On Tyler Cowen’s “Great Stagnation”

I’m late to this party, but I’m late to every party. Tyler Cowen’s recent microepic, The Great Stagnation, has been pretty throughly chewed over by the blogosphere. The essay is a quick read, thought-provoking, and getting to give Cowen a couple of bucks for the privilege only adds to the pleasure. The quick summary, for those who’ve been living in a cave, is that since 1973, we’ve been living in a “great stagnation”, during which the pace of growth experienced by the median American household slowed relative to expectations set in the period preceding. Cowen suggests that the explanation for this is a slowdown in the rate of technological change combined with an exhaustion of “low hanging fruit” afforded us by earlier advantages and innovations. Cowen simultaneously disputes both conventional measures of economic performance (we do not observe a “great stagnation” in headline GDP) and left-ish arguments that economic unhappiness stems primarily from maldistribution. We suffer instead from an absence of anticipated wealth. As Cowen puts it, we’re simply “poorer than we thought”.

  • I think the deepest issue Cowen brings out has less to do with technology than with problems in what economists measure (and people perceive) as “revenue” or “production”. In particular Cowen makes two related points:

    1. Many activities that generate apparent revenue are detached from reliable judgments of value. Using revenue as a measure of production requires, at a minimum, that discriminating, budget-constrained actors determine that whatever is “paid-for” offers real-economic value superior or at least comparable to activities that could be inspired by alternative expenditures of the funds.

      Cowen is appropriately general with this critique. Expenditures by government may not meet this “market test” because political actors may direct expenditures for reasons other than inspiring high-value economic activity, or because, for informational or organizational reasons, government may be unable to discern relative value. But the private sector is not immune. In spheres such as health care and education, the benefits of private sector as well as public sector expenditures are difficult to evaluate relative to alternative uses of resources. Cowen reminds us that health care and education are widely viewed as “growth” sectors, but to the degree we collectively overpay for them, “revenue” overstates economic value. A substantial portion of these expenditures should probably be accounted for as transfers and excluded from measures of aggregate production. But of course, we have no means of estimating the size of the appropriate haircut.

      I’d add another important industry to government, health care, and education: financial services. Like with health care and education, we simply are unable to evaluate the degree to which payments to financial service providers represent wise use of resources and to what degree they represent transfers to financial industry stakeholders. Inherent informational problems associated with investment quality, combined with the temptation by service providers to exploit these difficulties to extract transfers, render financial sector revenue highly suspect as a marker of value. Also, financial services are intimately involved in the other problematic sectors: One thing that binds government, health-care, and education is that all are financed in roundabout and sometimes opaque ways that soften near-term budget constraints and that shift costs and risks, both across time and onto people other than the purchasing decisionmaker. The means by which government, health-care, and education are financed help keep them vulnerable to agency and information problems.

      I think of government, education, health care, and finance collectively as the “information asymmetry industry”, and I find it terrifying that many people presume that they are the future growth industries for the United States. Dani Rodrik has pointed out that tradable goods are special, in terms of engendering development in often corrupt emerging markets. Cowen offers an astute explantion: tradables that compete in international markets are usually low-information-asymmetry goods. Apparent value (revenue from trade) and real value are likely to be closely aligned and hard to fake. I worry that specialization in the information asymmetry industry could be an antidevelopment strategy for developed countries.

    2. Conversely, Cowen points out that many new technologies generate value without generating commensurate revenue. It is clear that we would collectively pay a lot more for recorded music or news, for example, because we did in the past (and it’s likely that our reduced payments have more to do with technology and industry changes than with changes in our preferences). Cowen suggests that many of the current era’s technologies are like this, which is nice from a certain perspective (yay! free stuff!) but can cause a kind of sclerosis in an economy that nourishes itself via flows of monetary exchange.

    I think that Cowen is right on both counts. And note that these two factors, in and of themselves, go some way towards explaining “The Great Stagnation”, even before we get to the headline argument about a slowdown in technological change. I’m not referring to an argument Cowen addresses (but cannot entirely dispose of) that there is no great stagnation at all, once we account for measurement error. Instead, I wonder whether, rather than a paucity of new technologies, we might be experiencing a breakdown of an older gizmo that economists refer to as “markets”. As our economy tilts away from sectors in which value (however defined) and financial revenue are reliably cojoined, our primary means of orienting our behavior towards valuable activity, individually and collectively, become less and less effective. We simply don’t know what we ought to do. So we err. If the quality of economic decisionmaking is poorer than it was in past, that has consequences for welfare.

  • An interesting corollary of Cowen’s argument is that a substantial fraction of notional savings are in fact empty claims — no meaningful real economic activity accompanied the generation of that income, so no real investment could have attended its non-consumption. This suggests that any attempt to mobilize savings in aggregate — any net dissaving — is likely to result in either inflation or displacement of consumption by current earners. I think that this is true, that it is now and increasingly will be a source of social and political problems.

