Is US Economic Growth Over? - OFCE

Is U. S. Economic Growth Over?
Lessons from the Long 20th Century
Robert J. Gordon, NBER, CEPR, OFCE
Lecture at Sciences-Po,
13 September 2011
Thank You for the Invitation
• Perhaps my 50th visit to Paris, the first in 1957, then 1963 honeymoon
• From my first contact with Paris at CDG baggage claim on Sunday morning, I
have been dazzled by the futuristic infrastructure
– The American feels like he’s arriving from the third world
• My two days here so far, overwhelmed by the rich choice of restaurants, even
on Sunday, the ease of obtaining taxis, the bon accueil in the restaurants and
the universal bilingualism
– Some places have both French and English menus. The food sounds so much better
in French.
• Impressed by prosperity. Last night I had to call seven restaurants before I
could find one which was not fully booked (“Je suis desolee monsieur, nous
sommes complets”)
• Impressed at the evident value of a great invention, the cell phone, for Paris
taxi drivers
One of my hobbies is the history of WWII, which I teach to selected freshmen in a small seminar.
Not many Americans, and perhaps not all Frenchmen, know that the most important single person
of the 20th century in preserving the beauty of Paris was the German General Choltitz.
What is “The Long 20th Century”?
• Commonplace term in European History: The long 19th
century is from the French Revolution of 1789 to the
start of WW I in 1914
• In parallel, the long 20th century for the U.S. is from the
end of the Civil War (1870) to now (2010)
– For Europe one hears of the “short 20th century” between
1914 and 1991
• Three industrial revolutions (IR) propelled growth. IR
#1 (1760-1830), IR #2 (1875-1900), and IR #3 (19852010).
– Impact spread over 100, 100, and 25 years?
The Basic Hypotheses of
This Talk
• U. S. economic growth has set the frontier for the
developed world since 1890
• The frontier has been pushed forward by IR #1 through
1870 and then the great IR #2 for the whole century 18701970
• For economic growth to continue after 2010, IR #3 will have
to live up to the precedent of IR #2, but it will not
• Even if innovation continues, it will increasingly meet
headwinds that will cancel its effect
• Consequence? No net economic growth after 2050. We’ll
come close to no net growth in per-capita consumption in
the U. S. over the 20 years following 2007.
• In the history of the millenia, the great surge of economic
growth from 1750 to 2050 will seem to be a remarkable but
once-only event.
The Main Novelties in This Talk
• The inventions of IR #3 were less important than IR #2.
• Diminishing returns will make the inventions of IR #3 ever
less important.
• My really novel proposition. No matter how strong or
weak are the remaining future innovations of IR #3, it
doesn’t matter
• The reason is that the U. S. economy faces five headwinds
so important and pervasive that no conceivable industrial
revolution could guarantee progress in the consumer
standard of living over the next 20 years.
The Five Headwinds Fighting
Innovation As a Source of Growth
• Inequality: growth in median income is much slower
than in statistical averages for income and
consumption per capita
• Globalization linked with IT: Hurts the leading nation
more than others. Those radiologists in India.
• Environment: Payback for past growth, sacrifice for
emerging market growth (is it fair?)
• Dysfunctional U.S. educational system (but is France
much better in international PISA test scores?)
• Twin deficits: consumer and government debt
overhang. However slow is growth in production per
capita, consumption per capita will grow slower.
How Could Economic Growth Be Over?
• Here are some immediate qualifications.
• This is just about the U. S., not about France, Japan, or any
emerging market country where growth proceeds apace. The
only mention beyond the U. S. will be a remark or two about
– The title is deliberately outrageous. But by the end you will
start to think, the end of U. S. economic growth could actually
happen quite soon. Particularly in consumption per capita for
the median household.
– The main point of this lecture is how American economic
growth rested for more than a century (1870-1970) on the
“Great Inventions” of the Second Industrial Revolution (IR #2).
– The inventions of the third industrial revolution (IR #3) were
less important overall. Importance greatest in 1985-2000 and
less so after 2000. Diminishing returns has set in.
