Is long term growth really ‘over’?

Robert Gordon’s new NBER paper, ‘Is US Economic Growth Over?’ has been making waves in the past few weeks. Here are a few thoughts on it.

A short version of Gordon’s argument is here. His provocative topline is:

The paper … suggests not just that economic growth was a one-time thing centred on 1750-2050, but also that because there was no growth before 1750, there might conceivably be no growth after 2050 or 2100. The process of innovation may be battering its head against the wall of diminishing returns. Indeed, this is already evident in much of the innovation sector …

Much of this is familiar from Tyler Cowen’s book ‘The Great Stagnation’, which kicked up a similar dustcloud in 2011. Gordon goes on to identify six ‘headwinds’ that may push back innovation in the States. These are: an ageing population, low skills and poor state education systems, inequality, globalisation and outsourcing, environmental constraints and government/consumer debt overhangs.

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Gordon is very clear that the analysis applies only to the US, but is also keen for researchers in other countries to pitch in. So, in no particular order:

1/ Many of the six ‘headwinds’ are much stronger in the US than elsewhere (a weak public education system in particular). As Gordon says, ‘my guess is that a Canadian or Swedish economist looking at the past and future of his or her country would not be nearly so alarmed’. (p23)

2/ Equally, some of these headwinds might reverse direction. For example, climate change may create new economic opportunities, not just constraints.

3/ This is very long wave analysis, and frankly it’s too early to tell if Internet-based innovation – Gordon’s ‘third industrial revolution’ – has really come to an end. That data only runs from 1960-2007; but previous revolutions took at least 100 years to fully diffuse. It feels premature to say that ‘the productivity impact of IR3 evaporated after only 8 years.’ (p13)

4/ There’s also something slightly odd about the historical treatment – which is done in terms of the country at the technology frontier. Gordon looks at the UK from 1300-1906, then the US til the present day. But it’s not obvious the underlying country drivers of growth are the same. And as Gordon acknowledges (p6), the future frontier country might not be the US.

5/ The analysis overlooks the dynamic nature of some innovations. Gordon suggests that urbanisation ‘only happens once’ – true, but its effects are persistent. Agglomeration economies can trigger virtuous cycles of urban development, raising growth over very long periods.

6/ Similarly, innovations like ‘travel speed’ haven’t changed much (p2) but their diffusion has been massive – e.g. far more people have access to plane travel than in 1958. This must have some impact on economic welfare through market size, if not on productivity.

7/ Gordon is perhaps a bit unfair on internet innovations. As he rightly points out, for most people running water and central heating are more ‘important’ than broadband. But he doesn’t really consider the internet as a general purpose technology with multiple affordances – many of which we’ve only just started to grasp. Equally, he doesn’t really consider big data, mobile, cloud or social technologies.

8/ The paper doesn’t really explore reasons why ‘IR3’ technologies haven’t fed through into labour productivity stats. There’s now a massive organisational literature which provides some answers. Work by Erik Brynjolfsson tells us that to make the most of ICTs, firms need to do substantial complementary investment in management and organisational structures. Research by John Van Reenen, Nick Bloom and others also highlights the importance of good management in triggering productivity gains for firms.

Some sectors have understood this better than others – such as ICT, retail and financial services, which have seen substantial technology-related productivity jumps.

In other words, just ‘putting a computer on the desk’ isn’t going to have much effect. And looking at average productivity changes hides some big sectoral differences. But this is how Gordon’s paper is thinking about it. A closer, finer-grained analysis might turn up some different answers.

Olympic Economics

Back in the spring – remember? – a lot of people were getting annoyed by the Olympics.

For Londoners, Dan Hancox wrote, “it’s as if someone else is throwing a party in our house, with a huge entry fee, and we’re all locked in the basement.” Roll forward to September and it feels as if a gigantic, city-wide, four-week bender has finally petered out. Everyone had a good time, and nobody fired any missiles.

As the weather turns, though, more sober assessments of the Games are appearing. The Centre for Cities has published a careful five-point legacy plan. And the Economist Intelligence Unit has put out Legacy 2012, a collection of essays on the summer’s economic and social repercussions.

You can download it here. I’ve got the lead piece, written pre-Games, which (post-Games) now seems a bit grumpy.

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Here are the headlines, and some reflections with the benefit of hindsight:

First, the direct economic benefits of 2012 to London are pretty small. This is the overwhelming message from the economic evidence, and the experience of past Games. Predictions of a hit to local retail and tourism also turned out to be correct.

Second, the major hard gain is the physical regeneration of the Olympic site. We can argue about whether winning the Games ‘created’ this, or just accelerated it. But some Londoners (homeowners, certainly) got more out of it than others.

It’s telling that the Centre for Cities suggests a ‘separate’ employment and skills strategy is needed for East London – so what positive effect did the Games have on local people’s employment chances?

Third, the indirect economic effects on the UK may be pretty big – as they have been for Korea, China and Spain. Hosting the Olympics is a massively powerful policy signal, and the Games are a platform from which to tell a story about the UK’s place in the world.

Work by Rose and Spiegel, published in the Economic Journal, suggests that on average, Olympic host countries get a whopping 20% trade boost. (Amazingly, even losing bidders pick up some positive trade effect.) The host city stands in for the nation at Games time, so that London effectively was the UK for foreign viewers. Boris clearly understood this before David Cameron.

More prescient than he knew, Tony Blair is fumbling for the political economy argument in this Vanity Fair interview (thanks to Will Davies for the spot):

For a country like Britain, it’s a great thing for us to have the Olympics here. We can afford to do the Olympics. We’re Britain. We’re not some Third World country.

For countries like Korea and China the story is ‘we’re arrived’. For Britain, perhaps – ‘we’ve still got it’?

So perhaps we’ve all been looking in the wrong place. If the message is the legacy, the biggest economic impacts of 2012 may be the long term boost to British soft power.

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The other takeaway  is that economists vastly under-estimated the intangible benefits from the Games. Pre-Games analysis suggested the ‘willingness to pay’ was dwarfed by the £9.3bn budget, but our medal hauls in both Games have clearly changed the calculus.

Perhaps we should have spotted this coming – Goldman Sachs suggest that host countries typically win 54% more medals than usual. That sporting success doesn’t come for free, as Will points out here. But Team GB’s glorious performances are likely worth several billions in – fleeting? – goodwill.

Minor fame

The Guardian‘s Weekend Magazine have chosen this photograph of the Golden Gate Bridge as one of their pictures of the week. Marvellous!

Sadly we didn’t get out of bed quick enough to buy the paper, but the moment lives forever on their website.

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The picture was originally used to illustrate ‘A Hidden Geography’, written in the Bay Area in late 2009.