Can America innovate its way to growth?

By Allison Schrager
October 23, 2013

America is banking on economic growth. Its ability to pay debts, lower unemployment, and provide better living standards all depend on growth returning to its pre-recession levels and staying there. But what if it doesn’t?

Several economists are worried it won’t. Growth can come from three sources: more labor, more capital, or more innovation. The 20th century was remarkable because each of these factors grew. America’s final push to manufacturing, and away from agriculture, increased the use of capital. The volume and quality of labor also increased. More people than ever finished high school and went on to college, and many women joined the labor force. But we can’t repeat these events. Not only that, future demographic trends are not favorable. American education isn’t giving many young people the skills they need to be competitive in the global economy. An aging citizenry means a smaller share of the population will be working to support everyone else. Lower rates of economic growth will make it harder to repay America’s debt — both entitlements and outstanding treasury bonds. Servicing debt will take more resources from the economy, creating a vicious cycle of high rates and low growth.

But not all hope is lost; there’s still innovation. Innovations make existing resources more productive. Productivity is measured by calculating how much output (GDP) increased or decreased given the inputs (capital and labor) used. If you get more output for the same amount of inputs, productivity has increased. That means if western economies innovate more, and thereby constantly increase productivity, they will still grow. If productivity outpaces the economic headwinds, America can still grow at the pace it used to. But that’s easier said than done.

In his new book, Nobel Prize winner Edmund Phelps frets that the culture of dynamism that leads to innovation has dwindled. He recently hosted a conference on the future of innovation where Robert Gordon of Northwestern argued, using results from a paper he wrote last year, that the pace of innovation has slowed because all the big and important things (electricity, indoor plumbing, cars) have already been discovered. Tyler Cowen argued a similar idea, with his book The Great Stagnation. He also believes all the low-hanging fruit has been picked; there isn’t much left to innovate that will have a notable increase in living standards. That suggests we’ve not only run out of new labor and capital but ideas, too.

This view seems to be confirmed by recent productivity estimates. Productivity increased by 2.3 percent, on average, each year between 1891 and 1972, but only by 1.33 percent from 1972 to 1996 and 1.33 percent between 2004 and 2012. Gordon believes the heady days of full integer growth are behind us. Between 1871 and 2007 GDP per capita grew 2 percent a year, on average; this meant living standards doubled every 35 years. But between the slower pace of innovation, changing demographics, debt and the environment he anticipates the American economy will only grow at 0.2 percent a year in the future.

But the future may not be as bleak as Gordon and the others suggest. First, it’s too soon to judge the impact of recent technology. Economic historian Joel Mokyr, also of Northwestern, points out that it took 50 years to realize the impact of the steam engine; we can’t count out new technology just yet. The infrastructure to deal with innovations often lags behind their creation. Take high-speed trains. They exist, yet America still doesn’t have the tracks to accommodate them. We still may not have realized the true potential of recent innovations.

Also, the purpose of growth is improvement in living standards. But GDP per capita is not an adequate metric to capture changes in living standards. It fails to consider all the changes in quality of life. Mokyr said, in response to claims that innovation is no longer radical, “you may want a flying car, but wait until you need an artificial hip.”

Cars provide an example of how innovation has changed to improve quality of life in ways GDP doesn’t capture. The household adoption of cars in the 20th century does not seem to be matched by recent innovation. Cars still are cars; they don’t fly or drive themselves (or at least not yet for the general public). But that undercounts some very important technologies that have transformed many lives. Things like anti-lock breaks and four-wheel drive means cars are much safer to drive. Between 1994 and 2011 the number of drivers killed in car accidents fell 24 percent. That’s even more impressive if you consider that the number of miles driven increased 25 percent and the number of licensed drivers increased 20 percent. Not dying in a car crash is surely important to quality of life, even if it’s less flashy than a flying car. The success of a car not killing someone is hard to fully capture in traditional productivity measures.

