Why New Technologies May Not Rekindle Growth

It's only January, but what may be the year's most important book on economics has already been published. Called "The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War," it argues we can't expect new technologies to rekindle rapid economic growth.

Despite all the Internet hoopla, advances in living standards will be modest and grudging. This somber message goes to the heart of the debate about America's future.

It's not that the author, economist Robert Gordon of Northwestern University, dislikes technology. Just the opposite: He's fascinated by it, and almost all his 762-page masterpiece describes the gains, mostly derived from new technologies, that have transformed daily life since the late 1800s.

Until then, he writes, "life and work were risky, dull, tedious, dangerous and often either too hot or too cold."

Take laundry. It involved the "most physically demanding" household chore: hauling water. Before washers and dryers, "washing, boiling and rinsing a single load of laundry used about 50 gallons of water." Housewives had to lug that water from outside, often eight to 10 times a day.

We all know what happened. Primitive conditions gave way to modern amenities and technologies.

In 1870, no homes had electricity, and few - if any - had indoor plumbing or central heating. By 1940, 40% of homes had central heating, 60% had flush indoor toilets, 70% had running water and 80% had electricity.

But in some ways, we succeeded too well, suggests Gordon. The spectacular advances conditioned us to believe that rapid technological progress is an inherent feature of our economic system. Invention and innovation can be dialed up to solve any problem: reversing sluggish economic growth, curing cancer or combating global warming.

Not so, says Gordon. Rapid advances are not assured. What he shows is that technology-driven growth has varied substantially over time. It was fastest from 1870 to 1970 - a "special century" - and slower before and after.

Consider the special century's crucial technologies: telephones, airplanes, television, synthetic fibers, plastics, assembly lines, chain stores, the internal combustion engine (cars, trucks) and electricity.

This last dominated because it enabled so much more: appliances that reduced housework; elevators that inspired skyscrapers; radio, TV and movies that remade pop culture; machines that overhauled factories; air conditioning that altered geography; and computers that manipulated data.

Because "these inventions cannot be repeated," the rapid economic growth they made possible won't be repeated either, argues Gordon.

Economic growth essentially reflects two factors: the size and productivity of the labor force. The special century's impact peaked in the first quarter-century after World War II, when annual productivity gains averaged almost 3%.

But since 2004, the average has dropped to about 1%. If the labor force also grows at 1% annually, then overall economic growth is around 2%. By historic standards, that's meager.

Gordon expects more of the same. He's unimpressed with the Internet revolution, which affects mainly the information, communications and entertainment sectors. Smartphones were introduced in 2007, he writes, but have had no discernible impact on productivity figures.

Moreover, he thinks middle-class income gains will be further eroded by inequality, high debts and an aging population requiring higher taxes to pay benefits.

The superstructure of modern societies rests on an assumed pillar of fast economic growth. People feel that they're getting ahead and that the collective needs of government can be met without crushing tax increases.

If Gordon is right, the future will be more contentious, because rising incomes that make the process work won't be rising very rapidly. There will be more emphasis on income redistribution. The competition for scarce funds will intensify, as will frustration and disappointment.

Is he right? That won't be settled conclusively for years or decades when it's clear whether new technologies were powerful enough to raise most Americans' living standards.

Gordon's critics say he has underestimated the power of new technologies, which are not easily predicted. In one respect, Gordon's focus on private-sector productivity seems misleading.

The real productivity problem involves health care and education, largely public services where we aren't getting our money's worth.

The infatuation with technology is a source of strength, but also of simplistic self-deception. What Gordon has provided is not a rejection of it but a sobering reminder of its limits.