Polemical Review of The Great Stagnation by Tyler Cowen
Introduction
I became aware of this “most debated nonfiction book so far this year” through an editorial by David Brooks in the New York Times. I was intrigued by Mr. Brooks’ rave review, and, through the wonders of modern technology, I was able to purchase this e-book-only publication for a mere $4.00 virtually immediately.
My initial assumption was that, since I had begun reading and writing about the decline in American economic power and prowess to recover from economic downturns, this book would provide some interesting food for thought.
Well, it did provide food for thought, but in a completely different direction. I was appalled by the simplistic analysis of the economic issues and the confusing and confused argumentation for what the author considers to be the causes and remedies for this situation.
I admit to having “a thing” about economics (the truly “dismal science”) and economists’ intellectual dishonesty, and with their in-bred and complex mathematical models, incapable of making any reliable, useful real-world contributions. So what follows is an unabashedly polemical review of Prof. Cowen’s pamphlet.
Unfortunately I cannot make my copy of this e-book pamphlet available to the reader, so if you want to put my ravings into context, please order it at
Chapter 1: The Low Hanging Fruit
The whole concept that America’s and the world’s accelerating economic woes are the result of the “low hanging fruit” being exhausted seems to me to be quite ridiculous. It implies that there is higher hanging fruit, which, if we were only tall (or smart) enough, would resolve our economic woes. It seems to be a phrase the author has become enamored with and which he keeps coming back to throughout the pamphlet, but the discussion presented at best makes a very tenuous and very confused case for that proposition. To be blunt, the comparison to the cherry and apple orchards is more in tune with a children’s book than an adult discussion of economic issues.
By the way, after Googling this specific title by Tyler Cowen I now somewhat understand why David Brooks in his recent column referred to it as “the most debated nonfiction book so far this year”; however, all this debate seems to be taking place within a small rarefied circle of economists and talking heads. What is especially interesting about this debate is that each of the commentators/reviewers is able to put their own spin and interpretation on Cowen’s work, often even more obtuse than the original text itself.
Even back in the 50s and 60‘s when I was going to high school and college there were serious discussions and questions about how an economic order (free-market capitalism) requiring continuous growth in productivity and continuous growth in consumption, could be sustained over the long haul, even aside from the resource and environmental considerations. And of course, it can’t.
Continuous increase in productivity means that fewer workers can produce the same amount of goods and services. To maintain high employment of the laid off workers (due to higher productivity) the demand for these goods and services must increase, new goods and services must be introduced and the markets for these goods and services must be increased beyond the “domestic” market. Add to that the steady increase in population (a trend that is slowing down or reversing, at least in advanced western societies) and you have the classic treadmill of free market economies.
Ever since the dawn of the industrial age western societies and economies have been trying to balance these countervailing realities of higher and higher productivity requiring ever greater consumption in order to provide employment (and income) to the freed up employees, plus whatever the prevailing population growth is, and on and on goes the vicious cycle.
The notion that we are on a technological plateau and that if we just give “scientist” the status and recognition (whatever that means -- in a capitalist society that can only translate into “a larger slice of the economic pie”) they will come up with the next silver bullet of “low hanging fruit” to feed this vicious cycle. And therein lies the basic fallacy underlaying all of modern day macroeconomics - that somehow we can always come up with the next technological innovation which will allow us to continue the hopeless spiral of higher productivity - less employment required - boost employment by creating “new demand” via some new “killer app”. That is like the age old hunt for the “perpetual motion machine”, which is rendered impossible by the second law of thermodynamics.
For most of the industrial revolution new products and services which were introduced, and the new demand for these products and services, easily required the workers freed up from productivity gains plus population growth. What we are faced with more recently, however, is that the new products and services created with new technologies do not suffice to employ the workers freed up by higher productivity (and population growth, if it still exists).
This is a systemic issue with the types of technologies being “invented” today and the products and services these new technologies engender. The Anglo-American version of free-market capitalism puts an especially high premium on productivity gains of new inventions, thus accelerating the reduction of employment and the ever more frantic efforts to increase demand through new products and services and new markets. This has nothing to do with “low hanging fruit” versus fruit which is more difficult to reach. This is a function of where we are in the technological innovation cycle, and what kinds of innovations are rewarded by our free-market capitalist system, which highlights the lethal flaw of our economic system based on everlasting growth.