Mokyr also makes an interesting point regarding who benefits from innovation. New technology is associated with the young. But many recent innovations benefit the old. Old age and retirement look very different than they used to. Well into their 70s, many people are vibrant and mobile. Retiring baby boomers are becoming a desirable demographic who demand products and technology — especially medical innovation that enhances the quality of their lives. Technology that benefits the elderly won’t have the same impact on traditional productivity.

Changing demographics also require us to redefine what we mean by increased living standards. We normally associate it with what more wealth buys, but that fails to capture leisure. Retirement used to consist of getting increasingly sick, feeble and dying. Retirement has gotten longer and more active: in 1970 the average retirement lasted 13 years, in 2010 it was over 18 years. People live longer and (up until the Great Recession) retired younger. This trend is not sustainable because it undermines growth by shrinking the labor force. But to some extent, longer and fulfilling retirements are not completely unreasonable. Increased prosperity means consuming more goods and leisure. The concept of modern retirement is one of the fruits of increased wealth.

An aging society may mean less growth and, just like more growth is presumed to benefit everyone, less growth is expected to be bad. But when you consider different demographics there are winners and losers. Japan has suffered from low growth since 1990, but the deflationary environment and long retirements meant good times for the Japanese elderly.

We don’t know what the future holds. The latest revolution in technology may be sowing the seeds of something profound that benefits everyone. But, so far it seems we are on a path where more gains go toward the elderly. A more balanced and higher growth path will involve improving education and encouraging people to work longer. Though even a low growth future doesn’t spell all doom and gloom, it shows traditional ways of measuring growth and innovation are aging too.

PHOTO: An engineer makes an adjustment to the robot “The Incredible Bionic Man” at the Smithsonian National Air and Space Museum in Washington October 17, 2013. REUTERS/Joshua Roberts

24 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

No. We would actually have to have a free society not controlled by moron corporate yes men who are the minions of the wealthy but also the bosses of our politicians. Rational thought would have to prevail, and that will never happen now that the inept and corrupt are in control.

Posted by brotherkenny4 | Report as abusive

‘innovation’ is a corporate buzzword, implying that you can devise a method of production that requires far fewer employees, yet establishes firm control over the remaining staff…….and reduces freedom of choice for the customer.

it’s a buzzword with undertones that suggest you can assert dominance over others….and reap benefits from that

Posted by Robertla | Report as abusive

America still has a great deal of innovation, even though it is far less than say 2 decades ago. But commercially successful innovations can only deliver so much. They cannot solve problems caused by cultural and management recklessness.

The main troubles of America are caused by:
1) Going into debt far far beyond any ability to repay. Worse, cannot help but increase debt to infinity.
2) An unbalanced public and private economy. Where the public side just spend far beyond revenue, racked up trillions of debt and cannot stop for fear of civil unrest. And the private side squeeze profit not from innovation or other sound methods, but by squeezing labor to the point of collapsing an entire class of people. American capitalism forgot that the purpose of capitalism is to benefit people, not money.

These problems are not solved by innovations of any kind. They are cultural, and can only be solved by fundamental societal reform. As they say in history, reform now under some reasonable control, or reform later and call it a civil war.

Posted by TomKi | Report as abusive

Cars have brakes so they don’t break.
“Well into their 70′s, many people are vibrant and mobile.”
Thanks Yoda.
This reads like an extra credit essay on an macroeconomics exam.-

Posted by notnews | Report as abusive

Nineteenth century opinions that were later regretted with hindsight and new knowledge, like Lord Kelvin saying there was little new ground in physics, or political debate about closing the US Patent Office since there was little left to invent; or the song about Kansas City having “gone about as far as they can go”; or current dismay over a possible impasse for esoteric physics at the extremes of observable scale; are all of a type of comment that lacked the ‘big picture’.

