Friday, January 29, 2016

Gordon on growth 2

PBS covers Bob Gordon's The Rise and Fall of American Growth.

[Embedded video. These aren't picked up when other sources pick up the blog, so come back to the original if you don't see the video.]

PBS and Paul Solman did a great job, especially relative to the usual standards of economics coverage in the media.  OK, not perfect -- they livened it up by tying it to partisan politics a bit more than they should have, though far less than usual.

I don't (yet, maybe) agree with Bob. I still hope that the mastery of information and biology can produce results like the mastery of electromagnetism and fossil fuels did earlier. I still suspect that slow growth is resulting from government-induced sclerosis rather than an absence of good ideas in a smoothly functioning economy.  But Bob has us talking about The Crucial Issue: long term growth, and its source in productivity. The 1870-1970 miracle was not about whether the federal funds rate was 0.25% higher or lower. And the issue is not about opinions, like the ones I just offered, but facts and research, which Bob offers.

The issue of future long-term growth is tied with the issue of measurement, something else that Bob has championed over the years. GDP is well designed to measure steel per worker. Information, health and lifespan increases are much more poorly measured. This is already a problem in long-term comparisons. In the video, Bob points to light as the greatest invention. The price of light has fallen by a factor of thousands since the age of candles, to the point where light consumption is a trivial part of GDP. It's a worse problem as all the great stuff becomes free. I suspect that we'll have to try to measure consumer surplus not just the market value of goods and services.

And congratulations to Bob. The economics profession tends to focus on the young rising stars, but he offers inspiration that economists can produce magnum opuses of deep impact at any point in a career.

Disclosure: I haven't read the book yet, but it is on top of the pile. More when I finish. Ed Glaeser has an excellent review.

Update: Tyler Cowen's review, in Foreign Affairs


  1. So the 'price of light' has fallen by a factor of thousands ??

    In this area there is a big yellow ball in the sky that gives free light for many hours every day.

    If he means artificial light I don't think that is very convincing either. Artificial visible light is one component of energy output. Not sure the cost of energy production has declined so dramatically over the decades.

    1. But it's not just energy production but lighting efficiency. LEDs are more efficient than bulbs.

    2. Lumens per dollar are cheaper by a factor of thousands with incandescent lights vs. candles.

    3. John,

      Being super nerd here but:

      "The lumen is the SI derived unit of luminous flux, a measure of the total quantity of visible light emitted by a source. Luminous flux differs from power (radiant flux) in that radiant flux includes all electromagnetic waves emitted, while luminous flux is weighted according to a model of the human eye's sensitivity to various wavelengths."

      A light bulb can have the same radiant flux as a candle but have a higher luminous flux. The difference is in the amount of infrared radiation (heat) given off by the two light sources.

      Lumens per dollar is a bad measure of productivity increase with regards to lighting. Try luminous flux / total radiant flux in units of Lumens / Watt to gauge the efficiency of a lighting source.

    4. More nerdishness:

      Luminous efficacy of a light source may be defined in two ways. The radiant luminous efficacy (LER) is the ratio of the visible light flux emitted (the luminous flux) to the total power radiated over all wavelengths. The source luminous efficacy (LES) is the ratio of the visible light flux emitted (the luminous flux) to the total power input to the source, such as a lamp. Visible light is measured in lumens, a unit which is defined in part by the differing sensitivity of the human eye to different wavelengths of light. Not all wavelengths of visible electromagnetic energy are equally effective at stimulating the human eye; the luminous efficacy of radiant energy (LER) is a measure of how well the distribution of energy matches the perception of the eye. The units of luminous efficacy are "lumens per watt" (lpw). The maximum LER possible is 683 lm/W for monochromatic green light at 555 nanometers wavelength, the peak sensitivity of the human eye.

      The luminous efficiency is defined as the ratio of the luminous efficacy to the theoretical maximum luminous efficacy of 683 lpw, and, as for luminous efficacy, is of two types, radiant luminous efficiency (LFR) and source luminous efficacy (LFS).

