Is the US Economy Entering a Period of Stagnation?

You are here:

Home
Economy
Is the US Economy Entering a Period of Stagnation?

I am by no stretch of the imagination an economist. But a recent paper and a recent book on the long-term prospects for sustained US economic growth—and the discussion they generated—captured my attention, perhaps because it makes a forecast that builds on centuries of history. I’ll do my best to briefly describe the paper’s thesis and some of the counterpoints made by others.

In “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” Northwestern University Professor Robert J. Gordon argues that nearly all of historical growth in production per capita has been driven by a series of three industrial revolutions. The first, from about 1750 to 1830, included steam engines and cotton spinning; the second, from about 1870 to 1900, the internal combustion engine, electricity, and running water; the third, beginning about 1960, the computer and Internet. The innovations from these three revolutions and the incremental improvements that followed improved US production per capita, but Gordon argues that they included many one-time events whose impact on economic output has largely already been captured. Productivity gains from the third revolution were smaller than those from the second, are slowing, and will continue to slow. (Note that Gordon excludes the period from 2007 onwards from his trends; that is, his argument is not skewed by the recent economic downturn.)

Moreover, Gordon identifies six economic “headwinds” that will put downward pressure on US growth going forward, namely the aging population, falling educational achievement, rising income inequality, globalization and ICT-enabled outsourcing, energy and environmental issues, and household and government debt.

Net, Gordon sees “the possibility that future economic growth may gradually sputter out.” Economic growth, which was virtually nil before about 1750, may once again be very slow, at least mature economies.

Tyler Cowen’s book The Great Stagnation goes farther, arguing that US economic growth until about 1974 benefited from “low-hanging fruit” that included not only technological innovation but also cheap land and rising education levels. Since about 1974 the low-hanging fruit has been gone and economic growth has slowed. And the Internet isn’t generating a tremendous amount of new economic activity—major players have relatively small payrolls and many activities are available for free.

Many commentators have responded to these arguments, from several angles:

Gordon is way too pessimistic. The three industrial revolutions were driven by the innovative, risk-taking spirit created during the Enlightenment, a spirit that is alive and well and will continue to drive innovation, though unevenly, over time.
Gordon may be right in the shorter term—especially about the headwinds he cites—but wrong in the longer term because information technology, biotechnology, and nanotechnology still have great potential for innovation.
Gordon is too pessimistic. There are a lot of policy changes that we could make to increase the likelihood of productive innovation going forward. Cowen’s book provoked similar comments.
Gordon’s reminder that real game-changing innovations like indoor plumbing and the automobile are historically rare is right on target.
Cowen’s data may also indicate that Americans are shifting from a modern focus on wealth creation to a post-modern focus on quality of life, a focus that yields little new economic activity.
Gordon is a bit too pessimistic. It may be too soon to forecast the end of growth. Instead, it may be time to think of the US economy not in terms of perpetual growth but in terms of sustainability.
Blogging for Forbes, Nick Schulz argued that there are plausible arguments both for and against the economic stagnation hypothesis. But taking the hypothesis seriously makes more sense to Schulz, because it inspires us to action to reignite innovation.