Just for some chuckles, the “low hanging fruit” to which America’s economic prosperity is attributed by Prof. Cowen are free land, technological breakthroughs and smart, uneducated kids. By the way, Prof. Cowen, what are the high hanging fruits?
OK, in fairness, “free land” is expanded to “abundant resources” in the text, which makes a lot more sense.
As for technological breakthroughs, according to Prof. Cowen, the moon landing was the turning point between the era of low hanging fruit and the new era of stagnation. And according to Prof. Cowen the impact of the moon landing was “Teflon, Tang, and amazing photographs”. I am hoping he meant that tongue-in-cheek, but then I would have to assume his whole “book” is tongue-in-cheek (that would actually explain a lot). I guess he missed the whole development of micro-electronics and computers, which resulted from the NASA programs
And then there is Mr Cowen “discussion” of the low hanging fruit of “smart, uneducated kids”. This to me is completely unintelligible, but that may be due to the fact that (thank god) I’m not an economist.
Then we meander into a discussion of median income stagnation and GDP (yawn - Prof. Cowen concedes that this discussion is not new), the flow of inventions and the fact that “meaningful” (whatever that means) inventions are becoming harder and more expensive, and inexplicably ends up with another one of those wonderfully obtuse and meaningless economic models of “private goods” versus “public goods”. Prof. Cowen concludes that
If one sentence were to sum up the mechanism driving the Great Stagnation, it is this: Recent and current innovation is more geared to private goods than to public goods. That simple observation ties together the three major macroeconomic events of our time: growing income inequality, stagnant median income, and .... the financial crisis.
This is beautiful. After a rambling discussion of “low hanging fruit”, median income stagnation, income inequality, the flow of technological innovation (which by themselves are actually quite interesting), Prof. Cowen has arrived at the unifying theory of today’s macroeconomic issues: a shift to private goods at the expense of public goods.
In real science (as opposed to the “dismal science” which is economics) coming up with unifying theories is much more elusive, since they have to stand up to the test of the real world. In economics, by contrast, such unifying theories can be based on “thought models” such as “private goods”, “public goods”, “self-regulating markets”, “perfect knowledge of all options”, “rational choice”, all of which do not really exist, and then spun, by dubious logic, into unifying models. Tests against the real world are not required because of the universal escape clause of economics: “everything else being equal”, for, of course, everything else never remains constant or equal.
Chapter 2: It’s the Government’s Fault
Now that Mr Cowen has, in Chapter 1, created the unifying theory of modern macroeconomics, for which he is “persuaded by the median income numbers because they are supported by other measurements..” such as GDP, in Chapter 2 the author proceeds to deconstruct these statistics.
“Nonetheless, I have come to fear that productivity statistics, and the national income statistics, are misleading us”.
Oh gee, how original. The fact that GDP is a poor measure of a country’s wealth should be pretty obvious. The OECD for example, as well as France’s Sarkozy and more recently Britain’s Cameron, have launched efforts to find more reliable measures. The US, by contrast, generally likes that measure because it can be used to support the fiction that America is the richest, greatest, biggest.
Prof. Cowen drops other little stink bombs all over Chapter 2 in his effort to “prove” that productivity and GDP growth have been overstated.
He argues that “stock prices - the valuation of capital - haven’t made lasting progress in a long time. As of the fall of 2010, the S&P 500 is more or less back where it had been in the mid 1990’s”. So in the wonderful way that economist have of picking their statistics so as to make their point, he selects the time between the peak of the tech bubble to the depth of the of the housing crash to “demonstrate” that S&P 500 valuations are stagnant. On the other hand, if you ask a financial advisor, he will quote the long-term (say 50 years) growth rate (in constant $) of between 4% and 7%. So in typical fashion of the dismal science, you can use statistics to argue either side of any argument.
Again, understand that I have no problem with the statement that GDP is a lousy indicator for the wealth and wellbeing of an economy or society. I do, however, object to economists’ arbitrary and sloppy use of statistics to make their arguments.
