The digital revolution didn't change everything.

Adam Bartos/Getty Images

Goodbye, Golden Age of Growth

Robert J. Gordon, a social sciences professor at Northwestern University, is the author of the textbook, "Macroeconomics," and a member of the National Bureau of Economic Research panel that determines when recessions begin and end.
Read More.
a | A

Can future innovations match the great inventions of the past? Will artificial intelligence, robots, 3D printing and other offspring of the digital revolution do for economic growth what the second industrial revolution did between 1920 and 1970? The techno-optimist school of economics says yes. I disagree.

The rise in the U.S. standard of living from 1870 to 1970 was a special century -- and won't likely be repeated. Growth over the next quarter century will resemble the slow pace of 2004–2015, not the faster growth rate of 1994–2004, much less the rapid rate achieved between 1920 and 1970.

The good news is that the economy will be able to maintain relatively full employment as the fruits of computerization cause work to evolve slowly, rather than in a great rush. I'm optimistic that job growth will continue and that new jobs will appear as rapidly as technology destroys old ones.

QuickTake The Internet of Things

The 1920-70 expansion grew out of the second industrial revolution, when fossil fuels, the internal-combustion engine, advanced metals and factory automation came together to produce electric lighting, indoor plumbing, home appliances, motor vehicles, air travel, air conditioning, television and much longer life expectancy. (The first industrial revolution, mostly in Britain in the late 18th century, involved the early use of iron and steel, steam engines and factory production.)

Many of the benefits of the second tidal wave of invention showed up in gross domestic product, output per person and output per hour. Total factor productivity -- how quickly output is growing relative to the capital and labor being used, and therefore a measure of innovation's contribution to growth -- grew more rapidly from 1920 to 1970 than before or since.

Households also benefited from the second industrial revolution in ways that escaped measurement, including the convenience, safety and brightness of electric light compared with oil lamps, and freedom from the drudgery of carrying water that clean, piped water made possible.

The slower rate of productivity growth since 1970 is important evidence that the third industrial revolution -- the one resulting from computers and digitalization -- has been less important than the second industrial revolution. Not only has the growth rate been slower since 1970, unmeasured improvements in the quality of everyday life created by computing are less significant than those of the previous industrial revolution.

True, innovation continues. Almost weekly, the stock market rewards new companies with initial public offering valuations of a billion dollars or more. But it's important to distinguish between the pace of innovation and the impact of innovation on productivity.

Growth in total factor productivity (the metric that captures innovation) was much faster between 1920 and 1970 than either before 1920 or since 1970. From 1970–1994, it was only 0.57 percent a year, less than a third the 1.89 percent rate of 1920-1970. Total factor productivity growth, or TFP, was notably faster from 1994–2004 than in other post-1970 intervals, but that brief revival was an aberration: It was much shorter lived and smaller in magnitude.  

Why did TFP growth accelerate rapidly after 1920? The roaring 1920s, followed by the dislocations of the Great Depression and World War II, disguised the rapid pace of innovation that began in the 1920s and took flight (both figuratively and literally) in the 1930s and 1940s.

The digital revolution also showed its main effects after a long delay. Even though the mainframe computer transformed many business practices starting in the 1960s, and the personal computer largely replaced the typewriter and calculator by the 1980s, the main effect was delayed until the 1994–2004 decade, when the invention of the Internet, web browsing, search engines and e-commerce changed almost every aspect of business practice.

Growth in output per person, our best measure of the rate of improvement in the standard of living, can proceed no faster than growth in output per hour, unless hours worked per person exhibit an increase. Yet the retirement of the baby-boom generation is already causing a decline in hours worked per person, and that's likely to continue for another 25 years. Future growth in output per person, therefore, will fall short of growth in output per hour, bringing labor productivity growth and its ultimate source, the pace of innovation as measured by TFP, to center stage in any discussion of the future of growth in American well-being.

The third industrial revolution encompasses the digital age of information and communication technology, beginning with the first mainframe computers in the late 1950s and continuing today. It was driven by an unprecedented (and never-repeated) rate of decline in the price of computer speed and memory, and a never-since-matched surge in the share of GDP devoted to information and communication technology investment.

The biggest digital breakthroughs happened in the late 1990s, when the marriage of computers and the Internet revived TFP growth. Web browsers, web surfing and e-mail became universal. The market for Internet services exploded and, by 2004, most of today’s Internet giants had been founded.

