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FEB 7, 2013

Marginalia Vol.8: Will Innovation Fail Us?

By John Vandenbrink
Dr. John Vandenbrink, Deputy Dean, Graduate School of Management, GLOBIS University

Marginalia are brief notes written in the margin of a book or article. John Vandenbrink, Deputy Dean of GLOBIS University, will share his notes on topics that have caught his attention in his readings on finance, business, and economics.

A Provocative Paper

Last year economist Robert J. Gordon released a working paper with potentially fundamental implications for today’s difficult economic situations in the United States, Japan, the UK, and other advanced economies. He challenged the assumption that economic growth will continue in the future, questioning, by implication, the wisdom of policies that count on growth to overcome looming debt and social payments. Leading publications have directed considerable attention to Gordon’s paper (see examples cited below), though there seems to be little evidence that it is influencing policies. For anyone concerned about the condition of major economies today, Gordon’s paper is worth exploring.

Diminished Growth in the Future?

Gordon is a professor at Northwestern University in the US who specializes in productivity. He takes a very long view, looking backward across centuries and forward across decades. He lays out his argument as follows:

● Before 1700 there was virtually no economic growth in the world. Standards of living did not change generation to generation.
● Three waves of inventions, or Industrial Revolutions, sparked sustained increases in productivity and wealth, first with the UK at the frontier, later the US
——IR1 (1750–1830) steam power, railroads
——IR2 (1870–1900) electricity, internal combustion engine, running water, indoor toilets, communications, chemicals, petroleum
——IR3 (1960–present) computers, Internet, mobile phones
● The inventions of IR1 and IR2—especially the latter—generated huge gains that continued decade after decade
● In developed nations the gains of IR1 and IR2 have been largely realized and provide no further impetus for growth
● IR3 is proving to have minor impact when compared to its predecessors
● There is no certainty that economic growth will continue indefinitely

Figure 1 illustrates the pattern of growth in real GDP per capita in the two frontier countries. Figure 2 graphs Gordon’s measurements of the impacts of IR2 and IR3 on productivity (total-economy output per hour of labor). The green bar labeled 1891–1972 shows IR2 generating increases in productivity of 2.33% annually across eighty-one years. The blue bar labeled 1972–1996 shows the reduced level of productivity growth after IR2 had largely dissipated. The orange bar labeled 1996–2004 shows what Gordon contends is the rather belated and short-lived impact of IR3’s PC and Internet revolution. The black bar labeled 2004–2012 shows that productivity growth has returned to the reduced level of 1972–1996.

Gordon expects innovation to continue, but without the transformational productivity gains of the past. Moreover, what little growth there is will be held back by “headwinds,” he says. He lists (focusing here specifically on the United Sates) demographic change, failures in education, income inequality, globalization dampening wages, costs of climate change, and debt burdens of governments and households. His calculations become rather complex as he accounts for income inequality, but ultimately they suggest that the future rate of income growth of the bottom 99% of earners is likely to be well below 1.0% per year. Elsewhere he writes that he expects US real GDP to grow at “a rate of just 1% a year.” Whatever the particular numbers that are chosen, the result marks, he writes, “an epochal decline in growth from the US record of the last 150 years of 2.0% annual growth rate in output per capita.”


How can we understand the difference between real GDP per-capita growing at 2% and at 1%? At 2%, the real value of output per person doubles every 35 years. At 1%, doubling requires 70 years. At 0.5%, doubling takes 139 years. The future looks very different in these scenarios. At 2%, it is far easier to raise taxes and pay down debt, which is what virtually all the major developed economies must do at some point.

When economists, central bankers, and budget-setting politicians make their plans, they must have in mind some value for the long-term, sustainable rates of real growth in their economies. The experience of the past 150 years sets expectations for growth of real GDP per-capita at 2% or more, and populations also grow, so expectations for growth of real GDP itself are typically 2% to 3% or more. Here are some actual assumptions for real GDP growth:
● US Congressional Budget Office, August 2012, Baseline:
——4.3% (2014–2017)
——2.4% (2018–2022)
● Japan Prime Minister Shinzo Abe’s draft budget for fiscal year beginning April 2013:
——2.5% (2013)
● UK Office for Budget Responsibility, Economic and fiscal outlook, December 2012:
——1.2% (2013)
——2.0% (2014)
——2.3% (2015)
——2.7% (2016)
——2.8% (2017)

Gordon’s analysis suggests that repairing the damage caused by the financial crisis of 2008 will not be enough to restore the climate of growth that developed economies have known for the past century, when prosperity increased significantly every year. It suggests, moreover, that none of the prescriptions for economic health that we hear so much about—fiscal stimulus, monetary stimulus, tax cuts, small government, deregulation, currency devaluation, income redistribution—can compensate for the lack of productivity gains from the high-impact technologies of the past. Of course, no one can know what inventions lie in our future, but perhaps it’s wise, as Gordon suggests, not to count on them.

Useful links:

An abstract of “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” by Robert J. Gordon, NBER Working Paper No. 18315, Issued in August 2012, is available from the National Bureau of Economic Research: A PDF copy the full paper is also available there, but for a fee.

A free version of the working paper is available from the Centre for Economic Policy Research:

A useful summary of Gordon’s working paper is available at Figures 1 and 2 above have been copied from this site.

“Was that it?” by M.C.K., Washington, Free exchange,, September 8, 2012

“Is unlimited growth a thing of the past?” by Martin Wolf, Financial Times, October 2, 2012

“Why Innovation Won’t Save US,” by Robert J. Gordon, Wall Street Journal, US ed., December 22, 2012, p. C3: This article contains Gordon’s forecast of 1% real GDP growth that is cited above.

“Has the ideas machine broken down?” The Economist, January 12–18, 2013, pp. 19–22