Tyler Cowen’s new book, “The Great Stagnation”
Your copy will arrive on January 25 and loyal MR readers are receiving the very first chance to buy it. Very little of the content has already appeared on MR.
Many of you have read my article “The Inequality that Matters,” but there I hardly touched on median income growth. That is because I was writing this eBook.
Has median household income really stagnated in the United States? If so, why? Are the causes political or something deeper? What are the important biases in how we are measuring national income and productivity and why do they matter for economic policy? Are we getting enough value for all the extra money we are spending on the health care and education sectors? What do some major right-wing and left-wing thinkers miss about this phenomenon?
How does all this relate to our recent financial crisis?
I dedicated this book to Michael Mandel and Peter Thiel, two major influences on some of the arguments.
Why did big government arise in the late 19th and early 20th centuries, what is its future, and why is science so important for macroeconomics? How can we fix the current mess we are in?
Read (and buy) the whole thing.
How great was Tyler Cowen’s marketing coup? Well he forced a technophobe like me to actually learn how to use Kindle. I wasn’t too happy about that, which makes me inclined to write a very negative review. But that’s kind of hard to do credibly when I agree with the central proposition of the book; that technological progress (at least as traditionally measured) has slowed dramatically, and will continue to be disappointing for the foreseeable future.
In an earlier post I argued that my grandma’s generation (1890-1969) saw the biggest increase in living standards; most notably a longer lifespan (due to diet/sanitation/health care), indoor plumbing and electric lights. Less important inventions included home appliances, cars and airplanes, and TVs. From the horse and buggy era to the moon landing in one life. And all I’ve seen is the home computer revolution. Not much consolation for a technophobe like me. I’m probably even more pessimistic than Tyler.
The parts of the book I liked best were those that discussed governance. I had noticed that there was a correlation between cultures that are good at governance, and cultures that are good at running big corporations. But Tyler added an interesting perspective, arguing that the technologies that facilitated the growth of big corporations also facilitated the growth of big government. I don’t recall if he made this point, but I couldn’t help thinking that the neoliberal revolution, which led to some shrinkage in government size, was also associated with a move away from the big corporate conglomerates of the 1960s, towards smaller and more nimble businesses.
Tyler has a long list of complaints about the wasteful nature of our government/education/health care sectors, which he hinted is really just one big sector. While reading this section I kept wondering when he was going to mention Singapore, which has constructed a fiscal regime ideally suited for the Great Stagnation. When he finally did, on “Page” 830-37, he did so in an unexpected context, as an example of a society that reveres scientists and engineers. He had just suggested that the most important thing we could do to overcome the stagnation was:
Raise the social status of scientists.
My initial reaction was skepticism. First, how realistic is it to expect something like this to happen? I suppose the counterargument is that every new idea seems unrealistic, until it actually occurs. But even if it did, would it really speed up the rate of scientific progress? My hunch is that if we doubled the number of people going into science, there would be very little acceleration in scientific progress. First, because the best scientists (think Einstein) are already in science, driven by a love of the subject. Second, with a reasonably comprehensive research regime, progress in finding a cure for cancer may require a certain set of interconnected discoveries in biochemistry that simply can’t be rushed by throwing more money and people at the problem. Similarly, progress in info tech may play out at a pace dictated by Moore’s law. Given Moore’s law, no amount of research could have produced a Kindle in 1983. Could more scientists speed up Moore’s law? Perhaps, I’m not qualified to say. But that’s certainly not the impression I get from reading others talk about information technology.
Here’s another exhortation that caught my eye:
Be tolerant, and realize there are some pretty deep-seated reasons for all the political strife and all the hard feelings and all the polarization.
I couldn’t help thinking of Paul Krugman and Tyler Cowen, the two brightest stars of the economic blogosphere. If only one of those two are able to have this sort of dispassionate take on policy strife, how likely are the rest of us mere mortals to be able keep a clear head and remain above the fray? Still, it’s great advice.
Ryan Avent at Free Exchange at The Economist:
Mr Cowen’s book can be very briefly (too briefly) summarised as follows. The rich world faces two problems. The first is that a decline in innovation has reduced the growth rate of output and median incomes, making it hard for rich countries to meat obligations accepted when expectations were higher. The second is that a lot of recent innovation is occuring in places like the internet, where new products are cheap or free and create very few jobs.
