Thomas Edsall’s Productivity Fears

October 15, 2012

In his NYT blog, Thomas Edsall took off from a recent paper by Northwestern University economist Robert Gordon and warned that we may see a future of very slow economic growth. While Gordon is a good economist, with many useful insights (including in this paper), it is worth throwing in a few words of caution.

First, economists’ ability to predict trends in productivity is virtually zero. There were two major shifts in productivity trends in the post-World War II period: the slowdown that began in 1973 and the speedup that began in 1995. Almost no one saw either shift coming even as the shifts were occurring, much less 3 or 5 years ahead of time. Forty years later there is still no agreement within the economics profession on the causes of the slowdown in 1973. Given this history, it is reasonable to view any projections of productivity growth for the next hundred years and beyond with more than a little skepticism.

With this caution, let me suggest some reasons that Gordon may be overly pessimistic. There are good reasons for believing that we could have large gains in living standards, even if these may not always be picked up in our GDP or productivity measures.

To start with an easy one, we spend more than 17 percent of GDP on health care, more than twice as much per person as the average for other wealthy countries. Yet, we have nothing obvious to show for it in the way of outcomes.

This suggests two obvious paths for gains. First, we can look to get our costs more in line with those of other wealthy countries. This would free up an enormous amount of resources for other uses. If the political system is too corrupt to allow for increased efficiency in the health care sector, we can look to take advantage of the more efficient systems elsewhere through increased trade.

We could also look to have the sort of improvements in lifestyle and diet that would bring our life expectancies up to those of other wealthy country. We are currently more than 5 years behind Japan, the leader among major countries. If we could get even with Japan, somewhere over the course of the century, this extra 5 years, beyond the current path of increase, would be worth more than $250,000 per person by standard measures.

A relatively simple way in which we could have an increase in living standards that would not be picked up GDP or productivity measures is by reducing the standard workweek to four days from five. If we assume that people spend an average of 1 hour on their round-trip commute, this would be an increase in pay per-hour spent working/commuting of more than 2 percent. If we also could stagger workdays and reduce congestion, the gains would be correspondingly larger.

There are several other areas where we might think that somewhere in the course of the 21st century we can progress that will improve society’s well-being. For example, we have roughly one percent of our adult population behind bars. This is both a substantial cost, since we have to pay for their care while they are incarcerated and it is a tremendous loss to these people and society. If we can figure out having a society where we don’t have to lock so many people up, this would imply enormous gains all around. (The incarceration rate in other wealthy countries is about one-tenth as high.)

In the same vein, more than 4 percent of our GDP (5 percent of non-health care GDP) goes to the military. In Europe and Japan, they spend less than 1 percent of GDP on the military on average. If we can manage to get a world where we don’t have major enemies, then the amount of resources devoted to the military could be reduced to European levels, freeing up a huge amount of resources for improved living standards.

There will undoubtedly be many other ways in which society will be improve living standards over the next century (my knowledge of the 2080s is not very good), but the items listed here are all areas that do not require major technological innovations, just restructuring society in various ways. If the bulk of the population does not see substantial improvements in living standards over the next century, the main obstacle will be political, not technology. We already have the technology to allow most people to live much better lives; we just are not using it very well.  

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