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American Economic Review: Papers & Proceedings 2016, 106(5): 6871

http://dx.doi.org/10.1257/aer.p20161072

Winter Is Coming: Robert Gordon

and the Future of Economic Growth

By G C*

* Department of Economics, University of California, 1Shields Avenue, Davis, CA 95616 (e-mail: gclark@ucdavis.edu). I thank Nick Crafts, Alex Field, and Robert Gordonfor comments.

Go to http://dx.doi.org/10.1257/aer.p20161072 to visitthe article page for additional materials and author disclo-sure statement.

The Rise and Fall of American Growth is acomprehensive survey of the growth of livingstandards in the United States from 1870 to2014, and a projection of growth rates for futuredecades. The book is magisterial in the scope ofits account of the history of growth. But, most

notable is the claim that the period 18701970,when output per capita grew at more than 2 per-cent a year, represents a Golden Era that will notbe seen again in the foreseeable future. Instead,slower technological advancecombined withan aging population, an end to rising educationlevels, a growing government debt, and risinginequalitywill leave virtually no room forgrowth over the next 25 years in median dis-posable real income per person (Gordon 2016,p. 642).

I focus here on the prediction that the growthrate of total factor productivity (TFP)in futuredecades will be substantially slower than in18701970. Despite news headlines replete withtechnological breakthroughs, despite the diz-zying values attributed to tech IPOs, Gordon ispessimistic about future TFP growth. We mustanticipate modest gains, similar to those wit-nessed in the last ten years, where US economicefficiency grew by only 0.4 percent per year.

US output per person in 2004 was nearly 16times that of 1870. Income per person doubled

per generation. But at recent rates of efficiencygrowth it will take 130 years to double outputper person, more than four generations, evenabsent adverse shocks.

But can we predict that TFP growth in thelast ten years represents the future? Can anyone

predict technological advance? Gordon, how-ever, convinces us that there are crucial lim-itations on technological advance in the nearfuture, key technological bottlenecks, that willmake future gains in living standards throughtechnological advance harder to attain.

I. The Gordonian Gloom

The core of Gordons pessimism aboutfuture technological advance is that the mod-ern US economy is now heavily based aroundservices, accounting for 80 percent of output.Manufacturing, traditionally a sector with higherefficiency advance, has shrunk to 12 percent ofthe economy.1

Most of these service occupations, arguesGordon, have little prospect of being techno-logically transformed soon by InformationTechnology. To reinforce Gordons pessimism,consider the job distribution in the current USeconomy. A surprising share of modern jobsare the timeless ones of the pre-industrial eracooking, serving food, cleaning, gardening, sell-ing, monitoring, guarding, imprisoning, personalservice, guiding vehicles, carrying packages.Food production and serving, for example, nowemploys significantly more people (9.1 percent)than do production jobs (6.6 percent). One in

ten workers is employed in sales.2The informa-tion technology revolution to date has left thesejobs largely untransformed. Workers in thesetypes of jobs in Europe in 1300, if transplantedto modern America, would need little retraining.

Even outside services, we can find jobs withno gain in productivity since the IndustrialRevolution. Builders price books in eighteenthcentury London show the rate at which brick-layers laid bricks in house construction. In 1787

1US Bureau of Economic Analysis (2015).2US Bureau of Labor Statistics (2015).

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this was 75 bricks laid per hour.3For modernEngland the rates are lower, 225 years later, ataround 5070 per hour.4

William Baumol, in an earlier version of theGordon argument, proposed the cost diseaseof the personal services. There were certainactivities, such as the performing arts, whereproductivity advance was impossible. Baumollater extended this to a whole range of personalserviceseducation, health, law.5

We might argue that a common feature ofservices is human labor and human interaction,and these are activities inherently difficult tomechanize. But services are no different in thisrespect to much of manufacturing and agricul-ture, where technological advance involved

mechanizing human labor. The human actionof spinning involved manipulating textile fiberswith the fingers to form thread. The core of theIndustrial Revolution in England (17701870)was mechanizing that action. That allowed out-put per worker hour in spinning to rise 300 foldin the course of 100 years, dramatically reduc-ing the cost of cloth. In farming, key earlieractivities were reaping and threshing grains byhand. Both of these activities were successfullymechanized in the nineteenth century. Why hasfood preparation resisted mechanization in away very unlike food production? Can we beconfident that these other tasks will not be soonmechanized?

II. More Pessimistic than Gordon

I think we should be even more pessimistic onTFP advance in these areas than Gordon on twogrounds. First, in recent years areas of rapid TFPgrowth have been those with high levels of R&Dexpenditures relative to value added.6Most of

R&D activity is still concentrated in manufac-turing, a declining sector of the economy. In

3Builders Price-Book (1787).4This rate is implied by the fact that, at piece work, lay-

ing 1,000 bricks costs 350500 while, at piece work, thecost of a bricklayer and assistant is about 24 per hour.

5Baumol and Bowen (1966); Baumol, Blackman, andWolff (1985).

6Griliches (1994, p. 5, table 1) shows for the United

States that there is a close relationship in 1958 to 1989between R&D expenditures per dollar of sales and TFPgrowth rates across manufacturing industries.

most of the economyservices and construc-tionthere is very little R&D activity.7

But even in the areas of the economy whereR&D is concentrated we can expect more mod-est gains in TFP. Information and electronicsmanufacture and software absorbs nearly half ofall corporate R&D expenditures, medical sub-stances and devices 20 percent, and transpor-tation equipment 15 percent. Thus, more than80 percent of all corporate R&D falls in threeareas of the economy that produce together lessthan 5 percent of value added. There are reasonsto believe the national TFP gains from this con-centrated R&D investment will be modest in thecoming decades.

