Fifteen years ago today terrorists flew two aircraft into
the World Trade Center in New York, and the world has never been the same
since. Although the US economy and stock market had been weakening for some time –
for example, it took the NBER until November 2001 to determine that the US
economy slid into recession in March 2001 – it truly marked, in my view, the
point at which the 1990s boom could be said to have ended. Although on the
surface the economy recovered relatively quickly, the event proved to be a traumatic
national event which saw the US unleash its military might on the Middle East and
profoundly changed American politics in ways which are still being felt today.
It was around the same time that we began to take much more notice of the rise of Chinese economic power. Whilst it would be wrong to suggest that the shift away from the unipolar economic world of the 1990s began this day fifteen years ago, it is easy to understand why this parallel might be drawn. Despite the efforts of Barack Obama to heal many of the wounds which were created by 9/11, Donald Trump has tapped into a surge of anger regarding the decline of the US. There is no doubt that the relative position of the US has diminished as China has ascended: In 2001, the US economy was eight times the size of China measured in simple dollar terms. By 2015 it was only 60% larger. In PPP terms, the IMF reckons that the Chinese economy is now larger than the US. However, this is a very different thing to saying that the US is in decline: After all, the dollar value of US output has increased by 69% since 2001.
But the ordinary working man and woman have felt the squeeze. Median US household income in 2014 was reported just below $54,000, having peaked at $57,843 in 2009. Thus the purchasing power of the average household has declined by around 7% since the end of the 1990s, and in inflation-adjusted terms, this decline is even bigger. This is attributed partly to falling household size – after all, if you only have to support one person rather than two, then life has got rather better rather than worse. It is also partly due to a rise in the number of low-skilled immigrants who populate the lower end of the income scale. But there is little doubt that in the US – as in most other parts of the industrialised world – the majority of the working population does not feel as though they have benefited from the recovery which is apparent in the headline economic statistics such as GDP or unemployment.
One factor which has contributed to this apparent slowdown is the deceleration in productivity growth. Back in 2001 the talk was of a productivity revolution, triggered by advances in ICT. Today, we worry that these advances are about to supplant labour rather than complement it. As Paul Krugman once remarked, “productivity isn't everything, but in the long run it is almost everything.” Over history, rising productivity has gone hand-in-hand with rising living standards and if it is not growing particularly rapidly, it should come as no surprise that our living standards are not progressing at the same rate as they once did. Economists continue to debate why this should be the case. It could be that many of the advances in productivity are simply not being captured properly in the data (I’ll come back to that another day) or, as Robert Gordon was pointing out back in 2001, many of our recent technological innovations do not offer the same boost to productivity as those in the past.
Either way, the last fifteen years have seen significant economic changes. These are partly the result of geo-political changes but perhaps more importantly they reflect socio-economic shifts. We may not have known it at the time, but perhaps the years around the turn of the century marked the start of a third industrial revolution driven by the dawn of the digital age. It took 60-80 years starting around 1760 for the first revolution to fully make its presence felt, whilst the period 1860-90 arguably marked the duration of the second. On the basis of past trends, we may thus only be halfway through the transition period of the third industrial revolution. For Stanley Kubrick, 2001 was the year of a space odyssey. For Americans, it marked the first significant attack on the US mainland. For future historians, it may yet go down as the start of a new era in world economics.
It was around the same time that we began to take much more notice of the rise of Chinese economic power. Whilst it would be wrong to suggest that the shift away from the unipolar economic world of the 1990s began this day fifteen years ago, it is easy to understand why this parallel might be drawn. Despite the efforts of Barack Obama to heal many of the wounds which were created by 9/11, Donald Trump has tapped into a surge of anger regarding the decline of the US. There is no doubt that the relative position of the US has diminished as China has ascended: In 2001, the US economy was eight times the size of China measured in simple dollar terms. By 2015 it was only 60% larger. In PPP terms, the IMF reckons that the Chinese economy is now larger than the US. However, this is a very different thing to saying that the US is in decline: After all, the dollar value of US output has increased by 69% since 2001.
But the ordinary working man and woman have felt the squeeze. Median US household income in 2014 was reported just below $54,000, having peaked at $57,843 in 2009. Thus the purchasing power of the average household has declined by around 7% since the end of the 1990s, and in inflation-adjusted terms, this decline is even bigger. This is attributed partly to falling household size – after all, if you only have to support one person rather than two, then life has got rather better rather than worse. It is also partly due to a rise in the number of low-skilled immigrants who populate the lower end of the income scale. But there is little doubt that in the US – as in most other parts of the industrialised world – the majority of the working population does not feel as though they have benefited from the recovery which is apparent in the headline economic statistics such as GDP or unemployment.
One factor which has contributed to this apparent slowdown is the deceleration in productivity growth. Back in 2001 the talk was of a productivity revolution, triggered by advances in ICT. Today, we worry that these advances are about to supplant labour rather than complement it. As Paul Krugman once remarked, “productivity isn't everything, but in the long run it is almost everything.” Over history, rising productivity has gone hand-in-hand with rising living standards and if it is not growing particularly rapidly, it should come as no surprise that our living standards are not progressing at the same rate as they once did. Economists continue to debate why this should be the case. It could be that many of the advances in productivity are simply not being captured properly in the data (I’ll come back to that another day) or, as Robert Gordon was pointing out back in 2001, many of our recent technological innovations do not offer the same boost to productivity as those in the past.
Either way, the last fifteen years have seen significant economic changes. These are partly the result of geo-political changes but perhaps more importantly they reflect socio-economic shifts. We may not have known it at the time, but perhaps the years around the turn of the century marked the start of a third industrial revolution driven by the dawn of the digital age. It took 60-80 years starting around 1760 for the first revolution to fully make its presence felt, whilst the period 1860-90 arguably marked the duration of the second. On the basis of past trends, we may thus only be halfway through the transition period of the third industrial revolution. For Stanley Kubrick, 2001 was the year of a space odyssey. For Americans, it marked the first significant attack on the US mainland. For future historians, it may yet go down as the start of a new era in world economics.
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