programmed rules, just like any other program.

        As for the F-16 control software, there’s nothing intelligent about it. It’s just a feedback device, no different in principle than a mechanical engine-speed governor or home thermostat.

        Thumb up 4 Thumb down 0
      • ciendolor says:

        …. any arbitrary modern computer game (on advanced platforms, eg. playstation) has artificially intelligent agents in it that would have blown the minds of researchers in the 1970′s. These are adaptive, contextually reactive agents exhibiting behavior that is casually difficult to predict. Other examples: many higher end automobiles could qualify as exhibiting AI behavior, and the Siri speech agent could also be considered AI. It’s so commonplace that nobody trumpets out that they are implementing algorithms today that would have been considered Buck Rogers in the 1970′s.

        Thumb up 0 Thumb down 0
  5. Scott says:

    There’s a false dichotomy here.

    If generically a mobile phone is not a breakthrough but an incremental improvement on a pay phone, then how exactly do you justify a horseless carriage as a major improvement and not an incremental improvement over horse-drawn?

    Well-loved. Like or Dislike: Thumb up 12 Thumb down 0
    • Seminymous Coward says:

      This is exactly correct. Dr. Gordon offers no clear criteria for what constitutes a breakthrough.

      Furthermore, his own graph for 2012′s economy size vs. a 1972-96 trend line shows us 9% ahead of where we would have guessed. His IR#3 explains that difference. Most importantly, Dr. Gordon provides no evidence at all that another isn’t coming.

      Spoiler: The IR#4 ahead of us will explain our future economic growth.

      Thumb up 3 Thumb down 0
    • mearl says:

      The invention of the vehicle brought about more roads, mass transit, the highway system, the spread of towns, urbanization, shopping as we know it now, factories, interchangeable parts on assembly lines, etc.

      Now I don’t think he means the vehicle did these things alone, but that industrial revolution changed every aspect of daily life and the way economics functions. Mass communication was a part of this- the infrastructure and the electricity required were invented and then people could talk regularly and easily across long distances for the first time ever. The digital revolution has made this easier and more efficient, but it’s really just a later stage in the development of mass communication rather than the invention of mass communication itself. The digital age has brought few fundamental infrastructural changes- it is mostly relying on what is already in existence. The sorts of infrastructural changes to maintain the Internet, for example, don’t change every aspect of daily life for every person in the country the way industrialization and urbanization did in the industrial and electrical revolution. This is his point.

      Thumb up 0 Thumb down 0
  6. paul says:

    The digital revolution has been greater than previous revolutions. Past revolutions, regardless of their impact, required training people and physical replication of products. Computers allow processes to be deployed via software. Nobody has to learn the process… it is just installed.

    It is a Meta revolution. It had changed how revolutions are done

    Thumb up 2 Thumb down 1
    • Paul says:

      Obviously people didn’t get what I was trying to say. Let’s put it another way.

      The Computer revolution is about the deployment of intelligence, without having to stuff said intelligence into anyone’s head. This takes the form of spreadsheets that flawlessly add numbers and apply formulas. Tax preparation software that, should we have to do all of that by hand, would require millions more accountants than is possible to train. Drones that take pilots out of the equation. Robots doing space exploration.

      This isn’t as obvious as a steam engine, but it is vastly more transformative in our culture, in our economy, in our productivity, in the environment.

      For better or worse, we have created things that have nearly unlimited potential to evolve, mostly on their own, inheriting functionality from the past.

      Thumb up 2 Thumb down 1
      • James says:

        Granting your arguments about a computer revolution, how does that contribute to economic growth? I would think that it would in fact shrink the economy overall. Consider what email and on-line banking have done to the post office and the jobs of bank tellers, for instance. Or the music industry: once it supported a subsidiary industrial chain making materials for vinyl records, tapes, and CDs. That’s vanishing, as music becomes just another bit stream to download. So music consumers get their music cheaper (in theory, anyway), but because the market is fundamentally limited by the amount of time people can & will listen to music, that part of the economy shrinks.

        Same is true for photography: once you had to buy film and pay for processing & printing. Now that part of the economy is just gone – ask any Kodak employee – and the digital camera market shrinks once everyone has a 12 megapixel or better camera embedded in their cell phone.

        Thumb up 1 Thumb down 0
  7. AJ says:

    Nod to Bobby D and the Wilburys:

    I guess I’ll go to Florida and get myself some sun,
    There ain’t no more opportunity here,
    everything’s been done.

    Thumb up 0 Thumb down 0
  8. JB says:

    Well, Industrial Revolution #4 better hurry up and arrive.

    We now have a global economy which led to a global job market. In the past that meant the loss of manufacturing and textile jobs to cheaper overseas countries.

    Advances in computing have made computers cheaper, easier to use, and the world more connected than ever before. This means that many jobs able to be performed sitting at a computer can be performed sitting at a computer in any country.

    It may have started with call centres etc. but as developing countries improve education and become more computer capable, businesses will seek cheaper ways of achieving outcomes.

    I can’t really see how this is avoidable. Indeed, if jobs continue to move overseas, then growth could well be something that used to occur.

    Thumb up 0 Thumb down 0
    • Seminymous Coward says:

      So jobs move overseas until those countries catch up economically and the wages stabilize, and this repeats until every country is rocking first-world quality of life. That sounds like growth to me. Tying it back to US growth, offshoring could hypothetically stall it, but the whole world’s economy will grow once those countries have caught up.

      Honestly, our sitting still on quality of life so that other countries can get up to date on water, food, plumbing, and stable electricity doesn’t sound that bad to me. Life is pretty good here already.

      Furthermore, null economic growth doesn’t mean null quality of life growth. A $500 laptop today is far more useful than a $5.9M (inflation-adjusted) ENIAC, even though it contributes far less to GDP.

      Well-loved. Like or Dislike: Thumb up 14 Thumb down 0
      • JAM says:

        There is one other benefit to the rest of the world catching up.

        When there is less of a differential in standards of living around the world, people will probably be a lot less paranoid about their national borders. Goods and labor will probably flow more freely as labor will be valued similarly in many places. Probably less desire for war. Probably result in less need for government and a bigger pie for everyone.

        A lot of probablys, but I guess I’m just an optimist.

        Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
      • triclops says:

        best not say any of that around any union supporters though…

        Thumb up 4 Thumb down 0