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THE WALL S1'RlH:.'TJOURML. REVm\", Saturday/Sunday, December 22 - 23, 20121 C3 Why Innovation Won't Save Us For more than a century, the U.S, economy grew robustly thanks to big inventions; those days are gone BY ROUEItT J. GOlUlON NOTHING HAS BEEN more central to America's s~lf·confidence than the faith that robust economic growth will con- tinue forever. Between ]891 and 2007. the nation achieved a robust 2~; annual growth rate of output per person. Unfor- tunately, the evidence suggests to me that future economic growth will achieve- at besr half that historic rate. The old rate allowed the Am c rican stan- dard of living to double every 35 ycars; for most people in the future [hat dou- bling may take a century or more. The groi v -th of the past century wasn't built on manna from heaven. It resulted in large part from a remark- able set of inventions between 1875 and woo. These started 'with Edison's elec- tric light bulb (879) and power station 0882), making possible everything from elevator buildings to consumer appliances. K:trl Benz invented the rust workable internal-combustion engine the same year as Edison's light bulb. This narrow time frame saw the in- troduction of running '{later and indoor plumbing, the greatest event in the his- tOll' of female liberation, as women were freed from carrying literally tons of water each year; The telephone, pho- ncgrapb. motion picture and radio also sprang into existence. The period after World War U saw another great spurt of invention. with the development of tele- vision, air conditioning, the jet plane and the interstate highway system. The profound boost that these inno- vations gave to economic growth would be difficult [0 repeat. Only once could transport speed be increased from the horse (6 miles per hour) to the Boeing 707 (550 mph). Only once could out- houses be replaced by running water and indoor plumbing. OnIy once could indoor temperatures, thanks to centro! henting and air conditioning, be con- verted from cold in winter and hot in summer to a uniform year-round climate of 68 to 72 degrees Fahrenheit. As the- impact of the late-rsrh-cen- tury inventions faded away around 19iO, the- computer revolution took over and allowed the economy to remain on our histone path of 2% annual growth. Computers replaced human labor and thus contributed to productivlty, hut the bulk of these benefits came early in the Electronics Era. In the 1960s. ntain- frame computers churned out bank stntemenrs and telephone bills. reduc- ing clerical laboz LTJ. the 19705, memory typewriters replaced repertuve retyping by armies of legal clerks. In the 1980s, PCS with word- •. ·.• rap were introduced. as were ATMs thm replaced bank tell- ers and bar-code scanning that replaced retail workers. The climax was the marriage of com' municaticns to the computer as the In- ternet arose in the 1990s. Amazon.com has been healthy throughout the post- WJr era, even in the past half-decade. But manufacturing's share of the eco- nomic pie has inexorably shrunk, from Z8~oin 1953 to U~, in 2010. That sector of the economy is performing a marvel- ous ballet, on a shrinking stage. Can economic growth be saved by Google's driverless car? This is bizarre ground for optimism. but it is pre- meted not just by Google's Eric Sthmidt but by the Massachusetts In- stitute of Technology's Erik Brynjoifs- son. People are in cars to go some-- where, whether from home to work or from home to shop. Once they are in- side the car, there is relatively little dif- ference betv..• een driving the tar on their own or having it drive itself. Greater safety? Auto fatalities per mil- lion miles traveled have already de- clined by a factor of 10 since 1950. [n setting cut the case for pessimism. I have been accused. by some- of a failure of imagination. New inventions always introduce new modes of growth, nnd his- tory provides many examples of doubt- ers who Questioned future benefits. But I am not forecasting an end to innova- tion. just 11 decline in the usefulness of future inventions in comparison with the great inventions of the past. Even if \-· •. e assume that Innovation produces 3: cornucopia of wonders be- yond ffi)' expectations, the economy still faces formidable headwinds. The retirement of the b:aby boomers and the continuing exodus of prime-age males from the labor force, some-times called the "missing fifth," arc reducing hours worked per member of the pop' ujation. American educational attain- ment continues to slide ever-down- ward in the international league tilbles, due to cost inflation at cur uni- versities, 51 trillion in student loans, abysmal test scores and large numbers of high-school dropouts. And inequality in America will con- tinue to grow, driven by poor educa- tional outcomes at the bottom and the rewards of globalization at the top, as American CEOs reap the benefits of mul- tinational sales to emerging markets. From 1993 to 2008, income growth among the bottom gO?:. of earners \\':15 0.5 points slower than the economy's overall growth rare. If future output grows, as I expect, at a rate of just 1~"; a year, that means s the overwhelming ma- jority of Americans 'lliU see their in- comes grow just 0.5~o annually, The future of American economic growth is dismal, and policy solutions are elusive. Skeptics need to come up with a better rebuttal. "OS founded in 1994, Googlein 1998 and Wikipedia in 2001 Since 2002, though, most computer-retaten inventions nave resulted not in fundamental transforma- tion bur in rninlaturization, as with hand-held devices like the il'hone, which combines the pre-2002 functions of lop- tops and early cenphones. Innovation continues 3p:lCC today, and many of those developing and funding new technologies recoil with disbelief et my suggestion that we have left behind the era of truly Important changes in our standard of living. The first response from skeptics <11- ways involves health care. They believe- that medical research, especially on the genome. promises to achieve enormous advances in the treatment of diseases. But the new techniques often fail to de- liver. One recent Shirl}', for instance, demonstrated that high-cost proton- beam treatment Icr prostate cancel' yields no better results than old-fash- ioned radiation rherapv, Pharmaceutical research appears to be entering a phase of diminishing re- turns. Developing new drugs is increas- ingly expensive, and the potential pool of beneficiaries is ever smaller, mainly people with esoteric types of cancer. few of the medical optimists acknowl- edge a stark historical fact; The rate of improvement in V.S. life expectancy was three times higher in the first hnlf of the 20th century than in the second. The Iracking revolution and soaring oil and gas production hnve also excited optimists. But this isn't a source of fu- ture economic growth; it merely holds off future economic decline. Over tile, P.1St decade. the economy has been bur- dened by oil prices between SSOnnd $150 pet barrel. which have sapped purchasing power available for nonen- ergy consumption. Holding these prices at bay is progress, to be sure, but it can't compare to the 19605, when "See the U.S.A. in your Chevrolet" became ever more possible along an expanding interstate highway system when gaso- line cost 25 cents 3 gallon Another claim by tile growth opti- mists is that 3~D printing and micro-roo bots will revolutionize manufacturing. This is 3U old story. told in one form or another since the first industrial robot was introduced by General Meters in 1961. Manufacturing productivity, driven by robots and other machines Mr. Gordon is Stanley G. Harris Pro- tessor in the Social Science.'> at Nort/l- westem University. His next book will be "Beyond the Rai/lbow: The Ameri- can Standard of Living Since the Cil'U t,'llar" (Princeton University Press).

