If you doubt this, consider the choice proposed by Professor Gordon. He asks you to choose between having all the technology developed since 2002 and no running water, or running water but no post-2002 technology. We'd all choose the latter. Which shows that just one of many late 19th century technologies is more important than all 21st century ones.
Not only has the boost to growth from innovation slowed, says Professor Gordon, but the US faces several "headwinds" constraining growth. The retirement of baby-boomers, the end of the growth in university education and in human capital and policies to combat climate change will, he says, also slow down growth. He thinks real GDP per person could grow by less than 1 per cent in coming years, rather than the 2 per cent we've seen in the last 100 years.
This raises a question. If Professor Gordon is right, what would it mean for share prices?
The obvious answer is that it would be bad. Lower growth in GDP implies lower growth in dividends and other cash flows such as share buy-backs. Anticipations of this should reduce share prices. And then there are the political effects to worry about. Slower growth in GDP means slower growth in tax revenues. This means that if the US is to avoid a long-term rise in government debt it faces an even nastier choice between cutting entitlements to pensions or healthcare or raising taxes. The conflicts this would cause would be exacerbated by a fact pointed out by Harvard University's Ben Friedman, that - in frustrating aspirations - slower growth makes people more mean-spirited, intolerant and prone to violence.
However, things might not be so terrible. It could be that financial markets are already pricing in Professor Gordon's pessimism. One sign of this is that yields on long-dated Treasury inflation-proofed securities (tips) are negative even for 10-year maturities. Why would investors accept a certainty of losing money? It could be because they are highly risk-averse. But it could also be that they don't anticipate any real economic growth and so expect poor returns on shares too.
A look at stock market valuations corroborates this possibility. The earnings yield* on the S&P 500 is now 6.6 per cent. This is over seven percentage points above the yield on 10-year tips, which is close to the largest gap since the latter were first issued. This can mean only one of two things: either investors think equities are very risky, or they expect little growth in cash flows on equities. But, given that it is so easy to diversify equity risk, by holding bonds or gold for example, why should the risk premium be so high? Perhaps instead, investors are pricing in low or no growth.
There's another reason not to worry about low growth. To see it, take Nokia. Its share price has fallen 90 per cent in the last five years. This is because it has lost from innovation. People who bought smartphones from Apple or Samsung stopped buying Nokia's products. This is an example of what Joseph Schumpeter called creative destruction; the innovation which creates new products also destroys older companies.
Nokia is only one example of this. Boyan Jovanovich of New York University has estimated that all of the substantial rise in the US stock market relative to GDP between the late 60s and late 90s was due to new companies such as Intel and Microsoft arriving on the market. Stocks that existed in 1968 fell. This, he said, was because the IT revolution of the 1980s and 90s devalued the growth opportunities of older companies which could not adapt to the new technologies.
Herein, paradoxically, lies a hope for investors. An economy of slow growth and little innovation is one in which existing companies face fewer threats. A world of little change is a world safe for dinosaurs.
This prospect isn't an exciting one; it means there will be fewer great growth stocks. But it isn't a wholly frightening one, either.
*This is possibly a better gauge of 'value' than the dividend yield, given that a lot of cash flows from equities take the form of share buy-backs rather than dividends.
