April 6, 2016


The Rise and Fall of American Growth
The U.S. Standard of Living since the Civil War
By Robert J. Gordon

The following extracts from Robert Gordon’s new book try to capture in a short six pages the essence of the argument he makes in a 600+ page book.  I, of course, have shorthanded it tremendously and have not tried to develop all of its themes. 

The two principle themes I have chosen to emphasize have been:

1.     The role of transformative innovation and entrepreneurship in dispersing that innovation.  This is something that we must keep in mind in every business or initiative we undertake.

2.     The reality of the “headwinds” we face in America in sustaining a rate of real growth that approximates what we had during the middle part of the 20th century.  Those headwinds include growing inequality and the challenge of sustaining the pace of the “unique” innovations that came into play during that period. 

The most compelling challenge for me is the one Gordon develops on the related issues of education and family formation.  You’ll see the shocking statistics that show the decline in births to married couples as well as the decline in the relative educational capability of the American workforce.  I come to this book with tremendous conviction in the importance of addressing these issues where we must:  at the very earliest age of a child, pre-natal through five, and also then changing the ways in which we finance elementary and secondary education to provide a more-even playing field to children and their families regardless of income.

Enough said.  I hope you enjoy these notes and that they encourage you to delve more deeply into this book.
The Great Leap Forward from the 1920s to the 1970s
Our task in this chapter is to shed light on this fundamental puzzle in American economic history:  What allowed the economy, particularly in the 1950s and the 1960s, to so unambiguously to exceed what would have been expected on the basis of trends estimated from the six decades before 1928?

The traditional measure of the pace of innovation and technological change is total factor productivity (TFP)—output divided by a weighted average of labor and capital input.  Gordon documents that the annualized growth rates of total factor productivity increased about fourfold during the fifty year period 1920-1970 (1.89%/year) versus prior years and versus the rate that has persisted since then.  Wood examines what was the cause of this “Great Leap.”

The most novel aspect of this chapter is its assertion that World War II itself was perhaps the most important contributor to the Great Leap.  We will examine the beneficial aspect of the war both through the demand and supply side of the economy.  The war created household savings that after 1945 was spent on consumer gods that had been unavailable during the war, the classic case of “pent-up demand.”  A strong case can be made that World War II, however devastating in terms of deaths and casualties among the American military (albeit much less than the greater toll of deaths and wounded among other combatants), nevertheless represented an economic miracle that rescued the American economy from the secular stagnation of the late 1930s.  In fact, this chapter will argue that the case is overwhelming for the “economic rescue” interpretation of World War II along every conceivable dimension, from education and the GI Bill to the deficit-financed mountain of household saving that gave a new middle class the ability to purchase the consumer durables made possible by the Second Industrial Revolution.

The supply effects are more subtle and interesting and include a vast expansion of the nation’s capital stock as the government paid for new factories and equipment that were then operated by private firms to create aircraft, ships and weapons.

The explanation of the Great Leap then turns to the innovation of the 1920s that had not been fully exploited by 1929, as well as to the additional inventions of the 1930s and 1940s.  By some measure, the 1930s were the most productive decade in terms of the numbers of inventions and patents granted relative to the size of the economy.  Previous chapters of this book have pointed to technological progress during the 1930s, including in the quality and diffusion of electric appliances, improvements in the quality of automobiles, the arrival of commercial air transport, the arrival of network radio programs available in every farm and hamlet, the culmination of growth in motion picture quality and attendance, and continuing improvements in health with the invention of the first sulfa drugs.  Inventions in the 1930s and 1940s also occurred in other areas not explicitly treated in previous chapters of the book, especially chemicals, plastics, and oil exploration and production.

Gordon also makes the case, one which challenges my own long-term thinking, that the history of immigration and trade during this period also are important factors in this “Great Leap” forward.  Let me explain. 

Between 1870 and 1913, roughly 30 million immigrants arrived on American shores; they crowded into central cities but also populated the Midwest and the plains states.  They made possible the rapid population growth rate of 2.1 percent per year over the same interval, and the new immigrants created as much demand as supply in the sense that there was no mass unemployment caused by their arrival—and in fact the unemployment rate in 1913 was only 4.3 percent.  All those new people required structures to house them, factories to work in, and equipment inside the factories, so the new immigrants contributed to the rapid rise of capital input.

Contrast this with the shriveling up of immigration after the restrictive immigration laws of 1921 and 1924.  The ratio of annual immigrations to the U.S. population dropped from an average 1.0 percent per year during 1909-13 to 0.25 percent per year during 1925-29, and the growth rate of the population fell from 2.1 percent during 1870-1913 and 0.9 percent between 1926 and 1945.

