by Bill O’Grady

Robert Gordon is a well-known economist who teaches at Northwestern University.  He was a member of the Boskin Commission that assessed the accuracy of the CPI and is also a member of the National Bureau of Economic Research, the body that dates business cycles.  Part of his research has focused on long-term economic and productivity growth.

In August 2012, he published a working paper suggesting that U.S. economic growth was “over.”[1]  Gordon’s thesis is that the first two industrial revolutions, the first starting in 1750 in England and the second in 1870 in the U.S., were so remarkable that nothing else has had a similar impact.  Although Gordon does acknowledge a third revolution, the computer and internet revolution which began around 1960, he suggests the impact pales in comparison to the earlier two revolutions.

From there, Gordon argues that the jump in growth that occurred from the first two revolutions will not likely be repeated, meaning that growth will slow down to the pre-revolutionary trend.  That isn’t to say that growth will become non-existent.  Instead, growth will slow to around 1.5% per year permanently.

The geopolitical impact of such a slowdown would be significant.  The global superpower generally is dominant in both the military and economic spheres.  It will be difficult for the U.S. to maintain such dominance with such slow growth.  Not only will fiscal restraints develop because of this slow growth, which will make military budgets problematic, fulfilling the reserve currency role and the global importer of last resort function will become nearly impossible as well.

In this report, we will discuss Professor Gordon’s thesis, examine the geopolitical impact if he is correct and offer some criticisms of his thesis.  We will conclude with potential market ramifications.

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[1] NBER Working Paper 18315, “Is U.S. Economic Growth Over?  Faltering Innovation Confronts the Six Headwinds,” Aug 2012.