The case of American exceptionalism -Part 2

How has productivity and growth evolved over the last century and a half?

The end of the civil war can be used as a starting point for assessing the gradual development of the modern era. As we will see, many of the innovations that lay the foundation for our daily lives were developed in the late 19th and early 20th century, but it took a long time for the new technologies to become commonplace in our society.

To measure the level of growth and innovation throughout American history, we are going to examine a metric called Total Factor Productivity (TFP).

The measurement is used in Robert Gordon’s book The Rise and Fall of American Growth, which will be the source of many statistics and graphs in upcoming analysis.

TFP essentially looks at how quickly output grows relative to the growth of labor and capital inputs: it is output divided by a weighted average of capital and labor input.

For a more advanced approach to TFP the reader can refer to many articles that describe more precise calculations. For the purposes of this paper it is important to know that higher TFP means more innovation and more productive uses of available resources.

So how has output changed since the Second Industrial Revolution, which began circa 1870? This first graph shows output per hour (black line) and output per person (white line) since 1890.

It is important to look at the slope of the respective lines. The line labeled “Extension of 1870-1928 trend” shows what growth would have been if the average between 1870 and 1928 was extrapolated to the present.

If the actual lines appear to have the same slope as the Extension line, then it means that growth was approximately equal the 1870-1928 rate.

What one should initially notice is that Actual Output per Hour grew at a faster rate between 1940 and 1970 than during any other time period. However once 1970 came around, the slope of the line reverted back to the 1870-1928 trend.

Furthermore we see Actual Output per Person plummet at around 1930 but then skyrocket over the ensuing decade, only to return back to approximately the same growth rate up to the present.

The drop can be attributed to the Great Depression while the surge was a result of the demands of World War II. Similar to Output per Hour, Output per Person has been

The following graph looks at Total Factor Productivity (TFP) growth for each decade since the start of the 20th century.

As aforementioned, this metric helps us gauge how innovative and efficient the American economy was during a specific period of time. Each year represents the TFP growth in the decade leading up to that year: for example 1950 represents TFP growth from 1940-1950.

We now see a finer picture of American Growth. The 1940s was unequivocally the most productive decade from a TFP standpoint. The decades leading up to and following the 40s were also much stronger than the other decades. 1970 again marks the beginning of a slowdown, as no decade hence forth managed to crack the 1% annual growth rate.

We can lump together our prosperous decades divide the stages of growth into a better connected picture.

This final bar graph uses the data from above but lumps the values into periods that tended to show similar growth trends. Once again we see the period between 1920 and 1970 is head and shoulders above its peers, but we also see the decade from 1994-2004 showed a unique revival that was otherwise out of line from the post 1970 trend.

Looking at the four figures, we now know what questions we need to answer to uncover the truth of American Growth:

1. What caused the Productivity Golden Age from 1920-1970?

2. Why has Growth slowed down since 1970?

3. What was so special about the brief revival from 1994-2004? Is it replicable?

4. Does the Future of American Growth have any hope of realizing its “Golden Age”

In the next articles we will tackle these questions one by one to help better understand the history of our country and hopefully gain a greater perspective and appreciation for where we are today.