      The luminous efficiency for LED(Nanoleaf NL02-1200)60W replacement bulbs maxes out at about 120 / 683 = 17.5%. That is quite a ways from 100% efficiency.

  2. "I still suspect that slow growth is resulting from government-induced sclerosis rather than an absence of good ideas in a smoothly functioning economy."

    How can we be sure those are the only two plausible explanations?

    1. True. "Lack of demand,'' need for fiscal and monetary stimulus is the leading point of discussion. Gordon's book makes clear how completely irrelevant such things are to long term growth.

    2. So you're saying there's a 3rd possibility (lack of demand/stimulus), but Gordon effectively eliminates that in his book? I'd think there'd be several other plausible explanations to consider beyond that. E.g. how about slow growth of the civilian labor force?

    3. "Lack of demand completely irrelevant ....". Not so sure. To use an extreme example to make the point, if everyone saved all of their income, "demand"(GDP) (and, paradoxically, savings) would drop to zero - companies could not invest - a "permanent" reduction in the ultimate capital stock - even after it recovers. Haven't read his book yet so I will look to his reasoning. Thanks. Interesting.

    4. If the problem was "government-induced sclerosis" then I suggest that two things would be visible in the world: (1) the technological frontier would be out well ahead, and getting further ahead, of what had been brought into use; and (2) some better run country somewhere would have jumped ahead of the United States. We see neither. All over the world everyone is playing catch up to the United States.

      Now I agree that fiscal stimulus and tinkering with interest rates is not the solution. The problem seems to be that globally we have fallen into a savings trap that is resulting in a savings glut. It is not that government needs to spend more, it is that certain groups need to save less. A full on global attack on tax havens and capital flight from China, Russia and the rest of the third world may be what is necessary to address the savings "glut".

    5. What if we had a pro-immigration open borders policy? How do you think that would compare to eliminating much of the "government-induced sclerosis?"

  3. "And the issue is not about opinions, like the ones I just offered..."

    Nice touch.

  4. I agree that there is a problem of how we measure economic output and that we need to consider consumer surplus.

    This seems to be a longer version of a paper that Gordon was peddling a few years ago. Gordon makes the mistake of thinking that technology and growth marched in lockstep when in fact there was a huge lag between technology and the economy.

    We had a huge, one time, leap in understanding basic chemistry and physics in the mid 19th century. That leap gave us, among other things, cheap mass produced steel which was an enabling technology for most of what followed. We then had a century long period of rapid growth from 1870 to 1970 as we worked out the opportunities and consequences of those one time discoveries (e.g. cheap steel made possible internal combustion which made the airplane possible). There was technical progress from 1870 to 1970 but it was all secondary to what came in the mid 19th century. By 1970 (the year of the Boeing 747 and the microprocessor) we had substantially closed the gap between what was possible and what was in use.

    The lesson of Gordon, if there is one, is that if we want progress then we should be putting more money into scientific research.

  5. It isn't clear to me why "It's a worse problem as all the great stuff becomes free." Sure t's a problem for meaningfully measuring real GDP or inflation, but not for nominal GDP.

    People will simply spend their money elsewhere, just as they've done with their savings from ever-cheaper light.

    1. "it's a problem for meaningfully measuring real GDP or inflation, but not for nominal GDP."

      The problem is that we could have a situation where nominal gdp is completely stagnant while the real gdp (as experienced by the public) is racing on ahead.

      If, for example, cancer treatment became twice as effective at half the cost we would record that as a decline in GDP - which is wrong. What if we could cure cancer or any infectious disease with a pill that cost $10.00 - that would be a drop in "GDP".

    2. I disagree with the partial equilibrium premise that folks will simply withhold incremental savings. Rather, folks will reallocate their spending power to other goods and services, which will sustain GDP.

  6. What if the $100 billion a year defense R&D budget was instead funneled to civilian agencies for R&D? An increase or decrease in real GDP going forward?

    Or better yet $100 billion a year in X prizes to all comers.