Outline of Talk
• Distinction between three IR’s
– IR #1 (1760-1830)
– IR #2 (1870-1900) [THE BIG ONE!]
– IR #3 (1985-2010) [HOW BIG BY COMPARISON?]
• The pivotal year 1870
– How much progress by 1870?
– The conditions of life and work in 1870
• The value of IR #2 is measured by how much life
changed between 1870 and 1970.
– Basic message: we’ve picked the low-hanging fruit of the
basic post-1870 transformation in the standard of living
A Brief Word on IR #1 (1760-1830)
• The Great Inventions were:
– Steam Engine
• Set on its side, the SE created the railroad
• And the steam ship
– Cotton gin
– Power-operated machines (power spindle and loom)
• Remarkably Little Response of MFP Growth
• Brad de Long: “Compared to the 20th Century growth,
all earlier centuries were standing still.” (not true of
1870-1900 when growth was faster than 1900-1929)
Slowness of Communications
• Communication speed limited by the horse and the sail
• The famous example: January 8, 1815 Battle of New
Orleans fought after the December 24, 1814 Ghent peace
• Even the RR and steamship would have made no difference
• The difference was made by the telegraph (1844) and
undersea cable (1858, 1866)
– 1850 30 days from NY to SF
– 1860-61 10 days by short-lived Pony Express
– Then instantaneous
• Humility for internet fans as a Great Invention, 1844 was
the greatest leap in the history of communications
The Beginning of Progress before
1870: Farming Productivity
• In 1830 farmers sowed by hand, cultivated by
hoe, cut grains with a sickle, and threshed
with a flail.
• Most farmers still used wooden plows, which
required more human energy than iron plows.
• Iron plow invented 1814, John Deere’s steel
plow 1850s, Cyrus McCormick’s reaper 1834
– Nothing self-propelled before 1870
Why is 1870 the Pivotal Year
for This Talk?
• End of Civil War, U. S. economic growth really
took off
• The basic data series for the U. S. economy begin
in 1869
• The epochal event: May 1869, the joining of the
transcontinental railway, the golden spike, silver
• The instantaneous telegraph transmission of the
one-word message DONE! not just to US and
Canada but also to UK.
The Golden Spike and the Silver
Hammer, May 14, 1869
• This was the first time in human history that news of an event
of widely recognized importance was greeted with such
celebration by so many people at the same time.
• Across the nation, bells pealed. It was said that more
cannons were fired in celebration than ever took part in the
Battle of Gettysburg.
• So far had communications come since the Battle of New
Orleans in 1815.
• But progress had just begun. The great IR #1 invention of the
railroad had laid only 60,000 miles in the U.S. by 1870,
compared to its ultimate spread of 250,000 miles in 1920
– The century-long influence of IR #1 was still happening
The Quality of Life and Work in 1870:
Our Indirect Measure of IR #2 Impact
• Many of the differences between 1870 and 2011 lie not just
in what we consume, but also in the quantity and quality of
work, youth, and old age.
– And by the “quality of work” we need to pay equal
attention to the 1870 male who made his income by
doing hard physical labor, often outside exposed to the
– and the 1870 female who with few exceptions toiled
inside the home in a boring and repetitive life marked by
unbelievable effort and drudgery.
• Our examination of life in 1870 indirectly becomes a way of
viewing the improvement in the standard of living and
working since then, largely achieved by IR #2.
Demography and Spending in 1870
• Over 80 percent of adults were married couples, almost
always with children, in contrast to less than 50 percent
married couples today.
• The population was roughly 80 percent working class, with
the remaining 20 percent middle class and a few that
qualified for the upper class. Our description of life in 1870
and afterwards refers to the working class majority.
• The three necessities are food, clothing, and shelter
– Contemporary surveys of household budgets show that these
three categories accounted for fully 85 percent of the
consumption of working class households over the four decades
between 1870 and 1910.
– Virtually nothing spent on durable goods or on services besides
housing rent.
• Questioning Engel’s Law
Of All its Impacts, IR #2 Had
Little Effect on Food and Clothing
• Americans were surprisingly well fed in 1870.
