The Great Stagnation

I just finished an essay by Tyler Cowen called The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better which I bought for my Kindle off Amazon.com. The basic premise is that the American economy has been stagnating since the 1970s because the country has used up it’s ‘low-hanging fruit’ of free land, educated immigrant labour and rise in education from a low base which drove easy economic prosperity starting in the seventeenth century.

Even though GDP has been increasing the last forty years the median household income has only increase incrementally and income equality is growing. We may have larger fridges that now make ice which can come in cubes or crushed but there have not been radical leaps in well being in recent years (except for the internet).

A lot of our recent innovations are ‘private goods’ rather than ‘public goods’. Contemporary innovation often takes the form of expanding positions of economic and political privilege, extracting resources from the government by lobbying, seeking the sometimes extreme protections of intellectual property laws, and producing goods that are exclusive or status related rather than universal, private rather than public….There are some very wealthy people, but a lot of their incomes are from financial innovations that do not translate to gains for the average American citizen.

These ‘private goods’ innovations are also part of the reason the rebound from the liquidity crisis has involved a jobless recovery.

Discovering who isn’t producing very much and firing them has been the biggest productivity gain in the last few years.

Over time, an increasing percentage of what we spend on government is spent on optional rather than core services because the core services tend to have been around longer. Another way of putting it is to say that the marginal value of added government, even if positive, falls as government grows larger.

As the US economy has matured, additional government expenditure has not made as much of an impact of increasing the sense of well being of the population and overall prosperity.

One of the biggest innovations of our generation has been the internet. This has been driven in part by Moore’s law but also by the ultimately simple conceptual ideas about how to link human beings together through the web.

In other words, the new low-hanging fruit is in our minds and in our laptops and not so much in the revenue-generating sector of the economy….Innovation hasn’t ceased, but has taken new forms and it had some in areas we did not predict very well. Yet we made our old plans and maintained our old institutions on the understanding that the new innovations would be a lot like the old, except that it isn’t.

Unfortunately one of the problems with the internet as the major form of innovation is that as wonderful as the new internet services are these are accomplished with very few employees. Even the most successful internet companies only have a few thousand workers.

  • Google – 20,000
  • eBay – 16,400
  • Facebook – 1,700
  • Twitter – 300

As another example the iPod by Apple may have been one of the most successful new products of our generation and a recent study estimated that including engineering and retails it had generated 13,920 jobs.

Without easy low-hanging fruit politics in the US have also become more difficult as there are few easy wins for politicians. This is part of the reason why American politics has becomes so divisive and polarized.

Even with these structural issues in the American economy there is some hope in the future. Emerging countries like India and China are moving their focus to science and engineering rather than just on making cheaper versions of already available goods and services. As this happens they will take a great role as innovators which should free Americans to spend time and energy innovation. The emerging economies have been able to take advantage of their own low-hanging fruit by the implementation of best technologies, best practices and institutional ideas of North America, Europe and Japan. This is called ‘catching-up growth’ and as others mature the US can also take advantage of this.

There is also the hope that the internet will mature and become more revenue generating. An example of this is that the internet can allow scientist to more easily collaborate, increasing their productivity and hopefully increasing ideas and innovation.

On both sides of the government there is a desire to improve K-12 education and reverse the stagnation the country has been facing. As this is seriously tackled the nation should receive dividends.

This essay was the perfect length and presented some interesting ideas. Like anything I feel that this is just one aspect of a larger issue but to get a better idea of why the US no longer seems to be leading the global economy you need to explore a host of different theories. I liked that Cowen presented some solutions as I feel writing about a problem without offering solutions is a copout.

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