The Rise And Fall Of American Growth

Robert J. Gordon “The Rise And Fall Of American Growth: The U.S. Standard of living since the Civil War,” Princeton Univ. Press, 2016, 762 pp.

This is a must-read book to realize and appreciate what an exceptional time of economic growth we have lived in since the Civil War, especially since 1920.  While reading, it is useful to remember that there was essentially no economic growth over the eight centuries between the fall of the Roman Empire and the Middle Ages.  And later real output per person in Britain between 1300 and 1700 barely doubled in four centuries, in contrast to the twentieth-century American experience which enjoyed a doubling every 32 years.  American growth had been steady but relatively slow until 1920.  It then essentially took off like a rocket in spite of the Great Depression and WWII. 

Then, in 1970, in spite of the digital revolution, growth began to decline significantly, has remained in decline, and appears it will not again surge as the unique economic revolution, by its very composition is unrepeatable; so many of its achievements could happen only once.  Gordon suggests that the future is all too likely to be marked by stagnant living standards for most Americans, because the effect of slowing technological progress will be reinforced by a set of “headwinds”: rising inequality, a plateau in education levels, an aging population and more.

My Notes:

Pg. 3:  Modern humans first emerged about 100,000 years ago and for 99,800 years almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level.  Then a couple of hundred years ago people started getting richer (p. 3).

Pg. 1:  The century of economic revolution following the Civil War in the United States freed households from the unremitting daily grind of painful manual labor, household drudgery, darkness, isolation, and an early death.  By the end of that hundred years, daily life had changed beyond recognition.  Manual outdoor jobs were replaced by work in air-conditioned environments, housework was increasingly performed by electric appliances, darkness was replaced by light, and isolation was replaced not just by travel, but also by color television images bringing the world into the living room.  Most important, a newborn infant could expect to live not to age forty-five, but to age seventy-eight (Infant mortality in 1870 was 176 per thousand and 12 in 1970. P. 50).  The economic revolution of 1870 to 1970 was unique in human history, unrepeatable because so many of its achievements could happen only once.

Pg. 2:  The books central thesis is that some inventions are more important than others, and that the revolutionary century after the Civil War occurred because of a unique clustering, in the late nineteenth century, the “Great Inventions.”   This leads to the second big idea: that economic growth since 1970 has been simultaneously dazzling and disappointing.  Advances since 1970 have tended to be channeled into a narrow sphere of human activity having to do with entertainment, communications, and the collection and processing of information.  For the rest of what humans care about—food, clothing, shelter, transportation, health, and working conditions—progress significantly slowed down after 1970.  The best measure of the pace of innovation and technical progress is total factor productivity (TFP), a measure of how quickly output is growing relative to the growth of labor and capital inputs.  TFP grew after 1970 at barely a third the rate achieved between 1920 and 1970.  And thirdly, the rise of inequality since 1970 has steadily directed an ever-larger share of the fruits of the American growth machine to the top of the income distribution.

Pg. 18:  Why did TFP grow so rapidly midcentury?  The surprising answer is that both the Great Depression and WWII directly contributed to the Great Leap.  Had there been no Great Depression, there would probably have been no New Deal, with its NIRA and Wagner Act that promoted unionization and that both directly and indirectly contributed to a sharp rise in real wages and a shrinkage in average weekly hours.  And WWII taught firms and workers how to operate more efficiently and there was a staggering amount of new capital equipment installed during the war at the government’s expense. 

Pg. 61:  The year 1870 represented modern America at dawn.  Over the subsequent six decades, every aspect of life experienced a revolution.  By 1929, urban America was electrified and almost every urban dwelling was networked, connected to the outside world with electricity, natural gas, telephone, clean running water, and sewers.  By 1929, the horse had almost vanished from urban streets, and the ratio of motor vehicles to the number of households reached 90 percent.  By 1929, infant mortality had been almost conquered.  (Electric light, the first reliable internal combustion engine, and wireless transmission were all invented within the same three-month period at the end of 1879.  Within the same decade, the telephone and phonograph were also invented.  The Second Industrial Revolution was on its way to changing the world beyond recognition).

Pg. 162:  By 1930 there were almost as many motor vehicles as households in the US, and an astonishing 78 percent of the world’s automobiles were registered in the US.

Pg. 214:  Infectious diseases that occurred in 1918-19 interrupted the otherwise relatively smooth longevity incline.  Fully 675,000 Americans died in the Spanish flu pandemic of 1918-19, a relatively small fraction of the estimated global mortality toll of 20 to 50 million. 

Pg. 218:  It is estimated that clean water filtration and chlorination systems explain half of the overall reduction in mortality between 1900 and 1936, as well as 75 percent of the decline in infant mortality and 67 percent of the decline in child mortality.