• The caloric content of their diet barely changed from 1800
until the late 20th century, with its current epidemic of
obesity. Same calories 1800, 1870, 1930.
• Since 75 percent of the population in 1870 was rural, much
of the food was produced on the farm.
• The 1870 diet of “hogs ‘n’ hominy” was monotonous but
impressed foreigners, including recent immigrants, with the
large amount of meat consumed
– Often at two or three meals per day, as compared to workingclass British and European households.
• James Bryce vs. Jacob Riis as observers of America
What Was Different About
Food and Clothing in 1870?
• U. S. 75% rural, 60% lived on farms
• Most food home-produced on farms
• Hogs ‘n’ hominy supplemented by home-grown
vegetables in summer on farms and in urban gardens
• Clothing: most women made their own clothing
• Purchased clothing in 1870, 20-to-1 men. By 1929 1to-1.
• Huge switch in consumption from fabrics and notions
in 1870 to purchased clothing in 1929.
• One more piece of evidence that the largest transition
in the history of the American standard of living
occurred between 1870 and 1929
Housing: Much Progress 1870 to 1930
• Urban tenements. “In most large cities, and in
many smaller ones, the more poorly
recompensed laborers inhabit tenements.”
• High rents, dark or dingy rooms, no toilet or
bathrooms. Families crowding 5 family
members into three small rooms were forced
to accommodate boarders and lodgers, just to
make ends meet.
• Farm houses, less crowded but still primitive
• By 1929 there had been a night & day change
Common Features of 1870 Housing,
Rural and Urban
• First was the lack of enclosed iron stoves that could control heat, invented
after 1870. Housewives in 1870 had the open hearth, with all its energy
inefficiency that would curl the hair of the modern Sierra Club.
• Second, there was no electricity. Light for working and reading at night
consisted of lamps fueled by kerosene or whale oil.
– Town gas was still a rarity.
– One candle produced light equal to about 1/100th of a simple
incandescent light bulb. Electric appliances were far in the future.
• Third, and most important, there was no running water. Every drop of
water for laundry, cooking, and indoor chamber pots had to be hauled in
by the housewife, and the waste water hauled out.
• One source claims that the average North Carolina housewife in 1870 had
to walk 148 miles per year while carrying 35 tons of water.
• Water in, water out. Coal or wood in for fires, ashes out.
Were summers better than winters
in 1870?
• Perhaps a trivial item was the lack of window
screens, which were invented in the 1870s
and 1880s.
• The typical farm family in the summer had
open windows, through which flies passed in
between the animal waste in the yard to the
food prepared for humans on the table.
• No wonder the house fly was once declared as
the “American bird” of the 19th century.
Utter Dependency in 1870 on the
• In 1872 horses throughout the northeast caught a virulent strain of
horse flu and could not be used for work and as a result:
– City life came to a standstill . . . Streetcar companies suspended
service, undelivered freight accumulated at wharves and railroad
depots, consumers lacked milk, ice, and groceries, saloons lacked
beer, work halted at construction sites, brickyards, and factories,
and city governments curtailed fire protection and garbage
A full century after James Watt’s steam engine, why were cities so
dependent on horses rather than steam-powered devices?
– Disadvantages of steam engines within the narrow confines of
cities included the ever-present danger of fires started by sparks,
their acrid black smoke, their deafening noise, and their heavy
weight which cracked street pavements.
More About Horses (and Pigs)
• Horses required expenditures each year for food and
maintenance equal to their capital cost
• The average horse produced 20 to 50 pounds of
manure and a gallon of urine daily, applied without
restraint to stables and streets. The daily amount of
manure worked out to between 5 and 10 tons per
urban square mile, all of which required gruesome
human labor to remove.
• The urban streets of the 1870s were full not just of
horses but pigs, which were tolerated because they ate
garbage. In Kansas City, the stench of patrolling hogs
was so penetrating that visiting Oscar Wilde observed,
“They made granite eyes weep.”
Why Life Expectancy Was So Low
in 1870
• At birth life expectancy was only 45 years in 1870
compared to 79 years recently.
