Weekly Geopolitical Report – A Productivity Boom: A Response to Robert Gordon, Part I (July 17, 2017)

by Bill O’Grady

Robert J. Gordon is a well-known economist and a professor at Northwestern University. A member of the National Bureau of Economic Research, his most notable work is in the area of productivity.  His 2016 book[1] argued that the best years of American productivity are behind us—highlighted by the introduction of steam power to industry, the mechanization and biological revolution in agriculture, the electrification of the country, the communications revolution of telegraph, telephone and television, and the transportation revolution of automobiles and airplanes.  He suggests that the technology revolution would never be able to replicate the growth spawned from these events.  Sadly, ecological damage, rapidly aging populations and the peaking of educational attainment mean that economic stagnation would be the order of the day for the Developed World economies.

We examined the geopolitical ramifications of Gordon’s position in an earlier report.[2]  Stagnation could easily lead to geopolitical problems.  For example, industrialization and the spread of democracy occurred at nearly the same time; it is generally believed that democracy supports economic development but it is possible the direction of causality occurs in the opposite direction.  If so, it may mean that a certain degree of economic growth is necessary to maintain democracy. If growth stagnates, it may become difficult to maintain societal order.  In addition, it is intuitive that an expanding economy makes distribution issues easier; it’s a lot more difficult to determine distribution if it appears to be a zero-sum environment.  In such a world, one group improves only at the expense of others.  That scenario creates conditions of conflict.

Michael Mandel and Bret Swanson recently published a paper[3] rebutting Gordon’s position, suggesting that productivity is poised to expand and support stronger economic growth.  In Part I of this report, we will examine the productivity issue, discuss Mandel and Swanson’s analysis of the situation, and focus on their specific division of industries.  Next week, we will look at six sectors of the economy that appear poised to digitize and how that could change the economy.  We will also discuss the hurdles to Mandel and Swanson’s projection.  As always, we will conclude with market ramifications.

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[1] Gordon, R. (2016). The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War. Princeton, NJ: Princeton University Press.

[2] See WGR, The Gordon Dilemma, 8/12/13.