David R. Henderson  

Gordon on Growth: Rates versus Levels

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I'm looking forward to reading Robert Gordon's new book, The Rise and Fall of American Growth. PBS recently did an 8-minute segment on it that lays out his argument nicely.

HT2 John Cochrane and Greg Mankiw.

I won't try to resolve the issue of whether future growth will be higher or lower than that of the period from 1870 to 1970 here--or anywhere. It can't be resolved. We simply can't know whether economic growth, properly measured, will be higher. John Cochrane points out that real GDP does not measure consumer surplus. And that's a problem.

I do want to point out, though, a simple error that PBS reporter Paul Solman makes that one would expect anyone who understands basic math not to make.

Note the quote from President Obama near the top of the story (at the 0:33 point):

Anyone claiming that America's economy is in decline is peddling fiction.

Solman then asks: "But really? Tell that to eminent economist Robert Gordon, a Democrat, who's peddling a distinctly nonfictional new book, The Rise and Fall of American Growth."

But there's no contradiction. Obama claimed that the U.S. economy is not in decline. What does this mean? That growth is positive. Is growth positive? Yes. Has growth, measured by real GDP, fallen since the golden era Gordon discusses? Possibly yes.

It's basic math, but it's basic math that people often forget. One of the most valuable things I learned in Ben Klein's course in monetary theory at UCLA was always to distinguish between levels and rates of change.

Solman does it again at the 2:08 point, saying, "But MIT's Erik Brynjolfsson doesn't buy the argument that the U.S. economy's best days are over."

I should hope he doesn't. Nor does Gordon. If per capita economic growth persists, then the U.S. economy's best days are ahead.

UPDATE: Commenter David below reminds me that I've discussed the consumer surplus point before. Here's one instance.


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COMMENTS (11 to date)
Craig Richardson writes:

So true. For students: Draw a graph of GDP growth over time that is first rising, peaks and then begins falling, crossing zero, and goes into negative territory.

My first day of class in Economic Growth and Development, I ask them "Where does the economy begin shrinking?"

More than 3/4 say right after the peak in GDP growth.

The really good way to illustrate is to put up the actual numbers of GDP and have them calculate the growth themselves.

David writes:

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David R. Henderson writes:

@David,
Basically, is there anything close to a satisfactory measure of aggregate consumer surplus that could compete with GDP?
I don’t think so.

Craig Richardson writes:

@David,

Here's the problem- shown through an example. The most valuable tool I have, aside from my electric drill, is my hammer. I've used it for 25 years in all manner of projects. It cost me about $7 and I've built decks, put up wallboard, and any number of projects. If there was a monopolist selling hammers, he or she could probably have gotten me to pay $1,000, given the incredible benefits I've gotten over the years (and future uses too). It's a lot easier to measure prices than consumer benefits, especially if prices are falling and goods are getting higher quality (e.g. laptops).

Mark Bahner writes:
I won't try to resolve the issue of whether future growth will be higher or lower than that of the period from 1870 to 1970 here--or anywhere. It can't be resolved. We simply can't know whether economic growth, properly measured, will be higher.

Science is all about predicting future events. You're saying that economics has no idea whether the real annual economic growth rate in the U.S. or the world will be higher or lower in the future?

Jon Murphy writes:

@Mark Bahner:

A prediction is an educated guess. It's far different from "knowing." We can know what happened in the past. We can guess what will happen in the future.

Seth writes:

Piggybacking on Jon Murhpy to Mark Bahner: Plus, who thinks economics is science?

@David Henderson: Props for pointing out Solman's basic math error. I wish more economists would do this more often. It might cut down on the media noise.

David R. Henderson writes:

@Mark Bahner,
Science is all about predicting future events.
This is a rare time when I disagree with you. It’s not. That’s part of science, but science is also about understanding.
You're saying that economics has no idea whether the real annual economic growth rate in the U.S. or the world will be higher or lower in the future?
No. I’m saying we can’t know. That’s different from saying we have no idea.

Mark Bahner writes:

Hi David,

No. I’m saying we can’t know. That’s different from saying we have no idea.

Yes, you're right of course. I see I mischaracterized what you wrote. Sorry about that.

I'll explain some related--though maybe distantly--issues, after I get over the shock of what's happened to Lord Grantham. ;-)

Best wishes,
Mark

David R. Henderson writes:

@Mark Bahner,
Thanks. Though I wish you hadn’t mentioned Lord Grantham. I’m on the West Coast. For that reason, I’m signing off for the night and not looking at anything on the web.

Mark Bahner writes:

D-oh!

I should have said, "on Downton Abbey." Or even "on television."

Sorry about that. (I wasn't think clearly. :-))

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