The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better is a pamphlet by Tyler Cowen published in 2011. It argues that the American economy has reached a historical technological plateau and the factors that drove economic growth for most of America's history are no longer present. These figurative "low-hanging fruit" include the cultivation of much free, previously unused land, technological breakthroughs in transport, refrigeration, electricity, mass communications, sanitation, and the growth of education. Cowen, a professor of economics at George Mason University, theorizes that these factors have contributed to stagnation in the median American wage since 1973.
The concept of a "Great Stagnation" has been contrasted with the idea of the "Great Divergence", a set of explanations that blame rising income inequality and globalization for the economic stall. Related debates have examined whether the internet's effect has yet been fully realized in production, if its users enjoy a significant consumer surplus, and how it might be further integrated into the economy. The final set of questions concerns appropriate policy responses to the problem.
The pamphlet, first published in January 2011 as an ebook, is 15,000 words long and was initially priced at US$4. A hardback version, which Cowen dubbed "the retrogression", was published in June 2011.Cowen, Tyler The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will(Eventually) Feel Better Dutton, 9 June 2011. While not all reviewers agreed with Cowen's thesis and arguments, the book was largely welcomed as timely and skilled in framing the debate around the future of the American economy.
Synopsis
The main thesis is that economic growth has slowed in the United States and in other advanced economies, as a result of falling rates of innovation.Klein, Erza "The Great Stagnation" Voices, www.washingtonpost.com. 31 January 2010. Retrieved 26 August 2012 In Chapter 1, Cowen describes the three major forms of "low-hanging fruit": the ease of cultivating free and unused land, rapid invention from 1880 to 1940 which capitalized on the scientific breakthroughs of the 18th and 19th centuries and the large returns from sending intelligent but uneducated children to school and university. There are potentially two further minor forms: cheap fossil fuels and the strength of the American constitution. Cowen concludes, "You could say, 'The modern United States was built at five forms of low-hanging fruit, and at most only two of those are still with us.' Fair enough."Cowen (2011:10) While they produced extremely large returns, future advances will be much more incremental. He offers anecdotal and statistical illustrations for this slowdown. First, he compares the changes witnessed by his grandmother with those of his own generation. Then, he cites median income statistics: the rate of growth drastically slowed from 1973 onwards.Cowen (2011:11) He further argues that the failure to diagnose the trend has led to a degradation in political discourse since left and right leaning actors blame the policies of "the other side" and "what I like to call the 'honest middle' cannot be heard above the din."
Chapter 2 examines productivity in the contemporary economy. Cowen describes spurts in productivity growth, 2.8% between 1996 and 2000 and 3.8% from 2000 to 2004, and he asks if they disprove the stagnation thesis. He concedes that there have been gains in certain areas, such as information technology, but argues that in other important areas such as finance, which is 8% of GDP, there has been less value created.
Also, whilst productivity figures have improved, median incomes and stock market prices, and thus the returns to capital and labor, have not improved. Furthermore, government consumption (government activity excluding transfer payments) represents between 15 and 20% of GDP, but since the sector is measured at cost it becomes less and less productive as it grows larger. Thus, the more government consumption there is, the more published GDP figures tend to overestimate growth in living standards.
In health care (17% of GDP), the problems of asymmetric information and moral hazard mean that increased spending results in little or no improvement in health outcomes. A similar result is observed in education, 6% of GDP, where outcomes have not improved in the last 40 years.
Chapter 3 considers whether the internet and other computing technologies disprove the argument. Cowen writes that while the internet has been fantastic for the intellectually curious, it has done little to raise material standards of living. The biggest Internet companies employ at most a few thousand people, and relatively few services are paying: "We have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy. When it comes to the web, those assumptions are turning out to be wrong or misleading."Cowen (2011:38)
Chapter 4 examines American politics in light of the thesis. Cowen says Paul Krugman's The Conscience of a Liberal (2007) puts the "cart before the horse" in asking for high marginal tax rates, unionization, and an egalitarian distribution of income and wealth. The policies worked in the 1950s precisely because the real income growth was there to support them. Cowen argues that the failure to recognize the stagnation has led to poor policy ideas from the right (such as "revenue generating tax cuts") and the left (redistribution of incomes).Cowen (2011:39) Cowen laments the "exaggeration" of both sides and the influence of political lobbying on economic policy. The growth in government, he says, was affordable during the period of lowhanging fruit, and the advances in transportation, industrial production, electronic communications and scientific management even facilitated it.