Pg. 248:  The percentage of the population living past their sixty-fifth birthday was only 34 percent in 1870 but jumped to 56 percent in 1940 and then to 77 percent in 2000.

Pg. 313:  The transition of the federal government from a laissez-faire regime to one of partial regulation began with the 1887 Interstate Commerce Act, which created the Interstate Commerce Commission and granted it the power to regulate railroad rates. 

Pg. 316:  Employment statistics in the 1930s relied on a bizarre definition of employment that excluded from the employment data those working for government agencies such as the WPA and CCC, it is estimated that the overall unemployment rate in 1941, officially 9.9 percent, was actually a substantially lower 6.6 percent when the WPA and CCC workers are counted as having been employed rather than unemployed.

Pg. 319:  The first industrial revolution (IR#1), based on the steam engine and its offshoots—particularly the railroad, steamships, and the shift from wood to iron and steel—resulted from inventions in the period 1770 to 1820 that were sufficiently important for their exploitation to require most of the nineteenth century.  The second industrial revolution (IR#2) reflected the effects of inventions of the late nineteenth century—particularly electricity and the internal combustion engine—and had its maximum effect on output per person and on productivity in the half-century 1920-70.  Between 1940 and 1970, output per person and output per hour continued to increase rapidly, in part as a result of three of the most important subsidiary spinoffs of IR#2—air conditioning, the interstate highway system, and commercial air transport—while the world of personal entertainment was forever altered by television.  The third industrial revolution (IR#3), associated with information land communication technology, began in 1960 and continues to this day.  However, in contrast to IR#2 which impacted on virtually the entire span of human wants and needs, including food, clothing, housing, transportation, entertainment, communication, information, health, medicine, and working conditions, IR#3 only revolutionized a few of these dimensions: in particular entertainment, communications, and information.  “This single fact of, the narrowness of the effects of IR#3, is enough to explain why growth in output per person and output per hour began to slow down after 1970. 

Pg. 332:  The networking of the nation’s housing stock during 1870-1940 qualifies as among the most important contributions to the improvement of the standard of living achieved in all of human history.  By 1940, the networking was complete, at least in urban America, with connections to electricity, gas, telephone, clean running water, and sewers.

Pg. 344:  There is perhaps no greater symbol of the attachment of ‘American consumers to their vehicles than that 70 percent of the revenue of the fast-food industry comes from the drive-through lanes.

Pg. 346:  International comparisons support the view that the United States is an outlier in the extent of its obesity.  In 2000, the United States percentage was 27 percent, and none of the twenty-three other countries compared had a percentage above 20 percent.  Half the countries had obesity percentages below 10 percent, with Italy at 8 percent, France at 6 percent, and Japan at 2 percent.  American poor children sit in idleness in front of TV screens and eat cheap fast foods high in fats and cholesterol.  Upper-middle-class children eat kale salads before their trip to participate on the soccer team.  Obesity is a social issue, not a technological phenomenon. (Makes one wonder if a “social issue” is the same as a “cultural issue”)

Pg. 370:  The increasing relative price of housing has created a new set of challenges.  In 1967, the median price of a new housing unit was 2.9 times median household income, but by 2011, this had increased to 4.5 times median household income.  This increase reflected both the increased relative price of housing construction, the higher relative price of land in desirable areas, and the stagnation of median household income that in part emerged as a side effect of growing inequality after the late 1970s.

Pg. 372:  By 1970 Consumer Reports (CR) product reports agreed that quality issues and defects had all but disappeared for all major appliances, and there was no further need to report about appliance product quality, so it rarely does so.

 Pg. 450:  The first credit card (1950) was the Diners Club card which worked in a limited network of twenty-seven restaurants.  In 1958 the BankAmericard quickly became the most popular credit card and in 1976 was renamed Visa.  (The first ATM machine introduced in Britain in 1967 and the US in 1968).  By 1980 barcode scanners improved in quality and 90 percent of grocery products had UPC registration.

Pg. 454:  In December 1991, the World Wide Web became accessible when the first server and browser were introduced in the US.  However, if any year can be anointed as the beginning of the Internet revolution, it is 1995.  The introduction of Windows 95 was a sensation. This version of Windows represented the transitional moment in the history of the Internet in that Microsoft’s Internet Explorer, a web browser derived from Mosaic, was available as an add-on to Windows 95.  By 2005 dial-up access to the internet had almost disappeared, replaced by broadband access.

Pg. 457:  Today Amazon sells 232 million products to a user base just in the US of 244 million customers, defined as those who have purchased anything within the past twelve months.  There are now 20 million Prime members, and they spend twice as much per year as other Amazon customers.

