The Great Stagnation

Orange Tree

The low-hanging fruit

Tyler Cowen’s new ebook, The Great Stagnation, is what all the cool kids on the blogosphere are reading these days. It’s a very short, extremely readable explanation of why American median wages have flatlined since the 1970s, and why we shouldn’t expect to grow like gangbusters anytime soon. It’s only $4.00.

The basic thesis is this: Western democracies very ably applied the techniques of industrial growth through mechanization and beauricratization to all areas of life, and these produced massive improvements in human welfare. These were the “low hanging fruit” in Cowen’s terms, the gains we could get just by applying our technological advances widely. Big government and big business grew in tandem as our ability to organize and create stuff exploded, and so between the 1870s and the 1970s the West’s living standards were transformed.

But by the early 1970s, these applications had spread their full extent, and the obvious areas of extension were not clear. We had gobbled up all the low hanging fruit, and now we were about to trudge forward on a growth plateau until the next round of enormous innovations arrived. To Cowen, the old growth model of economics, which supposed that we ran on a smooth track upwards (with some business cycle bumps along the way), fueled by free market competition and ever-perfecting our products, has a fundamental flaw. Competition improves things on the margin and allows scientific discoveries to be used intelligently. But what really leads to major improvements in human welfare are revolutionary scientific discoveries.

Adding to this problem, the areas where we do appear to be innovating and leading growth are in all the sectors of the economy least susceptible to these good market forces. Education and health care are driving forward, but both of these are intricately tied up into very poor incentive schemes and difficult to appreciate gradations of quality. So, for example, in medicine most of our costs are paid for by third parties, either insurance companies or the government. Not only does this encourage excessive consumption of health care, but because of the nature of medicine, which has to be completely tailored to the individual, it is difficult to judge whether these vast sums of money are being used effectively. Thus, market forces which lead to quality improvements are inhibited, and the ability of the market to give us an estimate of the value we’re producing is limited. These critiques apply to expansions in education, finance and government as well: our growth industries are opaque, complex, and often unhealthily wedded to regulation and regulators.

This is a pretty convincing thesis, and Cowen brings some unfortunately powerful evidence to support it. But when it comes to policy suggestions, there isn’t much. Cowen thinks the best thing we can do is raise the status of scientists, to encourage the best and brightest to go that way. But as Scott Sumner says, there may be diminishing returns to scientists, and there’s plenty of more direct steps we should be taking. These would include:

1. Neoliberal type policies along the lines of Will Wilkinson: really pull back on regulations in health care, encourage as much competition in schooling as possible, and simplify government by getting rid of most in-kind welfare. Additionally, have “wicked good social insurance” to make sure that people across the board share in the wealth.

2. Raise the prestige of being a government bureaucrat. The libertarian within me cringes, but being in favor of limited government shouldn’t make us favorable to bad government. In fact, though we should push for government to do less, we should always push for it to do better. Because government simply won’t pay as much as a wealthy firm or blue chip company, it needs to make up the difference in wages with some greater cache.

3. Open up the border, even if just with work visas. Cowen doesn’t address this, but people outside of the developed world have been doing well — much better than they’ve ever done in human history. But we can improve millions of lives immeasurably by allowing them to come into the United States, and this will create many more potential scientific breakthroughs — by giving people access to educations and infrastructures they would otherwise never receive — than somehow raising scientists’ social status.

Now: these solutes don’t solve the fundamental problem of finding more scientific breakthroughs. But they could help ease the pain of the moment, and lay a groundwork for the future.

Photo: Miggslives

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3 Responses to The Great Stagnation

  1. Ed says:

    I also felt that Cowen’s answer, raising the social status of scientists, was a bit weak. And I hadn’t thought about your argument concerning the status of bureaucrats, but both of you shy away from how, exactly, to accomplish this. I think the easiest way is just raise their salaries. Respect follows money. With education I think it is even more important for developing countries to educate more of their people faster so they have the opportunity to innovate, not just opening our borders.

  2. Morton says:

    Yeah, I basically agree with everything you said. Cowen is by nature an obscure and reticent guy (though also brilliant), and my point about bureaucrats has the same weakness as his, though I think it’s easier from a policy point of view to apply your solution, higher pay, to the government than to scientists (how do you get people to pay scientists more?). It is important for all countries to improve their education systems, but I don’t really see how this directly effects the US’s immigration policy. If we want both to improve general human welfare and the US’s in particular we’ll want to allow people from across the world in. It’s like Romer’s charter city idea, creating free market oriented and law-based cities within poor countries, without any of the messy and culturally insensitive elements of actually starting new cities.

    (and for the sake of trivia and Tyler Cowen: http://marginalrevolution.com/marginalrevolution/2010/05/ramban-a-12th-century-jewish-biblical-commentator.html)

  3. Pingback: Raising the Prestige of Government Bureaucrats for Dummies | Morton and George

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