The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better
By Tyler Cowen
(Dutton/Penguin, Kindle Edition, $3.99)
With The Great Stagnation, Tyler Cowen has given us a provocative and highly controversial assessment of the U.S. economy. Cowen, a professor of economics at George Mason University, the co-proprietor of the popular blog Marginal Revolution, and the author of a monthly business column for the New York Times, argues that the U.S. economy has been stagnating for more than a generation due to a slowdown in technological invention and progress. The slowdown in invention is behind several current adverse trends, among them rising inequality, stagnating wages and income for the middle class, rising government debt, protests against government spending, and, even, the recent financial crisis. His case is worth pondering even if in the end the reader may not be convinced that he is right.
The Great Stagnation is an e-book available only on the Internet at a modest price, with a condensed argument set forth in a mere 15,000 words. While the author is a skilled economist, he presents his case with a minimum of academic jargon and technical proofs. The intelligent layman can proceed through the book in a few hours of attentive reading and come away from the experience with a new way of looking at old problems. The presentation of the argument in this form is ironic in that the author proceeds to argue that the revolution in computers has done little to change our ways of living.
Cowen argues that the rapid increase in incomes and living standards that occurred through the 20th century and especially during the quarter century after World War II was propelled by a series of technological breakthroughs that were rapidly commercialized and made available to nearly everyone. These included electricity, indoor plumbing, railroads, the combustion engine and the automobile, the telephone, radio and television, and aviation. These developments with their various offshoots produced millions of jobs for Americans, generating rising incomes and living standards and changing the ways people lived. The growth in incomes allowed for increasing shares to be siphoned off by government to pay for services (education) and infrastructure (highways and airports) required by these far-reaching innovations.
Yet the pace of growth in incomes and standards of living has slowed down substantially since the 1970s. Indeed, Cowen identifies 1973 as the precise point at which growth and progress began to slow and incomes began to stagnate. During the postwar period from 1947 to 1973, real household income doubled from a median of $22,000 to $44,000 (measured in 2004 dollars), or an increase in real terms of about 3 percent per year. Afterward, during the 31-year period from 1973 to 2004, real (median) household income grew by just 22 per cent in real terms to about $54,000, or an average of less than 1 percent per year. If incomes had continued to grow at the earlier rate during this latter period the median household income in the U.S. today would be more than $90,000 per year. This slowdown in progress is a major factor behind our increasingly acrimonious political debates and the growing resentment over the costs of government.
Cowen's explanation for this slowdown is intriguing and counter-intuitive, since most people think that we are living in a period of rapid technological progress driven by computers, cell phones, and the Internet. Yet Cowen cites technical studies suggesting that the pace of invention has actually slowed since the 1970s, a conclusion also echoed by prominent figures in the investment and technology fields such as Peter Thiel and Michael Mandel. Thus Cowen argues that our current living standards are built upon innovations and breakthroughs produced a century ago. Until we produce innovations comparable to electricity and the automobile, the stagnation will continue.
The United States has already harvested the "low-hanging fruit" that propelled the growth in living standards during the first two-thirds of the 20th century. Our abundant free land has been settled and put to commercial use. We have educated our population to a near maximum extent. We have exploited the technological breakthroughs of the early part of the century. It is now hard to identify new sources of growth. At the same time, we are now spending much more than in the past on government, whose contributions to economic growth are hard to measure. Government controls large sectors of the economy where costs have gone up but productivity and measured outcomes have declined. We spend growing sums in health and education but do not receive returns commensurate with those investments. Conservatives and liberals are mistaken to think that growth can be revived through tax cuts or by more public investment when the real source of our trouble is the slowdown in technological progress.
Cowen anticipates the criticism that the current revolution in technology will propel a rise in living standards comparable to the breakthroughs of the past century. He argues, first of all, that these industries employ very few people compared to the numbers employed in the past by firms like General Motors or AT&T. Google, for example, only employs about 20,000 people, eBay about 16,000, and Facebook only 2,000. These companies, while highly profitable, produce very few jobs and thus cannot produce improvements in living standards. The jobs they do produce go to the highly skilled and educated, thereby further widening income gaps in the society and weakening the economic position of the unskilled and less educated. While they make our lives more interesting by allowing us to surf the Internet and play video games, these innovations have done little as yet to generate widely shared economic benefits.
According to Cowen, the financial blowout of 2007 and 2008 occurred because Americans, taking prosperity for granted, thought that they were wealthier than in fact they were. Thus they borrowed against their homes and stock portfolios and governments made extravagant promises to public workers and future retirees in the belief that asset values and incomes would continue to rise. They were wrong because, due to the great stagnation, the U.S. economy was not creating the real wealth required to sustain those asset values or to support the vast amounts of credit leveraged against them. The crash served as a system-wide reminder that our economy is not growing as rapidly as we thought it was.
