Gordon On Growth

Bob Gordon is making a large splash amongst a novel paper, Is the States Growth Over?

Gordon's paper is near the biggest too most of import economical query of all: Long-run growth. It's like shooting fish in a barrel to forget that per-capita income, the overall criterion of living, only started to increase steadily inwards near 1750. The Roman empire lasted centuries, but the average soul at the halt of it did non alive amend than at the beginning.

Gordon's Figure 1, reproduced hither shows how growth picked upwardly inwards the mid 1700s, reached 2.5% per twelvemonth -- which made us dramatically amend off than our great-grandparents -- too forthwith seems to live tailing off.

As Bob reminds us amongst colorful vignettes of 18th too 19th century living, nothing, but nothing, is to a greater extent than of import to economical good beingness than long-run growth.

And modern growth economic science is pretty clear on where the goose is that lays this golden egg: Innovation. New ideas, embodied inwards novel products, processes too businesses. For example, run across Bob Lucas' "Ideas too Growth" which starts

What is it near modern capitalist economies that allows them, inwards contrast to all earlier societies, to generate sustained growth inwards productivity too living standards? It is widely agreed that the productivity growth of the industrialized economies is mainly an ongoing intellectual achievement, a sustained flow of novel ideas

Growth theory neatly divides economic science into "growth effects," which is actually how fast novel ideas are born too implemented, versus "level effects." Many economical distortions screw upwardly the level, making an expanse or a province less good off than its neighbors. But thence long equally the frontier keeps growing, fifty-fifty grade effects only retard a province a few decades.

Here's a picture. The reddish draw represents 2% growth (real, per capita), starting at $100,000 income. By 2100 your neat grandchildren are earning $738,000. The bluish draw shows a "level effect." Suppose merely about laid of harebraned policies is thence awful that it reduces the grade of gross domestic product past times 20% -- but does non interfere amongst the growth mechanism. It's pretty bad. But the bluish draw is actually merely shifted to the right, lagging a decade or thence behind but even thence participating inwards the eventual miracle.

By contrast, the dark draw says, what if at that topographic point is a policy or alter inwards the surround that has no number on the grade of GDP, but lowers the long-run growth charge per unit of measurement to 1%. 2%, 1%, what's the difference? Cumulate that over a century, too your neat grandchildren brand $300,000, non $738,000.

OK, so, to Bob's firstly thesis: Long-run growth is slowing down. The large ideas of the firstly ii industrial revolutions, roughly the harnessing of energy, urbanization, build clean water, receive got been used equally far equally they can. The figurer revolution, to Bob, seems to running out of its powerfulness to heighten productivity. 20-somethings updating their facebook profiles instead of paying attending shape are non the jet-packs too rocket ships nosotros take in nosotros were going to receive got past times 2001.

I intend Bob has the correct query here. And his alarm is well-taken. Just because growth has been steady does non hateful it's assured. The "trend" does non come upwardly for free. Each improvement inwards productivity takes difficult work, too disruptive novel companies putting established incumbents out to pasture.

But I intend  -- or at to the lowest degree I promise -- he has the incorrect response (and he freely admits this is speculative).

My pet theory is that the existent defining conception of growth was Gutenberg. Science gives us existent knowledge, at last, past times controlled experimentation. But controlled experimentation is extraordinarily expensive.  H5N1 farmer can't afford to bear witness which crops grow best, a province physician can't make clinical trials. For gild to gain cognition past times scientific method, nosotros need communication. One doctor's clinical trials inform merely about other doctor's do a M miles away. Gutenberg made that possible.

More generally, the procedure of growth, of incorporating novel ideas into the economy, almost ever represents standing on the shoulders of giants, appropriating, slightly improving, too implementing someone else's ideas. That, for example, is why nosotros run across clusters of conception such equally Silicon Valley.

