The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will(Eventually) Feel Better [ハードカバー]

"The Great Stagnation" offers a very concise and well thought-out essay on the relationship between innovation and prosperity. The first chapter, which shows how median incomes have stagnated in recent years as the economy's "low hanging fruit" has gotten scarce is especially well done. The parts on health care and education are also very good.

Cowen's central idea is that the pace of innovation has slowed, and that we are now on a "technological plateau" that makes further growth challenging. If you consider technology in the broad sense (energy, transportation, home, etc), this makes sense as things have not changed a lot in recent decades. However, I think it is also true that progress has been highly concentrated in information technology and communications, and that things continue to advance rapidly in this area. Cowen notes this but seems to feel that the Internet is the only really major innovation.

Cowen argues that what we need is a new burst of innovation that will propel economic growth. Here is the problem I see with that: Cowen writes that "a lot of our major innovations are springing up in sectors where a lot of work is done by machines, not by human beings." In fact if you look at companies like Google or Facebook, or entire industries like semiconductors, computers, Internet or biotech, there are really not a lot of jobs in total and certainly not a lot for middle skill people. If there is manufacturing it is either heavily automated or offshore.

The question is: if today's innovations are already creating industries that are not labor-intensive and rely instead on technology, why would the future be different? Won't the new burst of innovation that Cowen calls for create even more technology-intensive industries...and few jobs?

This issue of whether future technology will create large numbers of jobs is explored in great depth in this book: The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future.

I would encourage anyone interested in this issue (and everyone should be)to read both these books and note that many of the observations are quite similar, while the conclusions and proposed solutions are very different. Innovation won't create broad-based prosperity unless it creates jobs that can be done by most people in the population. Without this, the danger is that future progress will just drive inequality to new heights.

Some reviewers have done a good job here, but some have utterly missed major points, if they have read the essay at all, which I doubt, so I will give potential readers an outline.

I. The low-hanging fruit we ate
..A. Examples in the United States
....1. Free land (Homestead Act, etc.)
....2. Technological breakthroughs (electricity, motor vehicles, telephone, radio, television, computers etc.)
....3. Smart, uneducated kids (who were made productive through excellent public education).
....4. This is a partial list; clearly other candidates can be proposed, e.g. cheap fossil fuels.
..B. Examples in other countries ("catch-up growth")
....1. Leveraging the technological breakthroughs of the West (e.g. China, India)
....2. Smart, uneducated kids (e.g. China, India)
..C. MEDIAN income growth in the U.S. has slowed notably since 1973.
....1. Decline in household size is not the cause.
....2. Unmeasured quality improvements (think electronic gadgetry) are not a counter (because there is
...... also unmeasured quality degradation, think traffic jams and AIDS)
..D. Rate of technical innovation has declined notably since 1873 and even more since 1955
....1. Innovation is getting harder; the low fruit has been picked.
....2. Recent innovations have slight marginal benefits
..E. Recent and current innovation is more geared to PRIVATE goods than to PUBLIC goods.
....**This is the driver of the Great Stagnation.
....1. Extracting resources from the government (subsidies for solar power, farm products, other junk;
.....useless construction; useless government employees; legal services, etc.) by lobbying.
....2. Extreme protections of intellectual property (e.g. by ridiculous patent laws that grant monopolies for
...... incandescently obvious ideas, enabled by our retarded judiciary)
....3. Recent financial innovations (CDO's, derivatives, etc.) that benefit Wall Street at public expense.
....4. THESE ALL RESULT IN INCREASED INCOME INEQUALITY.