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Page 1: , Why Innovation Won't Save Us - Northwestern Universityeconomics.weinberg.northwestern.edu/robert-gordon/files/TopicalEssays/... · THE WALL S1'RlH:.'TJOURML. REVm\", S aturda y

THE WALL S1'RlH:.'TJOURML.

REVm\",Saturday/Sunday, December 22 - 23, 20121 C3

Why Innovation Won't Save UsFor more than a century, the U.S, economy grew robustly thanks to big inventions; those days are gone

BY ROUEItT J. GOlUlON

NOTHING HAS BEEN more central toAmerica's s~lf·confidence than the faiththat robust economic growth will con-tinue forever. Between ]891 and 2007.the nation achieved a robust 2~; annualgrowth rate of output per person. Unfor-tunately, the evidence suggests to methat future economic growth willachieve- at besr half that historic rate.The old rate allowed the Am crican stan-dard of living to double every 35 ycars;for most people in the future [hat dou-bling may take a century or more.

The groi v-th of the past centurywasn't built on manna from heaven. Itresulted in large part from a remark-able set of inventions between 1875 andwoo. These started 'with Edison's elec-tric light bulb (879) and power station0882), making possible everythingfrom elevator buildings to consumerappliances. K:trl Benz invented the rustworkable internal-combustion enginethe same year as Edison's light bulb.

This narrow time frame saw the in-troduction of running '{later and indoorplumbing, the greatest event in the his-tOll' of female liberation, as womenwere freed from carrying literally tonsof water each year; The telephone, pho-ncgrapb. motion picture and radio alsosprang into existence. The period afterWorld War U saw another great spurt ofinvention. with the development of tele-vision, air conditioning, the jet planeand the interstate highway system.

The profound boost that these inno-vations gave to economic growth wouldbe difficult [0 repeat. Only once couldtransport speed be increased from thehorse (6 miles per hour) to the Boeing707 (550 mph). Only once could out-houses be replaced by running waterand indoor plumbing. OnIy once couldindoor temperatures, thanks to centro!henting and air conditioning, be con-verted from cold in winter and hot insummer to a uniform year-round climateof 68 to 72 degrees Fahrenheit.

