CityReads│The End of Growth in the Standard of Living?

CityReadsVol.82

The End of Growth 

in the Standard of Living?

In his book, The Rise and Fall of American Growth, Robert Gordon provides an in-depth account of the changes of American economic growth since the civil war. He demonstrates that the life-altering scale of innovations between 1870 and 1970 can't be repeated. He contends that the nation's productivity growth, which has already slowed to a crawl, will be further held back by the vexing headwinds of rising inequality, stagnating education, an aging population, and the rising debt.

Robert J. Gordon, 2016. The Rise and Fall of American Growth:The U.S. Standard of Living since the Civil War, Princeton University Press.

Source: http://press.princeton.edu/titles/10544.html

In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, home appliances, motor vehicles, air travel, air conditioning, and television transformed households and workplaces. With medical advances, life expectancy between 1870 and 1970 grew from forty-five to seventy-two years. Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth by Robert J. Gordon, a distinguished macro­economist and economic historian at Northwestern, provides an in-depth account of this momentous era. But has that era of unprecedented growth come to an end?

Gordon challenges the view that economic growth can or will continue unabated, and he demonstrates that the life-altering scale of innovations between 1870 and 1970 can't be repeated. He contends that the nation's productivity growth, which has already slowed to a crawl, will be further held back by the vexing headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government. Gordon warns that the younger generation may be the first in American history that fails to exceed their parents' standard of living, and that rather than depend on the great advances of the past, we must find new solutions to overcome the challenges facing us.

This is a book about the rise and fall of American economic growth since the Civil War. Economic growth is not a steady process that creates economic advance at a regular pace, century after century. Instead, progress occurs much more rapidly in some times than in others. There was virtually no economic growth for millennia until 1770, only slow growth in the transition century before 1870, remarkably rapid growth in the century ending in 1970, and slower growth since then. Why was productivity growth so fast between 1920 and 1970 and so slow thereafter. This book contributes to resolving one of the most fundamental questions about American economic history.

Scope of this book is not only limited to the American experience between 1870 and 2014, but it is also limited to the viewpoint of the household in its twin roles as consumer and worker.

This book intends to create a quantitative and qualitative record of the changes in the American standard of living that so greatly increased consumer welfare, especially during the special century, 1870–1970.

The book is divided into three parts. Part I includes eight chapters (chapters 2–9) on the revolutionary advances in the standard of living through 1940, a dividing year chosen both because it is halfway between 1870 and 2010 and because 1940 marks the year of the first Census of Housing, with its detailed quantitative measures of housing and its equipment. 

Part II (chapters 10–15) extends the narrative from 1940 to the present day, and its chapters are organized to give less attention to food, clothing, and other aspects of life that changed slowly and to place more emphasis on the rapid changes that occurred in the spheres of entertainment, communication, and information technology. 

Part III begins in chapter 16 with an attempt to explain “the Great Leap Forward,” assessing reasons why labor productivity and TFP grew so much more rapidly from 1920 to 1970 than before or after. Then chapter 17 compares changes in the pace of innovation since 1970 with that likely to occur in the next quarter century. Part III concludes with chapter 18, on the headwinds that are slowing U.S. economic growth below the pace that otherwise would be made possible by technological advance, including inequality, education, demography, and fiscal—that are in the process of reducing growth in median real disposable income well below the growth rate of productivity. The book closes with a short postscript chapter proposing a menu of directions for policy that might be helpful tacks against the headwinds.

The resulting book combines economics and history in a unique blend. The book differs from most on economic history in its close examination of the small details of everyday life and work, both inside and outside of the home. It is not like most histories of the evolution of home life or working conditions, for it interprets the details within the broader context of the analysis of economic growth. More than 120 graphs and tables provide new transformations and arrangements of the data. The analysis contributes a joint interpretation of both the rapid pace of economic growth in the central decades of the twentieth century and of the post-1970 growth slowdown that continues to this day.

The book is not just about numbers and trends and growth rates going up and down but also about individual sweat and tears, about the drudgery of doing laundry in the era before running water and the washing machine, where the only tools were the scrub board and the outdoor clothes line. This is a book about the drama of a revolutionary century when, through a set of miracles, economic growth accelerated, the modern world was created, and then after that creation the potential for future inventions having a similar impact on everyday life of necessity was inevitably diminished.

The special century (1870-1970)

This book adopts the “special century” approach to economic growth, holding that economic growth witnessed a singular interval of rapid growth that will not be repeated—the designation of the century between 1870 and 1970 as the special epoch applies only to the United States..

The century of revolution in the United States after the Civil War was economic, not political, freeing households from an unremitting daily grind of painful manual labor, household drudgery, darkness, isolation, and early death. Only one hundred years later, daily life had changed beyond recognition.

Manual outdoor jobs were replaced by work in air-conditioned environments, housework was increasingly performed by electric appliances, darkness was replaced by light, and isolation was replaced not just by travel, but also by color television images bringing the world into the living room. Most important, a newborn infant could expect to live not to age forty-five, but to age seventy-two.

The economic revolution of 1870 to 1970 was unique in human history, unrepeatable because so many of its achievements could happen only once.

Our central thesis is that some inventions are more important than others, and that the revolutionary century after the Civil War was made possible by a unique clustering, in the late nineteenth century, of what we will call the “Great Inventions.”

