Ideology and Tyler Cowen's Stagnation Thesis
In this interview with Nick Schulz, Tyler Cowen discusses his stagnation hypothesis. He complains that he is getting unexpected pushback from market-oriented economists, but he does not complain about unexpected support from journalists on the left.
Perhaps one reason for the ideological reaction is that Cowen cites statistics that are typically used to bash America. Things like slow growth of median household income and the large amount that we spend on health care without better longevity. Advocates of more statist policies use these data to suggest that we would be better off imitating Europe.
If pressed, I assume Cowen would say that things are no better in Europe. Is innovation any better in Europe? No. Is growth in health care costs less of a problem in Europe? No. Has median income performed better in Europe than in America since 1973? I have not checked, but I would be that the answer is no.
One of the main points that free-market economists make in defense of capitalism is that it promotes innovation. Again, Cowen would not deny this. But the claim that innovation has run out of low-hanging fruit might be interpreted to suggest that we should just give up on it for now. Instead, since the advantage of capitalism is no longer available, we might as well do more central planning and redistribution. That may not be Cowen’s policy conclusion, but I think it is what statists will take away from his e-book.
Another quibble I have is that Cowen cites the lack of job creation as a sign of stagnation. I think that is borderline demagogic. If you think of it as a cyclical phenomenon, weak job growth by definition does not reflect secular stagnation. On the other hand, the secular decline in employment is something that I believe is indicative of rapid technological progress, not the opposite. Nobody said that the role of innovation is to create jobs. Innovation disrupts patterns of production, and in the long run it raises real incomes. If anything, people may take more of their income in the form of leisure.
Cowen says that he came to believe in the stagnation hypothesis when he began to doubt that the possible understatement of growth in the quality of goods and services (aka “CPI bias”) has become more severe in recent years. He decided that it must have been just as hard to measure progress in the quality of durable goods prior to 1973 as to measure the progress in, say, computers since then. He is entitled to hold that as an opinion. I think, though, that one is equally entitled to hold a different opinion. In particular, product variety has been increasing more rapidly in recent years. Nowadays, Tyler prides himself on his ability to find outstanding ethnic restaurants in strip malls. As of 1973, the ethnic food available in a strip mall was limited to chow mein or pizza, neither of which merited an ethnic dining guide.
I personally do not think that the stagnation hypothesis can survive the thought experiment in which you offer somebody the choice between (a) today’s median income and today’s array of goods, services, and prices or (b) 1973’s median income (plus, say 25 percent) and 1973’s array of goods, services and prices. I think that so many people would reject the 1973 option that the stagnation hypothesis becomes untenable.
Feb 4 2011 at 3:56pm
I haven’t read Tyler’s book yet, so correct me if I’m wrong, but isn’t he arguing that the gain in welfare from the hypoethetical you present is less than the gain in welfare if you compare 1930 median income and array of goods to the 1973 case? Isn’t that the right hypothetical by which to judge his thesis?
Feb 4 2011 at 4:00pm
On the other hand, the secular decline in employment is something that I believe is indicative of rapid technological progress, not the opposite. Nobody said that the role of innovation is to create jobs. Innovation disrupts patterns of production, and in the long run it raises real incomes.
I find the idea that technology must always create jobs faster than it destroys them in any given period of time to be rather odd. Even if it does create more jobs in the long term than it destroys, nothing says it must be simultaneous. As it is, adapting technology for existing applications is much easier than creating entirely new ones. Thus, there can be a significant lag between job destruction and job creation.
If median wages are rising much less than real GDP per capita, then it is probable that the economic value of the worker has declined. This makes absolutely no sense if technology has stagnated.
Feb 4 2011 at 4:16pm
Kling, “One of the main points that free-market economists make in defense of capitalism is that it promotes innovation. Again, Cowen would not deny this. But the claim that innovation has run out of low-hanging fruit might be interpreted to suggest that we should just give up on it for now. Instead, since the advantage of capitalism is no longer available, we might as well do more central planning and redistribution.”
I am baffled why Cowen, Kling, and everyone talks about median household income, rather than median worker income. Household income introduces all kinds of noise into the measurement of wage income due to household size, number of dependents, etc. The only reason I can think of why some economists talk about household income is that it distorts how badly median wages have stagnated.
Additionally, I think Kling is introducing ideology into the mix by focusing on innovation and GDP gains. Voters care about their slice of the pie relative to others, and in absolute terms. They vote for what makes them feel good, and they may well believe what’s good for them is SHRINKING GDP if that increases their slice of the pie relative to others. And that may be rational because people are envious, covetous, etc and take pleasure from such things.
There are political issues in deciding whether to maximize GDP versus maximize wages of typical workers. These political decissions by definition cannot be resolved by economists because economics is an amoral tool that can be used to pursue the objectives of any political system, be it dictatorship, democracy, populism, theocracy, etc. Economics does not in any way tie to libertarianism.