As the- impact of the late-rsrh-cen-tury inventions faded away around19iO, the- computer revolution took overand allowed the economy to remain onour histone path of 2% annual growth.Computers replaced human labor andthus contributed to productivlty, hutthe bulk of these benefits came early inthe Electronics Era. In the 1960s. ntain-frame computers churned out bankstntemenrs and telephone bills. reduc-ing clerical laboz LTJ. the 19705, memorytypewriters replaced repertuve retypingby armies of legal clerks. In the 1980s,PCS with word- •.·.•rap were introduced.as were ATMs thm replaced bank tell-ers and bar-code scanning that replacedretail workers.

The climax was the marriage of com'municaticns to the computer as the In-ternet arose in the 1990s. Amazon.com

has been healthy throughout the post-WJr era, even in the past half-decade.But manufacturing's share of the eco-nomic pie has inexorably shrunk, fromZ8~oin 1953 to U~, in 2010. That sectorof the economy is performing a marvel-ous ballet, on a shrinking stage.

Can economic growth be saved byGoogle's driverless car? This is bizarreground for optimism. but it is pre-meted not just by Google's EricSthmidt but by the Massachusetts In-stitute of Technology's Erik Brynjoifs-son. People are in cars to go some--where, whether from home to work orfrom home to shop. Once they are in-side the car, there is relatively little dif-ference betv..•een driving the tar ontheir own or having it drive itself.Greater safety? Auto fatalities per mil-lion miles traveled have already de-clined by a factor of 10 since 1950.

[n setting cut the case for pessimism.I have been accused. by some- of a failureof imagination. New inventions alwaysintroduce new modes of growth, nnd his-tory provides many examples of doubt-ers who Questioned future benefits. ButI am not forecasting an end to innova-tion. just 11decline in the usefulness offuture inventions in comparison with thegreat inventions of the past.

Even if \-·•.e assume that Innovationproduces 3: cornucopia of wonders be-yond ffi)' expectations, the economystill faces formidable headwinds. Theretirement of the b:aby boomers andthe continuing exodus of prime-agemales from the labor force, some-timescalled the "missing fifth," arc reducinghours worked per member of the pop'ujation. American educational attain-ment continues to slide ever-down-ward in the international leaguetilbles, due to cost inflation at cur uni-versities, 51 trillion in student loans,abysmal test scores and large numbersof high-school dropouts.

And inequality in America will con-tinue to grow, driven by poor educa-tional outcomes at the bottom and therewards of globalization at the top, asAmerican CEOs reap the benefits of mul-tinational sales to emerging markets.From 1993 to 2008, income growthamong the bottom gO?:. of earners \\':15

0.5 points slower than the economy'soverall growth rare. If future outputgrows, as I expect, at a rate of just 1~";ayear, that means s the overwhelming ma-jority of Americans 'lliU see their in-comes grow just 0.5~oannually,

The future of American economicgrowth is dismal, and policy solutionsare elusive. Skeptics need to come upwith a better rebuttal.

"OS founded in 1994, Googlein 1998 andWikipedia in 2001 Since 2002, though,most computer-retaten inventions naveresulted not in fundamental transforma-tion bur in rninlaturization, as withhand-held devices like the il'hone, whichcombines the pre-2002 functions of lop-tops and early cenphones.

Innovation continues 3p:lCC today,and many of those developing andfunding new technologies recoil withdisbelief et my suggestion that we haveleft behind the era of truly Importantchanges in our standard of living.

The first response from skeptics <11-ways involves health care. They believe-that medical research, especially on thegenome. promises to achieve enormousadvances in the treatment of diseases.But the new techniques often fail to de-

liver. One recent Shirl}', for instance,demonstrated that high-cost proton-beam treatment Icr prostate cancel'yields no better results than old-fash-ioned radiation rherapv,

Pharmaceutical research appears tobe entering a phase of diminishing re-turns. Developing new drugs is increas-ingly expensive, and the potential poolof beneficiaries is ever smaller, mainlypeople with esoteric types of cancer.few of the medical optimists acknowl-edge a stark historical fact; The rate ofimprovement in V.S. life expectancywas three times higher in the first hnlfof the 20th century than in the second.