  • Despite the evidence that Cowen is able to muster (and lively internet debates about kitchen appliances and time travel), I remain agnostic on the question of whether a slowdown in the pace of technological change is largely to blame for whatever it is that ails us. I wouldn’t rule it out, but like Kevin Drum and others, I see a lot of very real “low hanging fruit” arising enhanced capabilities to coordinate and collaborate via internet and information technologies. These benefits go well beyond “cognitive surplus” and bemused infovoria. [1] Coordination technologies, ranging from assembly lines to the limited-liability joint-stock corporation, contributed mightily to past golden ages of advancement and growth.

    Cowen is clearly right that, with the exception of the internet, recent years have offered few technologies that radically and visibly altered how people live. But I think we need to think carefully about an “extensive” and “intensive” margin for technological change. The early industrial revolution largely streamlined manufacture of existing categories of goods (think textile factories rather than spinning wheels and molded products replacing hand-smithed metal). Producers saw their world turned upside-down, but consumers mostly found themselves with recognizable stuff, just more and cheaper. Still, one wouldn’t characterize it as a low-growth era.

    Cowen seems really focused on the “extensive margin” — the development of qualitatively new goods. I don’t think “growth”, in aggregate or as experienced by the median family, really captures what Cowen thinks we are missing. Instead, I think that Cowen is lamenting a scarcity of breathtaking resets. Developments like electrification and the widespread adoption of automobiles didn’t make people richer as much as they completely changed the circumstances of everyday life. Indirectly, they also made the production and marketing of previously extant goods much more efficient: Electricity helped make bread cheaper. But I don’t think cheap bread impresses Cowen as much as the fact that, post-electricity, humans colonized the night and Presidents colonized living rooms. Income statistics do end up capturing these sorts of changes, but in a manner that is arbitrary and formal. Ultimately, different technological regimes are incommensurable in welfare terms. While most of us would choose more food over inadequate nutrition and better health over worse, adoption of new technology is less a matter of individual choice than social evolution. One must adopt an automobile-centric lifestyle if workplaces move far from available housing. One must become internet proficient if current modes of employment are contingent upon it. The fact that the gas we are forced to purchase is factored into computations of real income and GDP doesn’t really imply that our preferences have been satisfied more completely than they would have been in a different-technology alternative. [2] It might be the case that the big changes whose absence troubles Cowen are welfare-destructive in and of themselves, but occurred only because they came bundled with large improvements in the productivity of prior goods, or simply because new possibilities rendered unstable earlier equilibria that were superior outright. If this is the case, we should celebrate rather than fret if recent modes of innovation have succeeded at increasing productivity without reseting the technological terms of our existence. [3] Ultimately, society is a game and big technological changes rescramble both the available strategies and payouts, leading to changes that are unpredictable both in form and in terms of welfare (under almost any welfare criterion that you might choose).

  • Suppose that it is true that we’re poorer than we’d anticipated, that past growth trends have eased. It’s not at all clear that what people conventionally think of as technology is the growth-limiting factor. Cowen looks to emerging markets for examples of how the availability of low-hanging fruit — technology and institutions already prevalent in developed economies — can hypercharge growth. But the less-developed world offers a different set of examples as well. There are many many economies where despite free and full availability of scientific information and plenty of institutions to emulate, low-hanging fruit is left to wither on the vine. We have (usually cartoonish and patronizing) explanations for other economies’ failures — “they” are corrupt and their cronies keep them down; they were scarred because of colonization by Belgians rather than Brits; (in whispers) they are culturally or even genetically inadequate to the task of development; they simply fail to make good choices. Whatever your just-so story, it’s pretty clear that from the inside, intelligent people struggle unsuccessfully to find means to overcome barriers that prevent them from picking delicacies that are hanging in front of their noses. We might be in a similar situation, with plenty of technological fruit ripe for the picking, but invisible barriers — political, cultural, whatever — that prevent us from doing so.

  • A few nights ago, a gentleman accosted me in a dream and declared himself to be “Tyrone”, Tyler Cowen’s evil twin. Tyrone told me that his brother had “as usual” got it all backwards. In fact, he told me, we’ve been in the Great Stagnation for a century as a result of, rather than for the lack of, technological progress. The median household is experiencing wealth stagnation caused by technological change. Households are feeling the pain now more than in the past, even despite a relatively modest pace of change, because over the past few decades we have managed to avoid employing the sort of durable and effective countermeasures to stagnation that have succeeded in the past.

