Book Report - The Great Stagnation

This is a very cool book published by Tyler Cowen. He’s a wicked smart economist; I regularly read his blog. He’s more conservative than I am in general; but he brings a top-notch mind to bear so when he speaks up it’s worth listening to him.

The Great Stagnation is a short book that he e-published. It’s cheap - only about five bucks - and it’s also short; you can finish it in two sittings. I actually kind of like this format; others have observed that this type of nonfiction means that you don’t have a lot of fluff. It’s almost like a long magazine article - Cowen lays out his thesis, provides some evidence, and that’s that.

Anyway, his thesis is simple: The massive economic gains this country enjoyed during the late 19th to late 20th centuries were the result of picking off what he identifies as low-hanging fruit. There are three forms of low hanging fruit that he identifies:

  • Free land. The US was enormous and empty. Now it’s less so (though still very empty in places).
  • Technological development. To wit: the combination of fossil fuels and machinery started a massive technological boom in the mid 19th century that accelerated. The addition of electricity in the 20th century further accelerated this boom.
  • Education: We took a population in which only like 6% graduated high school in the early 20th century to one in which 70% graduate high school and 25% graduate college.

To support his thesis he has sort of a sub-thesis: GDP growth is not the best measure of economic health. Rather, median income growth is. A healthy society, economically speaking, is one in which everyone is enjoying the fruits of economic growth.

As we all know, US GDP has been going pretty well (up until the 2000s at least) while median income has stagnated since the 70s. Cowen’s operative theory here is that many of the economic gains since the 70s have been illusory; that they specifically fall into three areas:

  1. Government spending, which is included in GDP numbers at cost. Because government spending is not subject to market valuation it is possible that the actual value of government spending is lower than the sum of its total.
  2. Healthcare. Healthcare spending is, like government spending, not really subject to market tests.
  3. Financialization. The financial sector appears to create no actual value; as far as anyone can tell they’re just sucking value out of the economy and keeping it for themselves.

With regards to #1: the operative theory is this. Whatever the government spends is included in our GDP numbers. However it’s likely that government spending exists on a scale of diminishing returns; e.g. the 1000th billion spent is not as effective as the 1st billion. With no market test for government spending we don’t know how much value it actually adds to the economy. Liberals will tell you that it’s adding a lot, conservatives will say it’s adding none. There was very little government spending in the earliest part of the 20th century; which means that we probably got lots of value out of the increased spending we saw start during the 30s. There’s now a lot of government spending going on; the marginal value of another dollar of government spending is much lower than it was 75 years ago. This is all very hand-wavy of course because there’s no way to actually measure the value of government spending.

With regards to #2: Pretty much the same as number one. Dollars spent on healthcare are subject to diminishing returns w/r/t value. Cowen points out that the US spends a huge amount of money on health care while health outcomes are no better (and in many cases worse) than countries who spend much less on health care… In other words, the spending on healthcare is recorded in GDP numbers at cost, even though the actual value created is probably much lower.

With regards to #3: The modern financial system doesn’t create any value; in fact it may be destroying value. It’s arguably a bunch of rich people sucking value out of the economy to enrich themselves. This also accounts for a big part of why the rich are getting so much richer.

So there you’ve got Cowen’s operating theory as to why median income is a better indicator of economic health than GDP. So why is median income stagnating? Like I said his thesis mentions low hanging fruit, three in particular.

  • Free Land: The US is huge and circa 1900 was pretty empty. Land is of course one of the factors of production. Virtually free land means you can produce more stuff cheaply. In terms of prescriptive policy and or explanatory terms this is the least interesting and we’ll not dwell on it further.

  • Huge returns on education are no longer possible: At the start of the century we had a large population of people who were uneducated but were still very smart. Many of them “stayed on the farm” and performed tasks that were much less valuable given the alternatives and their intelligence. Educating them meant that they were able to perform much more valuable work, e.g., it unlocked their potential which translated into huge economic gains for our society. Around the 70s our high school graduation rate hit 76%; now it’s down around 70%. There’s obviously a lot of merit in getting to that remaining 30%; but in terms of economic returns it’s pretty obvious they’re going to be diminishing (the returns). There’s just not a huge pool of really smart uneducated workers to tap like there once was.

