The Great Stagnation?

That's the title (sans question mark) of a new e-book by Tyler Cowen, economics professor at George Mason University and blogger extraordinaire at the wonderful Marginal Revolution. The thesis is summarized by the book's fashionably prolix subtitle: "How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better."

Tyler argues that, ever since colonial times, the American economy has benefited from "low-hanging fruit" -- i.e., bountiful opportunities for growth. He singles out three in particular: free land, technological breakthroughs, and smart but uneducated kids. "Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was stil there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. That's it. That is what has gone wrong." Tyler identifies the exhaustion of easy opportunities for growth as the main culprit behind the slowdown in growth over recent decades, rising inequality, the nastiness of our present-day politics, and even the recent global financial meltdown.

It's a wonderful book: provocative, clever, full of surprises, accessibly written, and mercifully brief. And most of the constituent elements of his argument I wholeheartedly endorse. Indeed, in a weird coincidence, I have a new Kauffman paper in the works that touches on very similar themes. I agree with Tyler that growth has gotten a lot harder since the early '70s. And I agree that a great deal of political mischief has been caused by our collective failure to grasp this important truth.

But, at least for now, I can't buy into the idea of a "Great Stagnation." I just don't think the evidence supports Tyler's sweeping historical narrative that centuries of easy progress are now over. A lot of the force of his argument comes from contrasting the United States' glittering economic performance in the decades following World War II with the decidedly less impressive record in recent decades. But if you zoom out and look at the larger historical record, Tyler's Great Stagnation more or less disappears. And if you zoom in and examine recent trends in detail, the numbers likewise belie the claim that we have hit some "technological plateau."

Tyler correctly points out that median family income rose smartly after World War II only to fall off sharply in the '70s. GDP per capita figures reveal the same trend, albeit a little less dramatically (because of the rise in income inequality). Between 1950and 1973, the average annual growth rate of real GDP per capita was 2.5%; for the period between 1973 and 2007, the corresponding figure was only 1.9%

But look what happens when you put these figures in larger historical context (note: I'm using calculations by Angus Maddison for earlier periods and Census figures for post-WWII periods):

1820 - 1870            1.3%

1870 - 1913            1.8%

1913 - 1950            1.6%

1950 - 1973            2.5%

1973 2007              1.9%

From this broader perspective, what Tyler calls the Great Stagnation looks like a return to normalcy after the "Great Boom" of the post-WWII decades. Indeed, recent growth rates are better than those of all other earlier periods. So yes, growth has cooled down since the postwar "Golden Age," and that fact poses real economic and political challenges. But the Golden Age was the outlier, not our present era; it just doesn't make sense to talk about the present period as stagnant after centuries of easy growth.

Now let's focus on trends in recent decades -- in particular, productivity growth. If we've reached some kind of technological plateau, that should show up most clearly in a fall-off in the growth of output per worker hour.  But look at the actual BLS labor productivity figures for the nonfarm business sector:

1947 - 1973            2.8%

1973 - 1995            1.4%

1995 - 2007            2.7%

Once again, there was a big dropoff after the postwar boom. But then look what happened: beginning in the mid-'90s, fueled by the IT revolution, productivity growth came roaring back, nearly equaling the record of the Golden Age. It's hard to look at these figures and conclude, with Tyler, that the trees in the orchard are becoming bare.

Granted, the productivity comeback offers no ground for complacency. The productivity figures look better than the per-capita GDP figures, in large part because the labor force participation rate peaked in the late '90s, fell during the dot-com bust, and only recovered to early '90s levels by 2007 (superior growth in output per worker was thus partially cancelled out by sluggish growth in the number of workers). Meanwhile, the per-capita GDP figures look better than the median income figures cited by Tyler because of the rise in inequality -- that is, because income growth has been concentrated at the top of the socioeconomic spectrum.

These facts point to real challenges for future growth. One reason the labor force participation rate has stalled is the aging of the population -- a trend that is going to cause all kinds of economic and political headaches in coming years. And rising income inequality is due in significant part to slumping human capital formation: we reaped big gains from sending Tyler's "smart but uneducated kids" to high school, college, and grad school, but educational attainment at both the secondary and postsecondary levels has stagnated since the '70s even as the demand for highly skilled workers has continued to climb.