    For the most part, Tyrone pointed out, technological progress is labor displacing. It simultaneously creates valuable new techniques for reconfiguring real resources while diminishing the number of people who are required to participate in those transformations, and who can therefore trade their participation for spending power. There is a myth among neoliberal economists that labor markets have always “adjusted” sua sponte: that when laborers were displaced from farms, “higher value” factories arose to employ them; that when the factories were downsized and offshored, a more pleasant, higher-value service economy came to be; etc. That narrative is wrong, he told me. At best it is criminally incomplete. With each technological change, new social institutions had to arise to sustain dispersed purchasing power despite a reduction of numbers and bargaining power of workers in old industries. Displaced workers ultimately did find new work, but only because the new social institutions “artificially” created buyers for all the things displaced workers reinvented themselves to sell. Without this institutional innovation, Tyrone tells me, something like the Great Depression would have been the new normal. Historically, institutions that have arisen to sustain purchasing power despite increasingly labor-efficient core production include direct government transfers and expenditures, labor unions, monetary policy interventions, financial bubbles and financial fraud.

    Cowen (Tyler, that is) argues that technological development creates opportunities for “bigger”, more extensive and intrusive government than existed during earlier periods. As Tyler tells the story, there is a progressive expansionary impulse to government, for which technological change creates opportunities, so government expands until those opportunities are fully exploited. Tyrone says his brother has the story backwards. Why, asks Tyrone, does government not only expand in absolute terms as a response to technological change, but also in relative terms? After all, as Tyler points out, private enterprise also has a natural expansionary impulse. With technological change, Tyler writes, “Everything was growing larger.” Yet, to the degree that we can measure it, government has grown dramatically in its share of the overall economy. Why does government win? Tyrone says government is a reluctant adopter of new technology (“Have you been to a government office?”), but that government outgrows the private sector despite this, because the concentration of economic power that attends technological changes demands countervailing state action if any semblance of broad-based affluence and democratic government is to be sustained. Tyrone (who is much more arrogant and less pleasant than his brother) proclaims this to be his “iron silicon law”: In (non-terminal) democratic societies, technological change must always and everywhere be accompanied by the growth of institutions that engender economic transfers from the relatively few who remain attached to older productive enterprises to the many who require purchasing power not only to live as they did before, but also to employ one another in novel or more marginal activities that were not pursued before. Inevitably those institutions develop in state or quasi-state sectors (which include the state-guaranteed financial sector and labor unions whose “collective bargaining” rights are enforced by the power of the state). Tyrone tells me that the only thing the post-Reagan “small government” schtick has accomplished is to push this process underground, so that covert transfers have been engineered by a “private” financial sector in ways that are inefficient, nontransparent, and often fraudulent according to traditional laws and norms. Some of these weak institutions upon which we relied to conduct transfers broke in 2008, so now we’re really feeling the pain. We’ll continue to feel the pain until we restore the ability of the financial system to hide widespread transfers, or until we employ some other sort of institution to provide a sustainable dispersion of purchasing power.

    Having met both brothers Cowen, I can state with some confidence that Tyler is smarter, better-looking, and much more engaging company over lunch. Tyrone is kind of icky, hygienically speaking, and he strikes me as gratuitously mean. But I think he has a point.


  • [1] Cowen does acknowledge the possibility the internet is generating low-hanging fruit, but that there are lags in the indirect process by which a communication and coordination technology translates into consumer visible improvements.

    [2] Even a thought experiment that holds health and nutrition constant but contemplates switching technologicolifestyles doesn’t cut it, because preferences are history-dependent. Emigration is a painful option even when better health and more food await on the other side of the border. We love the world that makes us. We’d really need to ask people in 1900 whether they’d prefer to move to our strange, televised world or to stay where they are but with 21st century health and wealth in terms of then-extant goods. If we allowed cross-migration between the 1900 and 2011 on those terms, giving people of both eras ample time to sample both eras, it’s not clear to me in which direction net migration would flow. To run this experiment, we’d have to correct for population differences and exclude groups that were plainly oppressed in 1900. (We’d want to exclude those groups from the sample, if what we are interested in is the welfare associated with technological, rather than social, change. It’s not obvious that the civil rights movement could not have happened independently of electricity or automobiles, although one could make a case that relaxation for the need for exploitative labor was a precondition for that movement.) Also, there’s the difficulty of simultaneously allowing both ample information for comparison and the sublime pleasure associated with not knowing what you are missing with respect to life in the other era.

    [3] I hasten to add that I, personally, am a technophile, and curious enthusiasm for technological resets is much of what I live for. But I don’t think that’s a very general or even common preference.

    Update History:

    • 14-Apr-2012, 10:00 p.m. EDT: More than a year later, Tyler Cowen and Scott Sumner have said nice things and relinked this piece. I gave it a reread, and though I remain happy with the substance, I found some textual and grammatical embarrassments. So no substantive changes, but I’ve made some small edits:
      • “…renders render financial sector revenue highly suspect as a marker of value.”
      • “it’s more likely that our reduced payments have more to do with technology”
      • “any attempt to mobilize savings in aggregate — any net dissaving — is likely to be attended by result in either inflation or displacement of consumption” (eliminated repetitive use of “attended by”)
     
     

38 Responses to “On Tyler Cowen’s “Great Stagnation””

  1. [...] This post was mentioned on Twitter by Epicurean Dealmaker, nadezhda and Mike Konczal, Conduit Journal. Conduit Journal said: On Tyler Cowen’s “Great Stagnation” http://bit.ly/gsMlI2 [...]