What made the century so unique is not only the magnitude of its transitions, but also the speed with which they were completed. Though not a single household was wired for electricity in 1880,nearly 100 percent of U.S. urban homes were wired by 1940, and in the same time interval the percentage of urban homes with clean running piped water and sewer pipes for waste disposal had reached 94 percent. More than 80 percent of urban homes in 1940 had interior flush toilets, 73 percent had gas for heating and cooking, 58 percent had central heating, and 56 percent had mechanical refrigerators. In short, the 1870 house was isolated from the rest of the world, but 1940 houses were “networked,” most having the five connections of electricity, gas, telephone, water, and sewer.

The improvement in working conditions for men was even more profound. In 1870,more than half of men were engaged in farming. Their hours were long and hard; they were exposed to heat in the summer and cold in the winter, and the fruits of their labor were at the mercy of droughts, floods, and infestations of insects. Working-class jobs in the city required sixty hours of work per week—ten hours per day, including Saturdays. More than half of teenage boys were engaged in child labor, and male heads of households worked until they were disabled or dead. But by 1970, the whole concept of time had changed, including the introduction of blocks of time that were barely known a century earlier, including the two-day weekend and retirement.

The less special years: from 1970 onwards

Designating 1870–1970 the “special century” implies that the years since 1970 have been less special. First, the technological advance started to show its age. With a few notable exceptions, the pace of innovation since 1970 has not been as broad or as deep as that spurred by the inventions of the special century. 

Economic growth since 1970 has been simultaneously dazzling and disappointing. This paradox is resolved when we recognize that advances since 1970 have tended to be channeled into a narrow sphere of human activity having to do with entertainment, communications, and the collection and processing of information. For the rest of what humans care about—food, clothing, shelter, transportation, health, and working conditions both inside and outside the home—progress slowed down after 1970, both qualitatively and quantitatively.

Second, after 1970, rising inequality meant that the fruits of innovation were no longer shared equally.

Third, progress after 1970 continued but focused more narrowly on entertainment, communication, and information technology. Total business and household spending on all electronic entertainment, communications, and information technology amounted in 2014 to only about 7 percent of gross domestic product (GDP).

Outside the sphere of entertainment, communications, and information technology, progress was much slower after 1970.

Fourth, developments in information and communication technology, just don’t measure up to past achievements. Specifically, he has argued that the I.T. revolution is less important than any one of the five Great Inventions that powered economic growth from 1870 to 1970: electricity, urban sanitation, chemicals and pharmaceuticals, the internal combustion engine and modern communication.

The Rise and Fall of Growth in the Standard of Living. 

Shown in figure 1–1 are the basic data for the standard of living, productivity, and hours worked per person covering the post-1870 period, divided at 1920 and 1970. Shown for each of the three periods are three bars, each depicting the average annual growth rate over the respective interval. 

The first and last periods are almost identical in the height of each bar, but the middle period (1920–70) is quite different. Output per person growth is substantially higher in the middle period, and productivity growth is much higher. The much greater excess of productivity growth over output per person in the middle period, compared to that in the first and last periods, reflects the sharp decline in hours worked per person between 1920 and 1970.

Annualized Growth Rate of Output per Person, Output per Hour, and Hours per Person,1870–2014

Why did labor productivity grow so much more quickly between 1920 and 1970 than before or after? We can divide the sources of the growth in labor productivity into three components: education, capital deepening and total factor productivity.

The effect of a rising ratio of capital input to labor hours is usually called “capital deepening.”

What remains after deducting the contributions of education and capital deepening is the growth of total factor productivity (TFP), which is a measure of how quickly output is growing relative to the growth of labor and capital inputs. This measure is the best proxy available for the underlying effect of innovation and technological change on economic growth. And the results are surprising. Because the contributions of education and capital deepening were roughly the same in each of the three intervals, all the faster growth of labor productivity in the middle period is the result of more rapid innovation and technological change.TFP grew after 1970 at barely a third the rate achieved between 1920 and 1970. 

Average Annual Growth Rates of Output per Hour and Its Components, Selected Intervals, 1890–2014

The end of growth in the standard of living?

Source: http://www.nytimes.com/2016/01/31/books/review/the-powers-that-were.html

This book’s predictions that future growth will be slower than in the past are strongly resisted by a group of commentators whom I collectively call the “techno-optimists.” They tend to ignore both the slow productivity growth of the past decade, as well as the force of the headwinds.

Yes, we are “gigantically” ahead of where our counterparts were in 1870, but our progress has slowed, and we face headwinds that are stronger barriers to continued growth than were faced by our ancestors a century or two ago.

The headwinds—inequality, education, demography, and debt repayment are buffeting the U.S. economy and pushing down the growth rate of the real disposable income of the bottom 99 percent of the income distribution to little above zero. The outlook for future growth in the U.S. standard of living is not promising. The future is all too likely to be marked by stagnant living standards for most Americans.

It’s a shocking prediction for a society whose self-image, arguably its very identity, is bound up with the expectation of constant progress. And you have to wonder about the social and political consequences of another generation of stagnation or decline in working-class incomes.

Is he right? 

Paul Krugman’s answer is a definite maybe. But whether or not you end up agreeing with Gordon’s thesis, this is a book well worth reading — a magisterial combination of deep technological history, vivid portraits of daily life over the past six generations and careful economic analysis. This book will challenge your views about the future; it will definitely transform how you see the past.

Of course, Gordon could be wrong: Maybe we’re on the cusp of truly transformative change, say from artificial intelligence or radical progress in biology (which would bring their own risks). 

David Harvey makes a comment in his latest book, The Ways of the World, “It is easier to interpret what happened in retrospect than to understand what’s going on at the time. I often wonder how we will think of our present confusions when we look back in a few years”.

We might extend this comment to Gordon’s prediction as well.

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