The Great Reversal

Via-RCP

By Robert Samuelson

WASHINGTON -- What we are witnessing in Europe -- and what may loom for the United States -- is the exhaustion of the modern social order. Since the early 1800s, industrial societies rested on a marriage of economic growth and political stability. Economic progress improved people's lives and anchored their loyalty to the state. Wars, depressions, revolutions and class conflicts interrupted the cycle. But over time, prosperity fostered stable democracies in the United States, Europe and parts of Asia. The present economic crisis might reverse this virtuous process. Slower economic expansion would feed political instability, and vice versa. This would be a historic and ominous break from the past.

It's this specter that hovers over the U.S. election and the entire developed world, though it need not come true. Modern economies -- especially the American -- possess great recuperative powers. Democratic traditions are strong. Still, a reversal can't be excluded, because most advanced countries face slower economic growth, even if (hardly certain) they successfully navigate the fallout of the global financial crisis. Semi-stagnant societies can't meet all expectations for jobs, higher wages and government benefits. Political institutions then lose legitimacy. Europe could foretell this dismal spiral.



Demographics alone suggest slower economic growth. The aging of the United States, Japan and most European countries reduces the labor force growth, because there are fewer new workers compared to retiring workers. In the United States, average labor force growth is now reckoned by the Congressional Budget Office at 0.5 percent a year, a third of its post-1950 average. Elsewhere, prospects are worse. In Germany, the labor force is barely growing; in Japan, it's declining. In the short run, a slowing labor force cushions unemployment. In the long run, it reduces economic growth.

From 1950 to 2011, U.S. economic growth averaged 3.3 percent annually, divided roughly equally between average labor force increases of 1.5 percent annually and productivity gains of 1.8 percent. (Productivity -- efficiency -- generally reflects new technologies, better management and more skilled workers.) With the labor force increasing more slowly, the pace of potential U.S. economic expansion would drop to 2.3 percent annually, assuming that productivity gains stay the same. Unfortunately, that's an iffy assumption.

In a fascinating paper, economist Robert Gordon of Northwestern University speculates that productivity increases have peaked. Per capita income gains may gradually slow to half or less of their historical rate. Most economists, he writes, believe "economic growth is a continuous process that will persist forever." It may not, he argues.

Gordon identifies three industrial "revolutions." The first began in England around 1750 and featured cotton spinning, the steam engine and railroads. The second, dating from 1870 to 1900, was the most significant and involved the harnessing of electricity, the invention of the internal combustion engine and the advent of indoor plumbing with running water. These, he contends, triggered other advances: appliances, highways, suburbs, airplanes, elevators and modern communications (telephones, televisions).

Gordon is less impressed with the third revolution: computers, starting around 1960 when big companies first used "mainframes." True, they automated airline reservations, banking transactions and clerical work. Secretaries "began to disappear." More recently, e-commerce has exploded. But Gordon sees the Internet, smartphones and tablets as tilted toward entertainment, not labor-saving. High productivity gains from cyber technologies "had faded away by 2004," he argues.

Technological innovation, though faltering, will continue, Gordon writes. Think more driverless cars and new cancer drugs. But he argues that the effects on average American living standards will be muted. Less-skilled workers from lackluster schools will cut productivity and wage growth further. Greater inequality will steer some gains to the wealthy. Higher taxes to cover budget deficits and transfers to the elderly will squeeze take-home pay. Health insurance costs (which he does not mention) would do the same. Though not preordained, Gordon's prophecies suggest a long era of stunted economic growth.

Economic progress -- progress that people can feel and that feeds hope and optimism -- favors political stability. If progress shrinks or vanishes, stability may suffer. People lose faith and feel betrayed. The role of economic growth in advanced societies is increasingly to satisfy the many claims from different groups. People can (or think they can) pursue their self-interest without harming the common good. When the system reduces or rejects many of those claims, as is now happening in Europe, the pursuit of self-interest becomes more contentious and destructive.

What's happening in America is different in degree, but not in kind, from what's occurring in Europe. Stalled economic growth there is straining the political system's ability to meet all expectations. People take to the streets; extremist parties expand. To avoid Europe's fate, we should reduce people's claims on the system and strive for faster economic growth. That's the lesson. If we ignore it, history may slip into reverse.