American Stagnation Since 1973

The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will(Eventually) Feel Better By Tyler Cowen

　

Book Description [on Amazon.com]

Release date: June 9, 2011 | ISBN-10: 0525952713 | ISBN-13: 978-0525952718
America is in disarray and our economy is failing us. We have been through the biggest financial crisis since the Great Depression, unemployment remains stubbornly high, and talk of a double-dip recession persists. Americans are not pulling the world economy out of its sluggish state -- if anything we are looking to Asia to drive a recovery.Median wages have risen only slowly since the 1970s, and this multi-decade stagnation is not yet over. By contrast, the living standards of earlier generations would double every few decades. The Democratic Party seeks to expand government spending even when the middle class feels squeezed, the public sector doesn’t always perform well, and we have no good plan for paying for forthcoming entitlement spending. To the extent Republicans have a consistent platform, it consists of unrealistic claims about how tax cuts will raise revenue and stimulate economic growth. The Republicans, when they hold power, are often a bigger fiscal disaster than the Democrats. How did we get into this mess?

Imagine a tropical island where the citrus and bananas hang from the trees. Low-hanging literal fruit -- you don’t even have to cook the stuff. In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century: free land; immigrant labor; and powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are barer than we would like to think. That’s it. That is what has gone wrong. The problem won’t be solved overnight, but there are reasons to be optimistic. We simply have to recognize the underlying causes of our past prosperity—low hanging fruit—and how we will come upon more of it.

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Below is an excellent, topic-by-topic outline of the book submitted to Amazon.com as one of the reviews:
[5 stars] Great essay, wish people would read it before reviewing it

by Chuck Crane, Scottsdale, Arizona
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.

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