Highlights: The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (The Princeton Economic History of the Western World), by Gordon, Robert J.


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During that summer, economists interested in growth were just beginning to digest John Kendrick’s magisterial 1961 book Productivity Trends in the United States that presented for the first time a consistent set of annual data on output and inputs back to 1889. The Kendrick data showed that the sharp jump in output relative to capital between the 1920s and the 1950s characterized the entire economy, not just the corporate sector. This appeared to conflict with our MIT classroom growth models that were characterized by a long-run constancy in the ratio of output to capital. Recognizing this potential contradiction between theory and fact, I wrote home to my economist parents on August 26, 1965, “I am fascinated by this because the rise in [the ratio of output to capital] must have been for technological, structural (‘real’) reasons.”1

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During that summer, economists interested in growth were just beginning to digest John Kendrick’s magisterial 1961 book Productivity Trends in the United States that presented for the first time a consistent set of annual data on output and inputs back to 1889. The Kendrick data showed that the sharp jump in output relative to capital between the 1920s and the 1950s characterized the entire economy, not just the corporate sector. This appeared to conflict with our MIT classroom growth models that were characterized by a long-run constancy in the ratio of output to capital. Recognizing this potential contradiction between theory and fact, I wrote home to my economist parents on August 26, 1965, “I am fascinated by this because the rise in [the ratio of output to capital] must have been for technological, structural (‘real’) reasons.”1

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My skepticism took the form of an article, also published in 2000, titled “Does the ‘New Economy’ Measure Up to the Great Inventions of the Past?” That paper pulled together the many dimensions of invention in the late nineteenth century and compared them systematically to the dot.com revolution of the 1990s. Thus was born Part I of this book with its analysis of how the great inventions changed everyday life. The overall theme of the book represents a merger of the two papers, the first on the “One Big Wave” and the second on the “Great Inventions.”

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One is the long tradition of economic history of explaining accelerations and decelerations of economic growth. The other is the more recent writing of the “techno-optimists,” who think that robots and artificial intelligence are currently bringing the American economy to the cusp of a historic acceleration of productivity growth to rates never experienced before.

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“Did Economics Win the Two World Wars?” which has provided the opportunity over 15 years to read extensively on the economics of the home front during World War II. This background helped lead me to the conclusion of Chapter 16, that the Great Depression and World War II taken together constitute the major explanation of the sharp jump in total factor productivity that occurred between the 1920s and 1950s.

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The resulting book combines economics and history in a unique blend. The book differs from most on economic history in its close examination of the small details of everyday life and work, both inside and outside of the home. It is not like most histories of the evolution of home life or working conditions, for it interprets the details within the broader context of the analysis of economic growth.

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The book is a readable flashback to another age when life and work were risky, dull, tedious, dangerous, and often either too hot or too cold in an era that lacked not just air conditioning but also central heating. The book is not just about numbers and trends and growth rates going up and down but also about individual sweat and tears, about the drudgery of doing laundry in the era before running water and the washing machine, where the only tools were the scrub board and the outdoor clothes line. This is a book about the drama of a revolutionary century when, through a set of miracles, economic growth accelerated, the modern world was created, and then after that creation the potential for future inventions having a similar impact on everyday life of necessity was inevitably diminished. The implications for the future of U.S. and world economic growth could not be more profound.

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Beyond their contribution to the record of measured growth, these inventions also benefited households in many ways that escaped measurement by GDP along countless dimensions, including the convenience, safety, and brightness of electric light compared to oil lamps; the freedom from the drudgery of carrying water made possible by clean piped water; the value of human life itself made possible by the conquest of infant mortality; and many others.

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slower growth rate of measured productivity since 1970 constitutes an important piece of evidence that the Third Industrial Revolution (IR #3) associated with computers and digitalization has been less important than IR #2. Not only has the measured record of growth been slower since 1970 than before, but, as we have previously suggested, the unmeasured improvements in the quality of everyday life created by IR #3 are less significant than the more profound set of unmeasured benefits of the earlier industrial revolution.

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it has been less broad in its scope than before, focused on entertainment and information and communication technology (ICT), and advances in several dimensions of the standard of living related to food, clothing, appliances, housing, transportation, health, and working conditions have advanced at a slower pace than before 1970.

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There is no debate about the frenetic pace of innovative activity, particularly in the spheres of digital technology, including robots and artificial intelligence. Instead, this chapter distinguishes between the pace of innovation and the impact of innovation on the growth rates of labor productivity and TFP.

