Are America's Best Days Over?

In The Rise and Fall of American Growth, Robert Gordon argues that America's exceptional growth of the early 20th century is over and done. His thesis is that innovation ain't what it used to be.

More specifically, Gordon argues that innovations of the past, from assembly lines to electricity and piped water produced a greater boost to productivity from 1920 to 1950 than the innovations of more recent decades.

Just the Facts
This conclusion surprised me. In studying the connection between economic growth and the decline of religion, I knew that the world economy is currently growing at a faster pace (over 3 percent per annum on average) than it has ever grown before throughout history. It would be strange if the world's largest economy were missing out on this growth spurt.

In reality it is not and this fact is illustrated quite clearly in Gordon's Figure 16-1 that depicts output per hour and output per person charging ahead at an accelerated pace first established during the 1950s. In fact, I have never seen a graph that so clearly falsified the thesis of a book by showing that economic growth has continued much more rapidly since 1950 than during the "great leap forward" of 1920- 1950.

Admittedly productivity has slowed since 2008 but this follows a global financial crisis. I am not an economist of course and one has to delve into some of the arcane terms in the field to understand what Gordon's argument is.

He refers to total factor productivity or the rate at which increasing inputs including, labor and capital, raise output. A decline in total factor productivity is interpreted as a decline in the oomph that the economy is receiving from innovation. So Gordon concludes that the US economy has been slowing down since 1970.

In more mundane terms, he argues that the standard of living Americans experience is increasing at a slower pace since 1970 and that is certainly hard to dispute.

The Real Problem
The real problem is not that the US economy is failing to grow. It is growing faster than ever before as already noted. The problem, as many other writers have noted, is that wages have not kept up with the tremendous increases in the productivity of the US economy so that the additional wealth is being kept in the hands of the richest one percent.

There is a great deal of head-scratching about why wealth generated by the US economy is not getting distributed better. This incites feelings of frustration and disappointment about the lack of economic progress. The problem is not low growth and it is not a lack of innovation either. Indeed, innovation could be a part of the problem because new technologies get rid of many well-paid professional jobs, reduce the demand for labor, and bring down wages.

Innovation is Part of the Problem
Gordon's contention that innovation today is not what it used to be seems wrong-headed in a world where entire industries are getting revamped by a few lines of code, as in replacement of the taxi industry by an app such as Uber. Other profound improvements in the quality of life include mobile phones, online shopping, driverless cars that may eliminate most traffic accidents, and on-demand streaming of entertainment, in addition to a mind-boggling array of new high-tech medical tests and treatments.

Unfortunately, instead of making workers wealthier, new technologies are either destroying their jobs or putting them into direct competition with employees in low-wage countries via electronic outsourcing.

This disruptive effect of new technology is familiar to historians and the mechanization of agriculture, for example, forced farm laborers to migrate to cities in search of work where they encountered pollution, poverty, and disease.

The current information technology revolution targets intelligent jobs in addition to manual labor. As a result, many middle-class occupations are getting seriously eroded. Examples range from air traffic controllers to journalists, musicians, and photographers. Some of these occupations are getting replaced by artificial intelligence, and some of the work is produced for free in the sharing economy, such as blog posts written by unpaid members of the public rather than professional journalists.

Such innovation has a depressant effect on both wages and the demand for workers in affected fields.
So looking to innovation to boost living standards may be getting the underlying relationship backwards. Modern discontent - reflected in the popularity of Trump and Sanders candidacies - is related to the loss of good jobs to technological innovation.

Workers are encountering a difficult period of adjustment such as what they experienced after the Industrial Revolution when living standards actually fell. In the end, though, they weathered the storm and living standards benefited from the increased productivity of a more mechanized society. Hopefully, that history will repeat itself so that Americans, and everyone else, can anticipate a brighter future for new generations.

This is not happening by itself and will require huge New-Deal type public investments in education, infrastructure, communications, and health, so that the growing wealth in the economy eventually feeds through to the general quality of life.