II. Our New (not so productive) Economy
..A. Most recent productivity gains in the private sector have been achieved by cutting out dead wood
....("discovering who isn't doing much and firing them").
..B. GDP statistics are flawed because they value expenditure at cost; actual value of the expenditure is
.... unknown in sectors where market forces do not operate.
..C. Underperforming sectors where valuation at cost is a big problem:
....1. Government.
......a. The marginal value of government, even if positive, falls as government grows larger.
........(1) Basic expenditures deliver high value. e.g. police, basic infrastructure, national security)
........(2) Ancillary expenditures deliver less value (e.g. bridges to nowhere, urban renewal boondoggles,
......... salaries for school administrators and federal drones
......b. Because government contribution to GDP is valued at cost, the larger the government grows,
........ the more GDP growth and living standards are overstated.
....2. Health care
......a. No bloody clue what things are actually worth; they are valued at cost.
......b. America currently spends 17% of GDP on health care, with outcomes worse than countries
....... that spend far less.
......c. Disproportionate spending on end care for the elderly.
......d. David Cutler's study: health care productivity growth 1995-2005 was negative.
....3. Education
......a. 6% of GDP at present.
......b. No improvements in student reading or math performance since mid 70's.
......c. But we are spending (constant dollars) twice a much now per student as we did then.
......d. High school graduation rate peaked at 80% in late 60's.
......e. Government claims of 88% graduation rate are nonsense.
......f. 20% of all new high school credentials each year come from passing equivalency tests.
..D. INNOVATION MUST OCCUR IN THESE UNDER-PERFORMING SECTORS
... This is where Cowan fails to state solutions clearly, which may disappoint readers, but his point is that
... these are areas where innovative thinking is required and good solutions need to be developed. My summary
... and suggestions:
....1. "If you can't measure it, you can't manage it." Use market approaches, intelligently ascertain value by
..... other means, and if measurement fails, arbitrarily force cuts in low-performing sectors (as a last resort).
....2. Government: 10% staff cuts. Strict spending limits pegged to per-capita government spending during a
.... benchmark period.
....3. Education: Standardized tests, charter schools, e-learning, vouchers (all of course resisted by the
..... education lobby).
....4. Health care: determine what works and pay only for that. Extending the life of an 90-year-old terminally
..... ill person for one month at a cost of $200,000 is not something that works.

III. Does the Internet Change Everything?
..A. Similar to early years of industrial revolution (advances made by amateurs)
..B. Hard to measure its productivity because its value lies largely in the mental dimension; most stuff on the
... internet is free.
....1. Traditional activity does occur (advertising, sale of goods). eBay, Amazon, Craigslist, ads on Google.
....2. While a public good, benefits of the Internet skewed to the intellectually curious.
....3. GDP is understated to extent it does not include the value of free internet pleasures.
..C. As an innovation, the internet has generated few jobs and revenue, compared to earlier innovations.
... (Example: Google employs 20,000, Twitter 300)
..D. Internet has also destroyed jobs in the music industry, book stores, and other forms of entertainment.
..E. So we're getting away from materialism, but it really hurts and people are yelping about it.

IV. The Government of Low-hanging Fruit
..A. Days of government largess are past; we can't slop the public trough like we used to.
..B. We won't be getting real income growth of 2% to 3%. We'll be lucky with 1%.
..C. Tax cuts without spending cuts (right wing approach) are untenable in the long term.
..D. Taking from the rich is also untenable in the long term; top 5% already pays for 43% of the federal
... government; top 1% for 27%.
..E. As real growth stagnates, demands from interest groups (corporations for tax breaks, K-12 teachers for job
... security, medical device makers for Medicare payments, public employees for pensions) will grow more
... strident. Expect more vociferous arguments about how to divide up the stagnant pie.
..F. Because government cannot continue to grow under current conditions, Liberals have become the new
... conservatives, supporting the status quo of handouts, bribes, and squandering.

V. Why did we have such a big financial crisis?
..A. Eight words: "WE THOUGHT WE WERE RICHER THAN WE WERE".
....1. We made plans expecting continued 3% productivity growth and the asset prices such growth would bring.
....2. We were lulled by successful handling of prior crises (e.g. the S&L bust and real estate bubble in the
..... 80's) into believing all risk could be managed effectively.
....3. Overconfidence was the problem. For everyone. Borrowers, investors, bankers, politicians, regulators.
..B. Markets and government failed miserably in estimating risk.
..C. Government encouraged risk by taking by overlooking accounting scandals (Freddie and Fannie) and promoting
... home ownership for everybody.
..D. Short-term response to stagnant incomes was to borrow against appreciated assets (home equity loans,
... mortgage refis), foolishly expecting continued asset appreciation. From 1993 through 2005,
... homeowners extracted equity equal to 11.5% of GDP.
..E. Fiscal stimulus in 2009 was inadequate, but a larger stimulus would not have helped. Problem is not lack of
... aggregate demand, but lack of revenue-generating innovation.
..F. Replacing private debt with public debt solves nothing. Sooner or later you have to pay the piper.
..G. The internet, by giving people much to do for free, may be exacerbating the current stagnation.