Pg. 468:  One can think of the middle of the twentieth century as the end of one of the most important social revolutions in history—the virtual elimination of infectious disease as a significant factor in social life.

Pg. 475:  In the 1990s, improvements in gender-related violence were joined by more widespread gains.  From muggings to murders, almost all types of violent crime sharply dropped in the last decade of the twentieth century.  The homicide rate, which stood at 10.5 victims per 100,000 people in 1991, was reduced to only 5.5 by 2000 and has seen hardly any variation since then.  In explanation, one controversial theory holds that Roe v. Wade (1973), by legalizing abortions and consequently reducing the number of unwanted births and uncared for children, is largely responsible.

Pg. 477:  In 1972 the tradition of ‘doctors know best’ changed when a federal appeals court for the first time established a legal requirement of informed consent.  According to the new standard, the physician had to tell the patient whatever ‘a reasonable person’ would want to know in order to decide whether to accept the treatment.

Pg. 480:  Had the regulatory norms of today existed in the 1940s, innovations such as kidney dialysis and antibiotics might never have come to fruition.  Today a handful of adverse outcomes out of tens of thousands of trials can derail a promising prospective treatment.

Pg. 487:  Fluoridation became the official policy of the US Public Health Service in 1951, and by 1960 water fluoridation was widespread and reaching 64 percent of the US population, one of the highest percentages in the world.  In one controlled experiment comparing the Irish Republic, which fluoridate water, and Northern Ireland, which did not, fluoridation was shown to reduce tooth decay by 56 percent.

Pg. 488:  Per person health care spending in the US is 55 percent higher than Canada’s, and US life expectancy is 2.5 years shorter.  Thirty-nine percent of the US excess expense is due to administrative expenses, 31 percent to higher incomes of medical practitioners, and 14 percent to additional procedures (e.g., extra tests), with the remaining 16 percent untraceable to specific causes.  (Addenda: By 2013, the share of medical care spending in GDP, which was only 4 percent between 1930 and 1960, had reached 18 percent yet a sixth of the population still lacked insurance and life expectancy at birth in the US was between two and four years shorter than in other developed countries providing universal care. (P. 496).

Pg. 499:  The high-school completion rate steadily climbed from 10 percent in 1900 to 75 percent in 1970, with little further advance since then.  The US college completion rate has dropped from first place in the international league tables to no better than fifteenth.  (Note: manufacturing jobs peaked in 1953 at about 30 percent of the labor force, falling to 10 percent by 2015 as the substitution of machines together with a surge of imported manufactured goods eliminated jobs in one American manufacturing industry after another.)

Pg. 504:  Between 1970 and 1998, the average income in the top 0.01 percent of the income distribution jumped from fifty to 250 times the economy-wide average income level.

Pg. 506:  By 2014 female labor force participation was at 73.9 percent up from below 40 percent in 1950.  And male participation at 96.8 percent in 1964 declined to 88.2 percent by 2014.

Pg. 518:  The aging of the population will drive up the costs of Medicare for the foreseeable future.  Between 2012 and 2037, it is estimated, the number of beneficiaries who will enroll in the program will grow by 36 percent or 18 million people, and Medicare spending as a percentage of GDP is projected to increase from 3 percent to 5 percent of GDP.  (While 5 workers supported the benefits of each retiree in 1960, there will be only 2 workers funding each retiree by 2030.)

Pg. 522:  The inventions of the third industrial revolution (IR#3), though revolutionary within their sphere of influence—entertainment, communication, and information technology—did not have the same effects on living standards as had electricity, the internal combustion engine, running water, improving life expectancy, and the other Great Inventions of the special century, not to mention the improvement in the human condition as work hours declined from 60 to 40 per week.

Pg. 527:  Among the most important examples of improvements not valued in real GDP are the brightness, convenience, and safety of electric light; the improved variety and reduced risk of food contamination made possible by refrigeration; the removal of horse droppings and urine from city streets and rural highways as motor vehicles replaced horses; the dimensions of change in human activity made possible by the speed and carrying capacity of the motor vehicle and commercial aviation; the value of instant communication made possible by the telegraph and telephone; and the value of entertainment delivered by the invention of the phonograph, radio, and motion pictures.  Some would place even more value on the arrival of clean running water that eliminated the previous drudgery of carrying water into and out of the home; the transition from outhouse to the indoor toilet and bathroom; the transition from child labor to high school education as the typical experience of teenage males; and, perhaps above all the value of the reduction of infant mortality from 22 percent in 1890 to 1 percent in 1950.

Pg. 530:  There are four headwinds that will combine to impair future growth in the disposable income of the bottom 99 percent of the income distribution that is likely to be barely positive and substantially slower than growth in the labor productivity of the total economy: income distribution inequality, educational disparity, demographic (living longer), and fiscal problems financing Medicare and Medicaid.