Both the immigration legislation and the draconian regime of high tariffs (the Ford-McCumber tariff of 1922 and the Smoot-Hawky tariff of 1930) converted the U.S. into a relatively closed economy during the three decades between 1930 and 1960.  The lack of competition for jobs from recent immigrants made it easier for unions to organize the push up wages in the 1930s.  The high tariff wall allowed American manufacturing to introduce all available innovations into U.S.-based factories without the outsourcing that has become common in the last several decades.  The lack of competition from immigrants and imports boosted the wages of workers at the bottom and contributed to the remarkable “great compression” of the income distribution during the 1940s, 1950s and 1960s.”

Thus the closing of the American economy through restrictive immigration legislation and high tariffs may indirectly have contributed to the rise of real wages in the 1930s, the focus of innovative investment in the domestic economy, and the general reduction of inequality from the 1920s to the 1950s.

Can the Innovations of the 1920s and 1930s Explain the Great Leap?
The two most important inventions of the late nineteenth century were electric light and power and the internal combustion engine, and these are often described as a “General Purpose Technology” (GPT) that can lead to the creation of many subinventions.

The most important invention of all time was the discovery of how to transform mechanical power into electricity, which then could be transported by wires for long distances and then retransformed into whatever form of energy might be desired.  This passage is interested also for its perspective on how much of the modern world had already been invented at the time of its writing in 1932.

Without it not only would the street car again be horse-drawn, but the automobile and the airplane would stop.  For without electromagnetic sparking devices, how could gasoline engines function? 

Thus every source of growth can be reduced back to the role of innovation and technological change.

Few descriptions of the role of risk and chance in the process of invention are as evocative as that of D.H. Killeffer, writing in 1948:

Inventions do not spring up perfect and ready for use.  Their conception is never virginal and must be many times repeated.  One seldom knows who the real father is.  The period of gestation is long with many false pains and strange forebirths…Few of the children of the mind ever survive and those only after many operations and much plastic surgery.

William Baumol offers a related caution.  Entrepreneurs contribute to economic growth far more than the narrow word “innovation” can convey.

The 1870-1970 century was unique.  Many of these inventions could only happen once, and others reached natural limits.  The transition from carrying water in and out to piped running water and waste removal could only happen once, as could the transition for women from the scrub board and clothes lines to the automatic washing machine and dryer.  After 1970, innovation excelled in the categories of entertainment, information and communication technology:  Television made its multiple transitions to color, cable, high-definition, flat screens and streaming, and the mainframe computer was joined by the personal computer, the Internet and the World Wide Web, search engines, e-commerce and smartphones and tablets.

The Challenge Ahead of the U.S. – Strong Headwinds – Devastating Statistics
The timing of the stream of innovations before and after 1970 is the fundamental cause of the rise and fall of American growth.  In recent years, further downward pressure on the growth rate has emerged from the four headwinds that are slowly strangling the American growth engine. Rising inequality has diverted a substantial share of income growth to the top 1 percent, leaving a smaller share for the bottom 99 percent.  Educational attainment is no longer increasing as rapidly as it did during most of the 20th century, which reduces productivity growth.  Hours worked per person are decreasing with the retirement of the baby-boom generation.  A rising share of the population in retirement, a shrinking share of working age, and longer life expectancy are coming together to place the federal debt/GDP ratio after the year 2020 on an unsustainable upward trajectory.  These four headwinds are sufficiently strong to leave virtually no room for growth over the next 25 years in median disposable real income per person.

Gordon underscores the challenge which an almost unbelievable change in family structure represents.

For white high school graduates, the percentage of children born out of wedlock increased from 4 percent in 1982 to 34 percent in 2008 and from 21 percent to 42 percent for white high school dropouts.  For blacks, the equivalent percentages are a rise from 48 percent to 74 percent for high school graduates and from 76 percent to 96 percent for high school dropouts.  Not only is the rate of marriage declining, but almost half of all marriages fail.  The number of children born outside of marriage is drawing equal with the number of children born within marriage.  June Carbone and Naomi Cahn summarize the implications for the future:

The American family is changing—and the changes guarantee that inequality will be greater in the next generation.  For the first time, America’s children will almost certainly not be as well educated, healthy, or wealthy as their parents, and the result stems from the growing disconnect between the resources available to adults and those invested in children.

Much of this reflects the importance that females place on having an employed spouse, as well as that there are only sixty-five employed men for every 100 women of a given age.  Among young African Americans, there are only fifty-one employed men for every 100 women, reflecting in large part the high incarceration rates of young black males. 