VI. Can we fix things?
..A. Promote favorable trends
....1. India and China
......a. Science and engineering interest in India and China: should yield innovations we can exploit.
......b. Offloading unskilled labor abroad gives us more time to pursue innovation (if we are smart enough).
......c. Consumers in China and India can offer a market for our innovations.
....2. Internet may do more for revenue generation in the future
......a. Promotes scientific learning and makes science more of a meritocracy; ideas rapidly shared and improved.
........ (Archaic intellectual property laws will need to change if we are to take advantage of this)
......b. Promotes self-education; a lot better than watching TV.
......c. These should all yield productivity gains.
....3. Improvements in K-12 education
......a. Majority of electorate no longer sides with education lobby.
......b. School choice, charter schools, incentives, better monitoring are now in favor.
....4. Raise the social status of scientists
......a. Science is what fuels economic growth, yet we reward law, medicine, and finance.
......b. [Aside: this is not the case in China and India, where engineers and scientists are more highly
....... esteemed, and occupy the highest offices in government. Here, we have poli sci graduates running things.]
......c. Culture of science is what drove the industrial revolution.
......d. We should not trust individual scientists uncritically, but we should respect science at the higher
....... level (a lot more than law or finance)
..B. Avoid unfavorable trends
....1. Cool the rhetoric, avoid useless strife.
....2. Stick to facts. Educate yourself. Don't demonize those you disagree with.
....3. A prolonged period of slow growth need not be bad -- Japan has tolerated it very well.
..C. Final Word
....1. The next low-hanging fruit may pose dangers. Be vigilant and quick to respond.
....2. Axis and Communist powers turned new technologies to destructive and oppressive ends.
....3. Balance of power can be upset.

This is a wonderful mini-book reflecting on the slowing pace of technological process, how US economic growth has changed as a result, and what that means for the next 30 years. Cowen's thesis--that much of the growth from 1940-'75 came from "low-hanging fruit" and will not easily be duplicated--makes a lot of sense to me, as does his assertion that further improving educational attainment will be worthwhile but very hard. As usual, Cowen is at his best not at developing revolutionary ideas but in putting ideas together in a new, interesting, thought-provoking, and meaningful ways, that make you think about old issues differently.

He raises interesting points about the productivity growth of the last 30 years: that, really, neither labor nor capital has gotten much richer, so maybe productivity didn't improve that much after all?; and that much of the productivity gains in recent years have come from producing the same amount (or close to it) with fewer people, rather than doing more with the same workforce.

And his thesis about economic growth being perhaps overstated...due to fast growth in sectors--education, health care, government--where expenditures are valued at cost rather than reflecting a market price...rings very true to me. He points out that schools today have MUCH better facilities than they did 40 years ago, and all of that shows up in published GDP numbers--but what is the true benefit of such? Or of highways, unnecessary doctor visits, etc.

His writing about the Internet, and its effect on GDP, also is insightful and important. That is, quality of life has improved in meaningful ways that are destructive to GDP: using wikipedia instead of buying a dictionary, posting on Internet bulletin boards rather than paying to go to the dance hall, etc. Certainly I would spend more than $20/month on movie theaters/rentals if Netflix weren't available. But it is, so I almost never go to the theater, and spend less on rentals than I would have 10 years ago. The immense value--if unmeasured--of the Internet means that GDP/income may be less relevant to quality of life than they used to be. However, our fiscal obligations can't be funded with improved quality of life, so reconciling a slower pace of economic growth with liabilities will be very difficult--especially given that, at present, we don't even really acknowledge the underlying problem. Cowen raises an interesting contrast with Europe, which--perhaps due to WWII--doesn't have the same experience with all their wants being fulfilled.