Saturday, February 26, 2011

Part six - Evolution of the US economy

OK, so what did all of this technology mean for the US economy? When I started thinking about this I asked myself the question. What is the US economy? What are the major industries?

I quickly decided that the real US economy was far to complex to think about. So instead, I thought about a simplified model. Model America looks like real America, but it only has 13 major industries. The government provides data showing GDP by industry, and my 13 industries more or less match the major industries in the GDP data. One complication is that the size of those industries has changed considerably over time. The changing size of industries over time provides a clue as to how technology has driven the US economy.
Unfortunately, this detailed data only goes back to about 1950. For earlier eras the data is very sparse, but I will describe them as best I can. All my GDP numbers are in 2005 chained dollars at purchasing power parity.


The nation of Washington and Jefferson had a GDP per capita of $1370. That is similar to modern Kenya or Bangladesh. Life expectancy at birth was 39, while life expectancy in modern Bangladesh is 63. Life was hard.


By 1880, GDP per capita had hit $3800, similar to modern Indonesia. Life expectancy was stuck at around 41. However, if children reached their 20th birthday, they could then expect to live into their 60s.  Of the workforce, 41% worked in agriculture.

Today, only 1% of the US workforce works in agriculture. Technological progress in agriculture did lot to boost US living standards in the first half of the 20th century. While technological progress in agriculture is continuing, agriculture is now too small a part of the economy for it to have much overall effect on GDP.

Cowen and others have claimed that the US benefited from abundant land. If that was true, then the US should have been considerably wealthier than land poor countries like Holland or the UK. GDP data from the 1870s indicate that the US was poorer than Holland and the UK.  This evidence rules out the idea that abundant land had a major impact on the US economy.

By 1913 the US had surpassed the European economies. Something that happened after 1880 pushed the US into the lead.


By 1950 GDP per capita had hit $13000, similar to modern Mexico. The US and Switzerland were about 50% better off than the major European countries. Avoiding the devastation that two World Wars had inflicted on Europe delivered a big economic benefit. In the charts and tables below, I show the evolution of the US economy from 1950 to 2008. The key point to note is the shrinkage in agriculture and manufacturing and the expansion in finance and health care.

The numbers are based on GDP by industry accounts from the Bureau of Economic Analysis. It is important to note that physical agriculture production did not decline. Over production in agriculture lead to declining prices, so the fraction of end user dollars spent on agricultural products decreased. Another way to look at it is that agriculture used a smaller fraction of the economy's resources of labor and capital. This is also partly true for manufacturing.

The numbers for 'Healthcare' only capture a fraction of the nation's health care spending. I don't attempt to correct them because I'm frankly not sure where the rest of it is hiding.

Value added by industry as a Percentage of GDP
Finance and Insurance  2.848
Health care1.637
Retail and Wholesale trade151512
Real Estate91113
Accommodation and food services2.52.52.8
Everything else91019

The changing mix of industries is likely to be an important reason for the slowdown in productivity growth after 1970. Agriculture and manufacturing are productivity champions. As their contribution to GDP shrinks, so their contribution to productivity growth becomes smaller.

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