The Iracking revolution and soaringoil and gas production hnve also excitedoptimists. But this isn't a source of fu-ture economic growth; it merely holds

off future economic decline. Over tile,P.1St decade. the economy has been bur-dened by oil prices between SSOnnd$150 pet barrel. which have sappedpurchasing power available for nonen-ergy consumption. Holding these pricesat bay is progress, to be sure, but itcan't compare to the 19605, when "Seethe U.S.A. in your Chevrolet" becameever more possible along an expandinginterstate highway system when gaso-line cost 25 cents 3 gallon

Another claim by tile growth opti-mists is that 3~D printing and micro-roobots will revolutionize manufacturing.This is 3U old story. told in one form oranother since the first industrial robotwas introduced by General Meters in1961. Manufacturing productivity,driven by robots and other machines

Mr. Gordon is Stanley G. Harris Pro-tessor in the Social Science.'> at Nort/l-westem University. His next book willbe "Beyond the Rai/lbow: The Ameri-can Standard of Living Since the Cil'Ut,'llar" (Princeton University Press).

Page 2: , Why Innovation Won't Save Us - Northwestern Universityeconomics.weinberg.northwestern.edu/robert-gordon/files/TopicalEssays/... · THE WALL S1'RlH:.'TJOURML. REVm\", S aturda y

The Decline of Innovation and Economic Growth I Robert J. Gordon - ... http://online.wsj.com/article/SBI00014241278873244616045781917 ...

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THE WALL STREET JOURNAL.WSJ.<xltI\

ESSAY December 21, 2012,7:34 p.m. ET

Why Innovation Won't Save UsFor more than a century, the U.S. economy grew robustly thanks to big inventions; those days are gone

ByROBERT J. GORDON

Nothing has been more central to America's self-confidence than the faith that robust economicgrowth will continue forever. Between 1891 and 2007, the nation achieved a robust 2% annualgrowth rate of output per person. Unfortunately, the evidence suggests to me that futureeconomic growth will achieve at best half that historic rate. The old rate allowed the Americanstandard of living to double every 35 years; for most people in the future that doubling may take acentury or more.

Getty Images

Innovation continues apace today, and many ofthose developing and funding new technologiesrecoil with disbelief at my suggestion that wehave left behind the era of truly importantchanges in our standard of living.

RelatedYou Call That Innovation? (5/23/12)

The growth of the past century wasn't built on mannafrom heaven. It resulted in large part from a remarkableset of inventions between 1875 and 1900. These startedwith Edison's electric light bulb (1879) and powerstation (1882), making possible everything fromelevator buildings to consumer appliances. Karl Benzinvented the first workable internal-combustion enginethe same year as Edison's light bulb.

This narrow time frame saw the introduction of runningwater and indoor plumbing, the greatest event in thehistory of female liberation, as women were freed fromcarrying literally tons of water each year. Thetelephone, phonograph, motion picture and radio alsosprang into existence. The period after World War IIsaw another great spurt of invention, with thedevelopment of television, air conditioning, the jetplane and the interstate highway system.

The profound boost that these innovations gave to economic growth would be difficult to repeat.Only once could transport speed be increased from the horse (6 miles per hour) to the Boeing 707(550 mph). Only once could outhouses be replaced by running water and indoor plumbing. Onlyonce could indoor temperatures, thanks to central heating and air conditioning, be convertedfrom cold in winter and hot in summer to a uniform year-round climate of 68 to 72 degreesFahrenheit.

As the impact of the Iate-ioth-century inventions faded away around 1970, the computer

10f3 12/22/20128:44 PM

Page 3: , Why Innovation Won't Save Us - Northwestern Universityeconomics.weinberg.northwestern.edu/robert-gordon/files/TopicalEssays/... · THE WALL S1'RlH:.'TJOURML. REVm\", S aturda y

The Decline of Innovation and Economic Growth I Robert J. Gordon - ... http://online.wsj.comlarticle/SB100014241278873244616045781917 ...

revolution took over and allowed the economy toremain on our historic path of 2% annual growth.Computers replaced human labor and thus contributedto productivity, but the bulk of these benefits cameearly in the Electronics Era. In the 1960s, mainframe

computers churned out bank statements and telephone bills, reducing clerical labor. In the 1970S,memory typewriters replaced repetitive retyping by armies oflegal clerks. In the 1980s, PCs withword-wrap were introduced, as were ATMs that replaced bank tellers and bar-code scanning thatreplaced retail workers.

More from ReviewThe Saturday Essay: The End of the Map

The Mystery of Mandela's Arrest

The climax was the marriage of communications to the computer as the Internet arose in the1990s. Amazon .com was founded in 1994, Google in 1998 and Wikipedia in 2001. Since 2002,though, most computer-related inventions have resulted not in fundamental transformation but inminiaturization, as with hand-held devices like the iPhone, which combines the pre-2002functions of laptops and early cellphones.