  7. I’ve only read the first couple of chapters (the free sample from Amazon), and I doubt I’ll read the rest because I’m not convinced that overall GDP growth matters much anymore. Happiness is more important than wealth in the narrow sense. For most of human history, and for much of the globe even today, wealth is a good proxy for happiness, but as I understand the current evidence, the correlation is starting to break down for developed countries. Once basic physiological needs are met, happiness turns on things like supportive relationships. So how big an innovation is Facebook compared to the refrigerator? For me personally, it’s valuable in helping to keep in contact with close friends and family who have moved away, and enlarging and deepening my circle of friends and acquaintances. I’m sure that has some impact on my happiness, perhaps even a large impact, but I don’t know how that could be quantified and compared with the happiness I would get from buying say, a better set of audio headphones. It seems to me that there are still many areas of economics which are quite strongly correlated with happiness, even in developed economies, such as unemployment, inflation, education, social mobility, health and so on. But overall GDP growth just doesn’t seem so important. The preoccupation with overall growth may even be counter-productive, if it means that the “economics of relationships” will be left to sociologists.

  8. John, you consistently refer to government induced sclerosis as the explanation and often say what else can it be. Measured technological progress is a residual and residuals are garbage cans.

    Maybe the epa and osha really knocked down growth by 1% per year. But do you reliable evidence that their impact is of this order?

  9. Hey John would love to get your view on this proposal of mine(sorry it is slight of topic)...I think I might have discovered a way to prevent regulatory capture of a regulator.The idea is simple. Start with the assumption that regulatory capture will happen and nothing you do will prevent it from happening.Then you divide the regulator into three independent wings, like the Legislative, Executive and Judiciary. Have three wings which can act as check and balances to each other. The Holy Trinity. Example in Auto Industry there are three chief regulatory captures.Industry,Workers and Consumers.Let the wings have representatives from each sector. Then we let the Coase theorem come into play, i.e. let the parties bargain with each other and you will get a more efficient result.At the end of the day, the issue is of bargaining,and you cannot capture that that information in a model,because it is in a constant state of flux.Example: when the oil prices were 120$ the bargaining would be very different when the price of oil is 30$.The consumer would be willing to pay higher taxes if the price of oil is going to go down,ask for better,safer cars at cheaper prices etc. The worker will be asking for higher wages as the cost of owning and making a vehicle around the currant market price is lower, hence greater profits,have better bargaining on their protections etc. The Industry would like to maximize the profits of shareholders, want better labor mobility, hire and fire laws,competition, trade, protectionism etc.The Government should not exist in the three mechanisms, not because of any libertarian reasons, but because even if a single team gets it, bargaining becomes asymmetric and the "game" is over.Imagine it as a game with three teams. The Government will at most have the power of a referee in a soccer match or an umpire in a cricket match.

  10. I strongly disagree with professor Gordon's main ideas. First, he gives too much credit to an specific invention and the time when things were invented but he does not give any credit at all to what mankind has done, neither how we have transform those inventions, over the years.

    To make an example, think about the telephone, invented in 1876 by Graham Bell. According to Gordon, all the credit or the benefits that people receive from the telephones are attributed to the 1870s - 1970s period. However, today's telephones, which probably are nothing like Graham Bell imagined, and had been transform after the 1990s (cellphones) receive no credit at all as a humankind invention.

    Finally, if someone develop a cure for all diseases, this cure might means nothing for humanity if it is so expensive that even the richest person in the world can afford it. But making that cure accessible to all people, which might occur over decades, has no value from Dr. Gordon's point of view.

    1. The difference between a telephone in 1900 and a telephone in 1950 is lot less than the difference between having a telephone and not having a telephone. The difference between 1950 and 2000 is a lot less than the difference between 1900 and 1950.

      Yes, we have continued to improve existing technologies but the big gains are from the early use. The importance of an invention may be logarithmic in time - it keeps going up but at an ever slower rate.

      The power of computers measured in operations per second per dollar is going up exponentially in time but their usefulness is only going up logarithmicly in time.