  • Technology based improvements have drastically slowed: As mentioned above, the theory here is that technological innovation is not as rapid as it seems. During the 1865-1965 era we were exploiting advancements made possible by a few huge innovations: machinery, fossil fuels, and later electricity but we’ve pretty much tapped those out and now we’re left with not a lot of huge advances to exploit (There is of course a huge asterisk on this one, namely the internet, which seems like a pretty big deal and gets addressed in its own chapter but for now let’s just ignore it). OK so anyway we’ve run out of technological advances to exploit. To prove this Cowen shows that 1) back in the 1800s and early 1900s you had lots of big inventions coming from average Joes; nowadays that mostly doesn’t happen. He also uses patent numbers; the number of yearly patents filed today isn’t much bigger than it was 30-40 years ago and given the corruption of the patent process the actual number of meaningful patents being filed today may be much much less.

Here’s a good time for our big asterisk, the internet (and computers in general). Computers are a huge thing of course; they’ve enabled massive productivity gains. But because they require specialty skills to really use these gains aren’t distributed very evenly through society. As far as the internet goes - it adds a huge amount of value to society but it’s not value that we capture in numbers. E.g., I get an immense amount of value from qt3, wikipedia, facebook, and various blogs. I love reading them, corresponding on them, etc etc. However the actual amount that value is reflected in GDP (or even someone’s income) is negligible; the marginal measurable economic value created by another post to qt3 or another blog read approaches zero. Likewise the internet isn’t really creating all that much dollar value given its reach; twitter has something like a bazillion users but only employs 200 people; Facebook has zillions more users but only employs like 3,000 people. Even Apple, which is like the most successful company in the world, doesn’t employ all that many people. This sort of actually creates a case that maybe we’re somewhat better off than even median income suggests (we’re getting all this value that isn’t reflected in any kind of numbers) but I’m not sure.

So there’s his general thesis and the explanations behind it. Naturally I barely did them justice; if you’re interested in learning more just go read the book (seriously it’s five dollars and will take you two or three hours). The second half of the book apparently presents some reasons to be hopeful that the Great Stagnation will end somewhat soon; I haven’t read that far yet so I’ll update when I do.

Excellent post, Jeff, and I think he’s probably right about most of that. I’ve always thought that a big reason the US has enjoyed so much success through history is geography, both in terms of plenitude and isolation.

Incidentally, and there’s no way to say this without sounding like a dick, you should stop using the word ‘basically.’ It’s a verbal cop-out used to convey veiled superiority. You’re not using it that way intentionally, I know, but that’s how it functions.


Thanks for the feedback (not being sarcastic). I’m trying to improve my writing and that sort of thing is welcome. Mostly I just use it as like a transition phrase to indicate that a summation is about to happen.

edit: holy shit I just fixed the post and you’re right; I used that fucking word like 8 times; several of which were unnecessary. I wonder if there’s a way to get MS-Word to automatically flag certain words when you type them. That would be helpful for writing papers, as well as for my longer posts (which I rarely write in the forum edit box after having learned long ago that the internet LOVES to eat long posts).

Yeah, he’s basically right.

It’s one of those things that once seen cannot be unseen. You’ll train yourself out of it quickly as you start noticing other people abuse it and its uglier cousin, “actually.”


This isn’t really a phenomenon unique to the internet. Television works the same way: It generates a lot of entertainment “value” but only some of this value is captured through related hardware sales and advertising. The truth of the matter is that your internet entertainment is probably better captured in the GDP numbers than the entertainment you get from jogging, or that your kids get from playing in the yard.

What you’re talking about is akin to Gross National Happiness. It’s an important metric to be aware of, but GNH growth isn’t going to let us tackle the public debt. For that reason, GDP is still a good number to be aware of. But you’re correct that GDP growth is a better measure of progress in societies where people’s material needs are not being fully met than it is a measure of progress in modern First World countries.

Without having read his arguments in detail, this seems patently absurd. The US is still enormous and empty.

  1. Government spending, which is included in GDP numbers at cost. Because government spending is not subject to market valuation it is possible that the actual value of government spending is lower than the sum of its total.

Government spending as a percentage of GDP has been stable since the 70s. That’s not a perfect counter to his argument, but it argues against government spending being a primary driver of GDP growth.