The laments that it’s all done are either sound science unaware of a limiting factor about to be removed, or reflect a narrow perspective ignoring opportunities for big advances on many other fronts when the most familiar one slows.

“Plastics!” is a cliché line from “The Graduate” – but “Materials Science!” or “Genetics!” or “Remote Sensing” or “Robotics” are just a few among many topics in good technical careers for youth today. We seem to be in a wave of applied science bringing the breakthrough basic research of the 20th century to every day technology and medicine, also making products more efficient or sustainable, and this seems like a wave that can keep a generation busy.

One key question is whether we are doing enough to encourage via education, and private and public funding, the longer-term more “blue sky” basic research that would feed into this applied science process for another generation.

Another question is whether we are producing the workers and students who will be innovators. On one hand, manufacturing in America finally embraced our lost prophet Deming and line workers are seen as an empowered source of innovation and engaged partners in continuous improvement, a positive change from a century ago. On the other hand kids are less involved in the activities that feature in biographies of many 20th century scientists and innovators: fixing everything on the farm, or fixing and building radios in say, a Brooklyn apartment, than they were 75 years ago. I do see school competitions and clubs in robotics for example that encourage creative work linking theory with experiment and practice, and many schools still have shop classes that could be updated to new technologies “let’s 3-D print or CNC machine a new part today, instead of going to the junkyard”.

My concern about preserving American know-how and innovation is keeping the foundation strong:

• A public that understands why science (in the broadest sense of STEM and sustainability) matters more than ever; and that takes national pride in research, scientific exploration, and new inventions and entrepreneurs, or Nobel prizes. NASA helps in this regard and the proposed Science Laureate might help too. There are lots of resources for kids and interested public to follow these topics, but popular culture has to change bit by bit before wesee them as paths to success that get due attention compared to entertainment, sports or Wall Street.

• Education that doesn’t shortchange science topics or strip essential hands-on lab work from science classes, and teaches innovation as part of history and culture, as well as with practical problem-solving.

• A longer term focus at corporate and political levels to keep filling our scientific pipeline from wide-ranging basic research, to applied science and engineering, to the production level, probably along a public to private path like the proven model from NASA’s and it’s precursor NACA’s research and technology development ultimately supporting American industry.

Posted by Decatur | Report as abusive

I’ve discussed Elon Musk recently with my kids as one example of an innovator: making rockets more efficient and cheaper; getting an elecric car to market (while not ‘perfect’, Teslas look pretty cool on the western US roads), and if hyperloop works, offering a elegantly innovative and more sustainable alternative to putting high-speed passenger trains on a national rail network of 50-mph freight train tracks.

I explain that if you know the math and science you can work out the numbers for business, and sketch out new ideas to build knowing they’re likely to work. I’m sure there are more like him emerging today and I hope we educate to that spirit and support the needed research for new innovators to build from.

Posted by Decatur | Report as abusive

Your thinking is of the same cloth that got us into this mess. GDP growth is a golden calf of economics. Consider you sell a carton of cigarettes to a child. This is GDP growth. Later you have many doctors attend to his many illnesses, charging large fees. More GDP growth materializes. Start thinking on new lines – prosperity without large nominal wealth, sharing of resources, responsible use of that which we have, a system that trends towards equality and fraternity rather than entrenching a 1%. Your article concerns only the 1% anyway and they probably don’t read it anyway, preferring to consult with lobbyists rather than economists when divining the future.

Posted by BidnisMan | Report as abusive

TomKi, “These problems are not solved by innovations of any kind. They are cultural, and can only be solved by fundamental societal reform. As they say in history, reform now under some reasonable control, or reform later and call it a civil war.” You are completely correct.

