More And More Experts Are Convinced America Is In For Years Of Low Growth

Giant african land snailWikimedia CommonsGiant African land snail

The U.S. economy was growing at
a 1.7% rate in Q2, which was much stronger than the 1.0% pace estimated by economists. It was also an acceleration from the 1.1% pace we saw in Q1.

Americans are hoping that the economy will soon return to its long-term average growth rate of around 3.5%.

Unfortunately, more and more experts are convinced those days are gone. Even the optimists believe they are a long way away.

JP Morgan economist Michael Feroli hit this issue hard in painful detail this week.

“As recently as the late 1990s, potential growth in the U.S. was estimated to be around 3.5%; by our estimates that figure has recently fallen by half, to 1.75%,” said Feroli.

In a lengthy research note, he noted that 1) the growth of America’s workforce is slowing and 2) the productivity levels of that population are deteriorating.

Regarding that first point, it has been well-telegraphed via the labour force participation rate that the working-age population has been declining. But an underappreciated negative force has been the trends in migration.

“A key influence here has been an estimated slowdown in net migration, both legal and illegal,” said Feroli. “Reduced net migration reflects heightened security concerns since the September 11 attacks, and the effect of soft labour markets.”

Regarding the latter point of productivity, Feroli attributes the post-2005 slowdown largely to declines in technological innovation.

The decline of innovation is central to the thesis of Robert Gordon, a Northwestern University economist whose work has been making the rounds on Wall Street in recent months.

Robert Gordon NorthwesternNorthwesternNorthwestern’s Robert Gordon

Here’s what Art Cashin, UBS Financial Services director of NYSE floor operations said in a note earlier this week:

…Some folks point to a dysfunctional Washington. Others see structural changes and challenges in key areas like employment. A few shrug and say it is just history reasserting itself. Most of the latter cite a year old paper by Professional Robert J. Gordon of Northwestern University. Professor Gordon maintains that, for much of human history, economic growth and improvement has been incrementally slow — somewhere in the range of GDP per capita, growing at about 0.2% per year. His work indicates we may revert to 0.5% growth for many decades to come.

Here is how Professor Gordon begins his thesis in the abstract to his paper (“Is U.S. Economic Growth Over? Faltering Innovation Confronts The Six Headwinds” {August 2012})

This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. The paper is only about the United States and views the future from 2007 while pretending that the financial crisis did not happen. Its point of departure is growth in per-capita real GDP in the frontier country since 1300, the U.K. until 1906 and the U.S. afterwards. Growth in this frontier gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing down since. The paper is about “how much further could the frontier growth rate decline?”

The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers, the web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (aeroplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once — urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.

Jeremy granthamCharlie RoseGMO’s Jeremy Grantham

Gordon’s work is cited widely by
GMO’s Jeremy Grantham, who has argued that the U.S. faces near-zero growth for decades.

In a follow-up note on Friday, Cashin showed that the slow-growth thesis was going more mainstream:

…One friend sent along an article from New York Magazine ( that had this very downbeat paragraph:

Gordon has two predictions to offer, the first of which is about the near future. For at least the next fifteen years or so, Gordon argues, our economy will grow at less than half the rate it has averaged since the late-nineteenth century because of a set of structural headwinds that Gordon believes will be even more severe than most other economists do: the ageing of the American population; the stagnation in educational achievement; the fiscal tightening to fix our public and private debt; the costs of health care and energy; the pressures of globalization and growing inequality. Over the past year, some other economists who once agreed with Gordon — most prominently Tyler Cowen of George Mason University — have taken note of the recent discoveries of abundant natural-gas reserves in the United States, and of the tentative deflation of health-care costs, and softened their pessimism. But to Gordon these are small corrections that leave the basic story unchanged. He believes we can no longer expect to double our standard of living in one generation; it will now take at least two. The common expectations that your children will attend college even if you haven’t, in other words, or will have twice as rich a life, in this view no longer look realistic. Some of these hopes are already outdated: The generation of Americans now in their twenties is the first to not be significantly better educated than their parents. If Gordon is right, then for all but the wealthiest one per cent of Americans, the rate of improvement in the standard of living — year over year, and generation after generation — will be no faster than it was during the dark ages.

The article also interviewed several economists who differ with or contest Gordon’s thesis. Interestingly, none seems to foresee an unalloyed Utopian future. (E.g. one says that the kind of work done by 65% of us could be done by robots. Turn the lights down, HAL.)

All of this is pretty gloomy.

On the bright side, it’s worth noting that some of the most important productivity-increasing innovations in history came out of nowhere. Think about the internet.

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