Chapter 5 proposes a simple cause for the 2008 financial crisis "We thought we were richer than we were."Cowen (2011:46) He argues that despite a series of regular, smaller crises since the 1980s, the crash was ultimately caused by investors taking too much risk across the economy, "housing and sub-prime loans were the proverbial canary in the coalmine."Cowen (2011:49)
Chapter 6 looks at solutions to the problem. Cowen praises the development of India and China as producers and consumers, the role of the internet in enlarging the scientific community, and a growing consensus for the reform of educational policy in the US. He further suggests for the social status of scientists to be raised to at least as strong a motivating factor as money can.
Analysis Place in the growth literature Matthew Yglesias described the book's themes as a continuation and expansion of those developed by Paul Krugman in The Age of Diminished Expectations, Third Edition: U.S. Economic Policy in the 1990s (1997). Both books treat the diminishing rate of return from basic science and the effects that it has on politics, specifically "that a growing share of innovative energy is going into rent-seeking or otherwise unproductive activities".
Timothy Noah compared it to Prosperity: The Coming Twenty Year Boom and What it Means to You by Bob Davis and David Wessel, an enormously popular book at the time (1998) which today resells for a penny. He described how both Prosperity and The Great Stagnation examine the puzzle of stagnant median wages though offer starkly different opinions about the prospects for future growth and in particular the role of information technologies in that. He concluded by calling Cowen's appeal to "realistic expectations" about growth a "weird conservative echo" of the Club of Rome's liberal "era of limits gospel from the 1970s". In the summer of 2012, Robert Gordon's paper, "Is U.S. Economic Growth Over?" prompted comparisons to Cowen's thesis.Lowrey, Annie "A Dismal Outlook for Growth" Economix blog, New York Times Company. 28 August 2012. Retrieved 25 September 2012. Gordon also points out that the easy gains of increased labor force participation, schooling or land use have been spent, while other major innovations or industries—such as transport or sanitation—have enjoyed only gradual improvement.Harford, Tim "Don't take growth for granted", Financial Times, 22 September 2012. Retrieved 25 September 2012.
Internet, growth and quality of life Writing in Slate, Annie Lowrey compares Cowen's treatment of the internet to the "productivity paradox" first postulated by economists in the 1980s. She quoted Robert Solow, a growth theorist, who wrote in 1987 "You can see the computer age everywhere but in the productivity statistics." To explain why growth had not picked up strongly after the boom in computing products from the 1970s onwards, they suggested that the changes advantaged some firms and disadvantaged others leaving little net gain. The problem also may be partly because of deficiencies in the measurement of income and well-being. The internet promotes more free culture, the consumption of which provides utility and happiness to people but cannot be captured through GDP figures that measure revenue.Lowrey, Anne Freaks, Geeks, and GDP Slate, 8 March 2011. Retrieved 26 August 2012.
The Economists Free Exchange blog argued that Cowen "undersold" recent innovations in digital technologies and that society was still in the process of re-organising itself around them. A growth spurt should be expected but this could take anything from years to decades, it warned. Furthermore, there are particularly large gains to be had in the area "cognition-augmenting innovations (as opposed to labor-augmenting innovations)". Writing in Forbes, Steve Denning described Cowen's "low-hanging fruit theory" as "folkloric nonsense".Denning, Steve. "America's Hottest Economist: Tyler Cowen & The Great Stagnation". Forbes, 31 May 2011. Retrieved 26 August 2012. The world of 1953, when Denning was young, is inconceivable to a young person today, he wrote, adding that the qualification "apart from the Internet" is equivalent to saying "apart from the wheel" when discussing transport. The Financial Times reviewer recognized that Cowen, a prominent blogger, "is no Luddite...he thinks life is more fun and interesting with the internet around".Crabtree, James. "The spectre of a jobless online world". The Financial Times, 4 April 2011. Retrieved 27 August 2011. He argued that most economists do not look at consumer technology to find the internet's effect on productivity but rather organizations: super-efficient retailers such as Wal-mart and Tesco have already incorporated it into their logistics. Furthermore, the pace of change means it could be a generation at least before we see the full implementation. Timothy Noah seizes upon Cowen's "concession" that the internet could well increase scientific output by allowing better communication between scientists in remote places. Just as Davis and Wessel incorrectly predicted a coming boom in middle class incomes due to computers, Cowen "seems equally wrong to suggest that computer technology is not on the verge of doing so."
Education and employment