Business as Usual in D.C.? Not in the Age of Low Growth
For all their differences, the presidential candidates share one defining characteristic: All of them are upbeat about the future (as long as they get elected).
In one of the most important books of recent years, Northwestern University economist Robert J. Gordon offers a radically different view. (You can read excerpts here.) When it comes to the American economy, Gordon is a pessimist. He thinks that past growth was a historical anomaly, spurred by a series of great inventions in the late 19th Century, above all electricity and the internal-combustion engine.
He insists that the period from 1870 to 1970 was “the special century,” unique in human history. In his view, it won’t happen again, not only because it depended on a non-repeatable set of circumstances, but also because the U. S. now faces four headwinds that can't easily be overcome.
These include rising inequality, which means that any gains from growth are concentrated among those at the very top; slow increases in educational attainment; demographic forces that will reduce productivity, including the retirement of baby boomers and lower labor force participation by those younger than 55; and increasing pressure on the federal debt, imposed by increasing life expectancy and a growing population of retirees. Gordon contends that because of these headwinds, the United States has “virtually no room for growth over the next 25 years in median disposable real income per person.”
Powerful and impressive though it is, Gordon’s argument runs into immediate questions. The more fundamental was captured by Yogi Berra: “It’s tough to make predictions, especially about the future.”
Gordon’s own data show that at any point over the last 150 years, economic predictions for the coming years, based on the most sophisticated charts and figures, would have been hazardous in the extreme. As late as 1920 -- decades after the great inventions -- growth rates weren't particularly impressive. At that time, who could possibly have foreseen the massive increases that occurred from 1920 to 1970?
It is true that since 1970, the U.S. has experienced a significant slowdown in average annual economic growth, both per person and per hour worked. But the data from the previous 100 years wouldn't have predicted that either.
Gordon is acutely aware that many new inventions, such as better robots, driverless cars, and artificial intelligence, are now on the horizon. He’s skeptical that they could have a large impact on growth. His reasoning is plausible -- but nonetheless speculative. In any given year, it’s difficult to know what form new inventions will take, and it’s even more difficult to project their cascading impacts on the economy.
But suppose that Gordon is indeed right. What’s the best policy response?
Focused on the four headwinds, Gordon proposes a series of reforms. To reduce inequality, he argues for a more progressive tax system and for eliminating unjustified tax deductions. To reduce the deficit and greenhouse gas emissions, he favors a carbon tax. To increase both productivity and equality, he favors improvements in preschool education, drug legalization, lower levels of incarceration, reductions in occupational licensing (“regressive regulation”) and an increase in the size and availability of the earned income tax credit.
Most of these proposals have merit, and they would help people who most need it. (Increasing the earned income tax credit and easing occupational licensing are unambiguously good ideas.) But as he acknowledges, they would do almost nothing about growth. Even if each were adopted, median disposable real income per person would rise by just a few tenths of one percent.
Here’s another problem: In a period of slow growth, there is likely to be little political appetite for some of his most important reforms. If growth is anemic, it will be challenging to gain support for cutting tax deductions and imposing a carbon tax.
Economists are able to do much better in explaining the past than in forecasting the future. Nonetheless, Gordon’s magisterial, data-filled book presents public officials with a stark and pressing question. Voters like optimism, but the U.S. might be stuck in a sustained period of uncomfortably slow growth. What are we going to do about that?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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