  2. MarcWPhoto writes:

    Just curious: Do you think of, say, auto manufacturing as the “means of industrial production asymmetry industry?”

  3. “Ultimately, different technological regimes are incommensurable in welfare terms.”

    This is one reason why comparisons of nominally inflated economic values across different technological regimes can be nonsense (e.g., “1780 dollars”). Much better to think in terms of the percentage of GDP, or total social income, or some aggregate measure, allocated to some persistently consumed good or service (e.g., healthcare, communication, education). But if pre-internet and post-internet regimes are indeed incommensurate, how indeed can we compare them? And even if we do, what is the point? Is someone proposing we go back, or postulate a different path-dependent present than we currently enjoy?

  4. mittelwerk writes:

    i like the unrepressed (unneurotic?) cowen better. at least he understands that the problem is merely one of optics: there is no “stagnation.” there is a post-democratic corporatism that is at once the form and content of “information-asymmetry” in the general economy. nothing is being “hidden,” so to speak, except the obsolescence of traditional norms and laws governing economic activity; however, the need to keep up appearances, to maintain the necessary democratic fictions of “fraud” and “corruption” evading regulation (and not being fused to it), as well as that of the private financial sector being a proxy and not the thing itself, is inefficient.

    this new system should simply walk out into the light. isn’t this the “other sort” of institution bad cowen speaks of?

  5. Robert Bell writes:

    Steve: “that when laborers were displaced from farms, “higher value” factories arose to employ them;”

    I’ve always heard this, and always had a sort of efficient markets type of explanation as to why it didn’t make sense. If there were higher value places for those laborers to work, why hadn’t they already left for the high value places *before* the labor displacement?

  6. Lord writes:

    One can view technology as adapting and accommodating ourselves to our world and removing our limitations in it. In that case, change may be less simply because we have already progressed so far, and future change has us voluntarily entering the artificial wombs of the Matrix.

    There is also the possibility technology rather than slowing is accelerating but since destruction occurs faster than creation, we are suffering from it currently to prosper in the future should it slow. But since there is no way to measure for better or worse, perhaps we are in the grip of technology and we have no choice over the matter. Perhaps the technology of the market is promoting the growth of the information asymmetric sectors as its own counterbalance.

  7. Keith G writes:

    “For the most part, Tyrone pointed out, technological progress, is labor displacing…There is a myth among neoliberal economists that labor markets have always “adjusted” sua sponte: that when laborers were displaced from farms, “higher value” factories arose to employ them; that when the factories were downsized and offshored, a more pleasant, higher-value service economy came to be; etc. That narrative is wrong, he told me. At best it is criminally incomplete.”

    That almost sounds like you are saying machines and technology can take jobs… Luddite!

    check this out:

    IBM Watson to put jobs in jeopardy!
    http://management.fortune.cnn.com/2011/02/15/will-ibm%e2%80%99s-watson-put-your-job-in-jeopardy/

  8. Max Rockbin writes:

    Your thoughtful posting is a terrific tribute to “The Great Stagnation.” It is certainly making people think.

    I like the attempt to abstract the idea of what something is worth beyond pure dollars or revenue. What is “qualitatively new” and so a superior product seems only a small step from dollars.

    If the purposes of an economy are to distribute production optimally (to improve quality of life and..) to improve or optimize production, then the value or utility probably ought to be measured in terms of how it enhances the economy instead of how much someone is willing to pay for it – or even how much utility it provides him or her. At least value should be measured that way if one is attempting to evaluate improvements in an economy as a whole and not a more microscopic view of a single person’s supply/demand.

    That would differentiate the utility of a person, say, buying a high mileage car like a Civic instead of a Hummer. The Hummer has more value in dollars. But the Civic is cheaper to operate and maintain, easier to drive and park, and superior in most ways to the Economy. A measure of value that attempts to evaluate the contribution of a product to the Economy must acknowledge the value of the Civic vs the Hummer and not simply assume the Hummer is more valuable because it costs more.

  9. Kleps writes:

    When information asymetry beats you, change the game, or just quit it. There is no unique and universal way of running a society

  10. Nick writes:

    First, phenomenal post, really gets you thinking about Cowen’s hypothesis and the state of things right now. Plenty of people could say it better than me.

    Nonetheless, is anyone else fascinated by the link posted at the bottom of the third bulletpoint? I find myself scouring the internet to find out what happened to that poor guy…

  11. Steve, here is a comment regarding this I left today on Ezra’s blog (slightly modified):

    Please keep in mind Cowen appears to be a pretty, or very, strong libertarian and willing to mislead for the cause (strong libertarians are usually forced to mislead for the cause, as if people really understood the implications, almost all would oppose their philosophy, so they’d have no chance in a democracy.)