Posted by 2Borknot2B | Report as abusive

I am an American. I have two U.S. Patents and two more patents pending. One technology I have patented was highlighted by the NIST as ‘next generation technology’ in its official Federal Investigation into the World Trade Center disaster. Essentially it is a networked evacuation system that could have saved the lives of the thousands trapped at the WTC towers on 9/11, and it is included in the Investigation’s Final Recommendation number 20, as technology that must be studied and implemented. So I can say this: NO, American CANNOT innovate its way to growth. The only people who are ‘growing’ are the uber rich 1% in the USA. Absolutely NOTHING in terms of wealth is trickling down to innovators, inventors and entrepreneurs.

Posted by rexsolomon | Report as abusive

What makes you think we (the USA) have a monopoly on innovation. We score low cognitive skill tests. Due to corruption and special interests we pay more for education and get less. We now produce only a minority of college graduates and a lot of them are from overseas. We do not motivate either the youth or the rest to become all they can intellectually. We do not even support graduate education of the american born. Look at any engineering graduate school student body and find over 1/3 foreign. Expect continued decline.

There is plenty to innovate there no programmed robot to your job is one example. Much of what is being called innovation is just lower cost of complexity due to build up of automated processes to produce ever more complex integrated circuits and large programs can be linked together to produce still larger computer programs. Which can be applied to automate new things.

Outside of that things move slower but they move.

Posted by Samrch | Report as abusive

“it’s too soon to judge the impact of recent technology. Economic historian Joel Mokyr, also of Northwestern, points out that it took 50 years to realize the impact of the steam engine…”. Absolutely true.

The bad news is that since 1980 the inexpensive “personal” computer has made obsolete millions of good middle-class jobs. These have disappeared. Not offshored, just gone. Forever.

Knowledge that is not readily available is as useless as a part that is not available. So here these computers have “supercharged” individuals, researchers and small business. As more and more knowledge flows through and onto the internet like a building flash flood, awareness of that knowledges spreads and it is adapted in ways not yet even imagined. Man’s ability to utilize existing technology will thus continue to expand.

Each such expansion will generate another expansion, and yet another. One almost certain effect is that the first modern human to live to one thousand years of age may have already been born.

The challenges to harness such “progress” such that humans world wide can shrink their footprint on the earth to something sustainable are huge. The battle for hearts and minds will be between quantity of human life and quality of human life. Failure is not an option, for even delay in such decision will inevitably mean increasing unrest, desperation and wars between the comfortable and the desperate competing for ownership and control accessible resources.

Decatur is on the right track. If there be a single “new technology that is going to have sea-change effects on our society and it’s potential, it is Robotics. Already automation has made huge inroads on our manufacturing and production “systems, while Robotics is still in the “assistant” stage such as in surgical use.

I do not envision humanoid robots, but uncountable invisible mechanical, electrical, hydraulic, etc.; devices as yet undreamed that will act as unseen slaves. First they will help us with our needs. Then they will help us with our wants. Eventually they will indulge the great majority of our whims.

The time will come when very, very few humans need “work”. When all are well educated and intellectual boredom is the great challenge, virtually all youth might compete to be chosen for preparation to “serve society”. If such positions are few in number and are filled by the best and brightest they will receive great respect and prestige.

Our “problem” will be how to otherwise productively employ a surplus of “qualified” people. What a different world that will be from today. The next two decades will be “interesting times” in which to live.

Posted by OneOfTheSheep | Report as abusive

With all due respect, or even without much of it, the author speaks from the standpoint of a foot soldier who is defending the principled status quo of our economic system which is built on intellectual mud and and fraudulent ideas beginning with those of Adam Smith and others that followed. I abhor the concepts, better named misconceptions, which the author pretends to push forward.

There have been many comments posted already that respond very well to the author’s diatribe. I applaud all of them. I will only point to another view of why the United States of America has a fundamental problem that cannot be solved short of entering a completely new social-economic paradigm in the short term of, say, the next twenty year. Else we are all doomed to the “day after” alternative.

