27 September 2012

Is US Economic Growth Over?


Here is how it starts:
Over that past month there has been much discussion of a new paper by Robert Gordon, a prominent economist at Northwestern University, which carried the provocative title: Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.” (See for instance, Annie Lowrey here, the Economist here and David Keohane here).

In what Tim Harford called “the summer’s most talked about working paper in economics,” Gordon argues that the economic growth of the past century may represent an aberration from the normal state of society, which experiences little economic growth. Look far enough back in time Gordon says and the world had minimal, if any economic growth, and looking ahead, we may be returning to that dismal state. Gordon explains that he is raising “the audacious idea that economic growth was a one-time-only event.”

Over the past month I have taken a close look at Gordon’s paper, the data he relies on and the papers that he cites. My conclusions are that Gordon’s analysis is deeply flawed and tells us essentially nothing about the potential for future economic growth. It does help to reveal a big gap in the discipline of economics, and that is the utter lack of an explicit theory of growth and the mechanisms by which it actually takes places. What Gordon has provided, in his own words, is a “a provocative fantasy” one that tells us much about the discipline of economics but little about the state of the world.
To read the rest head on over. Comments welcomed.

9 comments:

  1. If we could predict innovation, then life on Earth could potentially be a veritable paradise. Unfortunately, we lack the power to divine the future, and we lack the power to know what unified theory or process some individual or cooperative will realize. Evolution is governed by a chaotic order, and while not revolutionary, it can also not be accurately forecast.

    Perhaps Gordon will find comfort in the traditional wisdom which advises that patience is a virtue.

    People should reject dreams of instant gratification and persevere to improve the human condition... for everyone. We should recognize that resources are finitely accessible. We should recognize individual dignity and its potential.

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  2. Attributed to Niels Bohr:

    "Prediction is very difficult, especially about the future."

    Sounds like Dr. Gordon is struggling with the same issue as climate prognosticators: articulating a theory of something far more complicated than, say, Manhattan's utility infrastructure, and based on whatever observations can be made of said infrastructure from 30,000 feet, is worthy of cocktail chatter and nothing more.

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  3. I think your critique is overly "viscous" (a deliberate misspelling). I think your other post is using too vicious language on something we can't know.

    The numbers you quote for the English enconomy are very far from facts.

    From the same period of your graph the history books quote Shakespeare as a source, lol

    There are very few lessons to be learned from this "data".

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  4. Funny coincidence.

    Just three days ago, I linked to that very same graph (gdp per capita) from Visualizing Economics, when i was in an exchange with a libertarian extremist who was arguing about how progressive taxation and social safety net programs doom the US to an economic death spiral.

    That graph certainly dispels that myth.

    And Roger - do you really think that the arrogance with which you denounce the work of others is necessary and/or beneficial? Can't you just disagree with their analysis frankly and yet leave open the possibility that your perspective isn't the final word?

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  5. One way to help ensure that economic growth doesn't end might be to address how corporate compensation practices are rigged, and how ultimately they damage the viability of business models.

    http://www.nytimes.com/2012/09/23/business/ceos-and-the-pay-em-or-lose-em-myth-fair-game.html

    --snip--

    It is increasingly apparent that the pay awarded to chief executives is becoming profoundly detached from not just the pay of the average worker, but also from the companies they run.

    [...]

    A hard and honest focus on the company itself and the accomplishments of the executive in question by the board, rather than blithely looking externally to other organizations, will best serve the company’s and the shareholder’s interests.

    --snip--

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  6. In my oppinon the most important thing that the featured paper demonstrates about the academic discipline of ecconomics is that is doesn't have any dicipline.

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  7. I'd say that Gordon's paper is based on subjective correlations... and if that is enough to draw significant conclusions from, then it's sad to me. However, I don't think that this type of work is representative of economics in general. I think that most applied work is done carefully, really trying to identify causal effects.

    I also think that growth models looking at human capital accumulation, development & innovation are where we need to spend our time when considering growth potential.

    The financial crisis, which is really separate from the real economy in many ways today, is not where we should be gathering our measurements of the standards of living and their potential growth in the future.

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  8. Roger, most Keynesian work on economic growth us unhelpful/nonsense, because Keynesians look at aggregates without even attempting to examine the motivations of individuals and firms whose actions drive change.

    http://mises.org/daily/5595/The-Many-Collapses-of-Keynesianism

    I'd suggest you start looking at the so-called "Austrian" school of economics.

    http://austrianeconomics.wikia.com/wiki/Gross_domestic_product
    http://mises.org/journals/qjae/pdf/Q12_3.pdf
    http://www.med.govt.nz/about-us/publications/publications-by-topic/occasional-papers/2008/08-07-pdf/view

    Regards,

    Tom

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