Why America’s Economic Growth May Be (Shh!) Over (Ep. 95)

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 here.)

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 We had portable music in the form of CD players, that’s been replaced by the iPod.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


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.

Mike B

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.



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!



Articial Intelligence

revolution. end of story.

Seminymous Coward

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


You'd be wrong.


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?

Seminymous Coward

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.


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


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.


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.


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.

Seminymous Coward

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.


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.

caleb b

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.


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/



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.