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history in which the role of the individual inventor dominated the late nineteenth century, followed by most of the twentieth century, when major inventions occurred within the research laboratories of giant corporations. After 1975, the individual entrepreneur returned as the modern electronic age was created by individuals such as Bill Gates, Steve Jobs, and Mark Zuckerberg.

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Instead the impact on TFP of the inventions of IR #3 were centered on the decade 1994–2004. We describe changes in business practices in the office, in the retail sector, and in the banking and financial sector and find in all cases that current methods of production had been largely achieved by 2004. Along numerous quantitative measures that compare the 1994–2004 decade with the recent past, we find a marked slowing down, leading to the suggestion that the wave of innovation in the late 1990s may have been unique, unlikely to be repeated over our forecasting horizon of the next quarter-century.

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The chapter concludes with an alternative version of the future in which the job destruction by robots and artificial intelligence proceeds slowly, just as it has over the past several decades. The economy will be able to maintain relatively full employment as the fruits of computerization cause the composition of job types and categories to evolve only slowly rather than in a great rush. The rate of advance of labor productivity and TFP over the next quarter century will resemble the slow pace of 2004–15, not the faster growth rate of 1994–2004, much less the even faster growth rate achieved long ago during 1920

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entrepreneurs who created the great inventions of the late nineteenth century—not just Americans, including Thomas Edison and the Wright Brothers, but also foreigners such as Karl Benz—deserve credit for most of the achievements of IR #2, which created unprecedented advances in the American standard of living in the century after 1870. Individual inventors were the developers not just of new goods, from electric light to the automobile to processed corn flakes to radio, but also of new services such as the department store, mail-order catalog retailing, and the motel by the side of the highway.

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Most studies of long-term economic growth attempt to subdivide the sources of growth among the inputs, particularly the number of worker-hours and the amount of physical capital per worker-hour, and the “residual” that remains after the contributions of labor and capital are subtracted out.

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Though primarily reflecting the role of innovation and technological change, increases in TFP also respond to other types of economic change going beyond innovation, for instance the movement over time of a large percentage of the working population from low-productivity jobs on the farm to higher-productivity jobs in the city. Solow found, to his own surprise and to others’, that only 13 percent of the increase in U.S. output per worker between 1910 and 1950 resulted from an increase in capital per worker; this famous result seemed to “take the capital out of capitalism.”

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Capital investment itself waxes and wanes depending not just on the business cycle but also on the potential profit made possible by investing to produce newly invented or improved products. Without innovation, there would be no accumulation of capital per worker. As Evsey Domar famously wrote in 1961, without technical change, capital accumulation would amount to “piling wooden plows on top of existing wooden plows.”

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This leaves education and reallocation as the remaining sources of growth beyond innovation itself. However, both of these also depend on innovation to provide the rewards necessary to make the investment to stay in school or to move from farm to city.

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Similarly, without innovation before 1750, the reallocation of labor from farm to city did not happen. It required the innovations that began in the late eighteenth century and that created the great urban industries to provide the incentive of higher wages to induce millions of farm workers to lay down their plows and move to the cities.

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The large jump in patents during the 1860–1880 period coincides with the dates of the great inventions of the second industrial revolution, including electric light and power (1879, 1882), the telephone (1876), and the internal combustion engine (1879). Patents per capita remained at a plateau over the interval between 1870 and 1940. There was then a dip through 1985 followed by an explosion, particularly after 1995. Average ratios in figure 17–1 over successive intervals are 18 for 1790–1830, 89 for 1830–1870, 344 from 1870 to 1940, 275 from 1940 to 1985, and then 485 from 1985 to 2012.

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three decades of the nineteenth century were the glory years of the self-employed American entrepreneur/inventor. Horatio Alger–like fantasies were conjured up by the concrete achievements of inventors like Bell and Edison, whose names were widely known and whose latest inventions were publicized and discussed. The goal of becoming an individual entrepreneur, a “self-made man,” excited dreams of young men, even if few would be able to follow the steps of social mobility pioneered by Edison. Nevertheless, many of the manufacturing firms of this era were founded by owners who had begun as ordinary workers. To start one’s own business—that is, to be an entrepreneur—was a badge of success; to remain a mere employee “was to forsake a life of striving for a condition of dependency—itself a sign of moral

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percentage of all U.S. patents granted to individuals (as contrasted with business firms) fell from 95 percent in 1880 to 73 percent in 1920, to 42 percent in 1940, and then gradually to 21 percent in 1970 and 15 percent in 2000. Of the remainder, until 1950, almost all were granted to U.S. firms, but after 1950, the share going to foreign firms soared until in 2000 the 85 percent not granted to individuals were divided almost evenly, with 44 percent going to U.S. firms and 41 percent to foreign firms. Nicholas attributes the decline in the share of independent invention to the growth of “complex capital-intensive areas such as chemicals and electricity.”

