Gordon on Growth: A Critique
By David Henderson
On Sunday I laid out Robert J. Gordon’s reasons for thinking that growth of per capita income in the future for most Americans will be substantially lower than it has been for the last two centuries. I promised a critique for yesterday but instead I had a good Labor Day with my family. So here’s my critique today. It is not complete because to write a full critique would take much research and many key strokes.
My main critique is that Gordon is way too certain of his conclusion. His big argument–not the one about the six headwinds–is as follows:
[T]he central theme of this article is that innovation does not have the same potential to create growth in the future as in the past.
Again, I emphasize that I don’t want to say that he’s wrong–he could well be right. But I don’t think his degree of certainty is justified. By the very nature of innovation, we don’t know what it will be. Gordon is aware of this and points to “four classic examples of innovation pessimism that turned out to be wildly wrong”: (1) Western Union’s claim that the telephone would not be “a serious means of communication, (2) the head of Warner Brothers saying, in the silent-film era, “Who the hell wants to hear actors talk?”, (3) IBM president Thomas Watson’s 1943 statement, that the world market for computers is “maybe five,” and (4) Bill Gates’s 1981 statement that 640 kilobytes (of capacity on a floppy disk) “ought to be enough for anyone.”
He misleads by saying “There are four classic examples.” No. He gave four classic examples but there are more. How about Lord Kelvin’s statement 1895 statement, “Heavier than air flying machines are impossible”?
Moreover, the term “innovation” doesn’t apply only to new inventions. It can apply to new government policies. What if state and local governments carried out two innovations: (1) allowing jitneys (see here, chapter titled “99 and 44 Hundredths Built” and here) and (2) pricing road use in a roughly revenue-neutral way (cutting gasoline taxes while raising tolls)? If those two measures reduced the average American’s time in traffic by even 20 hours a year (which is only 5 minutes a day for a 250-day year), that would be like a 1% increase in real GDP. Of course, that would be a one-time increase and an increase in growth only over the period in which it happens, but it’s nothing to sneeze at. But Gordon considers very few policy options. And there are many more he could have considered.
Now to his six “headwinds” against growth.
1. The “demographic dividend” is now “in reverse motion.” That is, the baby boomers are retiring. Thus hours per capita are falling and therefore, ceteris paribus, growth of output per capita will fall. That drops growth by 0.2 percentage points per year. I’ll grant him that one. Notice, though, that this is a level change stretched over time. 30 years from now, that change will be pretty much complete. Gordon admits as much.
2. Higher education. Because high tuitions are deterring people, especially poor people, from going to college, we will lose 0.4 percentage points in growth. Hmmm. Gordon obviously does not read co-blogger Bryan. (Bryan’s posts on this are too numerous to mention.) Gordon takes it as given that education is mainly about becoming more productive rather than mainly about signaling higher productivity. But, as I pointed out in my critique of a similar point by Tyler Cowen:
Cowen’s third factor in the disappearance of low-hanging fruit is the high percentage of people who attend college. I found this factor more persuasive. He points out that in 1900, only 6.4 percent of high-school-aged Americans graduated from high school. That number peaked in the late 1960s at 80 percent, he notes, and has fallen to about 74 percent more recently. Also, in 1900, only one quarter of one percent of Americans went to college, whereas 40 percent of people aged 18 to 24 are in college today. In other words, there is not much room for improvement in educational attainment and, as he notes, the marginal college student today “cannot write a clear sentence, perhaps cannot read well, and cannot perform all the functions of basic arithmetic.”
This suggests a huge piece of low-hanging fruit right in front of his nose: the number of people going to college. Cut that number dramatically and many of the “marginal students” would get jobs doing something productive — as plumbers, as electricians, or in any of a number of occupations that do not require a college degree. I say this not as a central planner who wishes to decree who shall attend college and who shall not, but as a defender of people’s right to use their income and wealth as they see fit rather than being forced to subsidize the education of others. Cut that subsidy to zero and cut taxes accordingly, and you would increase the after-tax income of many people, including the median family, and substantially reduce the number of marginal college students. If a marginal student still wants to go to college and he or his family or someone else he persuades wants to pay for it, then let him.
3. Rising inequality of income. Gordon notes that this doesn’t affect growth of per capita income but would reduce growth of median income. But he takes an era of an unusual increase in income inequality (1993 to 2008), finds that, for that era, the gap between the growth of real household income for the bottom 99 percent and the top 1 percent was 0.55 percentage points per year, and extrapolates that into the future. There’s not much basis for that.
4. The interaction between globalization and developments in information technology and communications (ICT). He writes, “Foreign inexpensive labor competes with American labor not just through outsourcing, but also through imports.” True. But that makes us better off, not worse off. When we can buy something cheaper, our real income is higher. Ricardo nailed this almost 2 centuries ago. It’s true that if the United States is a net exporter of something, then competition from abroad can hurt producers here more than it helps consumers here. But that’s not what he’s getting at. He’s getting at “factor price equalization.” The idea is that wages will equalize and, with the U.S. being one of the highest-wage countries, that means wages will fall. Of course, this is premised on the idea that all labor within a country and around the world is the same. This factor gives him a 0.2-percentage-point drop in growth.
5. Energy and the environment. Gordon buys into the idea that we need a stiff tax on carbon. If such a tax is not rebated, we lose 0.2 percentage points of growth annually. Simply solution: rebate it. Interestingly, though, he hints that the purpose of such a tax is mainly to make a statement, not to actually reduce carbon use: he points out that China and India together use twice as much carbon as we do and hints that their growth in carbon usage will be higher than ours.
Interestingly, he doesn’t point out that U.S. carbon dioxide emissions in the first quarter of 2012 were the lowest they’ve been in any January-March quarter since 1992. This is partly due to the slow recovery and a mild winter, but another important reason is the switch from coal to natural gas. Of course, Gordon would be right to point out that this switch can’t continue past the extreme case that we get rid of all coal. But it still could go far past where it’s gone.
6. The twin household and government deficits. We can reduce debt/GDP, he notes, with lower government spending and/or higher taxes. This gives him a 0.3-percentage-point reduction in annual growth. I can’t comment because he doesn’t give enough data to allow one to know how he reached this conclusion.
The good news is that even if Gordon is right on six “headwinds,” they’re all slow changes in levels. The long-run growth rate, looking out about 30 years beyond now, would be pretty much unaffected by any of the six factors.
In a later post, I’ll make some summary comments.