Choosing Growth

Recently, EPA Administrator Scott Pruitt defended the withdrawal of the United States from the 2015 Paris Climate Accord by alleging that the agreement had placed “constraints on the economy.” Rather ...

Recently, EPA Administrator Scott Pruitt defended the withdrawal of the United States from the 2015 Paris Climate Accord by alleging that the agreement had placed “constraints on the economy.” Rather than regulations, Pruitt promised, it was “technology and innovation” breakthroughs in the private sector that would curb carbon emissions, create new jobs, and spur economic growth. (Pruitt stopped short of conceding manmade climate change, however.)

Everywhere we look—from environmental policy to healthcare to education—the Trump Administration seems hell-bent to throw us at the tender mercies of the market. Can unfettered capitalism address our most pressing problems? Certainly not, readers of The Rise and Fall of American Growth: The US Standard of Living Since the Civil War by economist Robert Gordon will conclude. Only the foolhardy would look to private-sector innovation to save our economy from stagnation, our planet from climate disaster, or our democracy from social conflict rooted in inequality.

In The Rise and Fall of American Growth, Gordon raises doubts that Americans will ever again enjoy the same magnitude of improvement in the conditions of daily life that they experienced in the period from 1870 to 1970 (especially 1870–1940). Gordon contends that the prospects for broad-based economic growth have diminished considerably since about 1970—probably permanently—and rather independently of voters’ political preferences, beliefs, or choices. According to Gordon, this is because technology—not policy—determines what nations can do to foster economic growth. And the pace of technological innovation has slowed, Gordon believes, probably irreversibly. Accordingly, his book pays little attention to the history of politics and policy. This approach renders moot questions about how to distribute the benefits of growth equitably, or how to contain the detrimental “externalities” of capitalism.

The Rise and Fall of American Growth offers a sobering wake-up call. Even so, Gordon misses important opportunities to use economic history to orient readers towards political action, which could galvanize the kind of policy changes that might improve social, economic, and environmental conditions in the 21st century.

Without actually intending to do so, the book demonstrates the singular role of the state in fostering innovation and growth.

Life got easier, healthier, and longer for everyone in the United States after 1870. An unparalleled surge in living standards took place between 1870 and 1940, particularly for households outside of the rural South, while the economy grew fastest between 1920 and 1970 (the period of highly progressive taxation identified in Scheve’s and Stasavage’s recent Taxing the Rich). Gordon credits these transformations to five great technological innovations: electricity, sanitation, chemicals and pharmaceuticals, the internal combustion engine, and modern communications systems.

After 1970, economic growth and technological innovation sputtered. Neither seems poised to resume a trajectory that could match that of the 20th century, a “revolution” Gordon deems “unique” and “unrepeatable.”

So don’t look to technology to save us, Gordon warns. He never believed the hype about the Internet Revolution and he won’t be placing any wagers on 3D printers or self-driving cars, either. That’s because recent advances in computer and digital technology impact only “a narrow sphere of human activity having to do with entertainment, communications, and the collection and processing of information.” Today, in the “great majority of economic activity,” Gordon argues, “the pace of innovation is not accelerating, and indeed in many aspects is slowing down.”

Historians and history buffs alike will appreciate the abundance of quantitative and qualitative evidence Gordon brings to bear to illustrate dramatic changes in daily life in the century after 1870. By focusing on household consumption, rather than production and output, Gordon delivers an engaging account of modern American economic history. Certainly a time traveler from 2017 would miss her iPhone in 1870. (Note to Gordon: some of us would miss tampons, birth control, epidurals, electric breast-pumps and BFA-free plastic baby bottles even more.) But, as our author shows, the lack of flushing toilets, electricity, heat, and running water would cause far more discomfort and disease, and likely an earlier death.

This focus on “small details of everyday life and work, both inside and outside the home” also works as a vehicle for presenting a critique of the concept of GDP. Although we take it for granted that GDP growth measures the economic progress of a nation, this indicator, Gordon explains, fails to capture improvements in the quality of the goods and services that the economy produces, or reductions in the hours or strenuousness of labor. In fact, if prices remain steady or even fall while quality improves, that component of GDP might decrease, even if consumers have more and better product and services at their disposal. (For more on the history and limits of GDP, readers should consult books by Eli Cook, Diane Coyle, Joseph Stiglitz, Amartya Sen, Jean-Paul Pitoussi, Jacob Assa, or the website Beyond GDP).


Tax the Rich?

By Julia Ott

A pattern emerges in Gordon’s book: technological breakthroughs occur, profit-minded entrepreneurs devise applications, markets distribute them as supply increases to meet demand, quality improves, prices fall, life improves—albeit at rates that vary. Gordon’s whiggishness ignores the ways in which human actors quite purposefully adopt and adapt technology to specific social and political contexts (for just one example, see Rob MacDougall’s The People’s Network on the varied patterns of telephone adoption in the United States versus Canada). It also obscures variations in the experiences of different populations. While Gordon identifies gaps between urban and rural populations’ acquisition of modern conveniences, readers learn little about long-standing and persistent disparities—between blacks and whites, or between different occupations—in measures of health and well-being.

Gordon’s narrative of successive improvements also sidelines the supply chains that delivered more, cheaper, better, and more varied products to American consumers after the Civil War. Historical fact should temper nostalgia: growth and comfort for some meant exploitation and environmental degradation for others.

