Slo-mo grow on the plateau: Tyler Cowen's general theory of American malaise

Why has the U.S. been plagued with a series of jobless recoveries, an extended period of middle class stagnation, and an equally extended rise in income inequality?  Tyler Cowen floats a new unifying theory through a medium that's part of his message: a novella-sized theory outline first  published as an e-book. The title provides an admirably concise precis: The Great Stagnation - How America Ate All the Low-Hanging fruit of Modern History,Got Sick, and Will (Eventually) Feel Better. The book is as accessible in price ($3.99) as it is in concision, clarity, and freedom from technical economic analysis (or jargon).

Cowen proposes that the United States has already picked all the "low-hanging fruit" of a now-past era of transformative technological development.  He claims that we are now living off the wealth (and growth) generated by the life-changing technologies of the late nineteenth to mid-twentieth century: automobiles, mass communication, air travel, fossil fuel exploitation --and that we're currently on a technological plateau, where growth is inevitably slower. At the same time, we're living with government institutions that can't be easily funded at the slower real growth levels that have prevailed in recent decades. So we're fighting with understandable bitterness over whether to maintain past levels of redistribution of a not-quickly-enough-growing pie -- or whether, ultimately, to shrink our expectations of what government can do for us, at least until we get off the plateau and into a new era of transformative technology.  Meanwhile, he is rueful about the efficiency of government where it matters most -- in education and healthcare delivery -- though perfunctorily upbeat about recent attempts to find efficient ways to improve education.

These theses are obviously meant to be provocative, all the more so as delivered in a short e-book that's almost an abstract of a potential tome that would fill in the conspicuously lacking evidence. In responding, I beg some latitude on two fronts. First, Cowen is an extraordinarily well-read polymath and an able economist, and it's fair to take it on faith that his evidence-light outline represents distillation of a huge amount of data and analysis. I'm responding just as a casual and moderately informed reader. Second, I'm going to indulge myself and compound the error by posting my spontaneous reactions without checking on what's probably already a copious response literature.  I could call this an experiment, but it's really an indulgence: I'm eager to read and engage other responses. But I want to get my thoughts out first, and blog space is cheap...

1) I'd question whether we're living in an era in which transformative technological innovation is in short supply. Cowen does allow "the Internet" as the great exception, but points out that the leading-edge tech companies employ relatively few people, and that Internet innovation has been notoriously difficult to monetize. He is strangely silent, though, about the impact of interactive technology and computer technology more generally on production and commerce of all kinds -- just-in-time factory production, product customization, bar coding, all the incredible efficiencies of large-scale retail operations that wring out large profits on tiny margins -- and on interactive technology's role in globalizing production. He also doesn't consider transformative technologies hiding in plain sight: personal computers themselves (never mind the Internet) and cell phones. It's true, as Cowen says, that the basic physical components of middle class life in America don't look that much different than they did in the 1960s. But they are much different. And the differences have generated a lot of wealth, even if  the U.S. middle class hasn't garnered as large a share as it did in he previous generation.

 2) Part of our problem in this era of allegedly relatively modest technological innovation, Cowen says, is that "A lot of our recent innovations are 'private goods' rather than 'public s.' (sic)" That is,

Contemporary innovation often takes the form of expanding positions of economic and political privilege, extracting resources from the government by lobbying, seeking the sometime extreme protections of intellectual property laws, and producing goods that are exclusive or status related rather than universal, private rather than public; think twenty-five seasons of new, fall season Gucci handbags.

No doubt -- but is this a new phenomenon?  Since when have innovators not sought private advantage, or not catered to the luxury market?  Electricity was a luxury good until government rate regulation forced utilities to make it affordable. I doubt that early trains were packed with the volk, either.  And on the other end of the scale, as Cowan actually emphasizes, Internet-related innovations are so egalitarian as to severely crimp profit opportunities. I would need to hear much more to be convinced of this:

The 'rise in income inequality' and the 'slowdown in ideas production' are two ways of describing the same phenomenon, namely that current innovation is more geared to private goods than to public goods.

In complaining about the proliferation of "private goods," Cowen is thinking largely of the financial industry, the innovations of which, he notes, have primarily benefited hedge fund managers (and presumably traders and Wall Street execs). No question that the financial sector has grown bloated, become a great talent suck, exacerbated raising income inequality -- Cowen emphasizes the vast gap between hedge fund managers and Fortune 500 CEOs -- and created products that did not help allocate capital to productive sources. But it strikes me as at least possible that the malformation in the financial industry is more a product of rapid technological innovation -- the ability to gather and crunch huge amounts of data and trade in nanoseconds, generating high-stakes Darwinian competition among top math minds -- than it is a matter of rent-seeking driven by a dearth of innovation.

Poor regulatory decisions, executed under both parties but driven by Republican free market fundamentalism (with too much Clintonian Democratic buy-in) doubtless also played a part.  I don't buy Cowen's claim that since euphoria was so widespread -- shared, for example, by a hypothetical over-enthusiastic museum director -- no one was to blame.  Regulations and regulators exist to quell euphoria when it crosses over into fraud -- and regulators who shared Cowen's apparent affection for Ayn Rand seem to have taken it as an article of faith that it rarely does.