    2. Today, we don't even know if what we call "telephone" (or cellphone) is really a "telephone" because it is used in so many ways that their inventors even image. The last use that someone do with a telephone today is to make a call. Perhaps, we are attributing to Graham Bell something that he didn't create

  11. headwinds facing growth .... "and most of all growing inequality" .... made me want to vomit but otherwise, nice piece. I missed that proven research that inequality is a headwind on LONG TERM GROWTH. Happy to talk poverty and immobility, but this inequality --> growth stuff still seems like garbage to me.

    I find this whole debate tiring. Let's say secular stagnation is here, then we should be freaked out and "weed the garden", invest in infrastructure, and do everything else we can to increase growth and reduce long term spending commitments. If it's not true and the information age spikes growth, we should still weed the garden. Let's focus on microeconomic policy with positive partial effects on growth (especially at the bottom two quintiles of the wealth distribution) and not worry about predicting the exact size of the benefits (see 4% debate).

    Rant over ... time to breathe ... and by breathe I mean try to write a dissertation

  12. Phantom GDP – sorry I do not buy the argument.
    The efficiencies derived from electricity and the internal combustion engine are all priced into GDP measures. They did not disappear anywhere. The savings from these efficiencies were reinvested into other productive resources and get depicted in a continuous stream of productivity increases and measured in GDP statistics. If you do not see the same thing going on today, especially with the impact of information technology, it is because it is not there; or, let’s say that the impact and improvement in productivity is not as great, small by comparison.

    If there are efficiencies something must be done with the savings. The only way the savings would not show up in GDP is if you buried it out in your backyard or stuffed it under your mattress. I suspect we have paltry GDP numbers today (and for the past 15 years) is because the “savings” is going mainly into consumptive activities more so than productive activities that have a broad base of support in an $18 trillion economy.
    The sectors that make up our economy are disjointed today in comparison to the 1960s. You only have to look at the California economy during 2010 after the Financial Crisis of 2008 and compare it to Texas. The Texas economy was humming because the Energy Sector was driving all the other sectors in the Texas economy. In California the only geographic area that was doing well in 2010 was the Silicon Valley – the rest of the state was still feeling the effects of the recession. If you want good economic growth in an $18 trillion economy you need all sectors working together and a broad-based sharing of the productivity gains by all who work, not the 1% (or the 10%) stiffening off the gains.

    It has nothing to do with how you measure GDP -- productivity is either there or it isn't. We are more of a service sector economy than a manufacturing/commercial sector economy than the 1960s and that has some effect on the GDP numbers. But that is because we have created an economy where we have a lot of low-wage, low-skill service jobs. The economy we have didn't fall from the heavens. We created it. We can change it. There is much opportunity to do better if we want to take up the challenge.

  13. There are 23 decades in U.S. history. Here is the record.
    Per capita Real GDP – 2009 $s; per capita Real GDP factors out inflation and population growth
    1. 1940s 40%
    2. 1960s 35%
    3. 1790s 33%
    4. 1870s 28%
    5. 1980s 25%
    6. 1970s 25%
    7. 1920s 24%
    8. 1850s 24%
    9. 1880s 23%
    10. 1990s 21%
    11. 1950s 19%
    12. 1840s 15%
    13. 1910s 14%
    14. 1930s 13%
    15. 1830s 10%
    16. 2010s 5% for 5 years
    17. 1890s 9.0%
    18. 1820s 8.0%
    19. 1860s 7.6%
    20. 2000s 5.5%
    21. 1900s 5.0%
    22. 1800s 3.0%
    23. 1810s 1.0%
    The 1960s are about 40% more productive than the 1980s and about 70% more productive than the 1990s. I might add that the 1960s were characterized by one federal deficit after another and yet because of the productivity of the overall U.S. economy the National Debt-to-GDP went from 70% in 1960 to 40% by the end of the decade. Also, as we went through the 1960s our competitiveness went into decline and our productivity went into decline -- labor productivity went into a 15 year decline from the mid/late-1960s to the early-1980s.

