PRINCETON – In a provocative recent paper, Robert Gordon of Northwestern University concludes that the rate of technological progress has slowed sharply, and that the rise in standards of living (at least in the world’s rich countries) is thus set to decelerate. In the twentieth century, he says, per capita income in the United States doubled about every 25-30 years. But the next doubling will likely occur only over 100 years, a pace last seen in the nineteenth century.
Long-term growth considerations, while recognized as crucial, seem distant from the here and now of financial repair and restoration of confidence. So the commentary on Gordon’s paper has been largely dissociated from the policy discussions addressing the ongoing Great Recession.
But a realistic assessment of growth prospects is precisely what is needed right now to design appropriate and feasible policies. Gordon’s point is not that growth will decelerate in the future, but rather that underlying productivity growth moved to a sharply lower trajectory around the year 2000. We lived the better part of the subsequent decade with a misguided sense of extended prosperity and inflated a financial bubble. Worse, we are treating the present as if the bubbly growth from 2000 to 2007 will return.
Consider the International Monetary Fund’s regular projections of world growth. In April 2010, about 18 months after the Lehman Brothers meltdown, the crisis seemed over. The forecast was for world GDP to grow at about 4.5% annually until 2015, which is slightly higher than the pace during the pre-crisis decade, while the average annual inflation rate was projected to be lower, at 2.9%. The future looked bright.