Strictly Business: Is economic growth as we know it thing of past?
Sunday, October 7, 2012
Talk to economists, businesspeople and economic developers, and often the running assumption about the future is that there will always be growth.
What is accepted, perhaps taken for granted, is that innovation begets growth, and growth begets more innovation.
Sounds reasonable. The history of the U.S. economy alone offers abundant evidence of it. But what if the experts are wrong?
Put another way, what if an expert whose policy paper has created a stir in the financial press is right?
The venerable Robert J. Gordon, a professor of social sciences and economics at Northwestern University, who's considered a leading expert on inflation, unemployment and productivity growth, has written a 13-page paper with the ominous title, "Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds."
I came across it while culling regional labor economist Scott Bailey's latest labor market report for a story about job growth and unemployment in Clark County.
By the way, if you haven't subscribed to Bailey's monthly analyses, I urge you to do so by shipping him an email, email@example.com. They're essential reading, not just for the local numbers but also for summaries of and references to brilliant, contrarian nuggets like Gordon's paper.
Which is a mind-bender. Read it — http://www.cepr.org/pubs/PolicyInsights/PolicyInsight63.pdf — and tell me what you think.
Here's the upshot: Gordon argues that innovation no longer has the same potential to generate growth in the future as in the past. He argues that America's first two industrial revolutions (the first one produced such things as steam engines and railroads; the second one, everything from electricity to indoor plumbing) involved one-time-only changes whose benefits were long-lasting.
"Both the first two revolutions required about 100 years for their full effects to percolate through the economy," he writes.
However, the main impact of the third revolution — the computer and Internet revolution beginning around 1960 and climaxing in the late 1990s — "has withered away in the past eight years."
And invention since 2000 "has centered on entertainment and communication devices that are smaller, smarter and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars or indoor plumbing changed it."
Which begs the question: What's more important to you, your indoor toilet or your iPad?
On top of the diminishing returns of innovation, Gordon heaps six "headwinds" he argues will hold down growth rates:
• The retirement of baby boomers, which will act as a drag on the economy.
• Our failure to keep up with other nations' growth in higher education, and the ballooning cost of attaining higher education.
• Rising inequality, which Gordon says is "the most important quantitatively" in hampering the growth of future income.
• Outsourcing of jobs, "from call centers to radiologist jobs."
• Climate change, which "represents a payback for past growth."
• High debt levels, both for households and government.
Gordon writes that he may be wrong. Other innovation pessimists, he notes, have been wrong before, too.
Nevertheless, I appreciate his paper. It's a call for more skepticism, for a re-examination of our assumptions about economic growth.
In this way, it's also a call to action.
After all, as English economist and journalist Tim Harford put it in a recent review of Gordon's paper: "Innovation won't happen by magic."
Aaron Corvin is a Columbian business reporter. 360-735-4518, Twitter: http://twitter.com/col_econ; http://twitter.com/col_energy; http://www.columbian.com/weblogs/strictly-business, or firstname.lastname@example.org.