The Great Stagnation, Chapter One
I will review Tyler Cowen’s new Kindle single one chapter at a time.
My father always said that the first iron law of social science is, “Sometimes it’s this way, and sometimes it’s that way.” In other words, beware of people arguing absolute propositions in social science. In that regard, Cowen’s opening chapter is something to beware of. He is arguing like a lawyer, piling on evidence (some of it quite dubious) for one side, rather than offering a balanced point of view. I will explain below.Cowen’s thesis, as you probably know by now, is that as a society we have picked the “low-hanging fruit” that support economic growth, and now we are in the middle of a period of slow growth. I think it is important to keep in mind that this point of view is likely to enjoy a better reception than it deserves. Bryan Caplan’s list of the four biases that non-economists have relative to economists includes “pessimistic bias,” and Cowen is, either consciously or otherwise, playing to that. Anyway, Cowen writes,
apart from the seemingly magical internet, life in broad material terms isn’t so different from what it was in 1953.
Really? In 1953, you had a much bigger chance of being stranded on the road with a broken-down car, and if you were stranded you had no phone. And if you were far from home and needed to have your car repaired, how could you get money to pay for it? You did not have a credit card, and there was no ATM to get cash. I guess you went down to Western Union to get money wired to you.
Medical care: many ailments would have been misdiagnosed or treated incorrectly–ulcers, hypertension, high cholesterol. If you were susceptible to depression, you could have gone for treatment with electric shock.
If you went back to 1895, gave a clerical worker or factory worker or health care worker the Rip Van Winkle treatment, and then woke them up in 1953, how hard would it be to train them to work with the then-current technology? Try the same thing going from 1953 to today, and I think it would be at least as hard.
Above all, I think that work has become optional for many more people than was the case in 1953. The most important way in which growth has been mis-measured by GDP is that it fails to capture the increase in leisure (including much better quality and quantity of life after 65) as well as the more pleasant work environments that many people enjoy.
In contrast to earlier in the twentieth century, who today is the marginal student thrown into the college environment? It is someone who cannot write a clear English sentence, perhaps cannot read well, and cannot perform all the functions of basic arithmetic.
This assertion, which I believe is valid, is a two-sentence refutation of the notion that more assistance for college education will solve the problem of slow growth of median incomes in the United States.
By the same token, however, taking a global perspective, there are people around the world who never before could have contributed to a knowledge-based economy and who are doing so. Look at median incomes in the world as a whole, and the news over recent decades is good. The distribution of incomes within the U.S. may be going one way, but the distribution of world income may be going another.
Cowen’s claim is that once the “low-hanging fruit” of universal basic education has been picked, it is much harder to get to the higher fruit of universal college education. On that point, I would have to agree. However, I have more hope that if we reduced credentialization then those who are not suited for a college education could find decent employment.
Later, Cowen writes,
it was easier for the average person to produce an important innovation in the nineteenth century than in the twentieth century…innovation was easier and it could be done by amateurs.
I do not think that innovation is a process that is driven by “aha!” moments. Even if the rate at which those moments are occurring is declining in some sense, I doubt that this is a critical issue. I think of innovation as a process that depends on culture and institutions, which determine the way that innovations are filtered and diffused.
Still later, Cowen writes,
Recent and current innovation is more geared to private goods than to public goods.
I regret his use of the loaded expressions “private goods” and “public goods.” A more neutral way of making the point would be to talk about the percentage of innovation captured by the innovator, which historically has been estimated to be really low. Of course, the older the innovation (the wheel, fire, the plow), the more of its benefits are likely to have been captured by later generations.
I will concede that recent financial innovations have yielded benefits that were captured largely by financial institutions. In fact, after you account for the benefits that went to Wall Street, the amount enjoyed by everyone else might be negative. If you think that is inherent in the process of financial innovation, then you may want to try to put some sand in the gears of the financial innovation process. If you think, as I do, that financial innovation is only bad when it serves the purpose of regulatory arbitrage, then your concern is more with making regulatory arbitrage less lucrative.
Overall, I recommend approaching The Great Staganation with skepticism. I remember the early 1970’s as a great time to argue that we were running out of resources. Now may seem like a great time to argue for secular stagnation. Ten years from now, it may not seem that way at all.