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percentage of all U.S. patents granted to individuals (as contrasted with business firms) fell from 95 percent in 1880 to 73 percent in 1920, to 42 percent in 1940, and then gradually to 21 percent in 1970 and 15 percent in 2000. Of the remainder, until 1950, almost all were granted to U.S. firms, but after 1950, the share going to foreign firms soared until in 2000 the 85 percent not granted to individuals were divided almost evenly, with 44 percent going to U.S. firms and 41 percent to foreign firms. Nicholas attributes the decline in the share of independent invention to the growth of “complex capital-intensive areas such as chemicals and electricity.”

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low cost of patents fostered a unique aspect of American invention—that many of the inventors had only an elementary or secondary education. The patent system allowed them to develop their ideas without a large investment in obtaining a patent; once the patent was granted, even inventors who had a low personal income were able to attract capital funding and also to sell licenses. The U.S. patent system was revolutionary “in its extension of effective property rights in to an extremely wide spectrum of the population. Moreover, it was exceptional in recognizing that it was in the public interest that patent rights, like other property rights, should be clearly defined and well enforced, with low transaction costs.”

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Paul David has provided a convincing case that almost four decades were required after Edison’s first 1882 power station for the development of the machines and methods that finally allowed the electrified factory to emerge in the 1920s. Similarly, Karl Benz’s invention of the first reliable internal combustion engine in 1879 was followed by two decades in which inventors experimented with brakes, transmissions, and other ancillary equipment needed to transfer the engine’s power to axles and wheels. Even though the first automobiles appeared in 1897, they did not gain widespread acceptance until the price reductions made possible by Henry Ford’s moving assembly line, introduced in 1913.

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The digital revolution, IR #3, also had its main effect on TFP after a long delay. Even though the mainframe computer transformed many business practices starting in the 1960s, and the personal computer largely replaced the typewriter and calculator by the 1980s, the main effect of IR #3 on TFP was delayed until the 1994–2004 decade, when the invention of the Internet, web browsing, search engines, and e-commerce produced a pervasive change in every aspect of business practice.

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Growth in output per person, our best measure of the rate of improvement in the standard of living, can proceed no faster than growth in output per hour unless hours worked per person exhibit an increase. Yet the

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It was driven by an unprecedented and never-repeated rate of decline in the price of computer speed and memory and a never-since-matched surge in the share of GDP devoted to investment in information and communication technology (ICT) investment.

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Reacting to the failure of these innovations to boost productivity growth, Robert Solow quipped, “You can see the computer age everywhere but in the productivity statistics.”

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The “I” and the “T” of ICT began in the 1960s with the mainframe computer, which eliminated boring and routine clerical labor previously needed to prepare telephone bills, bank statements, and insurance policies. Credit cards would not have been possible without mainframe computers to keep track of the billions of transactions. Gradually electric memory typewriters and later personal computers eliminated repetitive retyping of everything from legal briefs to academic manuscripts. In the 1980s, three additional standalone electronic inventions introduced a new level of convenience into everyday life. The first of these was the ATM, which made personal contact with bank tellers unnecessary. In retailing, two devices greatly raised the productivity and speed of the checkout process: the barcode scanner and the authorization devices that read credit cards

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The late 1990s, when TFP growth finally revived, witnessed the marriage of computers and communication. Suddenly within the brief half-decade interval between 1993 and 1998, the standalone computer was linked to the outside world through the Internet, and by the end of the 1990s, web browsers, web surfing, and e-mail had become universal. The market for Internet services exploded, and by 2004, most of today’s Internet giants had been founded. Throughout every sector, paper and typewriters were replaced by flat screens running powerful software. Professors no longer need to subscribe to or store academic journals. Instead they can access JSTOR, which has 8,000 subscribing institutions and provides full-text access to more than 2,000 journals

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Categories of personal consumption expenditures that felt little effect from the ICT revolution were the purchase of food for consumption at home and away from home, clothing and footwear, motor vehicles and fuel to make them move, furniture, household supplies, and appliances.

