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 We had portable music in the form of CD players, that’s been replaced by the iPod.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.

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  1. caleb b says:

    Not to be nitpicky, but the chart of the Dow Jones Industrial Average doesn’t really have a place here. The DJIA is a price-weighted index so essentially, inflation can up the index with no “real” change in wealth creation. The DJIA will continue to trend higher as long as inflation does…so if that is our basis for “economic growth,” then short of apocalypse, our “growth” is far from over.

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  2. BrianB says:

    The central problem here is not new electronic technology and computing but the “Energy” that they and our modern civilization runs on. Gordon states and refers to steam power in the first Industrial Revolution. It wasn’t the new “physical” steam engine it self but the coal and wood that was put into the combustion chamber to heat the water. You had to have the steam engine but it was worthless if you couldn’t stoke the fires with wood or coal. Just like a smart phone or iphone is worth nothing if there is no electricity.
    When drilling for petroleum gushed huge amounts of oil in 1859 and when combined with the new chemistry of cracking discovered by Benjamin Siliman in the 1840′s, the the energy of one horse (horse power) greatly increased. What industry could do with one horse within one hour, a cheap gallon of gasoline was able to greatly increase. Refer to conversion charts in google or elsewhere, but 1 gallon of gasoline is equal to… now get this… 49.0814091684 horses working together for one hour or what we refer to as 49.0814091684 horse power (hp).
    The second Industrial Revolution, Gordon refers to the contribution of the internal combustion engine. Like the “physical” steam engine, the “physical” internal combustion engine is worthless without the cheap gasoline. The more superior Energy is electricity and the AC motor. We can thank great electrical engineers such as Edison but even more so, when referring to the alternating current (AC) induction motor to histories forgotten genius Nikola Tesla. Our current modern technological age has skyrocketed because of electricity and the motors they run on. They are the more superior technology. Electricity is even more efficient than gasoline. The future in cars is the electric car such as the Tesla roadster, Nissan Leaf, GM Volt, etc.
    A lot of our electronic devices use electric motors such as blenders, food processors, the air conditioning in the car, house, power tools, etc. Go right down the line and electricity is the number one energy that all of our iphones ipads, cell phones, laptops, computers, homes or cars electrical system, etc. If it wasn’t for the battery and Teslas electric coil in the car the internal combustion engine would have to be started with handle crank or lawn mower like pull cord from “human” energy.
    Long winded but hopefully I am getting through. Even though the third Industrial Revolution is considered to be the computing or “information” age it still runs on the 2nd IR’s Energy (actually one could argue that Electricity was the one and only 2nd IR’s energy and was over run or “run over” by the internal combustion engine). The electric car was the first horseless carriage the internal combustion engine took control because gasoline was a liquid and could be poured into the gas tank while the development of battery technology and storage of the electricity slowly progressed. Funding by the petroleum industry over ruled is reflected today by how much money and control they have on our world economic energy model, the U.S and World political systems.
    Until our President and/or candidates address this looming “Energy Problem” stagnation will continue while we all pay more for petroleum and oil products.
    The new Industrial Revolution will be mainly electricity and how we extract it. We get electricity now from Teslas generator by the use of an electromagnetic field passing over copper wiring in the generator. But we have to use another form of energy to turn the motor such as gasoline, diesel, propane, bio-fuels, nuclear, the discovery of fusion or a better way of extracting the energy from our main power source in the solar system, which is our Sun. In the book “Sun and Earth” by Herbert Friedman, published in 1986 by Scientific American Library, there is 5 million horsepower (per hour) per square mile from the Sun. One hp is equal to 746 watts of electricity so: 5 million hp per hour multiplied by 746 watts equals to 3,730,000 kw per hour in a square mile. We all kind of have an idea how much energy there is when we split the atom. It is believed to actually be more than that. It is believed that within one square centimeter (packed with atoms) there is enough energy to run the earth for a day. I have begun a blog at http://undergroundcyberjungle.blogspot.com/

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    • BrianB says:

      To add to above each Industrial Revolution mainly had two components: The Energy and a Transportation of goods/services/communications Vehicle.
      No. 1 IR Steam power stoked by the Energy: Coal and Wood. Vehicle was the Railroad .
      No. 2 IR Electricity and internal combustion (or petro chemicals), other combustibles such as natural gas as the Energies. The vehicle were the automobiles, trolleys, still electric/diesel railroads but also information transfer by telegraph, telephone, radio, television, satellites, etc.
      No. 3 IR Still run on electricity and petroleum and the discovery of other combustibles such as natural gas but the vehicles are computers, computing and speed on electrical devices, etc.
      For the No. 4 IR We need to switch to using cheaper forms of electricity and the newer electronic devices and newer modes of transportation that also run on electricity, fusion, antimatter, etc.
      Maybe Electrogravitics and antigravity propulsions will take us beyond earth and to discoveries within our solar system, other star systems in our galaxy and universe. It will be much harder to go anywhere with World War II technologies such as solid and liquid fuels.
      We need to have stars in our eyes and vision.

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  3. web design says:

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

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  4. Joe says:

    As an engineer, people expect me to get excited by technology, but I usually could care less. For a while I’ve been saying what Gordon is saying about “incremental improvement”. There has been nothing really new since the internet, in my estimation, and therefore nothing to get excited about.

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  5. Thalia says:

    Suggesting that the mobile phone was just a minor improvement on existing pay phones is like suggesting that the car was a minor improvement over the horse and buggy. Both got you there faster than walking, after all. Was it an incremental improvement? I don’t think so. And, of course, the true development by Ford wasn’t the motorized carriage, that already existed, but the manufacturing mechanisms that made it affordable by the average man. Those types of improvements have been happening regularly.

    But the last truly big leap was the Internet. The one that is least recognized but was a leap (though whether it was forward is debatable) was robotics. While we don’t yet have household robots, almost all industrial manufacturing relies on robotics. I expect customized biology is on the cusp for a real breakthrough as well.

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  6. J1 says:

    Does Gordon write peak oil articles or sell gold under another name?

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  7. Alex F. says:

    This podcast is politically motivated.
    Its idea is that the economic slowdown is inevitable and as such it is not Obama’s fault.

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  8. Tung Bo says:

    Gordon writes: “If you think about the great inventions of the last ten years, you think of iPods..” Right there, you can see why he reached the wrong conclusion – because he doesn’t understand what are the real great inventions of the information revolution. A better list should include:
    E-Mail
    WWW
    Cellphone
    GPS
    Air Traffic Control
    Seismic mapping – enabling oil/gas discovery
    Medical imaging
    Manufacutring automation – including robots

    The information revolution is NOT about the Internet bubble. We are in the middle of it and it has a long way to run. We just literally can’t see the forest for the tree right now.

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