Paul Krugman: Is Growth Over?

How important is the digital revolution?

Is Growth Over?, by Paul Krugman, Commentary, NY Times: The great bulk of the economic commentary you read in the papers is focused on the short run: the effects of the “fiscal cliff” on U.S. recovery, the stresses on the euro, Japan’s latest attempt to break out of deflation. This focus is understandable... But... What do we know about the prospects for long-run prosperity? The answer is: less than we think.

The long-term projections produced by official agencies, like the Congressional Budget Office, generally make two big assumptions. One is that economic growth over the next few decades will resemble growth over the past few decades. ... On the other side, however, these projections generally assume that income inequality, which soared over the past three decades, will increase only modestly looking forward. ...

Yet this conventional wisdom is very likely to be wrong on one or both dimensions.

Recently, Robert Gordon ... created a stir by arguing that economic growth is likely to slow sharply — indeed, that the age of growth that began in the 18th century may well be drawing to an end. ...

It’s an interesting thesis... And while I don’t think he’s right, the way in which he’s probably wrong has implications equally destructive of conventional wisdom. For the case against Mr. Gordon’s techno-pessimism rests largely on the assertion that the big payoff to information technology, which is just getting started, will come from the rise of smart machines.

If you follow these things, you know that the field of artificial intelligence has for decades been a frustrating underachiever... Lately, however, the barriers seem to have fallen... So machines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.

But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe that the conventional wisdom embodied in long-run budget projections — projections that shape almost every aspect of current policy discussion — is all wrong.

What, then, are the implications of this alternative vision for policy? Well, I’ll have to address that topic in a future column.