Mr Sumner’s response is a good one. What Mr Cowen is essentially saying, he suggests, is that the actual price level is tumbling. Technology has created a lot of great things that are available for free, and so the price of a typical basket of household consumption is dropping like a rock. People used to spend a lot of money going to movies, buying books and records, making expensive long-distance phone calls, paying for word processing software, and so on. Now, a lot of that can be done at almost no cost. Prices are falling.
That has a couple of implications. It suggests that real incomes are actually rising, at least for those consuming the bulk of the free online content. And perhaps real incomes are too high, in some cases, for labour markets to clear. Given broader disinflation (understated because non-purchased goods aren’t included in price indexes) both prices and wages may need to adjust, but if they’re sticky, then they won’t. What’s needed is reinflation.
To a certain extent, Mr Cowen is concerned about society’s ability to pay off old obligations, and one reason society might struggle to do this is that new innovations deliver value through non-monetary transactions. But the value is still there, and that’s what should really matter for the paying-off of obligations. When you borrow, you’re offering to compensate the lender with more utility tomorrow for less utility today. Thanks to the internet, utility today is cheap, and that’s only a problem because the obligations we acquired yesterday were denominated in dollars. But we can print enough money to meet yesterday’s obligations. Indeed, we should, in order to offset the deflationary pressures from the cheap innovations.
Imagine a world in which technology has advanced to the point that robots can build robots that operate at basically no cost at basically no cost, such that people can have anything that want anytime for free; the only constraint on consumption is the time available. That would be a cashless economy, and as a result, debtors would be totally unable to pay creditors. But does that matter?
Tyler Cowen argues that technological change since the early 1960s hasn’t been as transformative for ordinary peoples’ lives as the change that went before.
I agree. I wrote about that a long time ago, using the example of kitchens:
Better yet, think about how a typical middle-class family lives today compared with 40 years ago — and compare those changes with the progress that took place over the previous 40 years.
I happen to be an expert on some of those changes, because I live in a house with a late-50s-vintage kitchen, never remodelled. The nonself-defrosting refrigerator, and the gas range with its open pilot lights, are pretty depressing (anyone know a good contractor?) — but when all is said and done it is still a pretty functional kitchen. The 1957 owners didn’t have a microwave, and we have gone from black and white broadcasts of Sid Caesar to off-color humor on The Comedy Channel, but basically they lived pretty much the way we do. Now turn the clock back another 39 years, to 1918 — and you are in a world in which a horse-drawn wagon delivered blocks of ice to your icebox, a world not only without TV but without mass media of any kind (regularly scheduled radio entertainment began only in 1920). And of course back in 1918 nearly half of Americans still lived on farms, most without electricity and many without running water. By any reasonable standard, the change in how America lived between 1918 and 1957 was immensely greater than the change between 1957 and the present.
Now, you can overstate this case; medical innovations, in particular, have made a huge difference to some peoples’ lives, mine included (I have a form of arthritis that would have crippled me in the 1950s, and in fact almost did 20 years ago until it was properly diagnosed, but barely affects my life now thanks to modern anti-inflammatories.) But the general sense that the future isn’t what it used to be seems right.
David Leonhardt interviews Cowen at NYT
Derek Thompson at The Atlantic:
Tyler Cowen’s celebrated Kindle publication “The Great Stagnation” has received a lot of attention from the Web community. The New York Times David Leonhardt gets the author to sit for an e-interview on his e-book and asks a good first question: If our innovation motor is broken, what should we do know?
Cowen responds that we should double down on science…
The N.I.H. has done a very good job in promoting medical innovation and this is in large part because it allocates funds on a relatively meritocratic basis; Congress doesn’t control particular grants and on many important fronts the N.I.H. has autonomy. It is one reason why the United States is the world leader in medical research and development and I would expand its funding, provided it retains this autonomy. Basic research is often what economists call a “public good” and it offers economic and health returns for many years to come.
… and get realistic about clean energy.
“Clean energy” is a very important issue, for reasons of climate change, but it won’t be a job creator in a useful sense. In terms of energy production, fossil fuels are quite powerful. With green energy, at this point, we are simply looking to break even, namely to receive some of our current power but without the negative environmental consequences which accrue from carbon. That’s a worthy goal, but we shouldn’t start thinking about green energy as speeding up economic growth or creating jobs. It’s more like a necessary burden we will have to bear and the fact that these costs lie in front of us – from both the climate change and from the technological adjustments — is a sobering thought.
