The Beginning of the End of American Prosperity?
Business + Economy

The Beginning of the End of American Prosperity?

The Fiscal Times/iStockphoto

Are the days of economic prosperity in America behind us?

They could be, according to economics professor Robert Gordon of Northwestern University. He argues in a new working paper Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds, that robust economic growth may be a thing of the past. The rapid progress made over the past 250 years could well prove to be a unique success tale for the history books, but not a sustainable path for the future.

The go-go days in the U.S. were precipitated by a trifecta of innovation and progress – revolutions in steam and the railroads from 1750 to 1830; electricity, internal combustion, running water, indoor toilets, communications, entertainment, chemicals, and petroleum from 1870 to 1900; and from 1960 to today, computers, the web, and mobile phones — all of which contributed to the country’s economic growth.

It's not that there won't be any more great innovations to fuel growth in the coming years, but even if innovation were to continue at the same rate as it has in the past, Gordon says America faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demographic trends like an aging workforce, gaps in the education system, rising income inequality, globalization, declining energy/environment resources, and of course, debt – held by the average American, as well as Uncle Sam.

Many of the headwinds are closely interconnected, and according to Gordon, globalization, education and inequality are causing the most damage. “Globalization pushes down wages at the middle and bottom, thus aggravating inequality. And educational failures also help account for the skill deficits that prevent many young people from qualifying for job openings,” Gordon told The Fiscal Times in an interview.

Demographically, from 1965 to 1990, the entry of women in the workforce helped boost the standard of living, but today the retirement of the baby boomers could reverse that progress, said Gordon. Chief economist for T. Rowe Price, Alan Levenson, agrees: “The demographic weight on growth is clear. The population is aging. Labor force growth will be half what it was 15 years ago.”

The country’s growing debt levels are problematic in both the short-term and the long-term. Consumers, however, seem to be doing a better job than the Federal government of getting their debt under control – Americans have cut household debt by about $1.3 trillion since it peaked in 2008, while the government continues to grow debt levels and heads towards a fiscal cliff. “Government debt is the biggest drain on our productivity,” says Villanova University economics professor Peter Zaleski.

And in America’s schools, most experts agree that there’s much room for improvement. “There is a gap in education and we’re falling behind, says Adolfo Laurenti, deputy chief economist with Mesirow Financial. But at the same time, he argues, “there's a lot of activity and initiatives addressing this issue. I think [Gordon] underestimates the nation's ability to make an adjustment.”

Not everyone agrees that American prosperity has come to an end.

Gordon “lacks empirical backing to support the working assumptions regarding productivity,” says Edinaldo Tebaldi, associate professor of the department of economics at Bryant University. “[Gordon] claims that income inequality is the 'the most important' factor holding down future productivity growth. [But there are] conflicting views regarding the relationship between inequality and growth, and some analyses find no relationship between growth and inequality — others show that increased inequality promotes economic growth.”

Globalization isn't necessarily a bad thing either, according to Tebaldi. “Gordon assumes low labor costs and technological change in emerging economies are damaging to productivity growth here in the U.S. He fails to recognize that international trade in goods and services is a two-way process. Growth in emerging economies can potentially increase the demand for goods and services produced in the U.S., promoting an increase in U.S. exports,” he says.

Laurenti also sees the upside of globalization. “Competition can create tremendous opportunity. It's not a slam-dunk as a headwind.”

When it comes to energy, Chris Faulkner, CEO of Breitling Oil & Gas, disagrees with Gordon. “We have a genuine energy boom market due to the growth in domestic energy production from unconventional shale. This country and the world is entering an ‘Age of Natural Gas.’ New discoveries of accessible domestic oil and natural gas hold the promise of more substantial benefits for the U.S. for decades to come, even the possibility of energy independence,” he says. “Oil and gas will turn America's headwinds into one of the biggest tailwinds we have seen in our lifetime.” In pockets of the country where these resources exist and the industry is drilling, nearby towns have unemployment under 3 percent and average wages are doubling from previous years, Faulkner said.

Innovation, the fundamental pillar of productivity growth is a random process, according to Tebaldi. “There is no greater difficulty than predicting when and how an innovative idea will impact the economy.”