The next stink bomb is the contorted argumentation about the fact (“[t]his statement is not antigovernment; it is just common sense”) that the marginal value of government spending falls as government grows larger. This is supposedly because “[o]ver time, an increasing percentage of what we spend on government is spent on optional rather that core services because the core services tend to have been around longer”.
What are core versus optional services? Is the provision of the Interstate Highway system a core or an optional service? If it is core, is the repair or expansion of the Interstate Highway system core or optional? Why would government expenditure on the latter (repair and expansion) be “worth” less than on the former? If we as a society decide that additional banking regulations are needed to prevent another financial disaster such as the one we recently experienced, then why would government spending on such regulations be worth less than on enforcing existing regulations?
Prof. Cowen again goes to the fruit orchard to make his point, this time the apple orchard. Perhaps he has missed his true calling.
The culmination of his arguments that government spending will overstate the productivity and GDP growth rates is:
“To better measure how well we are doing as a nation, remember this about productivity:
- The larger the role of government in the economy, the more the published figures of GDP growth are overstating improvements in our living standard....
- The larger the percentage of government consumption in the economy, the harder it is to tell exactly how well we are doing in real economic growth and living standards”.
If Prof. Cowen is interested in understanding why GDP is a poor measure of a society’s wealth and standard of living, I would recommend the book by Thomas Geoghegan, Were You Born on the Wrong Continent?, which gives a lot of colourful examples of “good” and “bad” GDP.
Even simpler, he need only go to his own section on “How much is health care really worth”, but looked at from a slightly different perspective. According to statistics from the World Health Organization, the US ranks 37th (between Costa Rica and Slovenia). In 2005 these countries spent respectively 7.1%, 15.2% and 7.2% of GDP on health care. The corresponding GDP per capita numbers (indexmundi.com, “most current”, not sure about the year) are $10,800, $46,300 and $26,700, which translates to $766, $7,038 and $1,850 in per person expenditures for health care in these three countries. One way to interpret these numbers is that $7,038 - $1,850 = $5,188 of per capita US health care spending is wasted, or at best, inefficient.
To play this numbers game a little further, if you subtract this wasted $5,188 per capita spending from the total US per capita GDP (= $41,112) this would drop the US ranking in GDP per capita from 10th to 16th place.
As all of Prof. Cowen’s discussions, although they contain some interesting and useful facts and conclusion, the health care discussion too ends up being entirely convoluted. It somehow ends up with the conclusion that most of the health care dollars are being spent on the elderly (true), and that somehow therefore it is not worth the money being spent on it because most of the younger people are not reaping the benefits. This is unbelievably ridiculous, because much of the money being spent on healthcare for the elderly is being paid for by the elderly (or was paid into Medicare by them); about 22% of lifetime medical expenses are incurred during the last year of life (http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1464043/), and health care spending is the leading cause of bankruptcy and poverty among the elderly.
The conclusion that should be obvious from an analysis of US health care, which is by and large dominated by free-market capitalist mechanisms, is that the free market mechanisms are doing a very poor job of efficiently allocating health care resources. As Prof. Cowen correctly states, “[o]ur health care sector is not especially accountable, and I don’t very much trust the market tests we have in place for measuring health care value”. What this should tell us is that if market forces cannot be relied upon to efficiently and effectively allocate health care resources, then other mechanisms must be employed. And the European model of socialized health care funding (i.e. more government involvement) should at the very least be a serious contender.
The third area where Prof. Cowen bemoans the “massive government distortion of incentives” is spending on education, especially K-12. The evidence is very persuasive that the increases in spending on education have not produced a proportional increase in the quality of education, especially since about 1970. This seems to be a global issue in that in most advanced economies the educational outcomes seem to be regressing despite increases in spending for education.
The results from Charter Schools, as preliminary as they are, seem to offer some hope for a better delivery system for K-12 education. However, a complete surrender to allow “market forces” to control both the delivery system and the distribution of education resources is counter to the democratic principles of providing everyone equal access to education. That is why most state constitutions provide as one of the main responsibilities of state government the provision of education for its children.