The “increased productivity” argument as a solution to our problems is misguided for the simple reason that the very results of the increased Product DOES NOT go t improve the standard of living of the society at large, but instead it continues to increase out of proportion the NOMINAL wealth of the so called one per centers. When a member of this class of people buys a Picasso for $100M and sells it for $200M, although the GNP has increased by the $100M profit, no new wealth has been produced, and worse yet, no part of such “nominal” wealth will be used to improve the social conditions of society at large.

And therein lays the problem. First, no new wealth being created. Second, any nominal wealth not being SHARED with those who need it most?

There is another way to look at the basic problem of increased productivity: Assume for argument’s sake that by a miracle of inventiveness in sciences and technology, that we create a “productive capacity” of GOODS (forget about services for the time being, since that is a subset of a different problem) in which all new production is done by automata such that NO human labor is necessary. The question then becomes: Who benefits from the results of THAT economic activity? And what kind of “economic system” would be required to enable (most of) the population in our society to “participate” in the enjoyment of of the wealth created by those autonomous computer-controlled self-replicating machines?

Until we devise a NEW model of social-economic system of production and consumption of those goods that enable us, each and all of us, to maintain a life at a higher standard of physical and intellectual living the USA population (and the civilization it represents)will continue to slide down into destruction and oblivion. Examples of that we have had in abundance in the past: the Egyptians, the Greeks, the Romans, the new powers stemming from the Renaissance (Spain, England. America will unquestionably follow their footsteps.

Maybe it is ironically (and hystorically) right that this destruction should take place so that a new species of human beings, say, HOMO CREATORIS, may come into existence.

Posted by gmontante | Report as abusive

@TomKi,@2Borknot2B “These problems are not solved by innovations of any kind. They are cultural, and can only be solved by fundamental societal reform. As they say in history, reform now under some reasonable control, or reform later and call it a civil war.”
I disagree. Some innovations do affect societies. The cell/smart phone and the internet have caused information to flow to people that never had it before. It is a form of education. Women all over the world are learning that they too can be educated and not suppressed and subjugated. The African miners are learning that there is a better life and are rioting to get their share. Twitter is a very large part of the Arab Spring. Warfare is now forever changed by the introduction of drones and robotics. Societies to change, and cultural problems can be affected by innovations.

Posted by tmc | Report as abusive

Thanks @Decatur, someone had to point that out. And as @OOTS points out, robotics is just beginning. We have the technology and artificial intelligence to replace the average man with a 100 IQ. We just haven’t made it economical to mass produce quite yet. We will shortly though. That will change the entire economic game as “jobs” will have to take on a whole new meaning. Also, Nano-technologies are just getting started. The possibilities combined with robotics and miniaturization are staggering. If the world holds together, we will see these awesome technologies change our world in the next two to three decades.

Posted by tmc | Report as abusive

You can have innovation all you want – but if the corporations that have the patents and programs then outsource their labor and build factories in other countries (plus paying little or no taxes), then our workers and our country lose.

We have become a “service economy” with little manufacturing – and that manufacturing used to be a stepping stone to middle class living.

Posted by AZreb | Report as abusive

Real innovation is rooted in science and technology. Virtually all of this innovation grwos out of discoveries made years before in research universities and government labs (yes, including defense programs). The explosion that is the internet grew out of DARPANET, followed by Tim Berners-Lee and colleagues at CERN. Often our businessmen, excessively focused on quarterly results, don’t see the big picture. Since 2000 the US budget cutters have been shortchanging science. State level budget cutters have been particularly aggressive in decimating funding for education. It does take years, sometimes decades for the shortfall to show up, but unless the US starts making the necessary investments, our country will become a second or third rate economic power in a few decades.

Posted by QuietThinker | Report as abusive

The Plutocracy that has ruled the United States for several decades is now so blatant and arrogant in their status quo that they no longer even provide lip-service to American ideals or hide their widespread corruption of government. The Class War has been won and it’s time that the Pee-Ons acknowledge the Idiocracy and bow down to the Plutarchs, the “job creators” who’ve created millions of jobs in foreign countries and stashed away their billions in tax-free foreign bank accounts.

