The State of the Economy, I
By Arnold Kling
The financial crisis creates significant opportunity for long-term pessimists. Again, I recommend the podcast featuring Ken Rogoff and Niall Ferguson. Rogoff has been a gloomy person (in a fun way) for as long as I have known him, which is more than 30 years. His current thesis, based in part on the Reinhart-Rogoff book, is that we have not ended the financial crisis. We have merely pivoted from a banking crisis to a government debt crisis.
Right now, I happen to think that Rogoff and Ferguson are correct to believe that the U.S. is headed for a crisis in its ability to repay its debt. Meanwhile, the focus of Congress is a debate on how to spend even more money, on health care. Some day, historians will look back at this and shake their heads, the way we now shake out heads about the mortgage loans that were made a few years ago.Another strand of pessimism looks backward and revises the two decades from 1985 to 2005 as being a false prosperity. Michael Mandel is in this camp. So is Steven Randy Waldman.
I think the United States has made terrible aggregate investment decisions over the last 30 years, and will continue to do so as long as a “ride the bubble then hide in banks” strategy pays off. Under the moderation dynamic, resource allocation is managed alternately by compromised capital markets and fiscal stimulators, neither of which make remotely good choices.
I think this overstates the case. I doubt that you could ever go back in history without being able to second-guess a lot of the investment that took place. But I think that one can make a case that the growth in GDP actually understates the economic gains of the past thirty years. When the choice set expands due to new goods and services, GDP statistics are biased downward.
Let me again cite the example of my oldest daughter, who moved to Arizona in September. She obtained a used car and found an apartment, without using a newspaper, a landline phone, or a map. She went on line the week before her move, found a car at a Carmax in Los Angeles, ordered it shipped to Arizona, and was met by the Carmax guy at the airport when she arrived. They drive back to Carmax, she buys the car, and then she goes to a McDonalds with free Wi-Fi, and uses her laptop to search for apartments. She then makes appointments using her cell phone and uses her GPS to supply directions. Thirty years ago, she would have spent much more time searching and probably wound up with a car and apartment much farther from her optimal choices.
As another example, the health care technology of 30 years ago was certainly adequate. But you would not want it, knowing what is available today. Your hospital and dental visits would involve a lot more pain and suffering if you did not have the latest equipment available.
I think that perhaps the most important trend of the past thirty years is the increased importance of cognitive skills relative to physical labor. Obviously, this has been going on for more than just the past thirty years, but during the past thirty years we saw an acceleration. This has had a number of consequences:
1. It changed the role of women. Their comparative advantage went from housework to market work.
2. This in turn, as Wolfers and Stevenson have pointed out, changed the nature of marriage. Men and women look for complementarity in consumption rather than in production.
3. This in turn leads to more assortive mating, with achievement-oriented men looking for interesting mates rather than for good maids.
4. This in turn leads to greater inequality across households. It also fosters greater inequality among children. The children of two affluent parents are likely to have much better genetic and environmental endowments than the children of two (likely unmarried) low-income parents.
5. Inequality is exacerbated by globalization and technological change. If your comparative advantage is basic physical labor, you have to compete with machines as well is with workers from the Third World.
The net result is an economy that has improved considerably for people with high cognitive skills, but which has improved only somewhat for people with relatively low cognitive skills.