Education is definitely one of the areas, not just in the US, but the world over, where better productivity is required. However, it is completely irresponsible to demonize government involvement on the basis of poor productivity gains in education. Government is involved in certain areas of “economic” activity not by choice but rather because of overriding concerns of equality (as in the case of education) , because market forces by themselves do not provide for efficient distribution of resources (as in the case of health care), or both (as in other areas such as infrastructure provision).
Chapter 3: The Internet: Savior and Culprit
Prof. Cowen is obviously a huge fan of the Internet, as am I. I could not be sitting in my easy chair, newly retired, with my Mac on my lap, merrily relieving my “grumpy old guy” symptoms by writing this polemic, checking for facts and figures on the Internet as I go along.
As a side note, my wife loves to read real books and hates computers and the Internet. And in fairness, if you get all your information only from the Internet, one could easily come to believe that “history” began about 10 to 15 years ago.
And at some level, this seems to have happened to Prof. Cowen, who portrays the Internet as something that came out of nowhere to present us with a game-changing technological development and a tectonic shift confronting us with a “new reality” of higher “productivity” resulting in fewer jobs.
As I pointed out in my critique of Chapter 1, this is ludicrous. Technological innovation since the very beginning of the industrial revolution has been focused on replacing humans with “machines” and requiring less human work to achieve the same output, i.e. increased “productivity”. The free-market capitalists system rewards exactly the kinds of technological innovation which reduces the needs for (expensive) human involvement, so it should be no surprise that that is exactly the kind of innovation our entrepreneurs are focusing on. It is quite conceivable that if our society and economy rewarded a different kind of innovation we might see new technologies which foster higher levels of employment.
The other interesting aspect of this chapter, indeed the whole pamphlet, is that Prof. Cowen seems to have no understanding of or appreciation for the role of government “investment” in preparing the road for many, if not most of the technological innovations which free-market capitalism is quick to take credit for.
Prof. Cowen demonizes government involvement in economic activity as causing “massive government distortion of incentives”. For him the moon landing led to “Teflon, Tang and some amazing photographs”. He has no regard for the massive technological development in micro-electronics and computers which was spurred by this government investment, which in turn laid an important part of the foundation for the development of the Internet. The other part of the foundation for the Internet is also the result of government investment known as DARPA.
In fact, much of the post WW II spurt in technological innovation and economic progress can be traced back to innovations coming out of government spending during the war - medical technology, logistics, materials and manufacturing to name just a few.
The myopic short term horizon of Wall Street driven free-market enterprise, looking ahead only to the next quarterly results, causes economists like Prof. Cowen to completely discount government programs and investments, which in general have a gestation and maturation period of multiple years or even decades.
This short term focus can also be related back to the discussion on the failings of education. Prof. Cowen points out correctly that every technological advance increases the requirement for highly trained employees to fill the (few remaining) jobs and that the current educational system does not fill that need. Because education is an activity which takes a long time to provide return on investment (say 13 years), our ingenious free-market entrepreneurs have “externalized” the cost of that investment, sit back and expect government, with all its “massive government distortion of incentives”, to carry out that task. Or, alternatively, they externalize the cost of education by importing highly skilled young people from abroad, and to hell with America’s young.
In the mythology of the self-regulating markets one would think that our free-market capitalism would recognize the need for skilled labor and tackle the task of training our young people themselves, since governments cannot be trusted to do anything right. But alas, that would require long-term planning and it is much cheaper, faster and easier to “lobby” (speak: bribe) politicians to allow the recruiting of people from around the world.
Before leaving Chapter 3, I can’t help myself, I just have to quote some of the more ridiculous gems.
“... using this stuff isn’t hard, just buy a Web connection, turn on your computer, create a few passwords, and you’re set to go”.
A few paragraphs further, the opposite:
“The internet is a public good, but you don’t benefit from it automatically in the same way you do from a flush toilet or a paved road. Learning how to use it is a much more specialized skill”.
“Buying $2 worth of bananas [note the fruit obsession again] boosts the GDP, but having $20 worth of fun cruising the Web does not”.
Truly brilliant! An economist has recognized the fact that there are things of “value” in life that cannot be monetized into the GDP, but which should still be valued by society. Take for example the peace of mind of having health insurance “between” jobs.
