A Critique of Grantham and Gordon: The Prospects for Long-term Growth
November 27, 2012
by Laurence B. Siegel
Robert Gordon’s six headwinds
Gordon’s essay is skillfully argued, offering many illuminating facts about the profound change in the daily lives of ordinary people between, say, 1870 and 1950. Having made the transition from a relatively primitive way of life (in which, for example, women spent much of their day carrying water) to a modern way of living, we cannot experience the same transition again, he argues.
There is something to his claim. Another 50-fold increase in the U.S. standard of living over the next 250 years is not in the cards. I agree with Gordon that the second industrial revolution, representing the bulk of the transition from a primitive standard of living, was the most important one, and the hardest to replicate. He concluded from this fact that further improvements in the standard of living will be less profound and will have a smaller impact on per capita GDP.
Maybe the improvements will be less profound for Americans – although it is hard to foretell the distant future – but we are not the only people in the world.
There are a great many people who have barely begun to experience the second industrial revolution, much less the third. Women all over the world still carry water day in and day out. We in the developed world don’t see it, except perhaps on Peace Corps assignments. As more people are liberated from the extreme effort and mental drudgery of manual labor, they need not invent new technologies to add to the growth rate of global GDP – they just need to be able to use the telephone, the automobile, the computer, and so on. A report from sub-Saharan Africa shows that the value placed by the poor on mobile phone access is so high that they are willing to forego meals to afford phone service. This is may sound like an irrational choice, but it’s actually supremely rational: The transactions in which they can engage over the phone will make future meals that much more secure and affordable.
Gordon identified six headwinds for future economic growth. Let us examine why each of them is less of a global concern than Gordon suggests. (The quotations I include below are all Gordon’s.)
1. “The ‘demographic dividend’ is now in reverse motion.”
This first headwind requires some explanation, because Gordon’s use of the term “demographic dividend” differs from the conventional use. The conventional demographic dividend is the increase in productivity that comes from a temporarily large ratio of workers to children-plus-retirees, which we experienced thanks to the sudden extension of life expectancy between the late 1800s and today. If people start living long enough to extend their working lives but not long enough to have much of a retirement, that boosts GDP. When the number of retired people climbs, as it has recently, the demographic dividend begins to dissipate; if people are having fewer children at the same time, the dividend may disappear entirely.
Gordon, however, treats the “demographic dividend” as a much narrower phenomenon: In his construction it was “the movement of females into the labor force between 1965 and 1990, which raised hours-per-capita and allowed real per-capita GDP to grow faster than output per hour.”
The entry of women into the workforce is a second-order effect. Women have always been productive, but their production was not well-captured by GDP measures until they moved in large numbers into the paid sector.
It is not a coincidence that the period of fastest economic growth occurred when increasing life expectancy was enabling most people to live productive lives in middle age, but not allowing them to retire.
This provocative reassessment challenges us to make better use of our elderly. Most older Americans wish to be economically active in some way, but their wisdom is more valued in the marketplace when they are scarce, not increasingly abundant, as they are today. As a result, jobs that use the skills of older workers effectively have been hard to come by. The trend toward retiring gradually rather than suddenly, whether because of insufficient savings or because of a desire to remain active, may be a step in the right direction.
2. Educational attainment in the U.S. has hit a “plateau.”
If one is trying to forecast global GDP, we should not be concerned about changes in country rankings. The U.S. led the second and third Industrial Revolutions, but there’s a good chance someone else will lead the next one. As an American, I’m deeply concerned about the shortcomings of the U.S.’s (primary and secondary) educational system, but I’m delighted to see that Chinese, Indian, African, and Latin American people are getting a chance and doing very well relative to their own recent past.
3. Inequality is on the rise.
“The most important [headwind] quantitatively in holding down the growth of our future income is rising inequality,” according to Gordon. “If what we care about when we talk about ‘consumer well being’ is the bottom 99 percent, then we must deduct 0.55 percent from the average growth rates of real GDP per capita presented here and elsewhere.”
This amounts to a forecast that the recent increase in inequality, which dates back only to about 1980 (before that, inequality was decreasing), will continue indefinitely. Further increases in inequality (as measured by the welfare of the top 1% of the income or wealth distribution compared with the other 99%) will only occur if increases in productivity are concentrated among the top 1% or if the top 1% can somehow exploit the others unfairly, capturing others’ productivity gains for themselves.4
Both seem extremely unlikely. The biggest productivity gains tend to come from people in the top 15% of the income distribution – engineers, entrepreneurs, doctors, and so forth – who may then enter the top 1%, if they can capture some of the gain. At any rate, I am more concerned about the tension between the top 15% (roughly corresponding to the intellectually gifted) and those of average or below-average ability. In a preindustrial or industrial society, the job description of “pick up this heavy object and move it over there” can be filled by the otherwise untalented. In the future, we will not need many such workers.
4. In other words, if the top 1% can arrange to pay the bottom 99% less than their marginal product. Just stating the problem this way makes such an outcome seem unlikely – 99% of the people do not work for the other 1%. About 17% work in various levels of government, and another 10% work for nonprofit organizations. Those in the private sector mostly work for corporations, the ownership of which is very widely dispersed among U.S. and non-U.S. pension funds and individual investors, and for small-business entrepreneurs whose incomes do not typically put them in the top 1%.