| || ||Kip Beckman |
Principal Research Associate,
Productivity guru Professor Robert Gordon, an economics professor at Northwestern University, recently asked an intriguing question: If given a choice, would you rather have all of the latest technological inventions such as Facebook and the iPhone, or running water and indoor plumbing? Most would choose the latter, especially those of us spending winters in Canada. Professor Gordon uses this query to highlight the important relationships between technology and economic growth. He contends that the most crucial life-altering benefits from technological innovations are behind us and that the U.S. economy (and presumably Canada too) is in for a long period of sluggish growth.
This is obviously a very controversial conclusion, but Gordon backs it up his views by examining trends in economic history going way back to 1300. He notes that there was virtually no growth in real per capita GDP in developed countries between 1300 and 1700 as standards of living for most people remained unchanged. Then growth started to accelerate in the mid 1700s, especially in the United Kingdom, as a result of the Industrial Revolution. In the United States, per capita growth in real GDP took off in the early 1900s and peaked between 1928 and 1950. Growth has steadily declined in the United States since 1950.
Gordon splits the phases of U.S. economic growth into three separate periods, all linked to technological change and productivity growth. Between 1750 and 1830, productivity and job growth accelerated due to the invention of the steam engine and railroads. This was followed by the major-life changing benefits of technological change attributable to the invention of electricity, the internal-combustion engine, running water and indoor plumbing between 1870 and 1900. These inventions led to other breakthroughs including air-conditioning, sanitation, rapid transportation, mass communication and the sharp growth in home appliances. The computer revolution, which also included the Internet and mobile telephones, started around 1960, and its impact on productivity continues to be felt to this day.
The most important period of technological breakthrough centred on the invention of electricity and the internal combustion engine in the late 1800s. Productivity growth in the United States averaged 2.3 per cent per year between 1891 and 1972. However, once some of the spin-off benefits from these important inventions started to run their course, such as the commercial airplane and interstate highways, productivity growth subsequently slowed down to 1.4 per cent per year between 1972 and 1996.
This “dismal age” of productivity growth was followed by a pick-up in growth, this time attributable to the computer and telecommunications revolution. Productivity growth averaged 2.5 per cent per year between 1996 and 2004. However, the impact on productivity from the computer revolution only lasted for about eight years—US productivity growth from 2004 to the present has averaged only 1.3 per cent on an annual basis. The technological change attributable to the computer and telecommunications has managed to displace many workers, especially those with low education, but it has failed to generate the type of sustained productivity and job growth that resulted in major increases in standards of living, such as those following the mass distribution of electricity.
Gordon notes that not all inventions are equal, and that the long spurt in productivity growth between 1891 and 1972 of 2.3 per cent per year—more than 80 years—was more important than technological breakthroughs either before or after this crucial time period. That period had a dramatic impact on Americans’ standard of living. Between 1906 and 1957, real per capita income expanded at an average annual clip of 3 per cent. As a point of comparison, growth in per capita income averaged only around 2 per cent per year between 1988 and 2007.
Peeking into the future, productivity growth in the United States will likely be constrained not only by the gradual winding down of the gains resulting from the computer revolution, but also by other serious headwinds. These include the impact of an aging population, high levels of government debt, income inequality, and the fact that the U.S. education system is quickly falling behind that of other major developed countries. Unfortunately, this suggests that the stagnation in household incomes that has been a fact of life for the past couple of decades is likely to continue.
Gordon’s overriding point is that the surge in standards of living in the United States attributable to the invention of electricity and the internal combustion engine could well be an anomaly—and the period of time prior to 1700, when standards of living remained unchanged for centuries, could be the new norm. Is this pessimistic outlook justified? While Gordon makes a very strong case, it is important to remember that predicting future changes in technology, and their impact on the economy and society, have been notoriously inaccurate and it is virtually impossible to know where the next “big thing” may be coming from. After all, one of the Warner brothers, the big movie producers, was very skeptical about the success of the technological breakthrough that enabled movies to be made with sound when he asked, “Who the hell wants to hear actors talk?”
Rana Foroohar, “More Jobs, Less Pay”, Time, (October, 2012).
Robert Gordon, “Is US Economic Growth Over? Faltering innovation Confronts the Six Headwinds”, NBER, (August, 2012).