NS3040 Fall Term 2016 U.S.: Long-Run Productivity Issues Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

U.S. Productivity I Oxford Analytica, United States: Long term Decline Forecasts are Wrong, October 17, 2012 Robert Gorden, Northwestern University thesis: U.K and U.S. economic growth over past years may have been a unique event Contends U.S. now facing its slowest long-term period of growth since mid-nineteenth century If correct U.S. will experience a prolonged version of near stagnation as in Japan since 1991 While attracting wide support, several key weaknesses. May have fallen for the “presentist” fallacy – assuming present conditions will persist indefinitely While poor US GDP growth has surpassed almost all other developed economies since 2008 crisis Extreeme pessimism was also present in U.S. in 1970s

U.S. Productivity II Starting point in Gordon’s analysis: Appears to be a clear pattern in long-term economic progress over past 250 years Starting in 1750 a pronounced pick up in productivity growth First in the U.K. and then in U.S. However these productivity increases appear to have peaked in the mid-1950s, and they have slowed over past 60 years From 1929-57 US per capita incomes doubled in 28 years Between 1957 and 1988 it took 31 years for incomes to double Since 2000 there has been a having of productivity growth Projecting this trend forward, it would take almost a century for US income per capita to double

U.S. Productivity III Timothy Aeppel, Has All the Really Important Stuff Already been Invented? WSJ June 16, 2014

U.S. Productivity IV Robin Harding, The Productivity Puzzle, FT June 30, 2014

U.S. Productivity V Gordon suggests that since 1750 there have been 3 fundamental technology revolutions in U.K. and U.S. 1. U.K industrial revolution 1750 and 1830 – steam engine, cotton spinning and railroads 2. Second industrial revolution, 1870-1900 – electricity, internal combustion engine, running water, indoor plumbing 3. IT revolution, 1960 - computers and internet First two required about 100 years for full effects to percolate through the economy From 1950-1970 the benefits of second revolution still at work – air conditioning, home appliances, interstate highway system Gordon feels the third revolution seems to be running course over much shorter time Most clerical tasks replaced by computers in 70s and 80s Innovations since 2000 centered on entertainment and communication devices that are smaller and more capable but do not increase productivity

U.S. Productivity VI Gordon’s other headwinds to long term growth Whereas in postwar period US labor force was boosted by entry of women, country now faces aging population U.S. is slipping down lists in the percentage of its population that has completed higher education Globalization will continue pressuring US household incomes through wage competition Household and government debt will constitute a major drag on growth due to necessary deleveraging.

U.S. Productivity VII Historically all long run forecasts have been overly pessimistic – and wrong. Malthus – 19th century. Population would outrun ability of planet to produce food – mass starvation Hansen – 1930s U.S. U.K entering a period of long run stagnation – all great inventions had taken place Peak Oil – last decade. Permanently high energy prices because oil reserves being depleted and production would be rapidly falling Usually forecasters can’t see how market prices will provide incentives to solutions that stave off the problem. More likely major breakthroughs in robotics, artificial intelligence, cheaper energy or things we can’t even visualize right now