The Scary Underlying Reason Millennials Will Be Worse Off Than Generations Before Them
Throughout this presidential election cycle, candidates have made some tremendous promises about how much the American economy would grow under their watch. Jeb Bush, whose campaign folded in February, guaranteed 4% annual growth during his tenure. Sen. Bernie Sanders has vowed his economic plan should spur more than 5% yearly growth.
A number of economic thinkers from across the political spectrum have debated the merits of their claims, and while some believe that such strong growth is possible, most consider it unlikely. The economy has grown at an average rate of 2.7% per year since the beginning of Ronald Reagan's presidency, according to Vox, and while there have been bouts of much higher rates of growth, especially under Reagan and President Bill Clinton, the lower growth trends since George W. Bush took office suggest breaching the 4% mark for a sustained period of time is improbable.
Why such pessimism? Northwestern University professor Robert J. Gordon's groundbreaking new book, The Rise and Fall of American Growth, contains some important clues. Gordon believes that due to historical trends in innovation and headwinds in the economy today, like skyrocketing inequality and debt, high growth rates are a thing of the past. He surmises today's young people may be first generation since the late 19th century to defy a modern American trend — a doubling in the standard of living compared to the previous generation.
Gordon's thesis is that the innovation that drives growth isn't consistent — or, as he puts it in his book, "Some inventions are more important than others." Today's ongoing information revolution is important, but in terms of changing society, it pales in comparison to the revolutions set off by the invention of electricity, the internal combustion engine and variety of other late 19th century and early 20th-century inventions.
He believes that for the foreseeable future, the explosive growth the United States experienced between 1870 and 1970 cannot be repeated. Mic spoke with Gordon about why that's the case, and what it means for what lies ahead.
Mic: What were the great inventions that created the "special century" between 1870 and 1970, and why did they matter so much?
Robert Gordon: The great inventions of the late 19th century were utterly transformative in every aspect of human life: Electricity made possible electric light, the elevator, electric machinery that revolutionized productivity and manufacturing; the internal combustion engine, which allowed us to make a transition in urban America from the horse to the motor vehicle, with all the implied cleaning of the city; the combination of telephone, phonograph, radio, motion pictures and then television that ended isolation and brought people in contact with the rest of the world in a way that could only happen once.
Then we have the rather mundane arrival of something that had been invented many millennia earlier, which is running water — most houses did not have connections to running water in 1870 or sewage disposal.
We took a house in 1870 that was completely isolated from the rest of the world, and by 1940 that house was connected five different ways to the outside world — through electricity, gas, telephone, running water and waste removal.
Every realm of human life changed, from food to clothing to shelter to running water to health. We conquered infectious diseases during the same period, and infant mortality fell from 22% to 1% between 1890 and 1950. It's the fact that all these things were happening simultaneously and many could happen only once — for instance, the transition from a rural society to an urban society.
And what happened between 1920 and 1970 specifically that made it unparalleled in terms of growth compared to any other point in American history?
RG: Productivity growth was particularly rapid in those 50 years because it took time for the inventions of the second industrial revolution to reach fruition. If you think about inventing an internal combustion engine, you can't just put it on a buggy or a horse-drawn carriage. You need to have a way of getting the power from the engine to the wheels, for example. There was a 20-year gap until we had the first motor cars appearing around 1900.
There was also the political revolution of the 1930s related to [Franklin Roosevelt's] New Deal that legalized unions and made it much easier for them to organize, which pushed up wages and encouraged business firms to invest in capital equipment, because labor was more expensive, and this raised productivity.
In World War II, where maximizing production was the only goal, with 16 million people being removed from the labor force to go fight in the Army and the Navy, business firms throughout the economy learned how to get along with less labor and become more productive. And even though we had this great wave of production during World War II, the productivity growth did not go away — it stayed high after the war, suggesting there was learning by doing that happened during World War II.
"We wanted flying cars, instead we got 140 characters." — Peter Thiel
You discuss how as much as the third industrial revolution — the information revolution — has transformed life, that transformation has been limited to the domains of communications and entertainment. It's summed up in that Peter Thiel quote you mentioned, "We wanted flying cars, instead we got 140 characters." So while we're commonly excited about what new phones can do or how apps can change the service sector, they don't seem to seep into every facet of life the way that electricity has.
RG: We have the example of Superstorm Sandy, which when it struck the eastern seaboard and took away electricity and many of the inventions of the 20th century for many people, let them go back a bit and see what life would've been like in the 19th century.
Seems a little more threatening than the disappearance of Facebook.
RG: People did have friends before Facebook.
But besides "unrepeatable" inventions, you think there are some other features of today's society that threaten growth.
RG: There are four headwinds that are slowing down the pace of progress. One of them is education: Back in 1900, only 10% of the American population had completed high school. By 1970, it was up to 80%. So we had a complete transformation of high school education throughout the first two-thirds of the 20th century. Since then we've had a plateau of about 80% with about 15% or 20% continuing to drop out of high school.
And that leads us to college, where enrollment has steadily increased, but we've had in recent years a fairly large chunk of our college graduates who cannot find jobs requiring a college education. They're coming out of colleges with heavy student debt and without the kind of jobs they expected to get to help repay the debt. That's the education headwind, and it's gradually removing the power of further education to raise productivity growth.
Then we have the demographic headwind — the aging of the population. As people make a transition from work to retirement, they're working few hours, and often when they retire, no hours at all. We're in the process of having a decline in hours of work per member of the population, and that means our income per person must grow more slowly than our productivity, or output per hour.
Inequality is a substantial headwind. Over the last 30 years roughly half of all income gains have gone to the top 1%, and the bottom 99% have scrambled to pick up the pieces left over by the top 1%. This means median income per person is growing slower than average income per person.
The last headwind is the fiscal reckoning that will come over the next 10 to 15 years as the Social Security and Medicare trust funds run out of money, and we face the unpleasant choice between cutting benefits to people who are retired or raising taxes on the rest of the population who are still working to support the larger number of old people.
What about those who say that we stand on the brink of technological innovation that will completely change how we live our lives?
RG: We've got four categories of innovation that are going on at the moment and that are predicted by some people I call the "techno-optimists" to create a revolution in productivity growth the likes of which we've never seen before. They don't understand how much more rapid productivity growth was in the middle of the 20th century and that we're nowhere near being able to achieve that again.
Look at the four categories they're pointing to — robots, artificial intelligence, 3-D printing and self-driving cars and trucks.
I look across all these great new ideas, I see steady, incremental innovation. For example, we've had robots for over 50 years, and they've made inroads in manufacturing ... but robots are advancing very slowly. 3-D printing has enormously sped up and enhanced the making of prototypes and design samples, but it's not mass production and is not suitable for making numerous objects that are sold to the mass consumer. We have the much-discussed self-driving trucks and cars — and there I would caution the real productivity growth would not come from the cars, but from the trucks — but are we really going to replace truck drivers? Simply having the truck drive itself is not going to eliminate the need for the human being to do shelf-placement.
I'm not saying in any way that there's nothing going on at all, of course it's going on all around us, but its impact is still relatively limited, and will be for at the least the next 25 years.