Freakonomics Radio - 240. Yes, the American Economy Is in a Funk -- But Not for the Reasons You Think

Episode Date: March 17, 2016

As sexy as the digital revolution may be, it can't compare to the Second Industrial Revolution (electricity! the gas engine! antibiotics!), which created the biggest standard-of-living boost in U.S. history. The only problem, argues the economist Robert Gordon, is that the Second Industrial Revolution was a one-time event. So what happens next?

If you ever find yourself running for president of the United States, first of all, my condolences, but that's not what I want to focus on. If you are running for president, one of your duties is apparently to pretend you're a doctor and that your patient is the American economy and that only you have the power to figure out what is making your patients so sick. We should be growing at 4%, not this new normal. This country is in big trouble.

We don't win anymore. We lose to China. We lose to Mexico, both in trade and at the border. We lose to everybody. We must raise incomes for hardworking Americans so they can afford a middle class life. There's a long list of potential diagnoses and an even longer list of potential causes. It's like when you catch a cold and then you try to figure out of all the sneezing,

sniffling, snotty people you saw recently, who did this to you? The greed of the billionaire class, the greed of Wall Street is destroying this economy. The sad reality is big government, massive taxes, massive regulation doesn't work. And even though the U.S. economy is far healthier than most countries' economies, and also, it should be said, way healthier than most economies throughout history, the prognosis given by the candidates is usually somewhere between dire and fatal. This country's running out of time. We can't afford to have another four years like the last eight years. We're on the verge of economic collapse. Most presidential candidates are, of course, not MDs, but nor are they

economists, which you might think would be kind of sort of helpful for a job that seems to have so much to do with the economy. So today on Freakonomics Radio, let's talk to someone who is an economist. I'm just a regular economist who has a fancy title. To someone who spent his career giving full answers to the questions that presidential candidates spend a soundbite on. That's about right. And let's provide an order of magnitude. And his diagnosis may surprise you. The data give an unambiguous answer that we...

Whoa, whoa, whoa, whoa, whoa. You got to listen to the show to get that. Right after the... Here, sing it with me. Womp, womp, womp. Womp, womp, womp. From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

Robert Gordon is an economist at Northwestern University and the author of a book called The Rise and Fall of American Growth. Think about that title for a moment. The Rise and Fall of American Growth. Think about that title for a moment. The Rise and Fall of American Growth. So Gordon's view may be as dark as all those presidential candidates' views, but while politicians generally look for easy villains, immigrants or China or Wall Street, Gordon takes a less, shall we say, hysterical view of things. It is a view based on how innovation and inventions affect the economy, especially the inventions of the past few decades.

The big debate is about how important these new inventions will be, how rapidly they will be diffusing throughout the economy. And that's where we get into some of the controversy that's been caused by my book. Anyway, like I said, Gordon is an academic. I'm Stanley G. Harris, professor of the social sciences at Northwestern University. Professor of social science is not professor of economics. Why is that? That sounds better. And it wasn't my idea. I didn't give myself that title. It was made up for me. So you're not on the side, an anthropologist and a psychologist and all that?

No, but I have gotten deeply into history. Gordon does indeed go deep into history, examining the trajectory of economic growth over the last few millennia. We had virtually no progress in human life between the Roman Empire and the late Middle Ages. Studies of England, where they have some of the best data and statistics, show that over 400 years, between 1300 and 1700, economic growth was only at a rate of 0.2% a year. And to put that into concrete terms, something growing that slowly at 0.2% requires 350 years to double. Not only was growth extraordinarily slow, but even as new inventions came along, steam-powered railroads and a broader network of food distribution, they didn't exactly transform society overnight.

One of the things that keyed my interest in the great inventions was a paperback book that I found in a bed and breakfast in Michigan where guests were invited to leave books and pick them up. And so I picked up this book. It was a book by Otto Bettman of the famous Bettman Photographic Archives. And it was full of wonderful line drawings and cartoons of the horrors of railroad travel in the late 19th century with boilers that would blow up, of milk that was adulterated and mixed with water or chalk, the complete lack of protection of the quality of the foods. And so this set of horrors of how terrible life was in the old days led me naturally down the path of exploring what were the things that changed us and improved it. Gordon looked hard at what's generally called the first industrial revolution, which began in the mid-18th century. When we had the invention of steam engines, steamships, locomotives, factories making cotton fabrics, and then the telegraph.

