The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern...

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The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September 25, 2014

Transcript of The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern...

Page 1: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

The Demise of U.S. Economic Growth: The Fifth Debate

With Joel Mokyr

Robert J. Gordon Northwestern University and NBER

OECD/NBER ConferenceParis, September 25, 2014

Page 2: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Output per Person equals Output per Hour times Hours per Person

Y/N Ξ Y/H * H/N• Productivity growth combines the role of innovations

with educational advancement.• Standard of living can grow faster than productivity if

hours per capita increase. Or the reverse can happen.• Example #1: Women enter the labor force 1965-95• Example #2: Baby-boomer generation retires.– This reduces the growth of our standard of living; someone

has to pay the bill for the idle hours of the baby-boomers.

Page 3: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

The Decline in Hours per Capita is Not Just About Baby-boom Retirement

• Prime-Age Males– Employment/Population Ratio 95% in 1968 to

83% in 2012• Youth– Employment/Population Ratio 65% in 1988 to

46% in 2012. Only about 1/3 of this decline is accounted for by increased school participation

• Females 20 and Over– Labor Force Participation Rate rose 35% in 1968 to

58% in 2000, then fell back to 55% in 2012

Page 4: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Prime-Age Male ParticipationIs Part of the Demographic Headwind

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 201260

65

70

75

80

85

90

95

100

Figure 20: Employment per Capita and Labor Force Participation Rate, Males Ages 25-54, 1960:Q1-2012:Q3

E/NL/N

Year

Perc

ent

Page 5: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Second Headwind: Education

• A major driver of that epochal 20th century productivity achievement was education– High school completion rate has barely changed since 1970. – Most people drop out of 2-year community colleges– College completion is increasing but 40% of recent graduates are in

jobs that do not require a college education– The U. S. is the only developed country where the educational

attainment of the 55-64 cohort is the same as 25-34 cohort• U.S. has dropped from #1 to #16 in college completion as

percent of population; same for high-school dropouts• This will reduce future economic growth by -0.3 percent per

year compared to the contribution of education to 20th century growth

Page 6: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Third Headwind: Inequality

• For 1993-2012 the gap between average real income growth of total vs. bottom 99% is

-0.53 percent per year.• This is continuing, it’s not over. Count the ways– CEO pay, sports and entertainment stars. ($10-15 million)– Wage pushbacks – lower wages, two-tier wages, shaving

pension and medical care benefits (Caterpillar, Boeing)– Firms pushing employees into part-time work (Wal-Mart)

Page 7: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Interaction Demographics, Education, Inequality

• Charles Murray’s division of white population into Belmont (top 20%) and Fishtown (bottom 30%)

• Social stability in Belmont, not in Fishtown– Percent of children of women aged 40 living with both

biological parents, change from 1960 to 2010:– Belmont 98% to 87%– Fishtown 95% to 35%

• Interaction with education: for a child to live without a father at home is a predictor of more high school drop outs in the future

Page 8: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Further Interactions Poverty, Education, and Inequality

• Proponents of subsidized early childhood education emphasize the vocabulary gap– Children in the top half arrive in kindergarten with 2 to 3 times

the vocabulary of children coming from poverty families• In the CPS last year, 20% of children were absent more

than one month during the academic year– Only 12% went on to receive any college degree

• International OECD-run PISA test results for 2013 were released in December, 2013– Of 38 developed countries, U.S. ranked #21 in reading, #24 in

science, and #31 in math

Page 9: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Fourth Headwind: Eventually We Have to Raise Taxes and/or Cut Entitlement Spending Growth

Page 10: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Fiscal Fix Will Reduce Growthin Disposable Income

• This chart understates future growth in debt/GDP ratio because it is overly optimistic on future GDP growth• Many state/local governments have

huge pension liabilities• Solutions at all levels of government

will require faster growth of taxes and/or slower growth of benefits

Page 11: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Subtracting the Headwinds fromFuture Growth

1891 1900 1909 1918 1927 1936 1945 1954 1963 1972 1981 1990 1999 2008 2017 2026 2035 2044 2053 2062 20711000

10000

100000

1000000

Figure 3. Future Economic Growth, 2.0 without Headwinds and 0.8 with Headwinds

Year

2009

US

Dol

lars

1891-2007 Actual = 2.0%

Actual Values2007:

$49,3872013:

$49,918

1891-2007 Actual = 2.0%

Actual Values

2077:$200,273

2077:$86,460

Page 12: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

How Are We Doing Now?12% Below Green, 4% Below Black

1992 1996 2000 2004 2008 201231250

Figure 4. Level of Real GDP per Capita through 2013:Q3, Actual, Optimistic, and Pessimistic Growth Rates

Year

2009

US

Dol

lars

(log

sca

le)

0.8%

Actual Values

2013:Q3$56,243

2013:Q3$50,022

2007:Q1$49,387

1891-2007 Actual= 2.0%

2013:Q3$51,800

log percentage differencebetween red line and green line= 11.7%between red line and black line= 3.5%

Page 13: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Now Let’s Switch from the Headwinds to the Outlook for Innovation and Future Productivity Growth

• Standard growth accounting decomposes growth in labor productivity into contributions of:– growth in labor quality– effect of capital deepening (K/N)– residual (= total factor productivity or TFP)

• But capital deepening is endogenous to TFP (Evsey Domar quote about plows)

• Thus growth in labor productiviity reflects long-term effects of education and innovation broadly defined

Page 14: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Productivity Growth:Innovation Plus Education

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Figure 5. Annualized Growth Rates of Output per Hour, 1891-2013

Perc

ent

2.36

1.38

2.54

1.33

1891-1972 1996-2004 2004-131972-1996Years

Page 15: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

The Second Industrial Revolution vs. the Third Industrial Revolution

Page 16: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

TFP Growth by Decade,1890-1900 through

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20120

0.5

1

1.5

2

2.5

3

3.5

10-Year Average Annual Growth in Total Factor Productivity, 1900-2012

Average Annual Growth Rate Over Ten Years Prior to Year Shown

Ann

ual T

FP G

row

th

Page 17: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Why Did Productivity Grow Faster In the Century Before 1972?