Chapter 4: Blame “Big Government”
As far as it goes, this chapter contains a lot of blah, blah obvious observations. Both political parties have their dogmas, talking points, their cure-all political soundbites, which do little to nothing to cure the problems of a shrinking economy.
Prof. Cowen again tries hard to drive home his “low hanging fruit” obsession. To repeat myself, the economic slowdown over the past 40 years is endemic to the values and rewards imposed on us by free-market capitalism: foster those innovations which increase productivity, require less (expensive) labor, and if an innovation does require labor, outsource it to the cheapest source.
My biggest problem with this chapter is the one-sided blaming of “big government” for its inability to deal with economic slowdowns. What then is the role of super efficient, self regulating, all-knowing, resource optimizing free-market capitalism? It sits back and hordes huge amount of cash, lays off employees to make its “bottom line” look better, thus transferring the responsibility for these “released resources” to the evil, inefficient, bumbling “big government” with all its “massive government distortion of incentives”.
Thus, to sit back and expect the next big technological “breakthroughs that will generate a lot of revenue and jobs” to magically appear, is completely illusory. Governments are still national in scope, while all “our” major corporations recognize no national boundaries; they take our government laws, regulations and services, which make their existence possible, for granted, but are free to outsource the expensive labor intensive components of any new technology.
Chapter 5: We all caused the Financial Meltdown
The thrust of this chapter is so patently and obviously ridiculous that I won’t waste too many words on it.
At an extremely superficial level one can of course always say that all of society is responsible when things go badly. But to say that we are all equally responsible for the financial meltdown is like saying everyone on the Titanic was culpable for the fact that it hit the iceberg and went down -- after all, all the passengers wanted to get to New York in record setting time.
The government had obvious regulatory responsibilities, which it failed to fulfill. The banks had fiduciary responsibilities which they most obviously failed to live up to, and according to some sources there were regulations which were recklessly violated and even laws purposely broken. To even imply that some home buyers who got in over their head (often as a result of wildly inaccurate assurances by mortgage brokers) are equally culpable is too ludicrous to even comment further on.
Chapter 6: The Fix - Genuflect to Scientists
If Chapter 5 is ridiculous, Chapter 6 is simple-mined to the extreme.
Prof. Cowen sees the following “positive” trends (I’m not making this up):
First, China and India, with their accelerating skills in science and engineering, will take over a much greater role as “innovators” (a role which the US continues to say is its greatest strength and its saving grace) and take over (even more) of the worlds production and service jobs, which, by some odd circular reasoning, will “free up our own time and energy for innovation”.
I love this line:
“If fewer Americans make cheap plastic toys [I suspect most of those are already made in China, but presumably even more of that is going to move there] maybe more Americans can search for technological breakthroughs”.
I guess we’re just too busy making cheap plastic toys, and once we are “liberated” from that job by China and India, we’ll just switch those liberated toy makers right to making technological breakthroughs.
Second, the Internet is going to save the day by making world-class scientists out of Web surfers in remote places of the world. These Web-educated scientists “will likely boost our technological progress ... over the next few decades”.
Don’t get me wrong, I think the Web is a great tool -- it’s first non-public incarnation was indeed designed to facilitate communication among scientists. But to assume that the ability to communicate quickly by itself will spur significant innovation of the type needed to generate millions of jobs in the US is just ludicrous. And, as I have pointed out ad nauseam, even if such an innovation does appear, our wonderful free-market capitalist system will ensure that any expensive labor intensive jobs will be outsourced so that only a few privileged entrepreneurs, investors and bankers will benefit.
The third positive trend Prof. Cowen sees is a sudden optimism about dramatic progress in K-12 education. Remember that in Chapter 2 be lambasted government for its inability to improve K-12 education and saw “no obvious ‘eyeballs-ready’ correlation between how much money is spent in U.S. public schools and the quality of final outcomes”. Four short chapters later he sees “the American electorate favoring concrete steps to bring greater quality and accountability to K-12 education”. If evil big government is incapable of making these changes, who will?
Unfortunately, after listening closely to the American electorate, the new Republican majority in The House have heard the opposite. They instead heard that the American electorate wants to eliminate the Department of Education and cut many other programs which were designed to improve education at all levels, starting with Head Start all the way to higher education. Furthermore, because of fiscal constraints at the State level, funding for education is being dramatically cut at the State and local levels.