On land use, I think the real factor is that while we still have plenty of land, we’ve already met most demands for things that land produces. You can only consume and export so much food, wood, etc.


His point is less that it’s a driver of GDP growth and more that we may not potentially get the value out of it that the dollar cost measure of government spending that we think we do, which is why he questions GDP as the final arbiter of economic health.

Fun project: Let 2008 be our baseline budget: 14,441.4 bn dollars. From there we can calculate the growth of our budget (in 2008 dollars). Data source: I do not believe these numbers are inflation adjusted.

1970: 1038.3 bn dollars, adjusted for inflation this is 5764.35 bn dollars. This is 40% of the 2008 budget; from 1970-2008 the budget has more than doubled.
1980: 2788.1 bn dollars, adjusted for inflation this is 7285.03 bn dollars. This is 50.4% of the 2008 budget; from 1980 to 2008 the budget doubled.
1990: 5800.5 bn dollars, adjusted for inflation this is 9555.20 bn dollar. This is 66% of the 2008 budget; from 1990 to 2008 the budget increased by about 50%.
2000: 9951.5 bn dollars, adjusted for inflation this is 12,442.2 bn dollars. This is 86.15% of the 2008 budget.

While it’s true that the budget remains constant in GDP terms I’m not sure that this disproves Tyler Cowen’s point: the marginal value of government spending declines with each dollar spent; therefore the “government spending” part of GDP may not be as valuable as it looks in dollar cost terms.

Also keep in mind the value isn’t necessarily the land itself, but what it contains and what you can do with it (mineral resources, farming, etc etc).

A cynical interpretation would be that he’s a libertarian trying to retroactively explain why it’s ok for the economy to stall, because he ideologically doesn’t like the things that would make the economy recover.

the marginal value of government spending declines with each dollar spent

In a given category and program structure, sure; the billionth dollar in food stamps doesn’t help as much as the first. However, brand-new programs (expanding insurance coverage) or efficiency reforms to existing programs (investment, I guess) wouldn’t have the same constraints. I don’t see why new programs necessarily must have a lower ROI than old programs either; over time market and moral inefficiencies appear of any size.

Of course, and he’s not so blunt as to just lump all government spending together; he acknowledges the same points that you make about having to separate out programs, etc.

Reading over this again:

What is his thesis, exactly? That GDP growth has stalled, but actually that’s no change because “real” economic growth stalled a long time ago?

What on earth does the declining marginal GDP/non-GDP productivity of government programs have to do with this thesis?

Didn’t Krugman write this back when the productivity growth numbers were low in the early 1990s?


twitter might only employ 200 people but it creates a large amount of value. just now i read about a tweet from the wrong account helped a beer company and the red cross.

the internet has helped me spend and save lots more money than when i wasn’t hooked up. so the internet could be where get more growth. i’m not sure why he’s saying it’s not captured: it is, just not in some separate “internet” category but in the growth of businesses and charity listing.

as for the basic inventions and patents stuff, i just read an article where the author says more and more people are doing basic research outside labs and companies. like the guy who invented a book digitizer from scrap materials and a few cameras? he put the plans on the internet (that thing that we can’t measure value from). and wikipedia: you can’t measure the value but it gets captured in how much more productive researchers are who need a quick reference or starting point.

Seems reasonable to me for the most part.

As far as him libertarian, I dunno about that. Saying the financial sector drains the economy and that the average person’s wages matter more would be decried as socialism or communism by libertarians.

Well, it’s hard to monetize the value of finding out that your team has a new coach 45 minutes before any major news outlet announces it. There is value in that, but who is making any money from it directly? Since it is indirect (at best), it’s hard to track and thus difficult to capture any data about it.

So basically, you are basically saying that one should not use the word basically, when basically all they really want to basically say is “basically”? Is this basically right?

I’m sorry, I couldn’t resist. :)


He’s a moderate one, but yes, he’s a libertarian quasi-Austrian. He’s at George Mason, which I think is the only economics program in the US with any Austrians in it.

Those offers sound awesome until you read the details. Who the hell is going to move into a tiny, tiny town in the middle of nowhere for free land, when that land is a postage-stamp plot in an abandoned housing plan?

Where does “essentially” fit on that family tree?