For most Americans living today, there has been a presumption that our children's lives will be more prosperous than own. The American Dream, whatever particularities might include, has always included this assumption. It is virtually a social contract. Is the idea that most of our children will have a more prosperous life than we did really valid?
Robert Gordon, economic historian at Northwestern University, released a book earlier this year, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War. Gordon's mammoth tome documents changes in the American standard of living over the past 150 years. His research leads him to conclude that not all innovations are equally significant in improving living standards. During the period from 1870-1970, a wave of technological and social innovation emerged that radically improved worker productivity, and therefore improved our standards of living. There has been innovation since 1970 but most of it, apart from communication and entertainment, has been an extension and a deepening of the innovations that occurred prior to 1970. The period from 1870 to about 1920 was a period of development and implementation of innovations that began to have full impact after 1920. Gordon estimates the average annual growth rate in output per hour like this:
1890-1920 = 1.50%
1920-1970 = 2.82%
1970-2014 = 1.62%
For those familiar with American history, you will remember that income inequality was quite high going into the 1920s. Inequality shrank steadily and substantially over the next fifty years, until the mid-1970s. This corresponds with Gordon's estimates of rapidly improving worker productivity. Since the 1970s, there has been slower growth and the growth is more related to capital investment than to improving worker productivity. We have seen income inequality grow since the 1970s.
Gordon is doubtful that we will ever again have a convergence of innovation like we had from 1870-1970. This, combined with certain demographic headwinds, will make sustainable high growth improbable for present generations. I hope to write more about this in coming days but this graphic posted by William Easterly on Twitter caught me eye. It comes from an article by David Leonhardt, The American Dream, Quantified at Last. I take it as more evidence consistent with Gordon's thesis.