All those things were invented in the century between 1770 and 1870, and they set the stage for the inventions that happened after 1870. And that's when the second Industrial Revolution would begin. We'll get there. But first, as Gordon was saying about the stage-setting inventions of the first Industrial Revolution. One example of setting the stage was the telegraph, which was the single biggest invention in human history in news could travel was by the speed of a horse or a sailing ship. And indeed, we have a famous example of the Battle of New Orleans, won by Andrew Jackson in January 1815, which took place three weeks after the peace treaty was signed between Britain and

the United States, ending the War of 1812. So, after the telegraph, of course, the human mind started imagining, well, what if we could find a way of allowing people to talk over these wires instead of just sending dot-dot-dash-d dash Morse codes. And that dream was realized fairly promptly in 1876 by Alexander Graham Bell and his competing inventor. Bell beat the competitor, whose name was Elisha Gray. Bell beat him to the U.S. Patent Office by about three hours. And if it had not been for that, we would have had the gray telephone system instead of the bell telephone system. As we all know, the telephone was but one of many, many, many inventions produced during

the Second Industrial Revolution. The Second Industrial Revolution included electricity, the internal combustion engine, chemicals, plastics, running water, the conquest of infectious diseases, the conquest of infant mortality, the development of processed food, the fact that women no longer had to make their clothes at home but could buy them either in department stores or in mail order catalogs. So all of those things, every dimension of human life was affected by the second industrial revolution with the inventions mainly taking place between 1870 and the early 1900s and having their big impact on such economic measures as productivity during the middle part of the 20th century, especially from 1920 to 1970. Now, remember what Robert Gordon said about the rate of growth between 1300 and 1700? Something growing that slowly at 0.2% requires 350 years to double. And how did that compare to the second Industrial Revolution? Since 1870, the amount of time that it's taken for the standard of living to double

has been more like 30 years, not 350 years. Wow. Think about that. If you had the good fortune to be born in the early 20th century, let's say, rather than the early 19th century, well's say, rather than the early 19th century. Well, that was a lot of good fortune. Okay, but wait a minute. As lucky as you might have been to be born in the early 20th century, how much luckier still would it be to have been born in the mid or late 20th century?

Because that's when we got the third industrial revolution, the one that's been so helpful if someone wants to, say, make and distribute a radio program that you can carry around with you and stick in your ears whenever you want. the personal computer in 1980, and then followed by the marriage of communications with computers that we call the internet or the dot-com revolution that happened in the late 1990s. So all of these changes radically changed our ability to process information along the way we had a similar revolution in entertainment. So the third industrial revolution includes entertainment, information through the computers, and the communication as we moved from landline phones to what we can call dumb mobile phones in the 1990s, then into smart mobile phones in the last 10 to 15 years. Now, there's nothing wrong with the Third Industrial Revolution. Each of those fields was dramatically and completely changed, particularly the information processing by the

computer and the invention of such things as e-commerce and search engines and email and web browsing. But those inventions, as monumental as they were, were taking place just in a narrow slice of human life in terms of the economy. And this brings us to the central argument of Robert Gordon's book, the argument that many economists and others are not willing to accept, at least not without a fight. Gordon believes that as bright and shiny and wonderful as the many manifestations of this third industrial revolution may be, well, they can't compare to the more essential inventions of the second industrial revolution when it comes to increasing the average person's standard of living. Moreover, Gordon has come to think that the great inventions of the second industrial revolution were a one-time event,

and that the resulting spike in American prosperity was therefore also a one-time event, which may account for all the gloom and doom on the presidential campaign trail. Even though you could easily argue that more people around the world are better off today than they've ever been, we all know that leaping forward feels a lot better than inching forward, especially when the nature of the inventions that we've been given these last few decades make it seem as if we are leaping forward. Our total spending on all electronic communications and computer devices, on entertainment, on the services that provide us with internet services and telephone devices, on entertainment, on the services that provide us with internet services

