In the Nation's Interest

The Growth of Unhappiness

Robert J. Gordon, Professor of Economics at Northwestern University, is about to release a book that may rival Thomas Piketty’s Capital in the Twenty-First Century for controversy (if not for ideology).  Gordon is an economics scholar of long standing – even longer if you consider that the late Robert A. (“Aaron” to his many friends and admirers) Gordon was his father. In recent years Robert Gordon has concentrated on the study of productivity growth.  It might be flip to say that he needs to work harder, because right now he can’t find very much.

And that is the problem.  Economists (including our friends at The Conference Board) have noted for some time that productivity growth has broken with its long-term trend, and not in a positive way.  It is part of the reason why the recovery from the recent recession following the financial crisis has been so unsatisfying, and why Americans by and large are so unhappy.  (Another factor among several is that wages on average have lagged behind even our limited productivity growth.) 

Unfortunately, Gordon’s January 2016 book, The Rise and Fall of American Growth, will tell us not to hold our breath waiting for improvement.

Part of Gordon’s argument can be conveyed with basic logic.  Gordon does not deny that innovation is going on around us all the time.  But he believes that the usefulness of that innovation – its impact on actual productivity – is declining.  A foundation of this argument is the observation that the really big innovations – the light bulb, electricity generation, indoor plumbing and climate control, telephonic communication, the automobile and air travel – are behind us.  He makes the point that many recent innovations have been incremental improvements on older, bigger ones – such as miniaturization of electronics, which allows smaller or multi-function portable telephones.

Gordon acknowledges that it has been claimed that all innovations have been found and that we have reached the best of all technological worlds, only for these claims to be proven false by the next round of innovation.  And of course, no one can see the future, and we do not know what new wonder might lurk around the next corner.  But Gordon’s point is really much more subtle than past naïve declarations of “the end of innovation.”  He is raising an issue of degree, not of kind.  And this question of degree is highly material.  The difference between 2 percent productivity growth (about the average from the “age of innovation” through the early 1970s) and 1 percent productivity growth (about where we have been since) is big, big money over a lifetime.

Is Gordon “right?”  His argument is sufficiently subtle and nuanced that economic historians could well be arguing that question half a century from now.  But many Americans are increasingly unhappy about the economy, and even today feel as though he is on the money (or the lack thereof).

But Martin Feldstein of Harvard University (which Gordon might call “the Northwestern of the East”) leaned fairly strongly the other way in a recent opinion column.  Feldstein points out that past innovations built the living standards we enjoy today, and aren’t going away.  So people aren’t becoming worse off.  Many quality-of-life innovations (most television content, Google, Facebook, etc.) don’t make it into the economic growth statistics at all because they are not sold at identifiable market prices.  (A brilliant and witty Nobel-winning economist, Robert Solow of MIT, observed back in 1987 that “you can see the computer age everywhere but in the productivity statistics.”)  And even lower rates of growth add up (or even better, compound) over time, meaning that parents might see their children fall down a few rungs on the economic ladder relatively speaking but still enjoy a higher standard of living after overall economic growth is factored in.

I would go Feldstein one better.  Many Americans have jobs that are on some kind of a career trajectory.  If incomes of typical workers are growing on average at 1 percent per year (after inflation, of course), then every rung on that career ladder can have a wage growing at 1 percent.  It is as though the career ladder is itself on an elevator rising at that 1 percent rate.  So every individual who climbs that career ladder to higher rungs of seniority and responsibility actually enjoys income growth that exceeds the 1 percent average.

But Americans still are unhappy as a group, and American parents still fear for the living standards of their children.  Why?  Well, the basic answer is that income growth is not meeting our expectations, and falling short of our expectations is the problem – even if our incomes are growing (faster than zero percent – and of course, in the wake of the financial crisis, even that condition is not met for everyone).

There are several reasons we might consider for this sense of unhappiness.

Yes, there is innovation and “growth” that is not measured in the GDP statistics.  But not even all measured economic growth necessarily registers in our minds and makes us happier.  It is evident that health care has improved in quality and become more powerful – and also more expensive.  For most Americans, the checks that pay for much or most of that health care are written by our employers.  There is good evidence that those health insurance payments have grown more rapidly than our cash wages over time.  But people (I believe) do not instinctively feel better off because those employer-paid health insurance premiums have grown more rapidly (and health care has improved in quality while it has become more expensive).  It is as though good health and health care are in our personal “baselines;” we judge our well-being by what is left over, and the growth of cash wages has stalled.

We also don’t value damage prevention in full.  If you are concerned about air quality and fear global climate change, you should be happy that automotive technology has advanced so far as to lessen smog, soot and carbon emissions.  (And yes, Volkswagen, I expect to hear from you about my wife’s diesel wagon.)  But we most likely measure our standards of living by how much of our paycheck will be eaten up by the car payment – without adjustment for cleaner air.

We do include anxiety in our “happiness” calculation, though.  And even the “less-effective” innovations that Gordon describes cause “creative destruction,” as the great economist Joseph Schumpeter taught us. To many the destruction taking place in our current economy is at least as salient as the creation that is occurring.  Feldstein wrote about middle-class children growing up to higher living standards if they enjoyed even sub-average wage growth, but careers these days can easily be destroyed by innovations that make even hard-earned skills obsolete and send workers down a quantum notch of compensation.

Finally, without all of the pejorative connotations, there is probably some measure of envy in popular attitudes about the economy.  The internet shows us all the “lifestyles of the rich and famous” up close and personal, 24/7.  We probably have a hard time counting our 1-percent blessings when confronted with other blessings so much richer than ours.  Slow overall economic growth just makes this worse.

So I’m looking forward to Robert J. Gordon’s book – just as you and I often look forward to re-watching an exquisitely made but dark motion picture (you might think of Ingmar Bergman; my choice would be “Das Boot”).  Both represent very high strata of their respective art forms.  I just don’t expect that either will make me feel happier.

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