I've focused on criticisms here, but I want to close by reiterating what an interesting, intelligent, and thought-provoking book this is. Growth has gotten harder, and there are mounting obstacles ahead. For pointing out these sobering facts, and doing so in such an engaging manner, The Great Stagnation deserves a wide readership.

Comments

[Stuy Parker]

I don't think you're painting an appropriate picture when your numbers are taken pre-recession. Of course our growth didn't slow: our economy was growing a lot due to poor financial practices that eventually led to the recession. We were borrowing growth from the future, and that was growth that wasn't there. I'm not a scholar, or anything, but I feel like your criticism is full of holes.

1947 - 1973 (26 years)

1973 - 1995 (22 years)

1995 - 2007 (12 years, recession not included)

Is that really a good sample set to use to prove your point?

"beginning in the mid-'90s, fueled by the IT revolution, productivity growth came roaring back"

But we again fail to mention the dot-com bubble, or the financial collapse of 2008, or what is probably another dot-com bubble bursting soon (with Facebook to blame). I, personally, think a lot of the 'growth' you're seeing that takes away from the idea of 'stagnation' is the result of a lot of smoke and mirrors in the financial sector. But I guess there's no way we'll know, not at least for another 10 years, then we can look at the numbers.

[KR. McKenzie]

I think the other major argument in the book was that GDP and productivity statistics are systematically overestimated. This is true for three reasons:

1. Government spending is accounted in GDP at cost. So a spending on a road that costs 300 million is put into GDP, but is it actually worth 300 million? It's hard to say. As the government has grown as a share of GDP, this is becoming a larger estimation problem.

2. The benefits of healthcare and the spending on healthcare don't necessarily match up. The US spends the most on healthcare out of any country in the world, but we have no where near the top in healthcare outcomes.

3. As with spending on healthcare, the benefits of our increased spending on education are very hard to quantify in the GDP figures. Spending has gone up over the past 50 years, but have education outcomes? That's not clear.

All three of these, which when combined are more than 25% of GDP (and growing), lead us to think that we're wealthier than we are. Thinking we're wealthier than we are leads to excessive risk taking.

These points were my major take away from the book.

[Bret Swanson]

Terrific insights, Brink. Here were my thoughts on Tyler's good essay at Forbes . . . http://blogs.forbes.com/bretswanson/2011/01/27/tylers-techno-slump/

[gwern]

> Once again, there was a big dropoff after the postwar boom. But then look what happened: beginning in the mid-'90s, fueled by the IT revolution, productivity growth came roaring back, nearly equaling the record of the Golden Age. It's hard to look at these figures and conclude, with Tyler, that the trees in the orchard are becoming bare.

IIRC, what Tyler specifically said was that this average productivity growth was only possible because companies became better at identifying the least productive workers and shifting their work onto more productive workers or otherwise replacing them.

And that this is not an indication of non-stagnation. It's low-hanging fruit. You can only fire the bottom 90% of performers a few times before you hit a limit.

If we looked at the median, or especially the upper deciles of productivity, the picture would perhaps not be so rosy and would show a leveling off with little growth - stagnation.

[JBrazier]

"2. The benefits of healthcare and the spending on healthcare don't necessarily match up. The US spends the most on healthcare out of any country in the world, but we have no where near the top in healthcare outcomes."

Is this based on studies of comparative clinical efficacy for specific medical interventions, or things like life expectancy and infant mortality?

Life expectancy is a very poor metric for assessing relative clinical efficacy since it's heavily influenced by lifestyle choices, accidents, murders, etc - that neither doctors nor hospitals have any meaningful influence over.

Infant mortality is defined differently in different countries, and babies that are too premature, too small, or die too soon are registered as stillbirths in some countries, vs infant deaths in others. America has very generous standards for what constitutes a live birth vs the rest of the world. This metric also covers 0-1 years, and factors that doctors and hospitals have little or no control over once again. Perinatal mortality is a much better stat.

WHO Rankings? Subjective estimate of the fairness of resource distribution, nothing to do with clinical efficacy.

[Ron H.]

KR. McKenzie,

I think you are making two very good points: First, that GDP may not be a very good indicator of wealth or our level of well being. Second, that government spending (your three examples) is inefficient.

In your first example, the road that cost $300 million is probably not worth that amount, and would likely have cost much less if built by a private actor. Nonetheless, $300 million was spent, so it is part of GDP even if it is wasteful.

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