– Causes in 1870: infant mortality resulting from poor
sanitation, water-transmitted diseases, and contaminated
– The first attempts at urban sanitation infrastructure
emptied waste not into cesspools but into nearby rivers
with no filtration. The theory at the time was that “the
rivers cleaned themselves.”
• Short life expectancies resulted also from hard physical
labor, the ongoing exposure to dwellings that were
often too hot, too cold, poorly ventilated, smoky from
coal and wood fires and gas or oil lighting, not to
mention all those insects passing back and forth
through unscreened windows.
The Standard of Living Involves
Not Just the Quality of Consumption
but the Quality of Work
• We can rate the “quality of work” as “pleasant” and
others as “unpleasant.”
• If we describe farming, blue-collar work, and domestic
servants as unpleasant jobs, and the rest as pleasant
then 87 percent of jobs in 1870 were unpleasant.
– By 2010 this percentage had declined to 22 percent.
• Most of this transition from unpleasant to relatively
pleasant work was completed by 1970.
• All of this transition should be credited as an
achievement of IR #2
– As one example, think of farm machinery that allowed an
enormous decline in the share of the work force in
farming, hard outdoor work exposed to the elements
The Quality of Work
for Women
• Already described: hauling those tons of water in
and out, plus the coal and wood
• Most bread was home-baked, so Sunday was
baking day
• Monday was laundry day
• Tuesday was the day to dry and fold the clothes
• Wednesday was the day for sewing and making
clothes for mothers and daughters
• Virtually no working-class women worked outside
the home.
Another Great Change:
The “Quality of Youth”
• Young people below the age of 25 made up 60 percent of
the population of 1870.
– Few children extended their education beyond the age of 12.
– Male teenagers worked, they were not at school, and the labor
force participation rate for males aged 16-19 was 76 percent.
– Participation by male teenagers was an economic necessity on
the farms of the American frontier, where immigrants were
dismayed to find that there was no ready supply of farm
laborers as in their homelands.
– Female teenagers shared the household chores of their
• Think of the leisurely life of today’s video game-obsessed
male teenagers and facebook-obsessed female teenagers
compared to their hard-working counterparts of 1870.
How Did the Great IR #2 Inventions
Change 1870 Living Conditions?
• The great inventions of IR #2 can be clustered into five
groups. Each had a primary breakthrough invention that
occurred between 1860 and 1900.
• The first was electricity, including both electric light and
electric motors.
– In the early decades of the 20th century electric motors
revolutionized manufacturing by decentralizing the source of
– After a lag electric motors embodied in consumer appliances
eliminated the greatest source of drudgery of all, manual
– Refrigerators eliminated food spoilage, and air conditioning
made summers enjoyable and opened the southern United
States for modern economic development.
The 2nd and 3rd Group
of Great Inventions of IR #2
• Second, the internal combustion engine made possible
personal autos, motor transport, motor trucks, and air
– Derivative inventions include the suburb, superhighway, and
– Gradually eliminated were many of the ills of 1870, from
manure to unplowed snow to rural isolation to the horses
• Third, the rapid spread after 1880 of running water, indoor
plumbing, and urban sanitation infrastructure.
– To be useful the indoor toilet required running water going in
and out to a sanitary disposal facility
– Urban sanitation infrastructure was the single biggest
contributor to improved health between 1870 and 1929.
The 4th and 5th Group
of Great Inventions of IR #2
• The fourth set includes petroleum, natural gas, and processes
which “rearrange molecules,” including chemicals, plastics, and
– Sulfa-based drugs were invented in the 1930s, penicillin during World
War II.
– Plastics were mainly developed after World War II.
• The fifth group consists of the complex of innovations related to
entertainment, communication, and information.
– We have already hailed the 1844 invention of the telegraph.
– Also in this group and qualifying as part of IR #2 are the telephone
(1876), phonograph (1877), popular photography (1880s, 1890s), radio
(1899), motion pictures (1881 to 1888), and television (1911).
• How far we had come by 1942. 4/10 of AFI’s greatest-ever films
were made in 1939-42
– Can you name them?