Feb 4 2011 at 4:31pm
I agree that complete stagnation is untenable, but Tyler’s point is not that there has been no progress, but that progress slowed down from earlier periods.
You need to redo your thought experiment comparing not just 2010 vs 1973, but also 1973 vs 1936. My guess is that the 1973-ers would be even more reluctant to switch with the earlier period than the 2010-ers.
Feb 4 2011 at 4:43pm
I don’t have any problem with Cowen’s data. Stagnation is evident. But major tech advances are always a surprise. Cowen is merely saying that there are no more surprised to come.
And pro-market people are wrong to criticize Cowen. The US is not significantly more free market than is Europe. So the stagnation can clearly be laid at the feet of creeping socialism, not the market.
Finally, Cowen’s emphasis on innovation is misplaced. The USSR was highly innovative with some of the best scientists in the world. Before the industrial revolution China was far more innovative than Western Europe. Innovation by itself means nothing. For innovation to improve welfare it must be aligned with strong property rights, including low regulation and taxes. At the same time low regulation and taxes spur innovation.
Feb 4 2011 at 4:51pm
volatility bounded writes:
I agree with you on the first half. I would refine more it is hourly worker compensation that we should look at. I would also like to factor in the difficulty and danger of the job. I grew up in Providence RI and the custom jewelry and tool manufacturing jobs that people used to work were very hard and dangerous. The job even for the low skilled are easier and safer now.
I like to look at the cost of things in minimum wage hours. The way I see it a minimum wage hour buys much more that it did in 1973. The exception was housing from 2004 though 2010 had gotten way too high but housing is once again falling back to trend.
Feb 4 2011 at 4:59pm
Hourly compensation makes Europe better and East Asia worse on the rankings, and the US slips a bit too. France has short hours, Singapore long hours.
One reason to consider household income, though, is that individuals generally pool their income in households, even if some dedicate their labor on non-market activities (i.e., homemaking). Thus individual hourly compensation, while a good indicator of return to selling labor on the open market (so to speak), is not quite a good indicator of the return to labor.
Feb 4 2011 at 5:21pm
If you want to compare 1973 to 2010, then you should also say working half the hours or with one homemaker. Hourly is a better comparison for that purpose since I don’t know many that live to work.
Feb 4 2011 at 5:25pm
Adam and Ed are correct, Arnold you are misunderstanding me.
Feb 4 2011 at 5:27pm
I agree with Ed even though it’s hard to test. The point is NOT that today’s bundle is worse than that of 1973. It’s that the jump from 1936 to 1973 was bigger. If we think about this in utility terms of course, it sounds natural. Even if the “real” gains in both periods were the same, diminishing marginal utility would mean that the utility gains would be different for the two periods because people’s starting incomes were so much lower in the 1930s. And of course if the gains were less (as Tyler claims) in recent years, then the subjective utility gains would be dramatically lower. It’s like the difference in going from 10K a year to 20K vs 20K to 40K. Furthermore Tyler’s claim is that 1936 to 1973 was more like going from 5K to 20K while recently it’s been 20K to 40K.
Feb 4 2011 at 5:34pm
I think a big part of why 1945-75 growth showed up in stats and why 1975-2005 haven’t, is that much of the 45-75 recorded wage growth was really the product of urbanization.
Wage growth (W) = growth due to technology (T) + growth due to urbanization (U).
U is basically the wage gain which a rural peasant gets by moving to a city. Urbanization in the west basically stopped by the 1970s, but continues in the 3rd world.
Measured T is likely to be cancelled out by measured inflation or eroded by competition, whereas U would not be.
Incremental gains from technological improvement doesn’t show up in the data. The fact that we don’t need to buy cassette tapes any more is not registered in income stats. But, imagine that a peasant moves to the city — he gets a sudden improvement in what he can afford to purchase, which occurs at an instant which keeps the cost of goods constant. Therefore, this shows up in the income stats.
In other words, W appears to have slowed, because U has disappeared, and all we now have is T.
Feb 4 2011 at 5:38pm
but Tyler’s point is not that there has been no progress, but that progress slowed down from earlier periods.
Except using slowing progress as an explanation makes no sense when you consider median family income growth has slowed far more than real GDP growth:
Falling rates of innovation should increase the value of the marginal worker, not decrease it. Innovation allows companies to substitute technology for labor. By reducing the technology available, companies would be forced to hire more workers to meet growing demand.
That’s not what we’re seeing.
Feb 4 2011 at 5:45pm
I think much of current US stagnation is due to misinvestment in home mortgages. We can argue the blame split for this misinvestment between private and public organizations, but clearly both are guilty. Hopefully the private organizations learned their lesson, but it is unclear to me that public organizations have.