From automobiles and pharmaceuticals to mass-market processed foods and ready-made clothing, 20th-century consumer culture depended upon more than Gordon’s Five Great Innovations. A continual flood of raw materials—rubber, lumber, wheat, meat, oil, coffee, tea, cotton, and sugar—could only be secured through violent and exploitative undertakings in the Great Plains, California, Cuba, the Philippines, Latin America, and the Middle East. These exploitations required not only new forms of technology, but also modern corporate forms of economic organization and the exercise of state power.

At the time, Americans interpreted this entanglement of the modern corporation and the modern state as a dire threat to democracy, even if it made life more comfortable. Concern over the demise of independent proprietorship and fear about the consolidation of corporate and elite power sparked the reform movements of the late 19th and early 20th centuries. These movements fought for policies that distributed quality of life improvements broadly. Running water, electricity, flushing toilets, and central heating did raise living standards in urban areas after 1870, but thanks to progressive and socialist politics. The conveniences and pleasures of mass production would never have reached the masses if Grangers and Populists had not successfully demanded rural free delivery from the federal government. For decades, the labor movement battled to reduce the length of the work-day and to improve working conditions. And it’s hard to imagine that any of these quality of life advancements would have crossed the Mason-Dixon line—or the color line—without New Deal infrastructure projects and the civil rights movement.

Without actually intending to do so, The Rise and Fall of American Growth demonstrates the singular role of the state in fostering innovation and growth over the long-run. For example, Gordon alludes to the Defense Plant Corporation, a World War II federal agency that purchased the most up-to-date plant and equipment needed to supply the war effort. DPC holdings ultimately totaled “roughly 50% of the stock of privately owned equipment that existed before the war.” After fierce political battles, private industry was allowed to acquire this state-of-the-art plant and equipment on the cheap after the war ended. That leap in total factor productivity that Gordon discovers in the 1950s? He should credit the Defense Plant Corporation, along with the federal government’s sustained investments in basic research and technology at midcentury, and US corporations’ patient commitment to in-house R&D in the same period.

It’s important to draw out these key moments and to re-frame them, because Gordon’s book misses its chance to draw upon history to emphasize the need for citizens to engage politically with questions about how new technologies spread and whom they benefit. The Rise and Fall of American Growth recounts a past that offers little guidance for the future.

Running water, electricity, flushing toilets, and central heating raised living standards in urban areas after 1870—but thanks to progressive and socialist politics.

Except perhaps to a hedge fund manager, who would likely decide to sell short. The book’s forecast calls for stagnation in living standards and indefinite suspension of economic growth. Gordon observes strong “headwinds” pushing against the economy: intensifying inequality, a weak education system, an aging population, rising levels of national debt, and “social dysfunction” at the bottom of the income distribution.

Unfortunately, Gordon barely theorizes and never measures whether lower inequality, better public education, a younger population, fiscal conservatism, or higher rates of marriage in fact cause broad-based economic growth. Certainly it seems plausible that diminishing real wages would compromise the ability of the 99 percent to enjoy the fruits of new technologies. And it seems likely that poor levels of educational attainment would compromise the productivity of workers. But how the government spends tax dollars—and how it distributes the tax burden—determines whether federal debt spurs or retards growth. And the “social dysfunction” hypothesis (drawn from the work of Charles Murray) seems spurious at best.

Although the historical evidence he presents points to the contrary, Gordon concludes that “the fostering of innovation is not a promising avenue for government policy intervention.” In postscript, he offers familiar leftish-libertarian policy recommendations: increase tax progressivity, raise the minimum wage, legalize drugs to reduce incarceration, improve early childhood education, reform copyright and patent law. But instead, a reader could just as easily conclude that bold federal policies to incite innovation offer our best and only hope.

So what can—or should—be done?

Voters today favor infrastructure spending by the government. Progressive economist Robert Pollin proposes a program of “green growth.” Taken together, massive, sustainable public investments to reduce emissions, develop renewable energy, and improve energy efficiency would prod economic growth and, more importantly, enhance social well-being broadly.

And we must tame the financial system, the strongest “headwind” of all. Despite the financial crisis, the financial sector remains bigger, more profitable, and less efficient today than during those decades before 1970 that witnessed strong economic growth and rising standard of living. Yet small business loans and net private investment have fallen off in recent years. The stock and bond markets fail to deliver investors’ funds to promising new enterprises and innovative ideas. Instead, they provide vehicles for corporations to buy back their shares, a practice restricted by SEC rules until 1982. After World War II until roughly 1980, J. W. Mason finds, each additional dollar of corporate cash flow or borrowing brought about 40 cents in corporate investment. Since the mid-1980s, that same dollar yields only about 10 cents of additional investment. Much of the rest—95 percent of profits in 2014!—is paid out by S&P500 corporations to shareholders in the form of buybacks and dividends. In other words, the stock market delivers money from corporations to investors, not the other way around. Is it any wonder, then, that innovation languishes and growth sputters while the 1 percent fattens and the planet warms?

Green growth, browned-out malaise, or scorching crisis? No one knows for sure what the future holds. The Rise and Fall of American Growth gives us no reason to doubt that political action and state policy will continue to determine economic, distributional, technological, and environmental outcomes in the future. Just as they always have in the past. icon

Featured image: Solar project at Fort Hunter Liggett, 2013. Photograph by US Army Corp of Engineers / Flickr