How Much Had Happened by 1929!
• Most of the benefits had already occurred by 1929.
– Urban America by then was electrified
– Electricity brought light to city streets and to every dwelling,
had made possible washing machines and refrigerators
– It made skyscrapers possible through electric elevators, and
revolutionized manufacturing by decentralizing the source of
• What a change even since 1900
– Rodgers and Hammerstein’s song “Everything’s Up to Date in
Kansas City” set in 1900 contains the highly relevant line,
– “they’ve gone and built a skyscraper seven stories high, that’s
as high as a building ought to go.”
– The rapid pace of progress since 1870 is symbolized by the
contrast between small walk-up buildings in that year and
the Empire State Building, completed in 1931.
Amazing 1929 factoids about
U. S. Motor Vehicles
6 million cars, trucks, busses produced in 1929
80 percent of the world’s auto production
90 percent of the world’s auto registrations
Is it any wonder how the “Arsenal of Democracy”
helped to win World War II, the “war of motors”?
• Full credit to the Soviets for beating the Germans,
but they rode to victory on 400,000 Dodge trucks
given to them by American Lend-Lease. While
the German supplies were still carried by horsedriven wagons.
Added Measures of 1929 Progress
• By 1929 in urban America the horses were gone, the manure was gone, the pigs
no longer roamed the streets, and farm families were no longer isolated.
• Motor transport, and electrified rapid transit in the largest cities, allowed
working-class families to escape from tenements to new tracts of single-family
homes epitomized by Chicago’s bungalow belt.
• By 1929 much of the drudgery had been removed from female existence.
– In urban America there was now running water, toilets, bathrooms, and
waste pipes that led to modern water filtration and sewage treatment
– The open hearth for heating and cooking had been replaced first by
enclosed cast iron stoves and by 1929 replaced again by hot-water central
heating and early versions of the kitchen range.
• The increase of life expectancy in the first half of the 20th century proceeded at
triple the rate of the last half.
– The invention of antibiotics and CT scans did not improve the length of life at
a rate remotely comparable to the earlier public investment in urban
sanitation infrastructure.
The Benign Role of Government
as a Backdrop to IR #2
• Civil War Legislation
– Homestead Act, free land
– Subsidies for transcontinental railways
– Morrill Act for land-grant state universities
• Teddy Roosevelt, Progressive Era
– Food and Drug Act 1906 (Upton Sinclair Jungle)
– Broke up Standard Oil monopoly
– Free, open immigration until 1922
• American standard of living propelled by fast
population growth, no internal customs barriers
– As symbolized by the Sears catalog, buying & selling
Enlightened Government Policy,
• FDR’s New Deal
Federal Deposit Insurance
Social Security, unemployment compensation
Glass-Steagall Act (repealed 1999)
Put people to work on Federal payroll, compared to Obama
– WPA, Hoover Dam, SF bridges, post offices, national parks
• Truman’s Marshall Plan and GI Bill
– Medicare
– Civil Rights
• Throughout postwar, govt support of research, computers,
Economic Growth as Created by IR #2,
• Television, first shown 1939, big cities 1946-51
• Interstate highways 1958-72
• Air travel
– We’ve never gone faster than the 1958 Boeing
– Reversal of speed, end of US space shuttle
• Spread of air conditioning, opening the south
• GI Bill, golden age of higher education, the
example of California
How Does IR #3 Measure Up?
• Definition, let’s be generous
– It didn’t start in 1995 with Windows 1995 & IE
– It didn’t start in 1982 with the IBM PC
– It started in 1946 with the ENIAC mainframe
• The main point is that IR #3 gains for business productivity and
human welfare started much earlier than most people recall.
• Progress was slow at the start because computers were mainframes
that occupied entire buildings, used vacuum tubes rather than
transistors, ran hot, required enormous air conditioning investment
• By 1961 telephone bills were being prepared with punch cards and
card sorters
• In graduate school during the mid-1960s we punched our own cards
and hand-fed them into the computer – my 1967 PhD thesis
includes more than 100 pages of beautifully formatted computerprinted data tables.