The One-Time-Only Inventions

– Polluting flames for light >> instant on-off electric light

– Factory power with steam engines and belts >> electric machine tools and hand tools

– Offices and home cold and hot >> central heating and air-conditioning

– Horses >> motor vehicles and air travel– Mainly rural 1870 >> mainly urban 1950

Page 18: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

More One-Time Changes Before 1972

– Carrying pails of water >> running water– Outhouses >> indoor bathrooms– Infant mortality 20% >> infant mortality 1%– Child labor. 1890 almost half of 14-15 year old

boys were in the labor force >> almost none after 1940

– Isolation >> telephone + phonograph + radio + TV

Page 19: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Summing Up, Why Was Productivity Growth Faster Before

1972 than After?

• The 2nd IR consisted of at least five dimensions of Great Inventions

– Each invention had spinoffs developed over 1890-1972

• In contrast the post-1960 3rd IR has been limited to one dimension, the ICT revolution, the digital economy– Its productivity impact was limited to 1996-2004

Page 20: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Summary of Subtraction from 2.0 to 0.2, Disposable Real Income per Capita of Bottom

99%

0

0.4

0.8

1.2

1.6

2

2.4

2.0

1.8

1.5

1.0

0.8

0.2

Perc

ent

Page 21: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Framing the Debate About Future Innovation

• My forecast of productivity growth for the 25 years after 2007 assumes that innovation will proceed at the same pace as the last 40 years

• Many innovations will occur over the next 40 years, but will they be as important as the last 40? They must be as important, or else my growth forecast is too optimistic

Page 22: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

The Next 40 Like the Last 40? What a Stunningly Optimistic Outlook!

• The next 40 years must bring us innovations as important as– The PC, the internet, e-commerce– Mobile phones, smart phones & ipads– Digitalization of library catalogues and parts catalogues– Instant free access to all the world’s information– Revolution in office equipment and procedures– Bar-code scanning, the ATM machine, i-tunes, cable TV,

CDs, DVDs, movie streaming

Page 23: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Can Future Innovation BeForecast in Advance

• The myth that the future cannot be forecast.– “Any pessimist gazing into the future is condemned y a

lack of imagination and doomed to repeat the mistakes of past pessimists.”

• The techno-optimists in making their predictions about the future are making guesses, just like those who are less optimistic. Optimism and pessimism are symmetric regarding future-gazing

Page 24: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Comments on Techno-optimists,Brynjolfsson and McAfee

• Their optimism centers on an explosion of data – billions >> trillions >> quadrillions (“BIG DATA”)

• Small, easily programmable robots• Driverless cars, trucks, and taxis• The genome will make possible advances in

medical and pharmaceutical technology

Page 25: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

They Are Slippery on Timing,Past vs. the Future

• Their book Second Machine Age claims that we are at a “point of inflection” toward an acceleration of technological change

• Yet they include as future progress things that have already happened in the past

• “Andy now sends Erik a file as an e-mail attachment whereas before he sent it as a floppy disk”.

• Sorry, guys, we’ve been doing this since at least 1993!• Productivity growth has not responded to the innovations of

the last decade• Examples of how different were the late 1990s from the past

decade

Page 26: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Four Pieces of Evidence That the Late 1990s Were Special

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Figure 5. Annualized Growth Rates of Output per Hour, 1891-2013

Perc

ent

2.36

1.38

2.54

1.33

1891-1972 1996-2004 2004-131972-1996Years

Page 27: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Growth in Manufacturing Capacity Peaked in the late 1990s

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

20092011

2013

-2

-1

0

1

2

3

4

5

6

7

8

Annualized Five-Year Change in Manufacturing Capacityand Capacity per Capita, 1977-2013

Capacity Capacity / WAP

Page 28: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

The Most Dynamic Part of Manufacturing Has Disappeared

1972 1975-07 1979-01 1982-07 1986-01 1989-07 1993-01 1996-07 2000-01 2003-07 2007 2010-070

1

2

3

4

5

6

7

8

9

Share of ICT Manufacturing Value-Added in Total Manufacturing Sector, 1972-2013

Share as a Percentage

Page 29: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Annual Rate of Change of ICT Deflator

19731975

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

20092011

-15

-10

-5

0

5

10

Page 30: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Are There Policy Solutions?

• Demographics: index the retirement age to life expectancy and sharply raise quotas for legal immigration

• Reduce the share of the population in prison by legalizing drugs

• Education: impose higher standards in secondary school while investing in pre-school to reduce the “vocabulary gap”

• Inequality: return capital gains and dividend tax rates to pre-1997 levels.

• Fiscal: eliminate $1.6 trillion of tax loopholes, mainly benefitting the rich

• Make medical care a right of citizenship, not tied to employment status

Page 31: The Demise of U.S. Economic Growth: The Fifth Debate With Joel Mokyr Robert J. Gordon Northwestern University and NBER OECD/NBER Conference Paris, September.

Summary: Headwinds vs. Innovation

• If future innovations are less important than the last 125 years and especially if they are less important than the last 40 years, all developed nations are affected– Still room for catching up in emerging markets

• Headwinds in other countries may be less serious– Better education (Canada, Korea)– Less inequality (Japan, Korea, France, Scandinavia)– Less future burden of rising debt/GDP ratio

• Assignment for our panel: Comment on all of the above.