By Stu Rosenblatt
Editor’s Note: This is part four of a four-part review of Robert Gordon’s The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War, an extremely useful book on the nation’s physical economy. Click here for Part I, here for Part II, and here for Part III.
Following the end of the war, from 1945 until 1972, the U.S. economy continued its upward expansion. Labor hours fell, in part due to the departure of many women from the labor force back to the home, and also to the adherence to the 40-hour work week. However, output per hour, i.e., labor productivity, continued to increase. (see Figure 1)
Gordon attributes much of this to the dramatic investment in the productive economy during World War II, and the carryover of those new technologies into the peacetime conversion of the war economy. Complementing this was the pent-up demand for consumer durables, i.e., housing, cars, and other items, that had been put aside during the war.
As for new infrastructure development, Gordon does an excellent job of presenting the impact of the highway system and the development of air travel. He praises the federal government for its leadership in the expansion of the interstate highway system and its impact on the economy. This had a direct effect on expanding the Total Factor Productivity. Congress appropriated $25 billion for over 40,000 miles of highways, and designated the Highway Trust Fund, funded by the gas tax, to pay for the program on an ongoing basis. This was capital budgeting at its best.
Gordon cites one study on the impact of the interstate system on business productivity, which showed that virtually all major industries experienced significant cost reductions due to cheaper transport. Another study said that interstate highway spending contributed to a 31% increase in American productivity during the 1950s, and a 25% increase in the 1960s. Starting in 1972, aid to transportation began its decline, and led to a precipitous fall in productivity increase to just 7% in the 1980s.
Gordon also does an excellent job outlining the development and benefits of the commercial airline industry. The result was a nationwide network of jet-powered air travel, complementing the rail and highway systems, also resulting in increased productivity in the economy.
However, there are some glaring omissions, including the role played by new water systems in the West and elsewhere. He also fails to report on the huge impact of the peaceful nuclear energy program. Nuclear power operates at a “higher flux density” than coal, gas, or oil, and hence, can direct a higher energy throughput into the economy.
He fails to even mention the space program, the signature accomplishment of the Kennedy administration, which represented a new “infrastructure” program, and a “science driver” that reshaped the economy. According to a study by Chase Econometrics, the Kennedy space program returned $14 for every dollar spent in the form of new industries, technologies, civilian applications, etc. The high point of U.S. productivity occurred in 1972, just after the peak of the space program.
Decline and Fall
In the concluding section of the book, Gordon presents a devastating critique of the last 40-year deterioration of the U.S. economy.
In summary: Rise and Fall focuses on three major industrial revolutions and their impact in the United States:
- The 19th Century Industrial Revolution I, based on the steam engine and its offshoots into rail, water, etc.
- Industrial Revolution II, centered on the late 19th Century technology breakthroughs, especially electric power, the internal combustion engine, and their many byproducts;
- Industrial Revolution III, based on information and communication technologies.
Gordon bluntly concludes that the last revolution is by far the weakest. While the information revolution was expanding during the 1990-2014 period, investment in Industrial Revolution II (IR 2) technologies was flagging, leading to an overall stagnation in productivity and output.
Rise and Fall reports the impact of the computer information technologies on the productivity of the economy; TFP did increase 1994-2004, the heyday of the application of new computer industries to output in the real economy. But from 2004 it has been on the decline.
In a devastating chart and analysis (see Figure 2), Gordon reviews the dramatic decline in productivity over the past 20 years under the domination of the information economy. Hours per person and output per person are now exhibiting negative growth, and productivity (output per hour) is also plunging toward zero!
Gordon demonstrates that TFP has been in a steady descent since 2004, and he produces several graphics as demonstration. First, he goes through the Federal Reserve index of Industrial Production and Industrial Capacity, and the ratio of the two, i.e., the rate of capacity utilization. (Figure 3)
New investment in information-communication technologies (ICT) in the 1990s resulted in a rapid expansion of manufacturing in those areas, peaking in about 1999-2000. Since then, it has been on a downward trajectory, dropping into negative territory in 2012. So much for the myth that ICT investment had a profound impact on productivity in other industries; Gordon found no increase in productivity even with large ICT inputs! (See Figure 4)
Also, since 2004, net investment into the capital stock of ICT technologies has plummeted to negative and remained there. Gordon concludes that any new revival in TFP due to the ICT industries is unlikely. He buries the ICT revolution with a quip from Solow, viz, that “we can see the computer age everywhere but in the productivity statistics.”
Gordon elaborates: “The final answer to Solow’s computer paradox is that computers are not everywhere. We don’t eat computers or wear them or drive to work in them or let them cut our hair. We live in dwelling units that have appliances much like those of the 1950s, and we drive in motor vehicles that perform the same functions as in the 1950s, albeit with more convenience and safety.”
He states categorically that in most areas of the economy, especially the consumer economy, productivity growth is converging on zero.
He highlights the decline in output per person, measuring this as the combination of hours per person and productivity (output per hour). Output per person declined rapidly from 1999 to 2014. Productivity (output per hour) growth fell from 2.7% in 1955-1964, to 1.44 in the 1977-1994 timeframe. He says this resulted from the ebbing of the impact of the Industrial Revolution 2 (IR2) technologies. Productivity grew to 2% in the heyday of the 1994-2004 ICT boomlet, fell to 1.3% in the next decade, and is at .6%, as of 2016.
The decline of the impact of IR2 and minimal impact of IR3 are summed up by Gordon as follows: In 2014, real GDP/person was $50,000; had productivity growth from 1970-2014 equaled that of 1920-1970, the real 2014 GDP per person would be $97,000. There has been an approximate 50% decline in GDP.
Gordon says he chose the title of his book, Rise and Fall of the American Economy, because of the dramatic ascent and cascading descent of output per person. The apogee was reached in 1970, and the bottom has yet to be seen. While he is pessimistic about the future of the nation, unless the policies are changed, he has posed the issues sharply. Either we return to the policies that created the greatest expansion in modern history, or we face an unthinkable plunge to oblivion.