The Progress of IR #3 Marked with
Personal Memories
1978: My first acoustic coupler and dumb terminal in 1978
1980: My first long-distance electronic co-authorship
1983: My first personal computer with its two floppy drives
1992: The heaven of Wordperfect 6.0
August 1993: My first e-mail
1994-95: Never since were e-mail messages so frequent or so
• Moving from personal anecdotes to aggregate data, the oneshot nature of the late 1990s boom:
– The share of total GDP taking the form of IT investment, including
software and telecommunications, experienced a one-time increase
from 3.6 to 4.8 percent between 1995 and 2000
– But was just 3.8 percent in 2007 and 3.7 percent in 2010.
• This is part of the case that IR #3 is slowing down already
Contributions of IR #3
to Business Productivity
• It started before the internet
– 1980s: ATM machines and bar-code scanning
– 1990s: Replacing paper library catalogs and paper parts
catalogs at auto dealers and repair shops
– Wal-Mart and its famous distribution efficiency
• Cell phone and internet were both the marriage of
computers and communications
– Cell phone for calls, not data, established by late 1990s
– PCs in offices had T-1 lines, not dial-up, back in mid1990s. Broadband arrived in homes 1992-96 and created
the e-commerce revolution
How Important Were IR #3 Innovations
during 2001 – 2011?
• A thought experiment to value IR #2 vs. IR #3
• Choice A is that you get to enjoy your laptop with all the software
that had already been invented in 2001, including windows,
internet explorer, and Amazon, and you get to keep running water
and indoor toilets. But you can’t use any electronic invention
introduced since 2001.
• Choice B is that you get everything invented in the past decade,
right up to facebook, twitter, and the ipad 2, but you have to give
up running water and indoor toilets, you have to go outside to an
outhouse, and you have to carry your water for bathing and
cooking in buckets and pails in from an outdoor well, and if you
want hot water you have to heat it on an open-heart fireplace that
you have to feed with wood or coal that you must carry inside in
buckets and pails. And there’s no cheating, you have to do it.
• Which do you choose?
Thinking About IR #2 vs. IR #3. Which
Do You Value More?
• The introduction of GPS navigation screens on autos compared to the
invention of the auto itself.
• The introduction of the cell phone compared to the invention of the
phone itself and the telegraph.
• The invention of home-streaming of movies to the invention of the
motion picture itself.
• The invention of the ipod to the invention of the phonograph.
• The invention of the microwave oven to the replacement of cooking on
the open hearth by the enclosed cast iron stove and later the kitchen
• Icemakers in refrigerators compared to the invention of the refrigerator or
even the icebox.
• The conversion of card catalogues in libraries to electronic screens with
the invention of electric light that made it possible to read books at night.
And Yet That Game Didn’t Include
So Many Benefits of IR #2
• Indoor plumbing
• Urban sanitation infrastructure
– Conquest of water-borne diseases
– Near-elimination of infant mortality
• The end of the female’s subservient role as a
carrier of water and coal
• The change of male jobs from unpleasant to
Negatives of the Internet
• Closing of options for consumers
– Bankruptcy of Blockbuster video rental chain
– Bankruptcy of Borders book store chain
• Detrimental effects on children
– News report: “Allison Miller, 14, sends and
receives 27,000 text messages per month.”
– Small problem, Allison is getting B grades, not A
grades, on her report card. She blames not being
able to concentrate on homework.
Distraction of Electronic Media
for Children
• 1998: 7.3 hours per day with media (including
• 2009: 10.5 hours per day
• Time reading books: unchanged
• Dispatch from Arizona. A school district spent
a huge amount to computerize classrooms,
convert teaching of basics to computer
• Result? No improvement in test scores
Summary of the Case Until Now
• The pace of economic growth has been propelled
by the three IR’s
• IR #2 is a much bigger deal than IR #3
• The expansion of the standard of living frontier is
less under IR #3
• Most of the big benefits of IR #3 for business
productivity happened early, before 2001, with
bar-code scanning and electronic catalogs
• The implication is that the scope for future
productivity growth matching the rate from 1870
to 1970 is quite limited
What About the Future of IR #3?