Pg. 555:  The two most important inventions of the late nineteenth century were electric light and power and the internal combustion engine, and these ae often described as a “General Purpose Technology” (GPT) that can and did lead to the creation of many sub inventions.

Pg. 588:  Moore’s Law originally formulated in 1965 predicted that the number of transistors on a computer chip would double every two years.  Moore’s prediction held up until 2006 when it went off the rails. The doubling time took eight years in 2009 instead of two (four in 2014). 

Pg. 602:  The replacement of human jobs by computers has been going on for more than five decades, and the replacement of human jobs by machines in general has been going on for more than two centuries.  Occupations such as financial advisers, credit analysts, insurance agents, and others are in the process of being replaced, following in the footsteps of victims of the web who lost their jobs within the past two decades, including travel agent, encyclopedia salesmen, and employees of Borders and Blockbuster. Yet these previous job losses did not prevent the US unemployment rate from declining to a rate near 5 percent in 2015, because new jobs were created to replace the jobs that were lost; albeit in the service sector and at lower wages.

Pg. 609:  The two-and-a-half decades after 1948 were a golden age for millions of high school graduates, who without a college education could work steadily at a unionized job and make an income high enough to afford a suburban house, one or two cars, and a life style of which median-income earners in most other countries could only dream.  But all that changed after the early 1970s.  A giant gap emerged between the growth rates of real income for the bottom 90 percent.  Average real income in the bottom 90 percent was actually lower in 2013 than it was in 1972.  In fact, peak real income for the bottom 90 percent of $37,053 in 2000 was barely higher than the $35,411 achieved in 1972, and by 2013, that average had declined from 2000 by 15 percent to $31,652.  Meanwhile the average real income for the top 10 percent doubled from $161,000 in 1972 to $324,000 in 2007, followed by a modest retreat to $273,000 in 2013.

Pg. 614:  The share of imports in US GDP increased from 5.4 percent in 1970 to 16.5 percent in 2014. 

Pg. 616:  Beyond the effects of deunionization, rising imports, the flow of immigrants, and automation, a fifth fact that has tended to increase inequality within the bottom 90 percent of the income distribution is the erosion of the minimum wage.  Stated in constant 2011 dollars, the minimum wage decreased between 1979 and 1989 from $8.38 to $5.87.  It reached a low point of $4.68 in 2006 before being raised to $7.25 in 2009.

Pg. 620:  A recent study quantified the trajectory of real wealth increases by dividing American households into an upper group comprising 21 percent of households, a middle group comprising 46 percent, and a lower group accounting for the remaining 33 percent.  For the large middle group, the real inflation-adjusted value of wealth stagnated over three decades, growing only from $94,300 in 1983 to $96,500 in 2013.  Over that thirty-year period, real wealth in the bottom group actually fell, from $11,400 to $9,300.  In contrast, the top group enjoyed an exact doubling of real wealth from $318,100 in 1983 to $639,400 in 2013. 

Pg. 625:  A UNICEF report lists the US eighteenth of twenty-four countries in the percentage of secondary students that rank below a fixed international standard in reading and math.  A recent evaluation by the ACT college entrance test organization showed that only 25 percent of high school students were prepared to attend college as evidenced by adequate scores on reading, math, and science.

Pg. 626:  The cost of a university education has risen since 1972 at more than triple the overall rate of inflation.  American college completion has been made possible only by a dramatic rise in student borrowing.  Americans now owe $1.2 trillion in college debt 

Pg. 631   Among young African Americans, there are only fifty-one employed men for every 100 women, reflecting in large part the high incarceration rates of young black males.  For white high school graduates, the percentage of children born out of wedlock increased from 4 percent in 1982 to 34 percent in 2008 and from 21 percent t to 42 percent for white high school dropouts.  For blacks, the equivalent percentages are a rise from 48 percent to 74 percent for high school graduates and from 76 percent to 96 percent for high school dropouts. 

Pg. 642:  The timing of the stream of innovations before and after 1970 is the fundamental cause of the rise and fall of American growth.  In recent years, further downward pressure on the growth rate has emerged from the four headwinds that are slowly strangling the American growth engine.  Rising inequality has diverted a substantial share of income growth to the top 1 percent, leaving a smaller share for the bottom 99 percent.  Educational attainment is no longer increasing as rapidly as it did during most of the 20^th century, which reduces productivity growth.  Hours worked per person are decreasing with the retirement of the baby-boom generation.  A rising share of the population in retirement, a shrinking share of working age, and longer life expectancy are coming together to place the federal debt/GDP ratio after the year 2020 on an unsustainable upward trajectory. These four headwinds are sufficiently strong to leave virtually no room for growth over the next 25 years in median disposable real income per person.