These are smart thoughts from a very smart guy. But let’s think about NIH funding from a jobs perspective. If the government increases science funding and this results in more pharmaceutical drugs coming online, that’s a great thing for the pharmaceutical industry. But new drugs, like any new technology, can be disruptive. For example, a drug to ease the side-effects of end-of-life diseases might replace the need for home health aides, which are projected to be one of the fastest growing jobs in the country for low-skilled workers. That’s not a reason not to develop a totally useful rug! But it throws a wrench into a claim (one that I’ve often made, too) that innovations in biosciences are pure job-creators.
Cowen’s characterization of plumbing, fossil fuels, public education systems, penicillin and so forth as “low-hanging fruit” bugs me a bit. It took human beings quite a while to figure all that out. But Cowen is right to say that once discovered, those innovations produced extremely high returns. From the economy’s perspective, the difference between having cars and not having cars is a lot larger than the difference between having cars and having slightly better cars. A 1992 Honda Accord and a 2010 Honda Accord aren’t the same, but they’re pretty close.
The obvious rejoinder to this is, “What about the internet?” The problem, as Cowen points out, is that the Internet is not yet employing many people or creating much growth. We needed a lot of people to build cars. We don’t need many people to program Facebook. It’s possible, Cowen thinks, that the Internet is just a different type of innovation, at least so far as its ripples in the labor market are concerned. “We have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy,” he writes. “When it comes to the web, those assumptions are turning out to be wrong or misleading. The revenue-intensive sector of our economy have been slowing down and the beg technological gains are coming in revenue-deficient sectors.”
Maybe the Internet just needs some time to come into its growth-accelerating own. Or maybe the Internet is going to be an odd innovation in that its gains to human knowledge and enjoyment and well-being will serve to demonstrate that GDP and even median wage growth are insufficient proxies for living standards. Either way, we’re still left with a problem: Stagnant wages are a bad thing even if Wikipedia is a big deal.
And it’s not just the Internet. Even when we’re growing, things look bad. The sectors that are expanding fastest are dysfunctional. We spend a lot of money on education and health care, but seem to be getting less and less back. The public sector is getting bigger, but it’s not at all clear it’s getting better. For much of the last few decades, the financial sector was was generating amazing returns — but that turned out to be a particularly damaging scam. And economic malaise is polarizing our politics, leaving us less able to respond to these problems in an effective or intelligent way.
Tyler makes a bunch of other arguments in “The Great Stagnation” too, some more persuasive than others. Like some other critics, I’m not sure why he uses median wage growth as a proxy for economic growth. It’s important, but it’s just not the same thing. Besides, median wage growth in the United States slowed very suddenly in 1973, and it’s really not plausible that our supply of low hanging fruit just suddenly dropped by half over the space of a few years. I also had a lot of problems with his arguments about whether GDP generated by government, education, and healthcare is as “real” as other GDP. For example, he suggests that as government grows, its consumption is less efficient, but that’s as true of the private sector as it is of the public sector. A dollar of GDP spent on an apple is surely more “real” than a dollar spent on a pet rock, but there’s simply no way to judge that. So we just call a dollar a dollar, and figure that people are able to decide for themselves whether they’re getting the same utility from one dollar as they do from the next.
The healthcare front is harder to judge. I agree with Tyler that we waste a lot of money on healthcare, but at the same time, I think a lot of people seriously underrate the value of modern improvements in healthcare. It’s not just vaccines, antibiotics, sterilization and anesthesia. Hip replacements really, truly improve your life quality, far more than a better car does. Ditto for antidepressants, blood pressure meds, cancer treatments, arthritis medication, and much more. The fact that we waste lots of money on useless end-of-life treatments doesn’t make this other stuff any less real.
To summarize, then: I agree that the pace of fundamental technological improvements has slowed, and I agree with Tyler’s basic point that this is likely to usher in an era of slower economic growth in advanced countries. At the same time, improvements in managerial and organizational efficiency thanks to computerization shouldn’t be underestimated. Neither should the fact that other countries still have quantum leaps in education to make, and that’s going to help us, not just the countries trying to catch up to us. After all, an invention is an invention, no matter where it comes from. And finally, try to keep an even keel about healthcare. It’s easy to point out its inefficiencies, but it’s also easy to miss its advances if they happen to be in areas that don’t affect you personally.
David Brooks at NYT
Cowen and Matthew Yglesias on Bloggingheads