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:
- 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.
- Healthcare. Healthcare spending is, like government spending, not really subject to market tests.
- 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.