Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds
Robert J. Gordon
NBER Working Paper No. 18315
Issued in August 2012
NBER Program(s):Development of the American Economy, Economic Fluctuations and Growth, Productivity, Innovation, and Entrepreneurship
This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow's seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. The paper is only about the United States and views the future from 2007 while pretending that the financial crisis did not happen. Its point of departure is growth in per-capita real GDP in the frontier country since 1300, the U.K. until 1906 and the U.S. afterwards. Growth in this frontier gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing down since. The paper is about "how much further could the frontier growth rate decline?"
The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR's), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers, the web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once - urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.
Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative "exercise in subtraction" suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.
Machine-readable bibliographic record - MARC, RIS, BibTeX
Document Object Identifier (DOI): 10.3386/w18315
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One major challenge is moving the companies from an overall focus on making their internal processes more efficient in order to cut costs, to thinking at least as much about customer knowledge, business strategy, partnership and sustainability. The government has an important role to play in this readjustment.
A comparative analysis of countries’ innovation strategies
The aim of the report is to examine how the government can contribute to a more competitive pulp and paper industry. Sweden has historically been successful through political measures which have contributed to making the industry more effective and reducing emissions. However, the challenge today is much more to do with meeting needs that exist in markets where the pulp and paper industry has not previously been active.
The analysis is based on a comparison of a number of countries that are major producers of pulp and paper. The main countries to be illustrated are Canada, Brazil, India, China, Japan and Finland.
Some countries have an innovation strategy with clear priorities
Canada, Finland and Japan all have politically supported innovation strategies with clear priorities. The strategies in Finland and Japan are principally based on clear social priorities. The Japanese strategy is primarily based on materials research, which is one of Japan’s strong areas. The Finnish strategy is based on preserving and developing the country as a major forest nation and thus that the Finnish forest should be used as a raw material when technically possible. The Canadian strategy is more market-oriented. Priorities are set jointly by businesses, government and universities, and changes take place over time. Companies from customer groups are included in this work. These priorities govern which areas receive research support.
Some aspects which connect these strategies are:
- They are based on a social need which entails a transition to fuels and materials derived from biomass.
- Different government departments perform this together, which increases clarity for businesses, organisations and universities. A clear government prioritisation also facilitates work on matters pertaining to state-aid.
- The strategies in Canada and Finland also prioritise export incentives with businesses, government and universities acting jointly in a small number of countries. These initiatives cost a lot of money. For example, the federal government of Canada invest more than 60 million kronor a year in export initiatives outside North America. Investments in export activities also come from the provinces. The province of British Columbia invests almost 12 million a year in export initiatives to India.
Important lessons for Swedish public measures
Sweden can draw a number of lessons from the countries which are included in this analysis. The most important include:
- The government needs to prioritise which social problems are to be dealt with and, as part of this, to justify how the bioeconomy is a solution. It might concern changing to materials and fuels that are sustainably produced from biomass.
- Based on this prioritisation, the government should implement an initiative over a period of several years with sufficient resources to make a difference. This should include investment aid for large projects similar to that provided in Finland. Measures to incentivise exports should also be included, but only to a number of selected and prioritised markets if it is to have an effect.
- The government needs to stimulate a greater focus on new markets. This can take place through research programmes and through promoting discussions between the industry and other customer groups.
¹ In the pulp industry pulp is produced from wood. It can be paper pulp, but also textile pulp or packaging pulp. In the paper industry paper is produced from paper pulp. The manufacture of pulp and paper can take place in the same mill, a so-called integrated mill.