Tuesday, May 03, 2011

Book Review (Kindle Single) - The Great Stagnation

Tyler Cowen's The Great Stagnation was the conversation-leader at the beginning of the year. Everyone read it, wrote columns about it, or blogged about it. Pundits still refer to it and debate it quite often. If I were assigning a book for students or faculty or policy makers to read and discuss, this would be at the top of the list.

Cowen's hypothesis is that much of the U.S.'s growth in the last 200 years has been by picking the "low-hanging" fruit:
1. As U.S. expanded westward, it acquired more resources ("free land").
2. Women and minorities gained acceptance and entered the workforce. Uneducated populace became more educated in 20th century.
3. There were gains in technology that had positive externalities.

#1 and #2 have basically peaked. We've also seen declines in high school graduation rates since the 1960s. So, we appear to have pretty much gotten the benefit of increased labor force participation and society-wide education. #3 just isn't happening like it did during the Industrial Revolution. Cowen argues that while the internet makes us more productive, it doesn't get us the GDP growth we expect. Facebook, Twitter, Apple, etc. are putting out great innovations, but these aren't creating many jobs or income (GDP). One could argue that iPods have destroyed as many jobs as they have created. Cowen is libertarian-slanted, so he doesn't gripe about this-- he's simply pointing out that if we're expecting a high rate of GDP growth we're setting ourselves up for huge disappointment.

"Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago."
So, Cowen notes that we're consuming less and focused more on emotional, spiritual happiness. The internet makes us very happy very cheaply, which means when we lose our jobs or lose income, we may be slightly more content and accepting of that. Median wages have stagnated.

The funny thing is, getting away from materialism on such a large scale—whatever the virtues of that switch—really, really hurts. It is the hurt that we in America are living right now.


Why it matters:
If the government expects GDP to grow at a 4% rate over the next 50 years in making its calculations about how much tax revenue it will has to spend, and instead we get something like 1% growth, interest rates will go up and we'll have overbuilt various sectors. Retirees won't see their stock portfolios grow like they'd like and may have retired too early.

Cowen makes the empirical point:
"The larger the role of government in the economy, the more the published figures for GDP growth are overstating improvements in our living standard...For better or worse, we used a lot of this new low-hanging fruit to build big government. Big government was one of the final creations from these new technologies."
We're all going to be disappointed. Cowen points to Japan's two "lost decades" as an example of a wealthy country managing economic stagnation without coming apart at the seams, and suggests we learn from Japan's example. Yikes!

Cowen uses his Stagnation hypothesis to explain the recent financial crises and recession. Everyone expected much greater GDP growth than was possible, and so they overinvested. Sooner or later, this causes a crash. Even now, people are expecting more GDP growth than what is possible, and this is causing frustration with an inevitable "jobless recovery," The Great Stagnation explains why the last few economic recoveries were "jobless."

Cowen's prescriptions:
1. End protectionis policies and allow gains from trade to happen:
"If fewer Americans make cheap plastic toys, maybe more Americans can search for technological breakthroughs or in some broader way contribute to that enterprise."
2. Have a societal shift away from idolizing sports and entertainment stars and idolizing scientists instead. If it becomes "cool" to be a scientist, we'll get more of them and more technologies invented. I agree with this, and this thought has affected my behavior heavily in the last 5-6 years.

I give this book 5 stars. Everyone read it for a reason. Kindle Singles are great things.

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