Friday 4 March

This Friday, Jon presents “The Great Stagnation”

This week's happy hour discussion will focus on the central thesis of the new book/essay by GMU Professor and well-known economics blogger Tyler Cowen, titled "The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better."

You can get it as an ebook on Amazon (or Barnes & Noble) for $4, and if you don't have a device with e-reader capabilities (Kindle, iPad, smartphone) you can read it on your computer using the Amazon Kindle application. It is only 15,000 words long. Alternatively, there are plenty of good reviews out there, try the Economist for example.

I've summarised a few thoughts on the book below, more at the end.

Highlights:

The central claim of the book is that the US, (perhaps even the "West") have been undergoing a slowing in technological progress and growth of material well-being since the early 1970s. Cowen presents anecdotal support for the slowing of "game-changer" innovation (iPhones vs telephones; cars vs better cars), as well as data on the stagnation of median income (which also applies to the UK), slowing in patent registration, R&D output and productivity. It is well established that there have been few medical breakthroughs for many years. Apparently, "a lot of our recent innovations are private goods rather than public goods."

In Cowen's own words: "One way of summing up TGS is to cite local diminishing returns and yet longer-run increasing returns, though right now we're on the diminishing segment of that curve."

Points for discussion:

1. Do we agree with the notion of a "great stagnation"?

2. What do we think is the role for the internet? Does information technology and globalisation tip the balance in favour of "superstars"?

3. Do we think that the recent shift in UK education policy will exacerbate the problems?

"Appendix"

Cowen argues that the primary cause for this slowing of progress is that we have exhausted a lot of the "low-hanging fruit" available to us. We no longer have vast amounts of unexploited land; educational enrolment is now sufficiently high that the marginal returns to just educating more people are much lower; major technological innovation is harder than it was; growing governments experience diminishing returns. Large parts of the economy are not subject to productivity-enhancing competitive pressure.

The book should not necessarily be interpreted as pessimistic. Cowen repeatedly mentions that technological plateaus are to be expected and are not likely to be permanent. The internet is one innovation that has improved the standard of living of many - the problem is it doesn't influence GDP all that much yet (Facebook only employs about 2,000, Twitter 300 and eBay about 17,000). In a low growth world we must learn to live within our means, which we've not yet managed. The financial crisis happened because "we thought we were richer than we were."

By the way, some think 3D printing may just be one of the game-changers we need.

In the Aghion and Howitt Schumpeterian framework, we can interpret the book's claims as a slowing of the expansion of the frontier, hence why China and India - currently in catch-up mode - have not yet been affected.