    Cowen wants to make science and technology look less fruitful so there will be less government spending and other actions on it, and as an excuse to not combat income inequality and for the terrible perfomance of the economy over the generation of Republican dominance). Remember, an extreme libertarian would rather have tremendous suffering and loss, and little, no, or even greatly negative advancement in science, medicine, and wealth, rather than give up even small bits of economic freedom.

    It is true that practical applied advancement in science and medicine in some ways seems slower than in the early 20th century, but largely we’ve been in a phase of laying the foundation for the next breakthroughs, with basic understanding and development of computers, DNA, nanotechnology, and more. But make no mistake, tremendous real applied advances, that will greatly improve our lives and our wealth are coming – And will come far sooner if the government invests heavily in them – the private sector will grossly underinvest, and inefficiently invest, in these things due to long established in economics market problems, like externalities, massive economies of scale, the zero marginal cost of ideas, etc., etc.

    Ray Kurzweil is a highly esteemed scientist and inventor, winner of the $500,000, 2001 Lemelson-MIT Prize. Here are some things he forecasts in his 2009 book, “Transcend”:

    In the 2030′s:

    “…nanobots that act as artificial white blood cells, except they’re a lot smarter than our natural white blood cells. These robotic “microbivores” can detect and destroy virtually any dangerous pathogen, including viruses, bacteria, cancer cells, as well as cancer stem cells. So tumors are stopped when they are just a handful of cells, long before they become a tumor. And we can download new software into these microbes when we discover new pathogens.” (page 143)

    “…in the rare even that you do have a heart attack, you’ll be glad you have these little robots (nanobot red blood cells). They’ll keep your heart and brain and all your vital organs supplied with oxygen for at least 4 hours. You can walk into your doctor’s office calmly and explain you’re having a heart attack. She’ll inject you with more respirocytes and then deal with removing the clot and fixing the problem.” (page 48)

    And there’s more, just as amazing.

    And you may have seen how good computer vehicle drivers are getting. We might have that commercially in 20 years or less. Not only would this virtually eliminate auto deaths, it would have a big effect on quality and way of life. Parents today spend huge time driving kids around – suddenly they have much more time, and add on household cleaning robots saving major time too. Remember household technology advances freed up the time for women to enter the workforce. And if cities cost a fortune to live in for a job, people could live an hour away and work, shave, have breakfast, etc., in a car with the windows tinting for privacy, and the computer driving, a mobile office, with highly advanced telecom.

    And if you’ve been following solar, you know it could be cheaper than fossil fuels in a generation or less. See, for example, this Scientific American article:

    http://www.scientificamerican.com/article.cfm?id=a-solar-grand-plan

    And I could go on with amazing advances that could happen over the next generation, or sooner, and are far more likely to with heavy government investment.

  12. And if Kurzweil’s projections sound unrealistic, remember that those advances involve computer technology and miniaturization, things which have been advancing exponentially relentlessly for two generations. As Kurzweil wrote in a 2008 Washington Post Op-Ed:

    M IT was so advanced in 1965 (the year I entered as a freshman) that it actually had a computer. Housed in its own building, it cost $11 million (in today’s dollars) and was shared by all students and faculty. Four decades later, the computer in your cellphone is a million times smaller, a million times less expensive and a thousand times more powerful. That’s a billion-fold increase in the amount of computation you can buy per dollar.

    Yet as powerful as information technology is today, we will make another billion-fold increase in capability (for the same cost) over the next 25 years. That’s because information technology builds on itself — we are continually using the latest tools to create the next so they grow in capability at an exponential rate. This doesn’t just mean snazzier cellphones. It means that change will rock every aspect of our world. The exponential growth in computing speed will unlock a solution to global warming, unmask the secret to longer life and solve myriad other worldly conundrums.

    At: http://www.washingtonpost.com/wp-dyn/content/article/2008/04/11/AR2008041103326.html

  13. reason writes:

    Richard,
    exponential growth ALWAYS stops eventually.

    Quotes regarding exponential growth and the exponential function.

    The greatest shortcoming of the human race is our inability to understand the exponential function
    Albert A. Bartlett, physicist

    Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.
    w:Kenneth Boulding, economist

  14. Regarding the expansion of entities, processes, and institutions in reaction to labor-displacing technological change:

    what we really need is to do some more serious big thinking about more than “work”, which is too narrow now. We need to figure how how we’re going to “occupy” people in the transition from post-industrial/service/information technology society to a roboticized, post-scarcity, arts and leisure society. If handled poorly, “social unrest”, mass protests, and outright violence may be become a regular part of the landscape, what with millions of always-idle, impoverished people just sitting on the sidelines, ignored. How long could this last? One hundred years, perhaps? That’s a long time to have constant social upheaval.

  15. Peter Kurze writes:

    Tyrone nails it in one:

    “[T]he concentration of economic power that attends technological changes demands countervailing state action if any semblance of broad-based affluence and democratic government is to be sustained.”