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Throughout the world, the equipment used in office work and the productivity of office employees closely resembles that of a decade ago.22 And business productivity continues to enjoy the permanent increase in personal comfort on the job that was achieved between 1930 and 1970 by the introduction of air conditioning into every office setting.

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The important point is that this transition from paper to electronic catalogs happened fifteen to twenty-five years ago and represented a one-time-only source of a jump in the level of productivity—hence a temporary rather than permanent increase in the growth rate of productivity.

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A leading puzzle of the current age is why the near-ubiquity of smartphones and tablets has been accompanied by such slow economy-wide productivity growth, particularly since 2009. One answer is that smartphones are used in the office for personal activities. Some 90 percent of office workers, whether using their office personal computers or their smartphones, visit recreational web sites during the work day. Almost the same percentage admit that they send personal e-mails and more than half report shopping for personal purposes during work time. “Tracking software suggests that 70 percent of employees visit retail sites.”

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wholesale distribution, inventory management, pricing, and product selection, but that productivity-enhancing shift away from traditional small-scale retailing is largely over. The retail productivity revolution is high on the list of the many accomplishments of IR #3 that are largely completed and will be difficult to surpass in the next several decades.

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a destruction of jobs is often greatly exaggerated. Bessen shows also that the invention of bookkeeping software did not prevent the number of accounting clerks from growing substantially between 1999 and 2009, although other evidence suggests that corporate financial software is continuing to reduce employment in corporate finance departments.

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century. By the 1950s, all the major household appliances (washer, dryer, refrigerator, range, dishwasher, and garbage disposer) had been invented, and by the early 1970s, they had reached most American households. Besides the microwave oven, the most important change has been the comfort provided by air conditioning; by 2010, almost 70 percent of American dwelling

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the major changes in the home in the half century since 1965 were all in the categories of entertainment, communication, and information devices.

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As shown in figure 17–4, the share of all business firms consisting of young firms (aged five years or younger) declined from 14.6 percent in 1978 to only 8.3 percent in 2011 even as the share of firms exiting (going out of business) remained roughly constant in the range of 8–10 percent. It is notable that the share of young entering firms had already declined substantially before the 2008–9 financial

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Related research on labor market dynamics points to a decline in “fluidity” as job reallocation rates fell more than a quarter after 1990, and worker reallocation rates fell more than a quarter after 2000. Slower job and worker reallocation means that new job opportunities are less plentiful and it is harder to gain employment after long jobless spells.

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The role of ICT investment in temporarily driving up the growth rate of manufacturing capacity in the late 1990s is well known. Martin Baily and Barry Bosworth have emphasized that if ICT production is stripped out of the manufacturing data, TFP growth in manufacturing has been an unimpressive 0.3 percent per year between 1987 and 2011.

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These four factors unique to the late 1990s—the surge in manufacturing capacity, the rise in the net investment ratio, the trough in the rate of decline in computer prices with the associated decline in the contribution of ICT capital to labor productivity growth, and the shift in the timing of Moore’s Law—all create a strong case that the dot-com era of the late 1990s was unique in its conjunction of factors that boosted growth in labor productivity and of TFP well above both the rate achieved during 1970–94 and during 2004–14. There are no signs in recent data that anything like the dot-com era is about to recur—manufacturing capacity growth turned negative during 2011–12 and the net investment ratio fell during 2009–13 to barely a third of its postwar average.

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Mokyr, is that the human brain is incapable of forecasting future innovations. He states without qualification that “History is always a bad guide to the future and economic historians should avoid making predictions.”38 He assumes that an instrument is necessary for an outcome. As an example, it would have been impossible for Pasteur to discover his germ theory of disease if Joseph A. Lister had not invented the achromatic-lens microscope in the 1820s.

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notable that innovations to fight pollution and global warming involve fighting “bads” rather than creating “goods.” Instead of raising the standard of living in the same manner as the past two centuries of innovations that have brought a wonder of new goods and services for consumers, innovations to stem the consequences of pollution and global

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But the common assumption that future innovation is non-forecastable is wrong. There are historical precedents of correct predictions made as long as fifty or 100 years in advance. After we review some of these, we will return to today’s forecasts for the next quarter-century.

