By Don Alexander, MBA
Associate, RSD Solutions Inc.
(Mr. Alexander is also a lecturer at NYU and SunySB)
Global growth is slowing – especially in advanced-technology economies and the outlook according to the IMF’s semi-annual World Economic Outlook forecasts confirm this trend. Regardless of cyclical trends, long-term economic growth may grind to a halt in developed countries. The recent two hundred fifty years of per-capita income growth maybe a mirage.
A basic tenet of economic theory is that economic growth is a continuous process that will persist over time. Robert Gordon claims that the rapid growth progress made over the past 250 years could well turn out to be a unique episode in human history because economic growth was a one-time occurrence centered on 1750-2000. He questions whether this assumption about growth is true. He examines this question in a recent study Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds (VOXEU, Sept. 11th). He also writes a longer version Center for Economic Policy Research Policy Insight 63 (Sept. 2012) and NBER WP 15834 (March 2010).
Gordon notes that cycles are not continuous. In particular, there was minimal growth before 1750 and there is no guarantee that growth will continue. He argues that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. Growth in the frontier economy gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing since.
The big peak in US growth came between 1928 and 1950, the years that span the Great Depression and WWII. The cause this economic growth spurt is subject to debate, but growth has steadily declined in intervals plotted since 1950. He notes the importance of innovations during the initial US growth spurt on per-capita consumption and productivity growth, especially before 1972.
However, the process of innovation may be battering its head against the wall of diminishing returns, facing six headwinds that are in the process of dragging long-term growth to half or less of the 1.9% annual rate experienced between 1860 and 2007. Given the diminishing returns from innovation, it may take 2070-2100 to see a doubling of US per-capita consumption from 2007 levels, given the slowdown in the cycle.
Even if innovation were to continue into the future at the rate of the two decades before 2007, the US faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9% annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative 'exercise in subtraction' suggests that future growth in consumption per capita for the bottom 99% of the income distribution could fall below 0.5% per year for an extended period of decades. The numbers in the 'exercise in subtraction' have been chosen to reduce growth to that of the UK for 1300-1700.
The pessimistic/provocative view adopted by Gordon suggests that it may take almost a century for income per capita to double from its 2007 level. The outcome may turn out to be much better than that. But the point of this paper is that it is likely to be much worse than any epoch of US growth since the civil war. It raises questions for policymakers on job creation and for creation of risk scenarios.
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