The Rise and Fall of American Growth Americans believe “in the green light, the orgastic future that year by year recedes before us. It eludes us then, but that’s no matter — tomorrow we will run faster, stretch out our arms farther…So we beat on, boats against the current, borne back ceaselessly into the past.”1 Like Gatsby, American’s never lose their optimism for an ever-brighter future; and our vehicle of choice to get to this destination is technology. But should we expect technology to move us to a future that transcends our past?

"We wanted flying cars, instead we got 140 characters."

― Peter Thiel


Most recently techno-optimists are embracing big data, artificial intelligence (AI), and the internet of things (IoT) to fundamentally change our way of life and take economic productivity to heights never before reached. One of the four key issues discussed at this year’s World Economic Forum was “economy-changing technologies”. These “economy-changing technologies” will bring us reduced crashes, energy consumption and pollution via autonomous vehicles; real-time evaluations and feedback for more targeted education; greater information sharing and more accurate diagnosis capability for improved healthcare; optimized supply chains for improved service and corporate bottom-lines… In fact, the perceived opportunities for technology to change current processes is endless; the bigger question is just how big of an impact will these changes have on our economy? According to Robert Gordon in his recent book The Rise and Fall of American Growth, the information and communications technology (ICT) revolution is a “green light” that, like Gatsby, “presents itself as an orgastic future that year by year recedes before us.” Moreover, his forecast for the ICT revolution’s impact on our economy is even more somber. What follows is a synopsis of Gordon’s main points.


tl;dr

If you’re short on time here are the big take-aways:

The special century of 1870-1970 experienced the most remarkable economic growth. No other 100-year period in world history has brought comparable progress and Gordon suggests that this special century should be our baseline for what real transformation looks like.

Gordon argues that although the ICT revolution has given us pretty cool stuff, this stuff is creating only marginal rather than fundamental improvements in our lives and businesses' productivity.

Gordon argues that four headwinds (income inequality, education, demography, and government debt) will cause near-term growth in business productivity and personal living standards to be in line with the abysmal rates we've experienced during the past decade rather than the fundamental forward leaps that techno-optimists predict and America experienced during the special century.

Although I'm hesitant of long-term macro predictions, and the policy recommendations would've been better excluded, the book provides a fantastically detailed account of the history and economics of American life from 1870-present. Definitely worth reading.


① The Special Century

Throughout the first half of his 700 page book, Gordon argues that the period from 1870 to 1970 was a “special century,” when America was fundamentally changed and the foundations of modern American life were laid. A central theme of Gordon’s book is that many inventions are one-time-only events subject to a long succession of subsequent incremental improvements. Truly transformative inventions are ones that impact nearly all individuals and the time period between 1870 and 1920 witnessed the momentum of a unique clustering of “Great Inventions”. This included electricity, flushing toilets, internal combustion engines, central heating, refrigeration, radio, telephony, clean water, vaccines, antibiotics, etc. These were inventions that offered the opportunity to impact every American in almost every aspect of daily life.

Edison

The integration of these inventions in the early 20th century initiated many of the truly transformative advancements. Electricity illuminated households and changed the workplace. Plumbing and running water changed the most basic daily tasks of bathing and washing clothes. The internal combustion engine and automobile created a networked America connected by roads, allowed for mail-order and delivery of consumable goods, rapidly changed farming, and created suburbia as we know it.

However, during this time more than half of family budgets were devoted to food and clothing and most of the rest to rent or the mortgage, not allowing for the adoption of many inventions that offered new conveniences. Through a combination of improved consumer credit options, increased wages2, accumulated savings due to WWII rationing, and two-income families with women entering the workforce unleashed a fury of consumer consumption, adoption, and improvements of these inventions. This led to a significant growth rate in the standard of living, labor productivity, and total factor productivity (TFP)3.

Gordon’s historical recount also illustrates the important fact that GDP does not always capture the true extent of improvements. Many of the most important gains in the standard of living during this time period, primarily from 1870-1940, are not captured by GDP suggesting that the growth rate of real GDP during this time is substantially understated.4

Regardless, Gordon argues no other 100-year period in world history has brought comparable progress and Gordon suggests that this special century should be our baseline for what real transformation looks like.


The Information and Communications Technology Revolution

So how does the ICT revolution compare? Gordon argues that although ICT has been revolutionary, it has been somewhat isolated and marginal in its influence. Genuinely major innovations normally bring about fundamental changes in personal lives and business practices. Gordon argues that although ICT caused big changes to business practices in the mid-1990s to the early 2000s, not much has happened since. In essence, what wide-sweeping productivity improvements could be gained by digitizing business processes was captured in the late 1990s when most businesses fully adopted the use of computers, an internet presence, and digitally networked components. Since then, what improvements have been made to ICT technology has only had marginal, if any, improvements to business productivity.

Total Factor Productivity

Some are quick to mention the likes of Google, Netflix, Apple, Facebook and other major tech companies. Granted, a whole new ICT industry has taken root in our economy but Gordon reminds us that the tech sector is only but a fraction of the total economy. In fact, total spending on all electronic communications, computer devices, internet and telephone services, and entertainment (which has been heavily influenced by ICT) only accounts for about 7% of the economy.5 That leaves the other 93% of the economy that has not been nearly as affected by the ICT Revolution.