and telephone services, you add that up and it's only about 7% of the economy. That leaves the other 93% of the economy that has not been nearly so profoundly affected by the third industrial revolution. On the other hand, I could say, my goodness, for seven cents of every dollar I earn, look how much stuff I'm getting, right? Because part of the appeal of this is because it's scalable, it's also presumably potentially really cheap, right? Why would you use spending as a proxy for the lack of significance in our, the convenience of being able to buy things from the comfort of our home is indeed a great step forward for some things that are amenable to that kind of buying. But so far, if we look at total retail sales, e-commerce only accounts for six to seven percent of total retail sales. There are still lots of things that people like to

buy in person, including clothing that they want to try on, things like automobiles. Lots of things that people like to buy in person, including clothing that they want to try on, things like automobiles. Lots of things are still purchased from traditional kinds of outlets. It sounds as though your argument is essentially that many of the inventions provided by the digital revolution, while exciting and appealing and sexy and maybe because they are so sexy, they gain more of our attention than they warrant, that as exciting and sexy, et cetera, as they are, that they are primarily refinements of previously existing things. So they make transportation more portable or convenient or communication more the same, shopping more the same, but

that they don't stand at all in comparison to the breakthroughs of the earlier technological revolution? I think they're breakthroughs. And indeed, if we look at business practices and procedures, we had a complete change from paper and file cabinets, calculating machines and typewriters, into the modern world of flat screens and search engines and electronic storage and electronic catalogs. That was a profound transformation that affected the lives of almost everybody who works in an office. And it took place over the 25 years or so between 1980 and 2005. Yes, during the heyday of the dot-com revolution,

we had our nationwide measures of progress, namely productivity growth, catching up briefly for about a decade to the kinds of measures of progress that we had back in the second industrial revolution. So it was transformative, but it didn't last long. The revival of productivity growth occurred only between about 1995 and 2005, in contrast to the similar big surge of productivity growth created by the second industrial revolution that lasted for a full 50 years from 1920 to 1970. So it's a matter not of whether we had breakthroughs, but how big and important they were and how much they boosted the amount people could produce per hour of work.

So this brings us really, I guess, to part of the controversy of your book, which also brings us to the title of your book, The Rise and Fall of American Growth. So as much as one can get excited about the inventions and the technology of the past, let's say, 40 years, your argument is much broader than that, which is that growth has peaked as we know it, and that if I understand correctly, in your view, it will never resume as we had it before. Is that about right? That's about right. And let's provide an order of magnitude.

We have a measure of the impact of innovations that economists call total factor productivity. And that tells us how much progress our economy is making relative to the hours of work that we put in and relative to the number of machines that we use. And so improvements in efficiency per unit of labor and per unit of machine is called total factor productivity. And you might just translate that into simple words, the impact of innovation. Well, our economist measures of that growth rate were three times as fastth century, and then a falling off, a slackening of the pace of innovation and economic growth since then. Coming up on Freakonomics Radio, if you don't like what Robert Gordon has to say about the past, you almost certainly won't like what he has to say about the future. It means as many people will be falling back as those who are moving ahead.

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You can find it on iTunes and elsewhere. The Northwestern economist Robert Gordon has written a book called The Rise and Fall of American Growth. It argues that we shouldn't expect to have the same economic growth rates we've had in the past, in large part because recent inventions are not transforming our lives as much as we think. This is disturbing to some people, including the political class, because there has been a foundational belief that future growth should mirror, at least to some degree, the past. Most people, when discussing the lack of growth that you're now talking about, gravitate not toward the economic structure through which you look at it, but more political structures, or at least it strikes me. They look to the political realm and they look for scapegoats. They look for, you know, the policies that have destroyed jobs or created low-paying jobs at the expense of better ones, or they look at policies that create too many burdens on business. So does your argument about our slowing growth or lack of growth overlap

with those political points, or does it really lie outside it, and is it therefore a different argument? Well, it's a little bit of both. What makes my forecast more radical, more radically pessimistic, are four headwinds, as I call them. And the first of those is inequality. Over the last 35 years, an amazingly high fraction of our economic progress has been siphoned into the incomes of the top 1% of the income distribution. That's a tremendously important feature that causes the slowdown. It's not just a lack of innovation. We're seeing plenty of innovation, but it's the fact that not