Should we consider the 0.40 percent growth rate of TFP from 2004-2014 as the most relevant basis for future growth? Or should our projections be based on the 1.02 percent average TFP growth of 1994–2004?

Although revolutionary, the Internet's effects were limited when compared with the second industrial revolution, which changed everything. The former had little effect on purchases of food, clothing, cars, furniture, fuel and appliances. A pedicure is a pedicure whether the customer is reading a magazine or surfing the web on a smartphone. Computers aren't everywhere: We don’t eat, wear or drive them to work. We don't let them cut our hair. We live in dwellings that have appliances much like those of the 1950s and we drive in motor vehicles that perform the same functions as in the 1950s, albeit with more convenience and safety.

There are several reasons, beyond the temporary nature of the TFP growth recovery in 1994–2004, to regard those years as unique. The acceleration died out quickly because most of the economy had already benefited from the Internet revolution. What's more, methods of production have changed little over the past decade.

In 1970, companies needed innumerable clerks to operate the keyboards of electric typewriters that had no ability to download content. Lacking memory, typewriters required repetitive retyping of everything from legal briefs to academic papers. By 2000, though, every office was equipped with web-linked personal computers that not only could perform any word-processing task, but any type of calculation at blinding speed.

By 2004, paper-dependent business procedures had been replaced by digitalization. Flat screens were everywhere. The revolutions in everyday life made possible by e-commerce and search engines were already well established. Amazon dates to 1994, Google to 1998, and Wikipedia and iTunes to 2001. Facebook is now more than a decade old.

By 2005, flat screens had completed the transition to the modern office, and broadband service had replaced dial-up service at home. But then progress slowed.

The late 1990s were not only a period of rapid decline in the prices of computer power, but also a period of rapid change in the progress of computer chip technology. Moore’s Law was originally formulated in 1965 to forecast that the number of transistors on a computer chip would double every two years. The doubling time followed the two-year predicted value with uncanny accuracy between 1975 and 1990.

Then the doubling time crept up to three years from 1992 to 1996, followed by a plunge to less than eighteen months between 1999 and 2003. The doubling time reached a trough of fourteen months in 2000. Chip technology caused a rapid decline in the ratio of price-to-performance for computer equipment. But since 2006, Moore’s Law has gone off the rails: The doubling time soared to eight years in 2009 and then declined gradually to four years in 2014.

Today, office equipment and the productivity of office workers closely resemble that of a decade ago. Business productivity continues to enjoy the permanent increase in personal comfort on the job that was achieved between 1930 and 1970 by the introduction of air conditioning in offices.

But all this happened 15 to 25 years ago and represents a one-time jump in the level of productivity -- hence a temporary rather than permanent increase in the growth rate of productivity.

In contrast to the decade or so of stability at work, life inside the home has been stable for nearly a half century. By the 1950s, all the major household appliances (washer, dryer, refrigerator, range, dishwasher, and garbage disposer) had been invented, and by the early 1970s, they had reached most American households. Besides the microwave oven, the most important change has been the comfort provided by air conditioning. By 2010, almost 70 percent of U.S. residences had central air conditioning.

The major changes in the home since 1965 have been in the categories of entertainment and communication and information devices. Television made its transition to color between 1965 and 1972, then variety increased with cable television in the 1970s and 1980s, and finally picture quality was improved with high-definition TV. Variety increased even further when Blockbuster and then Netflix made it possible to rent an almost infinite variety of motion picture DVDs. Now, movie streaming is common.

For the past decade, homes have had access to entertainment and information through fast broadband connections to the web, and smartphones have made the web portable. But now that smartphones and tablets have saturated the market, advances in consumer electronics have become harder to achieve.

The sense that change is slowing was palpable at the 2014 Consumer Electronics Show, where attendees were underwhelmed by offerings that couldn't stand up to the videocassette recorders of 1970, the compact disc players of 1981, the high definition TVs of 1998 or the Microsoft Xbox of 2001.

For all these reasons, the computer revolution's effect on TFP was short-lived, and growth slowed in the most recent decade.

Part 2 of this excerpt will explain the implications of all this for the next quarter century.

(This is the first of two excerpts from "The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War," published this month by Princeton University Press.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Robert J Gordon at rjg@northwestern.edu

To contact the editor responsible for this story:
Paula Dwyer at pdwyer11@bloomberg.net