Gordon on Growth

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

Gordon's paper is well-nigh the biggest too most of import economical query of all: Long-run growth. It's piece of cake to forget that per-capita income , the overall criterion of living , only started to increase steadily inward well-nigh 1750. The Roman empire lasted centuries , but the average individual at the cease of it did non alive improve than at the beginning.

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

As Bob reminds us amongst colorful vignettes of 18th too 19th century living , naught , but naught , 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 inward novel products , processes too businesses. For illustration , come across Bob Lucas' "Ideas too Growth" which starts

What is it well-nigh modern capitalist economies that allows them , inward contrast to all earlier societies , to generate sustained growth inward 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 grade , making an expanse or a province less good off than its neighbors. But therefore long every bit the frontier keeps growing , fifty-fifty grade effects only retard a province a few decades.

Here's a picture. The cherry trace represents 2% growth (real , per capita) , starting at $100 ,000 income. By 2100 your groovy grandchildren are earning $738 ,000. The blueish trace shows a "level effect." Suppose about laid of harebraned policies is therefore 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 blueish trace is actually simply shifted to the correct , lagging a decade or therefore behind but yet participating inward the eventual miracle.

By contrast , the dark trace says , what if at that topographic point is a policy or alter inward the environs that has no termination on the grade of gross domestic product , 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 groovy grandchildren brand $300 ,000 , non $738 ,000.

OK , therefore , to Bob's foremost thesis: Long-run growth is slowing down. The large ideas of the foremost 2 industrial revolutions , roughly the harnessing of unloosen energy , urbanization , build clean H2O , receive got been used every bit far every bit they can. The figurer revolution , to Bob , seems to running out of its powerfulness to enhance productivity. 20-somethings updating their facebook profiles instead of paying attending cast are non the jet-packs too rocket ships nosotros persuasion nosotros were going to receive got past times 2001.

I intend Bob has the correct query here. And his alert 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 inward productivity takes difficult piece of job , 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 respond (and he freely admits this is speculative).

My pet theory is that the existent defining excogitation of growth was Gutenberg. Science gives us existent noesis , at terminal , past times controlled experimentation. But controlled experimentation is extraordinarily expensive.  Influenza A virus subtype H5N1 farmer can't afford to essay out which crops grow best , a province medico can't make clinical trials. For gild to gain noesis past times scientific method , nosotros require communication. One doctor's clinical trials inform about other doctor's do a thou miles away. Gutenberg made that possible.

More mostly , the procedure of growth , of incorporating novel ideas into the economic scheme , almost e'er represents standing on the shoulders of giants , appropriating , slightly improving , too implementing someone else's ideas. That , for illustration , is why nosotros come across clusters of excogitation such every bit Silicon Valley.

Well , if Gutenberg (and subsequent innovations that used his ideas , the paper , the scientific periodical , too Earth library) lowered the costs of communicating ideas too widened the community of people that a given persuasion could laissez passer on , the cyberspace simply did that tenfold. As I expect at the cool materials -- nanotechnology , genetic engineering etc. -- underway too the 2nd worldwide communication of ideas , I receive got promise we'll come across that 2.5 percentage again. If nosotros permit the procedure run.

For illustration , intend how Bob's persuasion got to your desk. When I was a immature economist , before the cyberspace , he would receive got mailed a paper to the NBER , a calendar month or 2 after the working paper would receive got been distributed. The cyberspace buzz I saw that got me to larn expect at it would receive got taken a few to a greater extent than months to percolate to me past times older information networks , too then I'd receive got to larn read it inward the library. Finally , who knows how I would receive got gotten to you. That all happened inward a week. The diffusion of ideas is on steroids.

Well , mayhap my pet theory is wrong. Still , long-run growth is the number ,  it is non guaranteed but hard-won ,  we didn't e'er 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 inward the way. His headwinds are 1) Demographics: aging too reduced labor-force participation 2) Plateau inward the States educational attainment 3) "The most of import quantitatively inward belongings downwardly the growth of our futurity income is ascension inequality." 4) Globalization too outsourcing 5) Energy too enviroment 6)  Household too regime 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 world teaching , refusing to permit inward immigrants , refusing to utilization nuclear powerfulness or GM foods.  And , I don't come across how he tin focus on the US. Suppose nosotros cede the frontier to , state , Red People's Republic of China , every bit the Great Britain ceded the frontier to us inward Bob's graph. But every bit long every bit nosotros yet utilization China's ideas too engineering , too they grow at 2.5 percentage , therefore make we.

The optimistic lesson of growth theory is that , no affair how badly y'all screw upwardly grade effects , growth volition bail y'all out eventually. So , whatsoever "headwinds" require 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 signal of growth theory is that , inward the long run , that's all that matters.

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

In whatsoever instance , simply posing the query this agency argues that the unsafe "headwinds" are alone dissimilar from the ones that Bob highlights. The returns from excogitation , starting novel companies , introducing novel products too processes -- too inward that procedure making established incumbents rattling unhappy -- are the most probable targets.

But it's also clear that ideas are world goods , or high fixed damage null marginal damage goods. Their production too diffusion depends a lot on non-market structures , similar , state , universities. (Don't confine from that observation to "they require to live subsidized ," every bit it it's all to piece of cake to subsidize bad ideas too.) That's about other lesson of Bob Lucas' paper , which is remarkably gratis of economical incentives.

Finally , a alert well-nigh statistics. Here is my terminal movie , blown up.

As y'all tin come across , if you're simply looking at gross domestic product trends , it's difficult to tell a "level" termination from a "growth" termination for several decades.

Much give-and-take of our electrical flow slump presumes it's a temporary "level" shock; the blueish trace volition larn dorsum upwardly chop-chop to the cherry line. The "stagnation" hypothesis is that we're on the blueish trace -- nosotros lost well-nigh 5% of gross domestic product inward the recession , too directly 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 blueish 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 simply eyeballing the gross domestic product or productivity data. We receive got to think. Which Bob is prodding us to do.