everybody is sharing in the fruits of that innovation. We've had, as the second headwind, a slowing in the pace of improvement of educational attainment. This is particularly true for American young men. So we have a lot of undereducated males who are not able, through their education, to contribute to highly productive occupations. And the rate of improvement in that was a substantial source of economic growth throughout most of the 20th century. Then we have the third headwind, which is demographics. That's simply the aging of the population. The retirement of the baby boom generation means that millions and millions of people are making a transition from working and creating income to not working and being dependent on income through Social Security

and Medicare provided by the working generation. And then finally, we have the universally recognized Day of Reckoning coming within the next 10 to 15 years as Social Security and Medicare run out of money. That can be fixed only by raising taxes or cutting benefits to those in the over 65 age group. And that raising of taxes or cutting of benefits will reduce further what we call the disposable income, the income that people actually have to use for consuming what they want. So between these four headwinds, inequality, education, demography, and a fiscal issue, and your view that the third industrial revolution is wildly overvalued or at least overappreciated,

I'm scared to ask you, but what are you then predicting for the American economic future? And do you see that prediction as applying to the global economic future as well? How singular is the American position? Those are two different questions. And first, if we just want to put some numbers on this, the growth of output per hour, our productivity, over the next 25 years is likely to be quite similar to what it's been over the last 10 to 11 years, and that's about 1.2% a year. Not bad, not that different from what occurred back in the 1970s and 80s. We had a brief respite in the late 1990s when our productivity did better than that. But leaving aside the late 1990s, our productivity growth is going to be fairly similar. And so that means I'm not predicting the end of innovation or the end of technological progress. Or the end of the world, we should say. Or the end of the world. All right. But then the 1.2% has to be reduced because that's output per

hour. But we're having our population is not working so many hours as the baby boomers retire. That cuts the 1.2 down to 0.8 growth in output per person. Then the inequality, the fact that so much of this is going to the people at the top, cuts the growth rate for the median income per person down from 0.8 to 0.4. And then the fiscal reckoning cuts us down further to 0.3. So 0.3% growth in disposable income of the median person in America is hardly progress at all. It means as many people will be falling back as those who are moving ahead. You asked as a second question, what does this mean for the rest of the world? You have to divide the rest of the world into the developed countries

like Western Europe, Japan, South Korea, Australia, New Zealand, Canada. That's the developed part of the rest of the world from the emerging markets, China, India, Southeast Asia. And the emerging markets will continue to catch up to the standard of living that has been achieved by the developed nations. But as I look around the world, this slowdown in productivity growth is pervasive. So they're following in our footsteps. We're not alone. Where we are alone is the pervasiveness of this increase in inequality is an American phenomenon that's not repeated everywhere. Our educational attainment is not as impressive as some other countries. So we're doing as well as anyone else on productivity, but we're suffering from headwinds that are not shared equally elsewhere.

If I'm listening to this program, I'm trying to figure out whether I should kill myself now and get it over with or live out this long economic doldrum. In other words, what does all this mostly terrible economic news translate into? Are we looking at, in your view, at least let's say in the rich countries, you know, widespread underemployment and perhaps unemployment? Are we looking at economic chaos? Are we looking at anarchy and war? What do you foresee? None of the above.

And let me go to the issue of employment. There is a considerable divide in those that look forward over the next 25 years between those I call the techno-optimists, who think that we're on the verge of revolutionary advances in technology and innovation, and thus fear that robots and artificial intelligence will be taking away jobs and leaving mass unemployment. As compared to me, where I think that new technologies are coming, but they're occurring at an amazingly slow pace, there's an awful lot of ordinary everyday human activity that robots cannot come close to duplicating. And so I see the robots are as much collaborating with and complementing human activity as replacing it. I think the idea that computers can win at quiz show games is very impressive, but the artificial intelligence computers have not yet

shown that they can match human judgments. These innovations are coming, but they're not black and white. They're not going to arrive tomorrow all in one fell swoop. And because it won't happen in one fell swoop, Robert Gordon says, he's not so worried about employment. The economy will keep producing jobs as it has during past technological shifts. We no longer have encyclopedia salesmen. We no longer have elevator operators. We no longer have blacksmiths. Machines have been replacing humans throughout the history of all three industrial revolutions. And I don't see any reason why this should be any different.

