The case of American exceptionalism - Part 4

In the last installment we looked at the reasons behind the miraculous surge in productivity during the 50 years between 1920 and 1970. We concluded that the burst was a combination of revolutionary technological innovations and a perfect storm of conditions such as World War II and the Great Depression that allowed those technologies to flourish. One of the most intense debates among politicians today is what policies can be used to return the country to this era of greatness, if any exist at all. In this part we’ll begin to investigate the reasons behind the slowdown since 1970. Technological Progress Stalls

One of the conclusions drawn in the last paper was that the combination of technological advances made from 1870 to 1940, and their ensuing prevalence as a result of increasing affordability caused by the emergence of a middle class following World War II, was the main driver of the Productivity Miracle. It is important that any student of economics embraces the fact that most, if not all, models of economic growth are founded on the notion that in the long run, technological progress ultimately drives changes in output per worker. There is an additional demographic component as population growth too drives increases in aggregate output, but gains in efficiency of production are rooted in technological progress. Thus if technological progress stalls, so will output per worker and other productivity metrics.

The bar graph below shows the composition of productivity since World War II

It is evident that MFP, which reflects growth from technology, is the most variable of the three components to growth. There are some fluctuations from capital accumulation and the labor composition contributed rather consistent growth rates, so we reinforce the notion that technological growth ultimately stimulates economic growth.

The key insight one should consider when analyzing the slowdown in growth between 1970 and the present day is that technological growth has not stalled solely because of either policy decisions, or a fundamental makeup in the spirit of American innovation, but rather because revolutionary leaps of the kind made in the prior century were unsustainable. For example, the jump between being able to communicate by letter to by telephone is enormous, but the jump from calling to having the option of texting is not as significant. Going from no entertainment to having television and radio is immaculate, but adding hundreds of miscellaneous channels portrayed in better quality doesn’t have the same growth impact.

We noted in the second installment that there was a brief resurgence in growth from 1994 to 2004 and that can almost entirely be attributed to gains made from the “Third Industrial Revolution”, when computers and the internet became the new technological darlings. Computers had been around for a while, but their period of tremendous growth could not occur until they reached a certain stage of maturity, a tipping point, when the flood gates opened and allowed them to invade everyday life. Try to imagine technological growth in the form of the following graph, which is known more formally as the Logistic Function (Source: Wikipedia).

When an innovation is first developed, it is often not in a form such that it is ready for widespread use; think of how large computers once were and their many limitations. There is a long period of time where the use of that technology is limited and gains are small; this corresponds to the left end of the graph. Slowly people will observe the technology and contribute ideas to improve upon it. This takes a long time and is often not well documented in the mainstream media. Growth is steadier as the technology becomes more useful, but still not completely adaptable. But then there reaches a point where some great advancement is made that pushes the technology over the top, whether it is Apple coming up with the Macintosh or Bill Gates developing Microsoft. Then growth accelerates, and everyone is enamored with great gains that quickly revolutionize the way they work and spend leisure time. This corresponds to the middle part of the graph when the slope of the line is steepest. After going through decades of slow improvements and tinkering, the public enjoys all the benefits of a new technology, thinking that growth will never slow.

But then the technology starts to, naturally, reach its limits. The difference between a computer in 1990 and 2005 is immense, and although there have been many improvements made from 2005 to the present day, it is starting to look like growth in that department may have passed its inflection point. Once you’re able to input data on the computer and have it ready in seconds, how much does it help if your computer has a better retina display or can do it in .004 seconds instead of .01? I am not doubting there will be amazing advances in computing technology in the future, but the growth in productivity since 2004 has been much slower than it was in the decade starting in 1994, and that likely comes from the fact that the essential advantages of a computer were obtained, and all of the accessory features display diminishing returns.

This inevitable slowdown, which has taken center stage in the last decade plus, causes citizens to feel like they have lost their glory days of progress, when in reality technological progress comes and goes in brief and disruptive ways. The reality of human progress is that for almost all of world history, economic growth (whether you are looking at output growth or productivity measures) has always been much less than 1 percent. It was not until the late 19th century that these metrics began to show some signs of life, and the 20th century has been the exception rather than the rule to progress. There is nothing wrong with people complaining about 2 percent growth when they remember the days of 3 and 4 percent, but it helps to appreciate that for most of human history people would go their entire lives without seeing meaningful advances in standard of living.

The reality is, without World War II, the US economy did not have a promising future. In all likelihood it would not have achieved the levels of growth that were observed, as the war helped stimulate a middle class and reduce inequality, as we will see in the next installment. The slowdown that began in the 1970's was not because America had “lost its innovative culture” or experienced an oil crisis in the middle. Rather it was a result of the miraculous boom from World War II slowly fading away.

The slowdown since 1970 has not been a trend unique to the United States. Many countries spent the decades following World War II rebuilding and restructuring their societies to play “catch up” to the new alpha dog America.

Conclusion

Thus technological progress has been the main culprit behind the slowdown since 1970. Many people like to argue it has been poor government policies or society that has fundamentally lost its spirit of the American Dream, but those viewpoints do not have much supporting evidence.

It would be inappropriate to think that technological progress has been the only reason behind the slowdown in 1970, so in the next paper we will look at more “man-made” reasons behind the slowdown since 1970.

-Brian Proferes

Member, MCG