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wires. In fact, much of IR #2 was not a surprise. Looking ahead in the year 1875, inventors were feverishly working on turning the telegraph into the telephone, trying to find a way to transform electricity coming from batteries into electric light, trying to find a way of harnessing the power of petroleum to create a lightweight and powerful internal combustion engine. The atmosphere of 1875 was suffused with “we’re almost there” speculation. After the relatively lightweight internal combustion engine was achieved, flight, humankind’s dream since Icarus, became a matter of time and experimentation.

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The most important sources of longer life expectancy in the twentieth century were achieved in the first half of that century, when life expectancy rose at twice the rate it did in the last half. This was the interval when infant mortality was conquered

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These small robots are no different in principle from the introduction of machinery dating back to the textile looms and spindles of the early British industrial revolution. Most workplace technologies are introduced with the intention of substituting machines for workers. Because this has been going on for two centuries, why are there then still so many jobs? Why in mid-2015 was the U.S. unemployment

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Surely multiple-function robots will be developed, but it will be a long and gradual process before robots outside of the manufacturing and wholesaling sectors become a significant factor in replacing human jobs in the service, transportation, or construction sectors. And it is in those sectors that the slowness of productivity growth is a problem. For instance, consider the task of folding laundry, which is simple and routine

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Thus it may contribute to productivity growth by reducing certain inefficiencies and lowering barriers to entrepreneurship, but these are unlikely to be huge effects felt throughout the economy. 3D printing is not expected to have much effect on mass production and thus on how most U.S. consumer goods are produced.

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modern methods achieved during the 1994–2004 decade. Six types of objective measures all show a peak of activity during the late 1990s and a sharp slowdown, stasis, or even decline in the most recent decade. These include the number of daily transactions on the New York Stock Exchange, the rate of creation of new business firms, the growth of manufacturing capacity, the rate of net investment, the rate of improvement in the performance of computer equipment relative to its price, and the rate of improvement of the density of computer chips.

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One resolution is that the replacement of human jobs by computers has been going on for more than five decades, and the replacement of human jobs by machines in general has been going on for more than two centuries. Occupations such as financial advisers, credit analysts, insurance agents, and others are in the process of being replaced, and these displaced workers follow in the footsteps of victims of the web who lost their jobs within the past two decades, including travel agents, encyclopedia salesmen, and employees of Borders and Blockbuster. Yet these previous job losses did not prevent the U.S. unemployment rate from declining to a rate near 5 percent in 2015, because new jobs were created to replace the jobs that were lost.

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The techno-pessimist view favored here recognizes the many dimensions of advance of robots and artificial intelligence while stressing the slowness of their macroeconomic effects and the many sectors of the economy in which the interaction of workers and machines has changed slowly, if at all, in the past decade. Just as the techno-optimists are pessimistic about job growth, the techno-pessimists are optimistic that job growth will continue and that new jobs will be created as rapidly as technology destroys old jobs.

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The problem created by the computer age is not mass unemployment but the gradual disappearance of good, steady, middle-level jobs that have been lost not just to robots and algorithms but to globalization and outsourcing to other countries, together with the concentration of job growth in routine manual jobs that offer relatively low wages.

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By several measures, including median real wages and real taxable income in the bottom 90 percent of the income distribution, there has been no progress at all. Other measures of income growth below the top 1 percent yield positive, rather than zero, growth—but at a rate substantially slower than averages that include the top 1 percent. Steadily rising inequality over the past four decades is just one of the headwinds blowing at gale force to slow the growth rate of the American standard of living. The others that receive attention in this chapter are education, demographics, and government debt. Additional headwinds such as globalization, global warming, and environmental pollution are touched on more briefly. The overall conclusion of this chapter is that the combined influence of the headwinds constitutes an important additional drag on future growth going well beyond the post-1970 slowdown in the impact of innovation evident in chapter 17. This chapter begins with a multifaceted treatment of the history of the American income distribution since the first income tax records became available 100 years ago. The rapid pace of advance in incomes at the top, particularly within the top 1 percent, can be explained by a set of factors that have boosted top incomes, including the economics of superstars, changing incentives for executive compensation, and capital gains on real estate and the stock market. Income stagnation for the bottom 90 percent of the distribution has a different

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The rapid pace of advance in incomes at the top, particularly within the top 1 percent, can be explained by a set of factors that have boosted top incomes, including the economics of superstars, changing incentives for executive compensation, and capital gains on real estate and the stock market. Income stagnation for the bottom 90 percent of the distribution has a different set of causes, including the effect of automation in destroying middle-income jobs, an erosion of the strength of labor unions, the decline in the purchasing power of the minimum wage, the effect of imports in the shrinkage of the manufacturing sector, and the role of both high-skilled and low-skilled immigration.