Innovation continues apace today, and many of those developing and funding new technologiesrecoil with disbelief at my suggestion that we have left behind the era of truly important changesin our standard of living.

The first response from skeptics always involves health care. They believe that medical research,especially on the genome, promises to achieve enormous advances in the treatment of diseases.But the new techniques often fail to deliver. One recent study, for instance, demonstrated thathigh-cost proton-beam treatment for prostate cancer yields no better results than old-fashionedradiation therapy.

Pharmaceutical research appears to be entering a phase of diminishing returns. Developing newdrugs is increasingly expensive, and the potential pool of beneficiaries is ever smaller, mainlypeople with esoteric types of cancer. Few of the medical optimists acknowledge a stark historicalfact: The rate of improvement in U.S. life expectancy was three times higher in the first half of thezoth century than in the second.

The fracking revolution and soaring oil and gas production have also excited optimists. But thisisn't a source of future economic growth; it merely holds off future economic decline. Over thepast decade, the economy has been burdened by oil prices between $50 and $150 per barrel,which have sapped purchasing power available for nonenergy consumption. Holding these pricesat bay is progress, to be sure, but it can't compare to the 1960s, when "See the U.SA. in yourChevrolet" became ever more possible along an expanding interstate highway system whengasoline cost 25 cents a gallon

Another claim by the growth optimists is that 3-D printing and micro-robots will revolutionizemanufacturing. This is an old story, told in one form or another since the first industrial robot wasintroduced by General Motors in 1961. Manufacturing productivity, driven by robots and othermachines has been healthy throughout the postwar era, even in the past half-decade. Butmanufacturing's share of the economic pie has inexorably shrunk, from 28% in 1953 to 11%in2010. That sector of the economy is performing a marvelous ballet, on a shrinking stage.

Can economic growth be saved by Google's driverless car? This is bizarre ground for optimism,but it is promoted not just by Google's Eric Schmidt but by the Massachusetts Institute ofTechnology's Erik Brynjolfsson. People are in cars to go somewhere, whether from home to workor from home to shop. Once they are inside the car, there is relatively little difference between

20f3 12122/20128:44 PM

Page 4: , Why Innovation Won't Save Us - Northwestern Universityeconomics.weinberg.northwestern.edu/robert-gordon/files/TopicalEssays/... · THE WALL S1'RlH:.'TJOURML. REVm\", S aturda y

The Decline of Innovation and Economic Growth I Robert J. Gordon - ... http://online.wsj.comlarticie/SBI 000 14241278873244616045781917 ...

driving the car on their own or having it drive itself. Greater safety? Auto fatalities per millionmiles traveled have already declined by a factor of 10 since 1950.

In setting out the case for pessimism, I have been accused by some of a failure of imagination.New inventions always introduce new modes of growth, and history provides many examples ofdoubters who questioned future benefits. But I am not forecasting an end to innovation, just adecline in the usefulness of future inventions in comparison with the great inventions of the past.

Even if we assume that innovation produces a cornucopia of wonders beyond my expectations,the economy still faces formidable headwinds. The retirement of the baby boomers and thecontinuing exodus of prime-age males from the labor force, sometimes called the "missing fifth,"are reducing hours worked per member of the population. American educational attainmentcontinues to slide ever-downward in the international league tables, due to cost inflation at ouruniversities, $1 trillion in student loans, abysmal test scores and large numbers of high-schooldropouts.

And inequality in America will continue to grow, driven by poor educational outcomes at thebottom and the rewards of globalization at the top, as American CEOs reap the benefits ofmultinational sales to emerging markets. From 1993 to 2008, income growth among the bottom99% of earners was 0.5 points slower than the economy's overall growth rate. If future outputgrows, as I expect, at a rate of just 1% a year, that means the overwhelming majority of Americanswill see their incomes grow just 0.5% annually.

The future of American economic growth is dismal, and policy solutions are elusive. Skeptics needto come up with a better rebuttal.

-Mr. Gordon is Stanley G. Harris Professor in the Social Sciences at Northwestern University. His next book will be"Beyond the Rainbow: The American Standard of Living Since the Civil War" (Princeton University Press).

A version of this article appeared December 22,2012, on page C3 in the u.s. edition of The WallStreet Journal, with the headline: Why Innovation Won'tSave Us.

Copyright 2012 Dow Jones & Company, Inc. All Rights ReservedThis copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by

copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visitwww.djreprints.com

30f3 12/2212012 8:44 PM