The Folly of Forecasting
• In 1876 an internal memo at Western Union, the
telegraph monopolist, said that “the telephone has too
many shortcomings to be considered as a serious
means of communication.”
• In 1927, a year before the first talking motion picture,
the head of Warner Brothers said “Who the hell wants
to hear actors talk?”
• In 1943 Thomas Watson, president of IBM, said “I think
there is a world market for maybe five computers.”
• In 1981 Bill Gates, defending the capacity of the firstgeneration floppy disk, claimed that “640 kilobytes out
to be enough for anyone.”
But We Don’t Need to Forecast
• Even if IR #3 continues to deliver inventions,
the tailwind of technology is confronting five
• Recall that we’re talking about the U. S. only,
but I’d be interested in your reaction – how
many of these headwinds does France face?
• The five categories again: inequality,
globalization, environment, education, debt
The Stunning Implication of
Rising U. S. Income Inequality
• Let’s say U. S. income per capita is growing at 1.5
percent per year while French is growing at 1.3
percent per year.
• The U. S. is doing better, right? Wrong?
• Income inequality has been rising in U.S. but not
in France
• The U.S. growth of 1.5 percent for the entire
population translates into only 0.9 percent for the
bottom 99 percent.
• Don’t believe it, look at the data of Piketty-Saez,
two world-famous French economists
Table 1. Real Annual Income Growth by Groups, 1993-2008
Average Income
Top 1% Incomes Bottom 99% Incomes
Real Annual Growth Real Annual Growth Real Annual Growth
Fraction of total
growth (or loss)
captured by top 1%
Bush Expansion 20022007
Great Recession 20072008
Full period
Clinton Expansion
2001 Recession
The U. S. Top Decile
Income Share, 1917-2008
Causes of U. S. Rising Inequality
• Within bottom 90 percent
– Weaker unions
– Lower real minimum wage
– Globalization
• Competition from imports
• Outsourcing
• Competition from low-skilled immigrants
• Within the top 1 percent
– Economics of super-stars
– Top lawyers, professionals as super-stars
– Managers, CEOs paid with stock options, counted in their
labor income
Decomposing the Top Decile US Income
Share into 3 Groups, 1913-2008
CEO Pay versus Average Wage Income,
Top 0.1% Income Shares in the U.S.,
France, and the U.K.,1913-2007
Second Headwind: Globalization
• Explaining the Autor-Katz “polarization hypothesis.”
– Upper level, creative, contact essential
– Mid-level white collar. Not creative, easily outsourced
– Bottom-level, contact essential. Waiters, bartenders, truck
drivers, nurses
• Inventing the internet has worked against the US.
• Instant computer access from anywhere is carving out the
mid-level white collar jobs
– Replaced by machines
– Replaced by outsourcing
• Implication for “the end of economic growth”, continued
shortfall of median income growth below mean income
Third Headwind: Environment
• Like a massive debt hangover, global warming requires
sacrifice of living standards
– Carbon taxes
– Constraints on which uses of energy are allowed
– Household disposable income is diverted into spending on
insulation and new energy-efficient cars and appliances which
don’t provide services any better than what they replace.
• Payback for 140 years of growth created by IR #2
• Advanced countries forced to sacrifice because of catch-up
in the emerging fast-growing nations
• Controversial analysis about policy implications,
uncontroversial that this will slow growth
Fourth Headwind:
The Dismal U.S. Education Situation
• U.S. higher education is much admired, but the main
achievement is in the past
– U.S. has fallen from 1st to 8th in college completion
– Cost inflation in higher education is as significant as in medical
– Costs at state universities rising faster because of state budget
– Many American students are being priced out of higher
– Who is attending in their place? The 500 Chinese applicants at
tiny Grinnell college in Iowa
• My story about Asian names in my Econ 311 class
– Increasingly, Asian immigrant students are heading home after
Even More Dismal is American
Primary and Secondary Education
• The OECD PISA tests in reading, math, and science
• Ranks of US within OECD (37 countries)
– Reading #17 (France #22)
– Science #23 (France #27)
– Math #31 (France #22)
• 75 percent of Army enlistees rejected because of poor test scores or
previous criminal records
• Only 35 percent of American high school students are prepared for
• Much of America’s college participation is in 2-year community colleges
which are glorified high schools, with most courses remedial, low
graduation rates, and few transfers to 4-year colleges
• Outcome: ever more American firms are complaining about inability to
find skilled workers, despite 16 million unemployed.