Underwater mortgages are also reducing employment by making the job matching process limited in geographic scope. Rather than forcing banks to renegotiate loans, it would be better if the government would facilitate portability of mortgage contracts such that people could move around the country to take better jobs.
Other stagnation is due to massive regulatory expansions upon large corporations. HIPPAA, SarBox, and other regulations are a noose around the neck of expanding businesses.
Health care, where I think we have a tremendous amount of technological improvement potential right now, is particularly laden with regulation that dramatically reduces competition and drives up costs.
Moreover the US suffers from a large informal sector in “illegal” aliens and the illegal drug trade, and informal sector industries remain small an inefficient. Legalization, or should I say allowing people to engage in voluntary free market exchanges, would help.
US education is an industry that is begging for improvement in efficiency, but except for colleges and vocational training, it is held back by a socialist monopoly.
Feb 4 2011 at 5:51pm
is the data which shows urbanization. it’s shocking to see how close it tracks measured changes in median wages.
i wouldn’t be surprised if you found a similar correlation in cross-national data
Feb 4 2011 at 6:07pm
david, you are correct I would need to add something for the factors that you mention. Clearly if one desires to work more but cannot that is a negative and a higher minimum wage would push my indicator up wrongly.
Feb 4 2011 at 6:08pm
It seems to me there was a whole lot of innovation just from 1995 to 2005. I really don’t know what Tyler’s talking about. Has he seen the spoof video of what an episode of 24 would look in 1994?
I just ordered pizza over the internet, and I live in a very rural area btw. I got live updates on when the pizza was being prepped, baked, checked, and finally out for delivery. I’m sure the driver had a GPS in her car.
There are so many little changes since 1954 or 1973 or even 1995 that it amounts to a huge shift. I agree, it all started in the late 19th Century. But in what sense has it slowed down? Driving is not the same basic experience it was 35 years ago. Way too many small changes along the way. Clearly communication has changed completely. Eating, clothing, and housing ourselves has changed dramatically. Whether it’s writing, teaching, publishing, reading journal articles, or running regressions, it’s clear our professional lives as economists have changed a lot. Is it progress? I don’t think I should even have to ask the question.
Feb 4 2011 at 7:28pm
So basically, what you are saying , Arnold, is that most basic “low hanging fruit” debates in economics have become so used and worn that certain stat families loaded and automatically suggest an ideological preference. I think that’s true.
I haven’t read the book but have been following the discussions. I can this much:
Tyler’s thesis strikes me as an attempt to show something that people have “felt” for some time now. It may be true…or it may be myopic when we look back in 20 years. Hard to tell.
Feb 4 2011 at 10:50pm
Maybe innovation doesn’t come in steady, measurable streams but in random bursts. So innovation has slowed. That has no bearing on future innovation whatsoever, unless, of course, the cause of the slowdown is too much tax and regulation, in other words, a lack of incentives.
Also, productivity slowed dramatically after 1973 due to high price inflation which slowed investment. Productivity picked up again in the 1990’s due mostly to the retail sector adopting the WalMart business model according the McKinsey. It slowed again after 2000 due to the tech stock crash. Most new investment went into housing, much of which was wasted.
Feb 5 2011 at 9:49am
Cowen like the evolutionary model for describing innovation, but the appropriate model is punctuated equilibrium, not gradualism.
Feb 5 2011 at 12:42pm
Productivity picked up again in the 1990’s due mostly to the retail sector adopting the WalMart business model according the McKinsey.
Wal-mart contributed significantly in part precisely because of its application of technology:
Wal-Mart has also been distinctive in its use of IT to improve its business
processes and cost position. It is widely regarded as the leader in the use of IT in
retail and pioneered a number of IT applications,
It slowed again after 2000 due to the tech stock crash.
Productivity growth did not fall below 2.5 until 2005 and remained there through 2008. 2009 and and 2010 showed growth rates of 3.5 and 3.6 respectively.
Feb 5 2011 at 2:22pm
it would be better if the government would facilitate portability of mortgage contracts such that people could move around the country to take better jobs.
Interesting idea, but just out of curiosity, how could this possibly be done?
I agree with your post, except the very end. Changes in the college degree world are still much more stagnant than they should be, because the tech changes run against deeply vested interests.
In the long run the vested interests will loose. But, it could be a really long run in the US.
Feb 7 2011 at 11:06am
Your examples play directly into Prof. Cowen’s thesis. He points out specifically that progress in today’s economy largely benefits a relatively small number of highly connected people, the “infovores” of his previous book.
This same logic applies to the diversity of goods available. It largely benefits a relatively small number of long tail consumers–from foodies to outre fashionistas–but not a broad population. Indeed, those demographic subgroups likely overlap heavily with the general “infovore” category. Thus it’s more reasonable to assume that these changes are manifestations of the phenomenon, not contrary to it.
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