After these gems, Prof. Cowen closes with his crowning wisdoms on how to end The Stagnation and hasten the arrival of the next Low Hanging Fruit:
Give scientists greater respect and status.
Be nice to each other.
I invite the reader to read the original pamphlet to get the details on these wonderful proposals.
Conclusion
Since I have lambasted Prof. Cowen for his shallow and often nonsensical pamphlet, you may well ask what solutions I can offer for The Great Stagnation.
The short answer is, I have no clue.
However, Prof. Cowen essentially made a whole lot of assumptions from which he drew conclusions which were only tenuously or not at all supported by the data presented. I can do that...
As I see it, there are four interrelated major issues causing The Great Stagnation.
First, the free-market capitalist system rewards and encourages technological innovations which result in increased “productivity”, that is fewer “inputs” (workers/employees being one, and often the most expensive of these inputs) are required to achieve the same “outputs” (products or services).
Second, each such productivity gain will require additional demand for products and services just to stay even in order to provide employment for those who lost their employment from the previous technology driven productivity gain. This is a vicious cycle endemic to free-market capitalism.
Third, even if some new technology for products and services requires large numbers of employees (which is very unlikely - see below), the free-market capitalist system is incentivized to export these jobs to lower cost countries, thus again not providing needed employment at home. Thus, waiting for the next big technological innovation to provide the needed boost is wishful thinking.
Fourth, historically technological innovations since about the 1960’s have been high in technological content but lower and lower in labor requirements. This is partly due to economic incentives, but also due to the natural progression of technology. This has nothing to do with low or high hanging fruit.
The long term solution needs to involve economists and government working together to modify the free-market capitalist system so it is not inherently dependent on everlasting growth in consumption.
I realize this is a tall order. But ultimately the notion of unending “growth” in a finite world is unsustainable. To someone trained in the physical sciences, this is self-evident.
I can almost see the pitying smiles on the faces of economists as they point to the “long history” of economic growth since the beginnings of the industrial revolution and how successful free-markets have been in fostering that growth. That “long history”, however, is really only a blink of the eyes in terms of human history.
More immediately, again depending on cooperation between economists, corporations and government, the incentives of free-market capitalism need to be modified to maintain and enhance “local” (i.e. national) employment as opposed to exporting these jobs abroad. This is of course difficult to implement, since governments are bound by national boundaries, whereas large corporations recognize no national boundaries.
One potential model for this is the European “social free-market system” (or free-market capitalism with a social conscience) . A crucial component of that system is the notion that corporations, and economic enterprises in general, have a responsibility not only to their stock holders or owners, but to their employees as well as society as a whole.
In the Anglo-American version of laissez-faire free-market capitalism, when “workers are released back into the market place to power other companies and sectors”, as Ian Bremmer so tactfully puts it, they exit the “system” which economics deals with (except if they are lucky enough to still have some money to be ”consumers”). These former employees are “externalized”, literally, and the costs associated with keeping them alive and possibly retraining them are left to the government and society in general.
This is very similar to the “good old days” when many companies “externalized” the disposal of waste, be it pollutants, excess heat, smoke, soot, into the environment, under the assumption that the atmosphere and the oceans are “boundless” and can absorb these materials without repercussions. Today it is (almost) generally accepted that the atmosphere and oceans are not infinite receptacles for waste, and enterprises are no longer entirely free to “externalize” these costs.
Well, the social free-market systems of Europe expand this to include workers. Workers, when laid off, can no longer be externalized to some boundless parallel world, where they are fed, housed and possibly retrained to be ready “to power other companies and sectors”, but rather the companies must retain some responsibility for them, for example to help retrain them. More generally, just as waste materials can no longer be freely released to the environment, there is a cost associated with “releas[ing] workers back into the market place”. This will incentivize companies to hold on to workers for the longer haul, and who knows, perhaps even benefit from not having to recruit, re-hire and re-train employees.
I can hear the hue and cry from laissez-faire capitalists and economists, and I don’t pretend that there is an easy solution. But, ladies and gentlemen, let’s be real - we have to do more than just give scientists more status and more than just being nice to one another.