Charles Murray’s most devastating statistic of all is that for mothers aged 40, the percentage of children living with both biological parents declined from 95 percent in 1960 to 34 percent in 2010.  The educational and inequality headwinds interact, leading to the prediction of a continuing slippage of the United States in the international league tables of high school and college completion rates. 

Other sources support Murray’s emphasis on social decline in the bottom third of the white population.  A recent study showed that between 1979 and 20009, the cumulative percentage of white male high school dropouts who had been in prison rose from 3.8 percent to 28.0 percent.  For blacks over the same time interval, the percentage who had been in prison rose from 14.7 percent to 68.0 percent.  That is, fully two-thirds of black male high school dropouts experience at least one spell in prison by the time they reach 40 years old.  For black graduates from high school (including those with GED certificates), the percentage in prison rose from 11.0 percent to 21.4 percent.

Any kind of criminal record, and especially time in prison, severely limits the employment opportunities available to those whose prison sentences are ending.  According to the FBI, no less than a third of all adult Americans have a criminal record of some sort, including arrests that did not lead to convictions; this stands as a major barrier to employment.

The Potential for Policy Changes to Boost Productivity and Combat the Headwinds
The potential effects of pro-growth policies are inherently limited by the nature of the underlying problems.  The fostering of innovation is not a promising avenue for government policy intervention, as the American innovation machine operates healthily on its own.  There is little room for policy to boost investment, since years of easy monetary policy and high profits have provided more investment funds than firms have chosen to use.  Instead, educational issues represent the most fruitful direction for policies to enhance productivity growth.  Moreover, overcoming aspects of the education headwind matters not only for productivity growth.  A better educational system, particularly for children at the youngest ages, can counter increasing inequality and alleviate the handicaps faced by children growing up in poverty.

Gordon goes on to document the growing inequality of our nation’s educational outcomes.

Throughout the post-war years, starting with the GI Bill, which allowed World War II veterans to obtain a college education at the government’s expense, the United States was the leader among nations in the college-completion rate of its youth.  But in the past two decades, the United States has stumbled, with its college completion rate now down to tenth or below.  College completion for households in the top quarter of the income distribution rose between 1970 and 2013 from 40% to 77%, but for those in the bottom quarter, it increased only from 6% to 9%. 

Education problems are even deeper in U.S. secondary schools, which rank in the bottom half in international reading, math and science tests administered to 15-year-olds.  We now rank 12th among developed nations in terms of the percentage of 25-34 year-old age group who have earned a BA degree from a four-year college (32%).

Most serious is the high degree of inequality in reading and vocabulary skills of the nation’s children at age 5, the normal age of entrance into kindergarten; middle class children have a spoken vocabulary as much as triple that of children brought up in poverty conditions by a single parent.

Toward Greater Equality of Opportunity – Preschool Education and the Financing of Elementary and Secondary Education
Though preschool is universal for 4-year-olds in countries such as Britain and Japan, in the United States, only 69 percent of that age group is enrolled in preschool programs, ranking U.S. participation as number 26 among OECD countries, with the poorest children least likely to be enrolled.  The Unites States is ranked 24th for the fraction of 3-year-olds participating in preschool programs, with a 50 percent enrollment parentage as compared to at least 90 percent in such countries as France and Italy.  The United States ranks poorly not just in the age at which children enter preschool but also in class sizes and per-pupil expenditures.

The benefits of preschool education apply to all students, but particularly to those growing up in low-income families.  Children of poor parents, who themselves have a limited educational attainment, enter kindergarten at age 5 suffering from a large vocabulary gap that limits their performance in elementary and secondary education and that leads to high dropout rates—and often to criminal activity.  Age 5 is too late for the educational system to intervene in the learning process, for by then, the brain has already developed rapidly to build the cognitive and character skills that are critical for future success.  Poor children lack the in-home reading, daily conversation, and frequent question/answer sessions so common in middle-class families, particularly those in which both parents have completed college.

Preschool comes first, because each level of disappointing performance in the American educational system, from poor outcomes on international PISA tests administered to 15-year-olds to remedial classes in community colleges, reflects the cascade of underachievement that children carry with them from one grade to the next.  No panacea has emerged in the form of school choice and charter schools, although there has been much experimentation—with some notable successes in which children from low-income backgrounds have earned high school diplomas and gone on to college.  An important component of the inequality and education headwinds is the U.S. system of financing elementary and secondary education by local property taxes, leading to the contrast between lavish facilities in rich suburbs which coexist with run-down, often outmoded schools in the poor areas of central cities.  A shift of school finance from local to statewide revenue sources would reduce inequality and improve educational outcomes.  Ideally, schools serving poor children should have the resources to spend more than those serving well-off children, rather than less as at present.

Book Exceprts_TheRiseandFallofAmericanGrowth