As for the impact of ICT on personal lives, Gordon argues these have been, primarily, all marginal improvements to our daily activities. Cars are becoming safer and more digitized but these are only marginal improvements whereas the invention of the car was a one time, fundamental change to how we commuted. Even the idea of driverless cars, although would allow the driver more freedom in what they do as they commute, this would only be a marginal change in our lives. It may eliminate taxi cab drivers but does this create a fundamental change in American lives, Gordon argues it would not. Computers, TVs, radios (i.e. podcasts & Sirius) are all examples of where the ICT revolution continues to advance capabilities (i.e. faster bandwidth, greater computing power, better image quality) but all these advancements provide only marginal rather than fundamental changes in our lives.

In addition, Gordon argues that additional constraints have become present during the ICT revolution that are influencing America’s growth. This includes a reduction in total labor force participation among the “prime-age”, increasing college costs and debt, declining business dynamism which reduces new startups and job mobility, and the decay of the middle class.

The net result Gordon argues, is that the ICT revolution has given us pretty cool stuff but this stuff is creating only marginal rather than fundamental improvements in our lives and businesses’ productivity.


Gordon’s Forecast of America’s Growth

So what should we expect over the next 25 years? Gordon provides his predictions for the primary indicators of productivity and standards of living. In a nutshell they are grim with the expectation that our growth rates will be more in line with the past 10 years, which has experienced some of the worst growth rates in the 20th and 21st centuries.

Gordon Forecast

Although, Gordon predicts productivity growth rates to be positive, his argument focuses on four “headwinds” that he believes will make standard of living for the majority of American’s to be stagnant.

First among the headwinds is income inequality. Since 1970 fundamental changes in share of income has resulted with the top 1% experiencing a substantially higher growth while the growth for the remaining 99% has plateaued. If this trend continues then what growth in corporate profits due to the mild productivity increases that may come will go disproportionately to the select few versus the majority of Americans.

The second headwind discussed is education. America’s decreasing performance in educational rankings and graduation rates will likely have a negative impact on business productivity growth rates compared to the special century, as education attainment has been positively linked to productivity. Moreover, the decreasing affordability of college and increasing student debt will continue to hinder growth in the standard of living as smaller percentages of future income will be disposable.

The third headwind presented is demography. With the labor participation rate decreasing, primarily from baby boomer retirees but also from a decrease in men and women in the 25-55 age group, which will result in a reduction in hours per person and therefore a result in the average output per person.

The final headwind posited by Gordon is the ratio of government debt to GDP. In 2015 the debt-to-GDP ratio was 74% according to the CBO and Gordon predicts this to increase to 125% by 2038. In addition, he cites the dwindling resources for Medicare and Social Security and the increasing aging of the baby boomer generation. Together these are certain to increase tax rates for all Americans and/or reduce future transfer payments which will also reduce the standard of living growth rates.

Various other factors are presented, all of which help to support his claim that in the near future we should expect the growth of business productivity and personal living standards to be in line with the abysmal rates we’ve experienced during the past decade rather than the fundamental forward leaps that techno-optimists predict and America experienced during the special century. So although we may continue to try run faster and stretch out our arms further, we will likely continue to “beat against the current, borne back ceaselessly into the past.”


My Final Take

If for no other reason, this book is worth purchasing for the detailed economic and historical assessment and portrayal of American life from 1870-present. Specifically, the vivid details provided of orginary life in America during 1870-1940 was fantastic. The economic details are also overwhelmingly detailed. At the least, this is a great historic account of post-civil war America - both from a macro and micro perspective.

Although I think Gordon provided a fairly good argument for his predictions, I am typically hesitant in such large scale forecasts. Moreover, his policy recommendations in his postscript were lacking of details and analysis and would’ve been just as well omitted.

Although I’ve become a little skeptical of the big data and AI hype, I’m not as quick to say that it may not eventually create fundamental changes. Early in the book Gordon discussed how certain technologies were developed in the late 1800s (electricity, telephony, internal combustion engine) but it took time to understand and implement the vehicle to diffuse this technology throughout America. Personnally, I think we are early on in the invention period of many computer technologies and, who knows, maybe in a decade we’ll finally find a revolutionary vehicle to diffuse the technology to create fundamental changes in our economy.

But I think Gordon provides important insights and at least directs us to first look and understand the history of America’s economy, and to treat this as a baseline to measure future growth against. At the end of the day this book is definitely worth reading.6


Go to top



1. F. Scott Fitzgerald's actual quote from the concluding chapter of The Great Gatsby reads "Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that’s no matter — tomorrow we will run faster, stretch out our arms farther... And then one fine morning- So we beat on, boats against the current, borne back ceaselessly into the past." "↩" </P>

2. Increased wages came from 4 factors: 1) employers such as Henry Ford realizing that increased wages reduced employment turnover and increased morale which lead to greater productivity, 2) Fair Labor Standards Act of 1938, 3) labor unions, and 4) high levels of government employment during WWII offered premium wages. "↩" </P>

3. In economics, total-factor productivity (TFP), also called multi-factor productivity, is a variable which accounts for effects in total output growth relative to the growth in traditionally measured inputs of labor and capital. It is widely considered the best measure of innovation and technological change. "↩" </P>

4. Examples include the brightness and safety of electric light compared to the inconvenience, danger, and dimness of karosene and whale oil lamps, the variety of food available due to the invention of processed food, the removal of horse manure and uring from city streets, the increased flexibility brought by personal automobiles, etc. "↩" </P>

5. Freakonomics podcast interview between Gordon and Steven Dubner. "↩" </P>

6. If you'd like to read more reviews regarding Gordon's book you can find reviews written by Tyler Cowen, Paul Krugman, The Economist, The Huffington Post, and Freakonomics. "↩" </P>