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Government debt is the fourth headwind, because the ratio of government debt to GDP is predicted to increase steadily in the future. The growing ratio of retirees to working taxpayers will soon require remedies that change the current set of rates for Social Security taxes and/or change the calculation of benefits; the Social Security trust fund is currently projected to decline by 2034 to a level below which it cannot pay for its current schedule of obligations, whereas the Medicare trust fund will reach exhaustion level in 2030.

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They address the problem that the proportion of those with low and medium incomes who pay taxes varies from year to year and era to era. Their now widely accepted solution is to use standard macroeconomic data derived from the national income accounts to estimate total income and then to subtract the top incomes, based on

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The two-and-a-half decades after 1948 were a golden age for millions of high school graduates, who without a college education could work steadily at a unionized job and make an income high enough to afford a suburban house with a back yard, one or two cars, and a life style of which median-income earners in most other countries could only dream.

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Average real income in the bottom 90 percent was actually lower in 2013 than it was in 1972. In fact, peak real income for the bottom 90 percent of $37,053 in 2000 was barely higher than the $35,411 achieved in 1972, and by 2013, that average

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The share of imports in U.S. GDP increased from 5.4 percent in 1970 to 16.5 percent in 2014. Labor embodied in imports is a substitute for domestic labor. For this reason, the increase in the import share of GDP has contributed to the decline in the relative wages of unskilled and middle-skilled workers.

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David Autor and co-authors calculated that imports from China between 1990 and 2007 accounted for about a quarter of the decline in manufacturing employment during that period and that they also lowered wages, reduced the labor force participation rate, and raised publicly financed transfer payments.

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Immigration accounted for more than half of total labor force growth in the United States over the decade between 1995 and 2005.

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Many low-skilled immigrants disproportionately take jobs and enter occupations already staffed by foreign-born workers—for example, restaurant workers and landscape services—and thus their main effect is to drive down wages of foreign-born workers, not domestic workers.

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The automation effect overlaps with “skill-biased technical change” that results in the destruction of routine jobs that are close substitutes to software-driven computers, and these job losses have occurred not just in the assembly lines of manufacturing plants, but also in such routine office occupations as typist, bookkeeper, clerk, receptionist, and others. Automation did not create a permanent state of mass unemployment, as once was feared by pessimists, and the economy was able to attain an unemployment rate below 5.0 percent in the business cycle expansion that ended in 2007, and the unemployment rate in 2015 has again declined close to 5.0 percent.

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middle-skilled workers are forced to compete for low-skilled manual jobs, thus raising the supply relative to the demand for manual workers.

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It has broken strikes in order to enforce a two-tier wage system in which new hires are paid half of existing workers, even though both groups are members of the same labor union.

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Even within the top 1 percent, income gains are much faster the higher one rises into the stratosphere of the top 0.1 percent and the top 0.01 percent. It is useful in identifying the sources of rising incomes at the top to use a three-way distinction between superstars in the sports and entertainment industries, other highly paid and highly skilled workers, and the controversial additional category of CEOs and other top corporate managers.

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On the demand side, audiences want to see the very best talent, not the second-best, so income is highly skewed because the ability of top superstars to fill large entertainment venues and to sell recordings is an order of magnitude greater than that of the second-best stars. On the supply side, the performer exerts the same effort whether ten or 10,000 witness the performance.

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CEOs and other top corporate officers represent a distinct third group. An ample literature suggests that CEO pay is not set purely on the market, but rather is set by peer CEOs who sit on compensation committees. Lucian Bebchuk and Yaniv Grinstein provide a managerial power hypothesis that drives top executive pay well above the market solution.

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they juxtapose a market-driven explanation against a managerial power explanation. Their first proposed explanation is that the use of stock options has increased so dramatically because corporate boards want to tighten the relationship between pay and performance. Their second proposed explanation, complementary to their first, is that boards want to increase CEO pay and choose option grants as a “less visible” method that is less likely to incite stockholder anger.

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This rise in the college wage premium has been sufficient to explain essentially all of the rise in earnings of those at the ninetieth percentile relative to those at the tenth percentile between 1984 and 2004.

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The upsurge in college graduate real wages occurred in two relatively short periods, first between 1964 and 1972 and then between 1996 and 2000. Between 1972 and 1996, and then again after 2000, the real wage of college graduates stagnated.