    Productivity is made up of labor, capital investment, land, and technological innovation. Labor, capital investment, and land are subject to diminishing marginal utility; technological innovation is not.
    REAL GDP – Chained 2009 Dollars *
    (Average Annual growth rates during the decade)
    1. 1940s – 5.87%
    2. 1960s – 5.16%
    3. 1950s – 3.88%
    4. 1970s – 3.69%
    5. 1980s – 3.62%
    6. 1990s – 3.47%
    7. 1930s – 2.04%
    8. 2010s – 1.99% (through 2013)
    9. 2000s – 1.48%
    * Chained dollars are used to factor out inflationary growth and to account for productivity improvements than can account for substituting newer and better products over older products.

    The rates of growth in GDP contributed by Technological Innovation alone (with inflation factored out, and the contributions of labor and capital factored out):
    1950s – 1.03%
    1960s – 1.17%
    1970s – 0.38%
    1980s – 1.03%
    1990s – 1.31%
    2000s – 0.29%
    2010s (through 2011) – 1.08%
    So even when you factor in the impact of desk-top computers, the internet and the web, and the whole information technology boom period of the mid-1980s through to the present – you still do not reach the productivity of the 1960s in comparison to the best years of the 1990s from the charts above showing productivity growth of 35% for the 1960s and 25% for the 1980s and a little over 20% for the 1990s. In other words, the 1960s are 40% more productive than the 1980s and 70% more productive than the 1990s even though the 1990s had greater technology input.

  14. We study history, as one branch of knowledge, to understand our place in the universe. The human animal is the one animal that has a cultural evolution as well as a biological evolution. We can shape and change that cultural evolution. We are the one animal that can change its environment and move about anywhere on Earth and beyond. The study of history is the link between the Past, the Present, and the Future – the link between knowledge and progress. Our progress as a species is linked to our quest for knowledge; and, technological advance and an understanding of our past is the key to the pace of that quest.
    Technological progress does not slow down. It speeds up as you go through the ages. Listen to President Kennedy on why we are going to the Moon and he gives an example of technological progress boiled down to 50 years, and the rate of development is ever faster.

    Why does the 1960s compare so favorably to the last twenty-five years? Well look at the factors that really drive an economy and are the major determinants for economic growth: (1) an economy make-up where the different sectors of the economy feed off of each other, as they did in the 1960s, rather than perform independently of each other, like they do today; (2) where the productive resources are home-based, like the 1960s, rather than off-shored, like today, so that fiscal, monetary, and tax policies can work together for a better society – there is little fiscal stimulus to our productive resources today, most federal spending goes to ‘consumptive needs’ rather than to ‘productive resources’; and, (3) leadership in government and the private sector among business leaders and working people along with civic engagement in our participatory democratic society that places a greater value on the well-being of the broader society than personal gain; and if that sounds too altruistic for the1960s, it simply means that all who worked shared in the productivity gains of the enterprise rather than the situation you have had the past several decades were the few at the top take a greater share than the many below.

    If you go through the 20th Century you see that people are becoming more educated; going from less than high school, to high school, to college and two-year technical degrees, and now to post-graduate studies. I do not know what the future holds, but I do not think the machines will take over. I believe people will have to devote a greater amount of their life to education for multi-disciplinary studies with a good technical background. Look around in the world, especially at all the under-privileged – there is plenty of potential to share our way of life with and improve the human condition. Economics is the study of allocating scarce resources. We have a way of life that is resource intense; so, there is plenty of potential for improvement, especially if we want to share our experience and values with others.

  15. The reason why progress increases at an increasing rate is because each succeeding generation builds on the success of the preceding generation. Progress is linked with increasing knowledge and technological innovation and technological innovation is what drives economic productivity. Progress/knowledge/technological innovation do not necessarily increase as a constant process; but, whether leaps and bounds or some constant process, progress takes place and over a considerable amount of time will show an increasing rate of expansion. If this is not reflected in our productivity data, something is going wrong and I don’t think it is in the measurement system we use. You don’t suppose it would be the political influence exercised by concentrated wealth that marries public policy with the economic enterprise, do you?


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