Ed Lotterman: A fascinating, pessimistic history of U.S. economic growth

Robert Gordon’s new book on productivity in the U.S. economy, “The Rise and Fall of American Growth,” is masterful, but reminds me of the character in Evelyn Waugh’s comic novel “Scoop,” who sings, “change and decay in all around I see” while looking in the mirror to shave.

Gordon skillfully lays out information about the history and trends of productivity. One can learn a great deal. It is not clear, however, that he proves his thesis that our economy now is doomed to a period of slow economic growth, if not outright stagnation.

To some degree, I think he is right: We are not likely to see the rapid annual increases in output that we saw repeatedly from 1870 to 1950. There are declining returns to investments in machinery or facilities and to research into new technology. Moreover, productive new technology often does come in fits and starts.

So there are many reasons the rate of growth of an economy may shrink over extended periods. The question is whether we are in the early years of such a drought now.

Let’s start with the basics.

Economists say goods and services are produced using some combination of land, labor and capital. In this stylized rubric, “land” refers to all natural resources; “labor” is all human effort. As economists use “capital” here, they don’t mean money or stocks or bonds. They mean physical things such as machines, tools, factories, railroads and so on that have been produced in the past and not for immediate consumption; they are durable items used for producing other things. The ways in which these basic resources are combined constitute technology.

When a bunch of prehistoric men blowing through hollow reeds clustered around a fire to smelt copper in charcoal, there was “land” in the form of firewood and ore, “labor” in the form of lungs and “capital” in the form of the reeds and perhaps some shovel, pick, hammer or anvil.

One can increase output by increasing any or all of the inputs or by changing the technology.

The U.S. economy grew tremendously in the 50 years between the Civil War and World War I. Some of that was due to more resources. We settled vast areas of the West taken from Native Americans. This increased availability of minerals, lumber and agricultural commodities. There was large-scale immigration. Health improvements, largely in urban sanitation, fostered a “natural increase” in population. We had a high savings rate and we attracted financial capital from Europe, especially England. So there was money to build railroads and steel mills, open mines and cut forests.

A great part of the increase in output came from using more basic resources. But this also was a period of great technological change, the “age of steel and steam.” Modern chemistry, largely stemming from German developments, reached industrial scale. Electricity became a vital way of illuminating factories, streets and housing. Designing structures and machines became based on science rather than rules of thumb and experience.

It was a paradoxical age. Total value of output exploded. Labor productivity — value of output per hour worked — soared. But it was a time of grinding poverty for many farmers, miners, lumberjacks and urban workers, at least until the mid-1890s.

This was due in part to monetary policy — the gold standard — that forced down commodity prices and wages. It was due to legislation and judicial decisions that greatly favored large owners of capital over labor. It was due to high levels of immigration that kept the labor supply over-abundant — and the price low — even as more and better machinery increased output per worker. Sound familiar?

All was not grim, however. Incomes eventually rose for many as did living standards for most. Reductions in mortality from safe drinking water improved life more than any dollar value of output would show. The sewing machine reduced drudgery. Electric lighting transformed domestic life.

World War I was a great economic disrupter, but mostly in Europe. The United States benefited, emerging as the greatest economy on the planet. With radio, automobiles and electrification of factories, growth was even more rapid in the decade after the war. Gordon is insightful in putting the whole span from 1870 to 1940 into one era of “the great inventions.”

Of course, the period since 1940 has brought great advances in telecommunications, information, cell biology, infectious disease control and so on. But the rate of increase of total output and of output per worker has slowed. While total national income continues to increase, the benefits accrue largely to a small fraction of the population.

Is this inevitable — the petering out of a process that inherently can only go so far? Are we doing something different in terms of investing in new technology development? What does slowing population growth and an aging population mean for output? Are we doomed to be like Japan, where increased output per hour worked is eaten up by a declining population so that national output is stagnant?

And would that be so bad?

Is increasing inequality of income and consumption merely an outcome of unrelated factors, or does it arise from the same forces that are slowing growth? Or is income inequality itself, as Gordon asserts in his final chapter, a “headwind” explaining why “long-run American economic growth slows to a crawl?”

Regardless of the answers, understanding the sources of growth and of how growth has played out in our own country is vital. “The Rise and Fall of American Growth” is a rare example of a work with solid economics that can be understood, and enjoyed, by nearly any lay person.

This story was originally published February 12, 2016 at 5:28 PM with the headline "Ed Lotterman: A fascinating, pessimistic history of U.S. economic growth."