We now have a new paper from economist Robert J. Gordon of Northwestern University that seeks to answer a great puzzle of our time: “Why has economic growth slowed when innovation appears to be accelerating?” In the process, Gordon illuminates a dispute between the Trump administration (which thinks growth can be increased) and its critics (who are dubious).
The “real” economy that we experience directly and the one defined by statistics are strikingly different. The first seems awash with innovation, from smartphones to driverless cars. And yet, the statistical economy is lackluster. From 1970 to 2006, U.S. economic growth averaged 3.2 percent a year; from 2006 and 2016, growth averaged 1.4 percent, reports Gordon.
That’s a huge decline. It matters, as Gordon says, because faster growth generates more tax revenue to “address the nation’s problems, including faltering education, aging infrastructure, and the looming shortfall in funding for Social Security and Medicare.” Not to mention immense budget deficits.
What explains the growth slowdown?
As a matter of arithmetic, economic growth consists of two parts. First, the number of workers and how long they work; that’s the “labor force.” And second, their skills — that’s their “productivity.” A brain surgeon is more productive than, say, a ditch-digger.
Gordon says that, contrary to conventional wisdom, flagging productivity gains aren’t the main cause of the economic slowdown. According to his calculations, nearly three-fifths (57 percent) of the economic slowdown from 2007 to 2017 reflects changes in the labor force. The most obvious is the retirement of baby boomers from the job market. Likewise, a growing proportion of men in their prime earning years (ages 25 to 54) are dropping out of the labor market.
These changes are significant in their own right, but they also seem to exonerate lower productivity growth as the main culprit in the decline of overall economic growth. (Productivity improvements typically stem from advances in technologies, products and organizational changes.)
Only about two-fifths (43 percent) of the decline in economic growth can be explained by weaker productivity gains, Gordon estimates. He acknowledges the tidal wave of new Internet products: Facebook, YouTube, eBay. But he argues that their very visibility exaggerates their economic significance. They pale in comparison with many earlier inventions — the automobile or electricity generation, for example. So productivity growth has also slumped.
The debate between the Trump administration and its economic critics involves whether, and how much, these trends can be easily altered by government policies. Can the government increase economic growth above today’s disappointing levels?
President Trump and his economic advisers have been arguing that they can. Favorable tax policies for businesses will, the argument goes, stimulate more investment in technologically advanced industries. Productivity growth will improve, boosting overall economic growth. That was the theory behind the Trump tax cut — the Tax Cuts and Jobs Act — passed late last year.
Not so fast, say critics. The negative trends affecting the economy reflect deep social problems that resist change. “Rising educational attainment during the 20th century was an important source of productivity growth,” writes Gordon, “but the pace of that increase slowed markedly after 1980.” The truth is that we’ve been trying to improve schools for decades with, at best, modest success.
Or take the drain of prime-age men from the job market. The main problem, argues Gordon, “reflects in large part the loss of stable middle-income employment opportunities.” The result has been fewer marriages, more drug use and more suicides, writes Gordon. None of this is easily altered. Among 20 advanced countries, the United States has the second-lowest labor-force participation rate of prime-age men. Only Italy is lower.
We seem to have entered a new economic era — one defined more by the limits on our economic power than by its promises. The explosion of new technologies seems to have fooled us into thinking that a burst of innovation will magically restore our economic vitality. On the evidence, this is a mirage.