In a provocative recent paper, Robert Gordon of Northwestern University concludes that the rate of technological progress has slowed sharply, and that the rise in standards of living (at least in the world’s rich countries) is thus set to decelerate. In the 20th century, he says, per capita income in the US doubled about every 25 to 30 years. However, the next doubling will likely occur only over 100 years, a pace last seen in the 19th century.
Long-term growth considerations, while recognized as crucial, seem distant from the here and now of financial repair and restoration of confidence. So the commentary on Gordon’s paper has been largely dissociated from the policy discussions addressing the ongoing Great Recession.
However, a realistic assessment of growth prospects is precisely what is needed right now to design appropriate and feasible policies. Gordon’s point is not that growth will decelerate in the future, but rather that underlying productivity growth moved to a sharply lower trajectory around the year 2000. We lived the better part of the subsequent decade with a misguided sense of extended prosperity and inflated a financial bubble. Worse, we are treating the present as if the bubbly growth from 2000 to 2007 will return.
Consider the IMF’s regular projections of world growth. In April 2010, about 18 months after the Lehman Brothers meltdown, the crisis seemed over. The forecast was for world GDP to grow at about 4.5 percent annually until 2015, which is slightly higher than the pace during the pre-crisis decade, while the average annual inflation rate was projected to be lower, at 2.9 percent. The future looked bright.
Instead, after successive revisions, world GDP last year is now expected to grow by only 3.3 percent while inflation is forecast to reach 4 percent, signaling much weaker global economic momentum than was anticipated. Lower-than-expected growth and higher-than-expected inflation have affected most economies.
In 2011 and last year, the UK stood out among the advanced economies in this regard; but the pattern holds even for Germany. The shine has similarly worn off the BRICs (Brazil, Russia, India and China).
Although projections by the IMF and others have been persistently optimistic, each setback has been treated as a temporary deviation, associated with its own unique cause: the Greek bailout, the tragic tsunami in Japan, the spike in volatility following Standard & Poor’s downgrade of US debt, and so on. The return to 4.5 percent world growth has merely been pushed back — in the latest forecasts to 2015.
Faith in renewed growth is an ill-advised policy strategy. At its core, the global economic crisis is a growth crisis. Financial institutions and markets assumed productivity would continue to grow at the pace of the late 1990s, which fostered an asset-price boom that conveyed an illusion of well-being; those not directly involved in the financial bubble were co-opted through buoyant international trade. European growth, with its heavy dependence on trade, received a special boost, as did emerging markets.
Once the Great Recession began, this process operated in reverse, unwinding the excesses. However, policymakers continued to benchmark recovery prospects to pre-crisis growth performance. When reality proved otherwise, the return of the past was not abandoned, but merely postponed. Continuing to assume the resumption of pre-crisis growth was necessary to justify postponing hard decisions.