    If the current wave of austerity measures rolls forward, it will wreck us completely. We are not poorer than we thought, we are almost literally choking on abundance. We continue to follow the dictates of a system designed to banish scarcity, but which is, in its rawest form, incapable of fostering social cohesion in a time of abundance. Sure, there are still limits everywhere. Things are finite. That’s life. But in the main, our problems are all traceable to market failure rather than any material inability to produce what we desire or need. Take an extreme case: By what mechanism is the hunger of the world’s destitute populations supposed to translate into market demand in Kansas?

    If we are poorer than we thought, it is mainly with respect to our moral coherence.

  16. john writes:

    In a fit of pique I wrote this on Tyler’s blog earlier this week, you have restated my premise much more eloquently. Also, Tyrone is more fun at parties!

    Suppose that around 1977 someone convinced the Carter administration that “anti-trust” should be enforced for “efficiency” rather than to prevent sectoral domination. The reasoning being that so long as ever larger and more concentrated industries are driving prices down, the consumer wins. Then suppose that around the same time someone else convinces Paul Volker that the NAIRU is rising and so one shouldn’t worry about the unemployed so much.

    This would create a condition in which monopolists could concentrate industries and push down both prices and wages, but in so doing, because there is no competition making investments to attack margins earned by the monopolists, investment becomes stagnant in the concentrated sectors. Because there is no competition for the monopolist and because higher rates of unemployment are normalized, wage earners loose the ability to command any share of the productivity gains from what improvements the monopolists do in fact make and wages become flat despite productivity growth.

    In this situation demand begins to slacken, but at the same time monopolist profits have soared because there is no competition and wage earners have been denied any benefit of productivity gains: capitalists have a lot of idle money on their hands. They encourage wage earners with stagnant wages to “benefit” from student loans, low car payments and credit card debt to sustain or enhance their living standards, improvements in which wage earners were encouraged to expect in the greatest democracy in the world. Now monopoly profits appear to recycle themselves in ever renewed demand. And with the march of technology that demand does in fact call into existence new sectors of economic activity.

    But these sectors quickly succumb to the monopoly bias built into the efficiency prejudice of anti-trust enforcement. WallMart dominates retail distribution of consumer goods, Pepsi, Coke, Nabisco and a few others dominate manufactured foods and food distribution through both supermarket and franchise business models that eliminate non-corporate competition, while new industries like micro-chip manufacture, software design and internet services almost instantly embody the monopoly form. New industry invention is required at an accelerating rate to maintain job opportunities commensurate with the displacement of wage earners by industry concentration.

    All the while monopoly profits are piling up while wages remain flat. Wage earners spend most of their income. This quotidian activity is the source of most demand. Monopolists “invest” most of their income but find it increasingly difficult to find investment opportunities that meet the profit creation criteria defined by Jerome Levy a hundred years ago because wage earner expenditures are essentially flat, like their wages. Instead monopolists settle for rents in the form of loaning out the profits to wage earners who have been deprived of this very same money by an inappropriately low NIARU for some forty odd years and are now acculturated to debt. We have taken to calling this “financialization”.

    Having more or less saturated consumer debt by the 1990s, after the dot.crash monopolists begin to flog mortgage debt in a new rainbow of forms. The great thing about the housing market is that it has its own multiplier effects: once you purchase the house you have to get the drapes and then the carpet and then the tv and the toaster and the furniture. It never really ends and if marketed correctly into a self reinforcing bubble, re-fi’s and second mortgages can fund additions and pools etc. It keeps a lot more people employed than just the construction workers. But then the bubble bursts.

    What looked prudent with regard to debt burdens in the boom, when you were making say $90K or maybe $110K looks rather different when all of a sudden you are unemployed for six months and then find a job at $55k. All this BS about deadbeat borrowers ignores this dynamic: the borrowers who were true deadbeats were actively recruited by sub-prime predators for the benefit of John Paulson and Magnetar who were looking to create risk free shorts for themselves. The rest of us just got pushed in front of the bus by artificial demand banks were flogging everywhichway in the form of easy credit even after the decline set in.

    AD is bled dry by the Minsky cycle. It leaves huge idle capital and equal amounts of idle wage earners. What AD there has been has been artificial since the late 70s when wage earners quit getting any benefit in wages from their productivity gains. I’m not proposing that they should monopolize the gains any more than monopolists should, but without income gains from increases in productivity all growth in AD is borrowed from those who do get the money gains from increased efficiency: it converts income into rents and ultimately destroys demand.

  17. reason,

    Exponential growth does stop eventually, but by that time, we have robots building robots, nanofabricators, quantum computers, solar providing all the power we need, and a lot more than this. I’ll take that.

    The indications are that the stopping of exponential growth won’t happen over the next generation (or generations), with the stuff on the horizon, and easily may accelerate.

