02/24/2016 02:16 pm ET Updated Feb 24, 2017

Politics and Productivity

Robert Gordon's new book, The Rise and Fall of American Growth, is the subject of controversy among economists because of his anticipation that "the outlook for future growth in the U.S. standard of living is not promising" 1. (22). Gordon's book, however, is much more than an anticipation of the future. It is a graphic and convincing statement of the way that past technological change has resulted in profound and progressive changes in people's lives.

In Gordon's analysis, the era between 1920 and 1970 was transformative. Since the early 1970s however, productivity growth has slowed; this despite the onset of the information, communications and technology (ICT) revolution. That revolution, Gordon argues, has left large segments of the American economy untouched, even as it has radically altered how people obtain information and communicate with one another. The slowdown in productivity growth has put downward pressure on standards of living, and Gordon argues that this negative trend will continue in the future. Americans' standard of living will also be under pressure because of what Gordon calls "headwinds:" rising income inequality; a slowing in gains in educational attainment; the aging of the population; growing indebtedness; and an increase in single parent households. The result of the combined effect of slow productivity growth and the headwinds is alarming. Gordon anticipates that in the future "the growth rate of the real disposable income of the bottom 99 percent of the income distribution [will be pushed down] to little above zero" (22).

However, Gordon does not search sufficiently for the causes of this anticipated malaise. Specifically he does not consider whether its source lies in our politics. It is true that he offers a list of "policy directions" that could address the headwinds (651), each of which would require changing how we do things. But even here he has nothing to say about what it would take politically for the reforms he seeks to be adopted. In any case, Gordon does not believe that the policies he advocates to offset the headwinds such as raising the minimum wage or making the tax system more progressive would have much of an impact. For him, the big issue is productivity growth. In Gordon's future scenario, the application of modern technology to production will remain too limited to drive an upsurge in the standard of living, and he thinks that there is not much we can do about it.

The striking thing about the omission of any political analysis is that it sits so uneasily with Gordon's own explanation of the surge in productivity between the end of the 1930s and the early 1970s. Fundamental to causing that surge was the decisive role played by the government in the economy. During the New Deal, the government actively encouraged union organizing. During World War II, the government played a direct part in steering research and development, and it actually purchased much of the productivity-raising equipment used by private firms. And after the war, the government-funded GI Bill of Rights provided an entire generation with access to advanced education. Each of these interventions in the economy was driven by a political imperative. In the 1930s it was to save capitalism from the Depression, and in the 1940s it was to save democracy from fascism. As Gordon demonstrates, these interventionist policies worked. They not only achieved the political objectives that motivated them. Just as importantly, those state interventions increased both the incentives and the capacity of firms to be more efficient in production.

Starting in the mid-1970s however, a new political agenda was constructed as private political donors put their dollars to work opposing interventionist policies. Under a neo-liberal flag, the power of private money succeeded in eviscerating the labor movement, reduced government research and development spending, and prevented minimum wage legislation from keeping up with inflation. Reversed were the policies that had worked in accelerating productivity growth in the past. The result was not surprising. The pace of economic growth tumbled, and has remained at low levels ever since.

Gordon omits politics because he does not sufficiently emphasize that, if left alone, firms will engage in less innovation than is socially desirable. The effort to innovate can be costly to firms in terms of time and money, while the benefits of those efforts are always uncertain ahead of time. That means that in order for the economy to achieve a high level of productivity growth, governments have to step in to nurture the process. Inexplicably, despite the evidence that he provides, Gordon is silent on the need for an interventionist state. Indeed he writes, "the fostering of innovation is not a promising avenue for government policy intervention, as the American innovation machine operates healthily own its own" (643).

The fact is, however, that we are not fated to face the gloomy future that Gordon foresees. But avoiding it will require a new politics - one that absorbs the lessons to be learned from the government policies of the 1930s and 1940s. Firms can produce socially desirable outcomes, but only if their behavior is shaped to do so. And, contrary to the view of big campaign contributors, it is government that must do the shaping. The political system we have now - dominated by super-rich donors - is getting us nowhere economically. As incomplete as it is, Gordon's book provides the evidence that our future prosperity is contingent on reducing the power of wealth by changing the way we finance our elections.

1. Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (Princeton: Princeton University Press, 2016). Pages in parenthesis in text.