– The unemployed are unskilled or those whose skills are now irrelevant
– The H1-B visa problem, the immigrants who accounted for 35% of Silicon
Valley start-ups
Fifth Headwind: Consumer and
Government Debt
• Household debt as % of disposable income went
from 90% in 1995 to 133% in 2007, since then is
back down only to 119%. Year after year of
deleveraging will follow
• Federal government deficit the result of
– Irresponsible Republicans, cut taxes while starting two
wars with no revenues to pay for them
– Then the deep revenue hole from the great recession
• Democrats equal blame: their role in state
government deficits.
Implications of the Five Headwinds
on Future Economic Growth
• Inequality will hold median income growth below average
income growth
• Globalization will continue to hollow out the previous routine
white and blue collar jobs in the former middle class
• Environment will either be ignored or will slow growth in
consumption of non-energy-related products
• Poor education will lead to more outsourcing, more
unemployed high-school dropouts, and increased movement
of American firms to foreign locations
• Consumer debt means that consumption will grow slower than
income; government debt means that more people will lose
their jobs from expenditure cuts, and incomes after taxes and
transfers will decrease relative to incomes before taxes and
Conclusion: Let’s Buttress This History
With Some Numbers
• You’re about to see bar charts tracing U. S. economic growth
since either 1870 or 1891.
• We’ll distinguish different concepts of economic growth
Real income per capita
Real consumption per capita
Average labor productivity
Total factor productivity
• Both unadjusted and adjusted for changes in capital and labor quality
• For each concept we’ll compare history with a coherent
forecast for 2007-27
– This does NOT take into account any long-run damage from loss
of human or physical capital in the Great Recession
Growth in Output and Consumption
per capita since 1870
The Consumption-GDP Ratio Since
1869: Why It’s Payback Time
Ten-Year Moving Average of GDP vs.
Consumption Growth, both per capita
The Distinction Between Output
per Capita and Output per Hour
Explaining the Difference: Growth in
Hours per Capita
Labor Productivity vs. Non-adjusted
MFP Growth
Adjusting for Improvements in
Labor and Capital “Quality”
The Bottom Line: The Different
Chronology of Consumption and MFP
Unadjusted MFP Growth By Itself
The Message of the Charts
• The underlying assumption is most optimistic:
unadjusted MFP growth in 2007-27 will be faster than
1988-2007 and indeed faster than at any time since
• Yet growth in consumption per capita will be slower
than at any time since 1870, except for 1913-28 (surely
a phony number)
• Why the difference?
– End of growth in educational attainment
– Reduced hours per capita due to retiring baby boomers
– Reduced C/Y ratio due to indebtedness overhang
But An Ever Bigger Message
• Projected growth of consumption per capita of
1.0% ignores growing inequality. For the bottom
99 percent of the income distribution, it could be
0.5% or less.
• Consumption could also be held down by
government debt reduction due to pension
reform, slower growth in transfers, higher taxes
• We’ll be perilously close to zero growth in
consumption per capita over the next 20 years,
even starting from a 2007 base that ignores the
destruction in human and physical capital that
has occurred since 2007 as a result of the Great
Conclusion: Now It’s Your Turn
• You might ask, what are my solutions?
• I would rather think about solutions by considering
differences between countries.
• Does the rate of technical advance for IR #3 matter for
France or other nations? Is the US still the technological
• Do you see productivity growth in France slowing down
further or speeding up?
• Which of the five headwinds does France share with the U.
– Inequality, gloobalization, environment, education, and debt
• Let’s start talking . . .