Will Americans Become Poorer?
CAMBRIDGE
– Robert Gordon of Northwestern University has launched a lively and
important debate about the future rate of economic growth in the United
States. Although his book The Rise and Fall of American Growth will not be published until January 2016, his thesis has already garnered coverage in the Economist and Foreign Affairs. Clearly, Gordon’s gloomy assessment of America’s growth prospects deserves to be taken seriously. But is it right?
Gordon
argues that the major technological changes that raised the standard of
living in the past are much more important than anything that can
happen in the future. He points to examples such as indoor plumbing,
automobiles, electricity, telephones, and central heating, and argues
that all of them were much more important for living standards than
recent innovations like the internet and mobile phones.
I
agree with Gordon that I would rather give up my mobile phone and even
the Internet than go without indoor plumbing and electricity. But that
just means that we are lucky to be living now rather than a century ago
(and even luckier to be living now than two centuries ago or in the
middle ages). The fact that these major innovations happened in the past
is not a reason to be pessimistic about the future.
Gordon
also points to the recent slowdown in real (inflation-adjusted) GDP
growth. According to official US statistics, real GDP per worker grew at
an average annual rate of 2.3% from 1891 to 1972, but by only 1.5%
since then.
But
the official statistics on GDP growth fail to capture most of the gains
in our standard of living that come from new and improved goods and
services. That means that the official growth rate does not reflect the
rise in real incomes that came with air conditioning, anti-cancer drugs,
new surgical procedures, and the many more mundane innovations.
Moreover, because the US government does not count anything in GDP
unless it is sold in the market, the vast expansion of television
entertainment and the introduction of services like Google and Facebook
have been completely excluded from the national account.
This
means that the true rise in real incomes was actually faster than the
official statistics imply – possibly much faster. That is true of the
data for the first half of the twentieth century, and it continues to be
true today. It is not clear whether the measurement problem was bigger
in the more distant past than it has been recently; but it is irrelevant
when we think about the future. Whether growth in per capita
income that is officially estimated at 1.5% is in reality more like 3%,
we are enjoying the higher level of real incomes inherited from the
past. So will future generations.
Indeed,
there is simply no reason for the view, often expressed in surveys and
appearing in Gordon’s book, that the children of today’s generation will
not enjoy a standard of living as high as their parents’. That may be
true for some people, especially those with relatively high incomes, but
it is definitely not true for most people.
Think
about a 30-year-old new parent at the middle of the income
distribution. Thirty years from now, the child will be as old as her
median-income parent is now. If real incomes grow at just 1.5% a year,
the median income 30 years from now will be nearly 60% higher than the
income of today’s median-income individual.
Even
if the child earns 30% less than the median at that time, her income
would still be higher than today’s median income. And if product
innovations and improvements imply that per capita real incomes grow at 3% a year, the median income of someone 30 years from now would be more than twice today’s median income.
So
Americans are lucky that they have inherited the innovations of the
past, and that real incomes will continue to grow in the future.
But
that is not a reason for complacency. The US can increase its future
growth rate by improving its education system, raising its rates of
saving and investment to where they were in the past, and fixing the
features of its tax and transfer systems that reduce employment and
earnings.
Gordon
focuses on the effect of technological innovation on Americans’ real
incomes. But an important limitation of his argument is that it gives
short shrift to policy innovation. America’s economy – and those
of many other countries – could grow faster in the future if
policymakers adopt the appropriate reforms.
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