COWEN CERTAINLY has a point. The great innovations of the past changed a rural and agricultural society into an urban and suburban civilization in a span of just 50 or 75 years, while current breakthroughs in computers and cell phones are unlikely to have such far-reaching effects.
The Great Stagnation encapsulates many insights drawn from "growth theory" suggesting that economies surge ahead through technological innovations and continue to grow by the accumulation of human capital. Looking forward, Cowen sees a remedy for "the great stagnation" in more and smarter investments in scientific research and in a more sophisticated appreciation among the public of the crucial role played by technology in driving economic growth and rising standards of living. In this sense he thinks that current battles between conservatives and liberals over taxes and public spending are beside the point and do not address the real source of our financial problems.
Against his case, one might raise the following objections:
First, Cowen is correct to point to 1973 as a pivotal year for the U.S. economy but perhaps not for the reasons he cites. That was the year in which OPEC was formed and when Middle Eastern countries unleashed the "sword of oil," driving up gasoline prices and ending the era of cheap energy for the U.S. economy. It was also about this time that West Germany and Japan reemerged as players in the global system after their economies were leveled in World War II, thus bringing to an end an era in which U.S. producers dominated the world's supply of quality consumer goods. To complicate matters further, it was also a time when the expenditures required by Lyndon Johnson's Great Society programs began to kick in so that public programs began to siphon resources previously allocated to private investment and production. One can see that growth may have slowed in the U.S. economy at this time for several intersecting reasons.
Second, the case implies a secular stagnation in growth rates since the 1970s but in fact there have been sub-periods of fairly rapid growth within that time frame. Between 1983 and 2000, the years of the Reagan "boom," real GDP grew at an average rate of 3.7 percent per year, not as rapidly as the 4.5 percent rate of annual growth achieved during the 1960s but impressive nonetheless, and a rate of growth sufficient to support rising living standards. This period of expansion was bookended by two periods of sub-par growth during the 1970s and the early 2000s. Indeed, our current fiscal troubles may arise from the subpar growth of the years from 2001 to 2009 when real GDP expanded at an average rate of just 1.6 percent per year. Thus the case for secular stagnation dating back to the 1970s is not as strong as one that places an emphasis on the recent period of disappointing growth as the real source of current troubles.
Third, if the case is correct, then why did we see a boom in financial assets that produced a 20-fold increase in stock market averages between 1982 and 2000? Investors certainly did not see a great stagnation taking place during these years -- quite the opposite, they saw a booming economy generating rising corporate profits and, in turn, rising stock valuations. Is it likely that sophisticated investors, focused on the short run, missed the long-term weaknesses in the U.S. economy? I for one doubt it. Interestingly enough, the stock markets have been generally stagnant over the past decade of subpar growth, which again suggests that our troubles are of more recent origin.
Finally, there are reasons to think that Cowen too quickly dismisses the potential economic impact of the computer and cell phone revolutions. These innovations have already led to impressive improvements in productivity and communication, while permitting people to work from home, in small business settings, and in highly skilled occupations. Some of these technologies are spreading around the world more rapidly than many of the innovations of the past. There are thousands and perhaps millions of people around the world who do not have access to indoor plumbing or higher education but are walking around with cell phones. It is still early days for some of these technologies, and we do not yet know where they may eventually lead. It is, moreover, a good and not a bad thing that companies like Google, Facebook, and Twitter can carry on their operations with modest investments in labor so that available manpower can be allocated to other uses. Do we really want Google or Microsoft to operate like the industrial behemoths of the past? It is in the nature of advancing economies to move away from enterprises like General Motors and toward smaller and more specialized firms that employ highly educated workers and exploit new technologies.
WHETHER COWEN is right or wrong about "the great stagnation," he has at least placed a critical issue on the table for national discussion. The American experiment has always depended upon economic growth as the main pathway to individual satisfaction and as a solvent for political discord. After the close of the frontier in the late 1800s, we soon found new avenues of progress in the amazing technological breakthroughs that Cowen cites. What will be the sources of growth in the 21st century?
On one critical point, however, Cowen is right on the money. We are not as wealthy as we think we are. As we eat our seed corn without replenishing it, we are bound to see our living standards deteriorate and our political conflicts escalate. The Great Stagnation is an important and impressive book, and a book of the best kind -- one that makes us think about current ills even when we may not agree with its diagnosis.