3) I also question Cowen's propositions about the diminishing returns from new government initiatives in a developed society with a legacy set of safety net services.   He complains, "when measuring GDP, we treat each dollar of government spending as if it is equal in value to the previous dollars that were spent. We're valuing dollars spent on highway extensions as if they worth as much as the dollars we spent on building the core roads that link major cities."

Granted -- and of course, one new government expenditure may be more efficient than another -- say sewer line repair, or high speed rail, instead of a that highway extension. But Cowen also seems to think that new government initiatives cannot be "core" and are inherently inferior to older ones. He puts forward this axiom (his italics):

The larger the role of government in the economy, the more the published figures for GDP growth are overstating improvements in our living standard.

That's assuming that there will never again be a highly efficient government initiative, worthy of being considered "core" by future generations.   I think that's a highly dubious assumption in a country that lacks universal healthcare, not to mention services yet undreamed of (subsidized settlement of far-off planets, anyone?) .  If the U.S. could devise a healthcare delivery system as efficient as that of France or Japan -- admittedly a big if -- we could cut the per capita cost of healthcare as a share of GDP in half.  Cowen is dubious about the likely efficiency of the Affordable Care Act, but he does not really engage the issue in the brief space of this book. What if Atul Gawande is right, and the ACA's experiments in accountable care organizations, efficiency incentives for hospitals, outcomes research (inhibited by a bar on using the data to determine what Medicare will pay for) and a host of other experiments has an effect comparable to the Department of Agriculture's seeding of innovations in farming in the early 20th century?  And from a different direction, if the U.S. could muster the political will to accord government the sole power to set pricing and coverage rules for medical procedures-- then , again, government "spending" on health insurance would likely reduce the real cost of healthcare.

Cowen himself implicitly admits that new government spending in the right places can have an outsized effect on GDP when he lists recent approaches to education reform as one of the hopeful signs that we are on track to get off the plateau:

we now see a critical mass in the American electorate favoring concrete steps to bring greater quality and accountability to K-12 education, whether through better incentives, school choice, charter schools, better monitoring, or whatever works...President Obama has opted for an education policy that, on the whole, teachers' unions strongly dislike. We haven't yet seen much in the way of results, but the tide is turning in a positive direction, and over time I expect this to produce results.

Here as in his discussion of health care, we must take it on faith that Cowen has read and thought deeply about the issue on which he expresses a perfunctory policy preference.  In any case, it would seem that he believes that the right kind of spending on education as he defines it would have an outsized impact on GDP, "government spending" though it be.

4. Finally, on the core assertion that our economic woes stem from a slowdown (or rather, a "plateau") in productive innovation, Cowen owes us a bit more explanation of two periods of sustained economic growth that he acknowledges to have taken place since we reached the alleged plateau around 1970: the mid-to-late eighties and the Clinton years. I imagine that he might explain the Clinton-era prosperity as in large part a technology bubble -- burst by the failure of Internet innovation to generate revenue and jobs.  I suspect that that's only partly true, and that, again, Cowen pays insufficient attention to innovations in business processes that have wrought much creative destruction -- job losses as well as value gains. And that points to a broader question: perhaps more recent technological innovations, including those enabling increased globalization, destroy jobs more quickly than earlier innovations did.

5. Cowen's chief policy recommendation to get us back on the track of innovation is comically inadequate. It's to "raise the social status of scientists" (his italics):

When it comes to motivating human beings, status often matters at least as much as money. I would like to see both incentives pointing in the right direction. Right now, scientists do not earn enough status and appreciation. While scientists are not, in American society, a low-status group, neither are they thought of as especially high status either. Science doesn't have the cache of law, medicine, or high finance. Few women or men dream of dating or marrying a scientist. Yet, upon reflection, are we not capable of finding Leonardo da Vinci the scientist as sexy and exciting as Leonardo da Vinci the artist?"

Win the future: seduce a scientist. There is a germ of truth here: finance has probably attracted too much talent in the last two decades (though doctors, increasingly, are scientists and innovators, as Atul Gawande notes in his commencement speech at Harvard Medical School today).  But it's hard to credit that science suffers from a lack of incentives.  The top scientific minds, of the sort that lay the ground for technological breakthroughs, would likely rarely be attracted to other fields -- at least those  whose minds are not wasted in the first place by lack of educational opportunity.  And practically or commercially oriented scientists have ample opportunity to turn their creativity to gold in industry, from computer science to biotech to alternative energy and a host of less obvious industries. Being part of a startup team has plenty of cache, and there are plenty of scientists, broadly defined, in U.S. startup companies.

This book's simplicity and brevity are part of its appeal. But it deserves a longer final chapter. In fact, the whole thing needs to be at least two or three times as long to have a real impact on those who don't share many of Cowen's assumptions.