$ $ $ $ The PLUTOCRACY RULES ! ! Hoo, RAH !

Posted by ptiffany | Report as abusive

We should “innovate” our way to single Payer health” care….make Beltway politicians subject to the rules of “Obamacare”…..and find out why it costs millions to get re-elected and/or run for office.

Posted by rikfre | Report as abusive

@ptiffany,

If your “Class War has been won and it’s time that the Pee-Ons acknowledge the Idiocracy and bow down to the Plutarchs…” can we look forward soon to your ceasing to post the same rant over and over?

Even if you’re sweet sixteen, go baby sit or stifle.

Posted by OneOfTheSheep | Report as abusive

Aside from hoping attitudes in society and politics change slightly in favor of fostering STEM, sustainability and innovation in education, and nurturing the fields of basic research from which applied science and technology are harvested, there’s another change needed that I hope will help us innovate our way to more economic growth.

Will we place more value on quality to reward innovation in the marketplace?

Our consumer culture had an aspect of Gresham’s Law with consumption becoming more and more commodity-based. There are some counter-currents such as local food movements, but overall lowest-cost vendors and lowest-cost overseas production have moved the onus for quality control from the supplier to the consumer. Overall we’ve opted for more cheap ‘stuff’ compared to choosing better or at least local/domestic ‘stuff’, a sort of adult failure to pass the ‘marshmallow test’ discussed with kids’ ability to gain by delayed gratification. The full cost of each purchase decision is a balance sheet that goes beyond checkout price and always opting for the low-cost commodity products adds societal costs that we all wind up paying anyway.

People seem to pay a small surcharge to do good with purchases – seems to be 10-20% acceptable for local or organic or farmers co-op or charity-based brands, from what I recall reading.

Will we shop with an ethos that rewards ‘innovative’ domesitic products? Will the market place reverse trends that began in baby-boomer anti-establishment 1960s-70s, grew in the ’80s and became exemplified by Wal-Mart once all the “buy from our American Partner” flags disappeared from aisles 20 years ago, for either 1) a little more economic nationalism in choices by each consumer, or 2) more consumer selection for innovation in better quality, not always lower price? Both of these would encourage innovation for a purpose besides cost-cutting, and help our economy.

Posted by Decatur | Report as abusive

There was a lot of discussion about technological innovations in terms of aging. How the elderly use resources for care, consume from savings, or contribute by working might be transformed if medical innovations tackle dementia before the bulk of the boomers experience it. It now seems unsusual to continue work part time as a senior reviewer or mentor sharing full benefit of experience, instead of the more commonplace retail jobs for working retired that are steps down from their middle-aged work. We might see a lot more of the former if medicine extends the years of peak cognition.

Posted by Decatur | Report as abusive

Innovation is in our (your) favor, but labor is not. The US standard of living and prosperity is based not on US labor alone but includes that of other poorer countries. This is making the other countries rich and eventually the US will not be able to afford as much labor overall to sustina its standard of living. It is possible that productivity will keep pace or exceed that, but unlikely as innovators seems to be focused more on entertainment and less on productivity. Maybe 3D printing will save us.

Posted by JoeMcS | Report as abusive

Great pint @Decatur. Though I think the with the elderly, we are seeing more in retail not due to loosing their cognition, but because so many more of the elderly need the income. They are the retired blue and lower white collar works and they are just as sharp as they ever were. But a retired welder or house painter only gets a retail job. Ever go to a diner in Florida?

Posted by tmc | Report as abusive

Odd that a British invention in the picture is being shown, though the parts came from around the world.

Posted by ch0senbygrace | Report as abusive

… [Trackback]

[...] There you will find 46949 more Infos: blogs.reuters.com/great-debate/2013/10/2 3/can-america-innovate-its-way-to-growth  / [...]