What is happening, and this is really part of the story of inequality and the evolution of the top incomes compared to the incomes in the middle and the bottom, is that the jobs that are being created are in many cases not as high paying and not requiring as much education as the jobs that are being lost to not just automation, not just the computers, but we also have lost an enormous number of jobs to globalization, to trade, to the impact of imports. So what we should worry about, and I don't have a great answer for this, is the downshifting in the quality of jobs and the menial nature of jobs. So I'm worried about the quality of jobs, not about us having enough jobs. We are, after all, down to 5.0% unemployment.

So to summarize your overall argument about our rise and fall of American growth, would it be an overstatement to say that there was a lot of low-hanging fruit, physical and labor and all other kinds of fruit that we picked beautifully and ate hungrily and we did really well with? And that those things once used up will never – that kind of gain will never appear again, as far as you can see? I think that's too strong. It's not that all the fruit has been picked. The problem with that analogy is the fruit tree is continually growing new fruit, and there's new fruit to be picked. The idea that many of the inventions were of more fundamental importance could perhaps be squeezed into the fruit analogy by saying that the pieces of fruit were larger, that were hanging in the lower part of the tree. And the tree is continuing to grow new fruit with self-driving cars, 3D printing, robots, and artificial intelligence. So the tree is continuing to grow new fruit with self-driving cars, 3D printing, robots, and artificial intelligence.

So the tree is not barren by any means. But the new fruit is growing very slowly. It takes a long time to pick. And the total amount of fruit that we wind up with is not as much as we did in the old days when the fruit was lower down and larger in size. You call the other camp the techno-optimists. Are you inherently then a techno-pessimist, or do you not go that far? You know, it's really the distinction is fast versus slow. It's the speed of the change. The techno-optimists act as if we're going to have a rapid revolution that within the next five or ten years is going to see universal world of robots and mass unemployment as a result of artificial intelligence.

I just think that the best way of looking into the future is to look at the recent past. Let's pretend we were talking back in the 17th century, even early 18th century, and we could say, you know, there hasn't been much economic change in lo these many centuries. Ergo, the best prediction will be that more of the same. And then boom, it did happen. So who's to say or why are you to say that that is not going to happen? Because that's one reason why I don't forecast beyond 25 years. It's possible that things can be invented 50 or 100 years from now that we can't even imagine. But we've got pretty widespread agreement on the inventions that are coming down the road over the next 25 years. And so just to have a disagreement over how fast or how slow that is,

is very different than the qualitative kind of mistake that you were just imagining for the 18th century. Robert Gordon's interpretation of our economic past and future is certainly open to your own interpretation. You may find it sobering, even frightening, or you might find it comforting. Because while political conversations about the economy always look for a scapegoat, a villain,

Gordon's economic conversation tells a different story, that our runaway growth of the past was essentially a golden age. And while it might be nice to repeat it, it's not like we're not still reaping the benefits every day. No one has taken away our electricity or clean water or refrigeration or air conditioning and the antibiotics and the cars and telephones, smart or dumb phones. And it may be that once so many of these external concrete needs have been met, what's left is the really hard stuff, the internal needs.

Things like psychological and cognitive gains, learning to find true happiness, or perhaps better yet, to be satisfied with what we have. If you could achieve that, then yes, it might make even electricity and clean water and antibiotics seem like pretty basic stuff. Next week on Freakonomics Radio, we are reaching into the archive to give you one of the most popular episodes we've ever made, The Economics of Sleep, Part 1. But until then, we need your help, your voice. This April, it is Self-Improvement Month at Freakonomics Radio,

and we want to hear what you would most like to improve about yourself, and why, and maybe what you've been doing to make that happen. So, record your voice on whatever voice memo app your phone has, and email us the file at radio at Freakonomics.com. Please include your name, where you live, and what you do. I'm looking forward to hearing from you. Thanks. Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Greg Rosalski. Our staff also includes Irva Gunja, Jay Kawa, Merit Jacob, Christopher Wirth, Kasia Mihailovic, Alison Hockenberry, and Caroline English. You can find all our previous episodes at Freakonomics.com. You can also subscribe to this podcast on iTunes or wherever you get your podcasts.