  18. Phil Koop writes:

    That median incomes have stagnated, as income is conventionally measured, is an empirical fact. That the distribution of income has become more skewed, with higher earners accruing a greater fraction of the total, is likewise an empirical fact. It is not a fact that innovation has slowed; but suppose we accept this hypothesis for the moment.

    All of the important questions of causality remain open. You have noted that the coincidence of decline in innovation and stagnation of median income does not prove that the former has caused that latter; and in fact there are grounds to doubt this. You might have argued that the same is true of income distribution.

    It is plausible that stagnation has increased income concentration. For instance, one might argue that there is a natural tendency for rent-seeking to become ever more entrenched, and that only revolutionary innovation can reverse this tendency. But equally, one might note that preserving the status quo benefits entrenched interests, and that they have acted in these interests to stifle innovation. With income comes power; so perhaps income maldistribution has caused stagnation after all.

  19. [...] puts it this way: A few nights ago, a gentleman accosted me in a dream and declared himself to be [...]

  20. [...] contribution to the discussion comes from Steve Waldman, who makes a lot of nice points in a post here. I want to focus on just a couple. First:Suppose that it is true that we’re poorer than we’d [...]

  21. [...] Interfluidity on Tyler Cowen’s The Great Stagnation: [...]

  22. Yancey Ward writes:

    One thing that binds government, health-care, and education is that all are financed in roundabout and sometimes opaque ways that soften near-term budget constraints and that shift costs and risks, both across time and onto people other than the purchasing decisionmaker. The means by which government, health-care, and education are financed help keep them vulnerable to agency and information problems.

    The other thing that binds them is that they are greatly or mostly government institutions. I think it important to note more explicitly that the consumers of these goods/services are being subisidized to consume them. There isn’t so much an information asymmetry as there is much less incentive for the consumer to care about the value as it relates to acutual cost.

  23. Eric Titus writes:

    These are so many interesting items here, I think two of the most intriguing are the notion of a breakdown of “markets” and the link between technology and development/productivity. The fascinating premise behind Cowen’s piece is that unmeasured rates of technological change have visible impacts on the economy. Rates of innovation are perhaps impossible to measure perfectly, but Cowen introduces the idea of ‘low-hanging fruit’, esp. college attendance, to show why the US now is different from the US half a century ago. But the concept also seems a little strained. Growth, whether from educational attainment, automating manufacturing, and digitalization only seem easy in the abstract. Perhaps GDP growth is slower becuase by now, a majority of Americans have cars, fridges, microwaves, tvs, computers, and cell phones, but that does not mean innovation has slowed. Your observation that innovation and growth are not interchangeable is a better explanation of why growth has slowed, and I’d like to add a financial component to that as well. At the moment, a good deal of investment is going into internet and entertainment products that are significantly more advanced than the items they replace. But these investments are unlikely to contribute directly to GDP and the overall growth of the economy. It is clear that computing and the internet have been as important to reshaping business as any industry in the past, the question is why we don’t see that reflected in GDP.

    This is where your more interesting point, about the breakdown of markets, is so key. As Cowen points out, acting on expectations of 3-4% growth can contribute to long-term issues. But the decoupling of innovation, productions, and GDP growth means that as a society, we may overpromote industries that are driving GDP growth at the moment, such as healthcare, education, and financial services sector. That is just a first reaction to this idea, but I think the notion of a breakdown in markets is as potentially interesting as that of a slowdown in innovation. But I wouldn’t view these breakdowns as negative so much as a reshaping of the economy.

  24. john c. halasz writes:

    Your Tyrone has lots of hair on his head and a gray bushy beard.

  25. [...] contribution to the discussion comes from Steve Waldman, who makes a lot of nice points in a post here. I want to focus on just a couple. First: Suppose that it is true that we’re poorer than we’d [...]

  26. [...] Waldman of interfluidity writes stuff in response to Tyler Cowen writing stuff.  I can recommend reading interfluidity without [...]

  27. OGT writes:

    I thought I was tired of the Great Stagnation discussion, until I read this. Late to the party, but quite an entrance! In a just and rational world, you’d be working this into its own e-book.

    The informational asymmetries industries is a good way to combine those industries. But I am slightly more optimistic that information technology can help here. Not primarily in things like distance learning, but in helping to measure real output and reformulating new markets or quasi-markets. Even measures like value added stats in education would have been cumbersome a generation ago.

    For financial markets I am less optimistic, as the asymmetry beneficiaries are much more sophisticated, united and powerful than in education or health care.

    As for the distribution arguments, I think what we’ve felt over the last couple of decades in the US is much more of a positive labor supply shock, as the developing world in Asia primarily was joined effectively into the global labor supply. That’s a politically explosive idea, but I think correct. Fortunately, China and India will absorb their labor supplies into the global economy, at which point wages and demand may begin to rebalance.