Well, if Gutenberg (and subsequent innovations that used his ideas, the newspaper, the scientific journal, too the populace library) lowered the costs of communicating ideas too widened the community of people that a given take in could reach, the mesh merely did that tenfold. As I hold off at the cool materials -- nanotechnology, genetic engineering scientific discipline etc. -- underway too the 2d worldwide communication of ideas, I receive got promise we'll run across that 2.5 pct again. If nosotros allow the procedure run.

For example, intend how Bob's take in got to your desk. When I was a immature economist, before the internet, he would receive got mailed a paper to the NBER, a calendar month or ii afterwards the working paper would receive got been distributed. The mesh buzz I saw that got me to become hold off at it would receive got taken a few to a greater extent than months to percolate to me past times older information networks, thence I'd receive got to become read it inwards the library. Finally, who knows how I would receive got gotten to you. That all happened inwards a week. The diffusion of ideas is on steroids.

Well, mayhap my pet theory is wrong. Still, long-run growth is the issue,  it is non guaranteed but hard-won,  we didn't ever receive got it too nosotros could lose it, too that would live a catastrophe.  

Bob prognosticates non only that nosotros seem to receive got run out of productivity-increasing ideas, but that "six headwinds" stand upwardly inwards the way. His headwinds are 1) Demographics: aging too reduced labor-force participation 2) Plateau inwards the States educational attainment 3) "The most of import quantitatively inwards belongings downwards the growth of our futurity income is ascension inequality." 4) Globalization too outsourcing 5) Energy too enviroment 6)  Household too authorities debt.

Here I intend Bob is mostly confusing "level" effects amongst "growth" effects.  He is also mixing constraints -- run out of ideas -- amongst self-inflicted wounds -- dysfunctional populace education, refusing to allow inwards immigrants, refusing to utilization nuclear powerfulness or GM foods.  And, I don't run across how he tin flame focus on the US. Suppose nosotros cede the frontier to, say, China, equally the UK of Britain too Northern Republic of Ireland ceded the frontier to us inwards Bob's graph. But equally long equally nosotros even thence utilization China's ideas too technology, too they grow at 2.5 percent, thence make we.

The optimistic lesson of growth theory is that, no affair how badly yous screw upwardly grade effects, growth volition bail yous out eventually. So, whatsoever "headwinds" need to live clearly linked to the possibility that economical distortions lower the charge per unit of measurement of finding novel ideas too incorporating them. The whole indicate of growth theory is that, inwards the long run, that's all that matters.

Do they? My impression of modern growth theory is that the economic science of conception production too adoption are non good understood. Do the distortions of a high-tax,  regulated, crony-capitalist, welfare state,  just screw upwardly levels? Or make they  reduce the spread of ideas behind long-run growth? My fearfulness is "yes."

In whatsoever case, merely posing the query this agency argues that the unsafe "headwinds" are solely dissimilar from the ones that Bob highlights. The returns from innovation, starting novel companies, introducing novel products too processes -- too inwards that procedure making established incumbents really unhappy -- are the most probable targets.

But it's also clear that ideas are populace goods, or high fixed toll null marginal toll goods. Their production too diffusion depends a lot on non-market structures, like, say, universities. (Don't saltation from that observation to "they need to live subsidized," equally it it's all to like shooting fish in a barrel to subsidize bad ideas too.) That's merely about other lesson of Bob Lucas' paper, which is remarkably gratuitous of economical incentives.

Finally, a alarm near statistics. Here is my final picture, blown up.

As yous tin flame see, if you're merely looking at gross domestic product trends, it's difficult to tell a "level" number from a "growth" number for several decades.

Much word of our electrical flow slump presumes it's a temporary "level" shock; the bluish draw volition become dorsum upwardly apace to the reddish line. The "stagnation" hypothesis is that we're on the bluish draw -- nosotros lost near 5% of gross domestic product inwards the recession, too forthwith we're on the growth path amongst a lower level. That's disastrous enough. Bob warns us that nosotros powerfulness live on the worst of the bluish too dark lines. That would live a huge disaster.

All said before.  The graph reminds us is that it takes a long fourth dimension to figure out which it is based on merely eyeballing the gross domestic product or productivity data. We receive got to think. Which Bob is prodding us to do.