First, while the gains in TFP in the informa-

tion technology producing sector have been amainstay in technological progress in the UnitedStates since the 1970s, there are signs that thecontribution of this sector are declining.

One important fact about the IT industry isthat its size, measured as a share of value added,is declining. Efficiency growth rates in the econ-omy as a whole can be decomposed into the con-tribution of each sector through the formula

(1) gAt=bjtgAj,

where bjtis the value added in sectorjin periodt, and gAjis the efficiency growth rate within sec-tor j. Computer and electronic products consti-tuted 2.28 percent of value added in 1997, butonly 1.54 percent by 2014.8 The quantities ofcomputer hardware have not risen as rapidly asprices declined.

In terms of equation (1), this implies that ifinformation technology devices were to signifi-cantly spur aggregate TFP advance back toward

the 1.2 percent average rate reported by Gordonfor 18902004 (Gordon 2016, figure 17-2), thenthe TFP growth rate within the sector wouldhave to be even higher than the 10 percent peryear reported for the glory years of 19802000.10 percent TFP growth within this sector wouldonly contribute 0.15 percent toward national

7Thus, in 2000, 82 percent of corporate R&D expendi-tures were in manufacturing. There were about three quar-ters of the economy, including utilities, construction, and

most of services where there was essentially no corporateR&D (National Science Board 2015, Appendix table 4-22).

8US Bureau of Economic Analysis (2015).

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TFP growth rates, too little to change muchdeclining TFP growth rates.

But there are distinct signals that the stagger-ing TFP growth rates of the 19452005 era forComputer and Electronic Products will not besustained in the future. The rapid decline of thereal price of various components of computerhardware has slowed significantly in the last tenyears.9

Another area of substantial R&D investmentis in health care products. Health care overallhas now become the largest single sector of theUS economy, generating nearly 18 percent ofGDP. So, in terms of the logic of equation (1),it is ever more important in determining overallrates of technological advance.

But, health care faces unique challenges ingenerating more output per unit of input. Since84 percent of the population survives to age 65,gains in life-years per person must primarilycome for those above age 65. However, peopleare likely genetically programmed to die, so thatadding life-years is becoming ever more difficultas the population ages. One measure of the out-put of the health sector is years lived per person.Over the past 150 years, as Gordon documents,the US health care system has increased thisfrom 3540 years to near 80 years. But if welook decade by decade at the increase in spend-ing on health care in the United States and thegains in life-years per person, we see that theimplied cost of additional life-years per personhave increased dramatically since the 1950s,being now in 20002010 $100,000 per life-yearper person. There is every prospect that thisincremental cost will rise.

The third area of significant R&D expenditureis transport equipment. However, much of theexpenditure on vehicles is to mitigate pollution,

and to make energy usage more efficient. Theseresearch expenditures are unlikely to be associ-ated with substantial gains in the measured out-put of the transportation or energy sectors.

The second reason for pessimism is that theprospect of machine replacements any timesoon for the many service workers that nowdominate the economy are surprisingly poor,as reflected in the low levels of investment in

9This is true, for example, of both the real price of CPUper unit and of the real price of dynamic random accessmemory (DRAM)(Muehlhauser and Rieber 2014).

such technologies. As Gordon points out, a taskas simple and unskilled to humans such as sort-ing laundry is immensely difficult currently formachines.

There have been, for example, attempts for atleast 50 years to develop mechanical bricklay-ers. Bricks are of standard size, and are laid invery regular formation. This task would seem anideal candidate for automation. But the produc-tion version of the current mechanical bricklayer(SAM) has to work in tandem with a humanbricklayer, doing just the more routine elementsof the task. It can work as fast as four humanbricklayers, but since its cost is $0.5 million,since it needs a machine tender, and since it canonly operate on straight stretches of wall, it is

estimated to be only economical in large scaleconstruction projects.10Mechanization in manyservice areasfood preparation and servingfor example, will be a similarly painfully slowprocess.

One area of significant recent investment inservices, for example, has been automated vehi-cles. Driving vehicles is an important activity inthe service sector, employing nearly 7 percent ofcurrent US workers. Since the driver of a vehiclehas only to choose speed and direction the taskshould be relatively easy to automate. However,as Gordon points out, Google, a pioneer in thisarea, does not expect to have a model for saleuntil four to five years from now. And the tech-nology Google relies upon is where the vehiclehas on board a map of the road terrain it operateswithin, accurate to within inches. It also dependson the vehicle knowing exactly where it is onthat map at all times. So, inclement weather,such as snow or heavy rain, may well makeoperation impossible. Less ambitious self-drivetechnologies, which serve just to take over from

a driver in a regular vehicle, have less demand-ing technical and environmental requirements.But as Gordon argues, even if successful, suchself-driving technologies offer little economicadvantage. Already it is possible to do manyother activities while guiding vehicles, so howbig can the gain be from automation of this task?

Thus it seems reasonable to expect in theimmediate future a world of only the mostmodest efficiency advances. The Golden Era ofgrowth has indeed passed.

10Quirke (2015).

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REFERENCES

Baumol, William J., Sue Anne Batey Blackman,

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Builders Price-Book. 1787. The builders price-book containing a correct list of the pricesallowed by the most eminent surveyors in Lon-don, to the several artificers concerned in

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Muehlhauser, Luke, and Lila Rieber. 2014.Exponential and non-exponential trendsin information technology. Machine Intel-ligence Research Institute, May 12. https://intelligence.org/2014/05/12/exponential-and-non-exponential/.

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