  28. David Pearson writes:

    A “sustainable dispersion” of purchasing power can be achieved, in part, by channeling “transfers” to Chinese consumers. This would enable the Chinese, and their external suppliers, “to employ one another in novel or more marginal activities that were not pursued before.” How to accomplish this? One way is to channel credit to Chinese consumers. An easier way is to make the rural and state-employed Chinese richer through Yuan revaluation. The problem is that the ensuing Chinese consumer boom will likely create high inflation, which in turn creates societal pressures in the country.

  29. [...] engines. Sorry about that! There’s plenty of better reviews out there, particularly this one. So anyway, I decided to add some proper blogging etiquette to the post and actually link to both [...]

  30. Benedict@Large writes:

    Sorry, but you need look no further than the rise of neoliberal economics and its insistance on tying government spending to the ability to collect taxes for your source of the Great Stagnation. This was/is akin to reinstalling the Gold Standard, only this time in the form of a “Tax Standard”. The problem with this of course is that your economy begins to act more and more like the standard and less and less like its inherent potential. Like gold once did, tax collections are now acting like an anchor attempting to drag the economy to a halt. And it’s doing a pretty good job.

  31. Doc at the Radar Station writes:

    “I think of government, education, health care, and finance collectively as the “information asymmetry industry”, and I find it terrifying that many people presume that they are the future growth industries for the United States.”
    -SRW

    Yes! Absolutely agree with you on this post. Lots of money going in >> not much value coming out! Tradeable goods is where it’s at and the sooner we snap out of the neoliberal hypnosis the better. Also, great thanks for the discussion about “extensive” and “intensive” margins for technological change. You have convinced me that the “intensive” tech changes in the early 19thC (i.e.) were generally benign things that helped-”bread got cheaper”. The “extensive” or “life-altering” technological changes tend to be associated with over-investment, busts, depressions, and mass unemployment-the “technological unemployment disease” that Irving Fisher mentioned. It would be great if you would expand more on the “extensive”/”intensive” tech change concept.

  32. [...] This is the most insightful piece I’ve read in a while. This entry was written by Chill, who is awesome. Bookmark the permalink or follow any comments here with the RSS feed for this post. Post a comment or leave a trackback: Trackback URL. [...]

  33. [...] Steve Waldman takes on “The Great [...]

  34. [...] More on The Great Stagnation (Interfluidity). [...]

  35. [...] references to this book in the press, see here, here, and here.  For blogosphere reaction, see here, here, and here. I also suspect that the ideas in this book may influence public policy debates in [...]

  36. [...] http://www.interfluidity.com/v2/1116.html I’m late to this party, but I’m late to every party. Tyler Cowen’s recent microepic, The Great Stagnation, has been pretty throughly chewed over by the blogosphere. The essay is a quick read, thought-provoking, and getting to give Cowen a couple of bucks for the privilege only adds to the pleasure. The quick summary, for those who’ve been living in a cave, is that since 1973, we’ve been living in a “great stagnation”, during which the pace of growth experienced by the median American household slowed relative to expectations set in the period preceding. Cowen suggests that the explanation for this is a slowdown in the rate of technological change combined with an exhaustion of “low hanging fruit” afforded us by earlier advantages and innovations. Cowen simultaneously disputes both conventional measures of economic performance (we do not observe a “great stagnation” in headline GDP) and left-ish arguments that economic unhappiness stems primarily from maldistribution. We suffer instead from an absence of anticipated wealth. As Cowen puts it, we’re simply “poorer than we thought”. [...]

  37. [...] http://www.interfluidity.com/v2/1116.html I’m late to this party, but I’m late to every party. Tyler Cowen’s recent microepic, The Great Stagnation, has been pretty throughly chewed over by the blogosphere. The essay is a quick read, thought-provoking, and getting to give Cowen a couple of bucks for the privilege only adds to the pleasure. The quick summary, for those who’ve been living in a cave, is that since 1973, we’ve been living in a “great stagnation”, during which the pace of growth experienced by the median American household slowed relative to expectations set in the period preceding. Cowen suggests that the explanation for this is a slowdown in the rate of technological change combined with an exhaustion of “low hanging fruit” afforded us by earlier advantages and innovations. Cowen simultaneously disputes both conventional measures of economic performance (we do not observe a “great stagnation” in headline GDP) and left-ish arguments that economic unhappiness stems primarily from maldistribution. We suffer instead from an absence of anticipated wealth. As Cowen puts it, we’re simply “poorer than we thought”. [...]

  38. Maia writes:

    I am studying my degree with the Open University, paying the whole cost myself for a postgraduate qualification, and cannot believe that the large fee does not cover the cost of one p/t online tutor, an exam and the marking of three essays, plus preparing a course several years ago for tens of thousands of students. I was wondering if the Open University of my (UK) and other countries would be a transparent-value exchange in education that could be used to compare to hidden-value ones? Your first course you don’t know, and you have to factor out subsidies for some students, but after your first course you pretty much know what you’re getting and the majority of students are working in the field of their qualification, so there is high information-value transparency. Just sayin’