The Future of Innovation Robert J. Gordon, Northwestern University and NBER Conference on The Future of U.S. Economic Growth CATO Institute, December 4, 2014

Today’s Question: Is the Pace of Innovation Speeding Up? The Second Machine Age, p. 44, “we’re at an inflection point” leading to faster growth But there’s no hint: – Faster growth in what measure of the aggregate economy? – Compared to what? Last 10 years? Last 50? Their argument proceeds by example: exponential growth in big data, small robots, 3-D printing, driverless cars

My Position in a Nutshell Blog: “Taking Robert Solow Seriously” Solow 1957: The history of TFP growth is the best guide to the importance of innovation – Fast and slow TFP growth provides a guide to the importance of different innovations The most important innovations happened long ago Over the past two decades the digital revolution caused TFP growth to spike, but not for long Flagging TFP growth suggests the most important contributions of the digital revolution have already happened

To Understand TFP History, We Need Definitions of the Three IR’s The 1 st IR occurred , continued impact through 1900 Steam engine, railroad, steamships, wood=>steel – The 2 nd IR occurred , continued impact through 1970 along at least 5 dimensions Electricity, light, elevators, machines, air conditioning Internal combustion engine, vehicles, air transport EICT: Telephone, phonograph, movies, radio, TV Chemicals, plastics, antibiotics, modern medicine Utter change in working conditions, job & home

Third Industrial Revolution Since 1960 the “EICT” Revolution – Entertainment: TV – color, cable, time shifting, HDTV, streaming – Information Tech – mainframes, minis, PCs, web browsers, e-commerce – Communications: mobile phones, smart phones – Productivity enhancers: ATM, bar-code scanning, lightning-fast credit card authorization – Lightning fast and free information, both public and proprietary inside the firm Everything on this list has already happened

IR #3 Has Failed the TFP Test Failure #1: TFP growth post-1970 barely 1/3 of Failure #2: IR #3 boosted TFP growth only briefly STARTLING CONCLUSION: MIGHT THE PRODUCTIVITY IMPACT OF THE THIRD INDUSTRIAL REVOLUTION BE ALMOST OVER?

Real GDP Per Capita Is Not the Same As TFP And Does Not Measure Innovation

Per-capita Real GDP Growth Now Is Below Pessimistic Trend

The Standard of Living Is Not the Same as Productivity Growth Total Output or GDP (Y). Total Hours of Work (H). Total Population (N). Y&H refer to total economy The Productivity Identity Y/N Ξ Y/H * H/N

Debut of Data on TFP Growth Since 1890 Forthcoming Book: Beyond the Rainbow: The American Standard of Living Since the Civil War Real GDP, BEA back to 1929, Kendrick Aggregate Hours BLS back to 1948, then Kendrick Capital Input, BEA back to 1925, then Kendrick

Adjustments to Capital Both private and government capital, except weapons Variable retirement ( ) Changing weights on structures vs. equipment to reflect shorter service lives of equipment (makes BEA = BLS)

Why Was Growth of Real GDP Per- capita So Steady at 2.1% Per Year?

Per-Capita Income Growth Does Not Equal Productivity Growth

The Same History, Just for Productivity (Y/H) Growth

The Second Industrial Revolution vs. the Third Industrial Revolution

The Effect of Education and Capital Deepening

The Second Industrial Revolution vs. the Third Industrial Revolution

Are the TFP Effects of IR #3 Almost Over?

The Second Industrial Revolution vs. the Third Industrial Revolution

Productivity Impact of IR #3 Is Largely Over ( ) What’s old? – Amazon (1994), Google (1998), Wiki (2001), itunes (2001), Facebook (2004) – Digitalization of library and parts catalogues is finished – Office work was revolutionized by 2004 – Bar-code scanning, the ATM machine, instant credit card authorization? Complete by 15 years ago What’s new? Iphone (2007), ipad (2010)

Stasis Everywhere You Look Offices use desktop computers and proprietary information as they did years ago – The Northwestern econ department staff, 1998 vs Retail stasis. Shelves stocked by humans, meat sliced at service counters, checkout bar-code scanning. Maybe card authorization a bit faster Medicine: electronic medical records largely rolled out, little or no change in what nurses and doctors do Higher Education: cost inflation comes from rising ratio of administrative staff to instructional staff

Stasis in Consumer Electronics NYT on Consumer Electronics Show, January 2014 This show was a far cry from the shows of old... Over the years it has been the place to spot some real innovations (VCR 1970, CD 1981, HDTV 1998) This year’s crop of products seemed a bit underwhelming by comparison Editor of gadget website: “This industry that employs all of these engineers... Needs you to throw out your old stuff and buy new stuff – even if that new stuff is only slightly upgraded.

Quantitative Reasons Will Not Be Repeated

Growth in Manufacturing Capacity Has Ceased

The Most Dynamic Part of Manufacturing Has Disappeared

The ICT Deflator and The Death of Moore’s Law

Optimistic to Conclude that Future Will Resemble the Past Decade TFP Growth? The best guide is , about 0.6 Capital deepening currently zero, will it gradually return to 0.6? Little further contribution from education Conclusion? Depending on capital deepening, upper bound on labor productivity growth of 1.2 Slower than 1.38 of , but faster than the 0.80 of Back to Erik, we are indeed at a “point of inflection” we are heading down, not up