Thursday, April 26, 2012

Review: The Great Stagnation, by Tyler Cowen

This little book, available as a Kindle e-book, can be summarized by its subtitle: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.

Cowen, a professor of economics at George Mason University, is known for his economics blog, Marginal Revolution, and writings in popular magazines and newspapers. He makes several related points in this brief book.

First, societies - in particular, American society in its fastest-growing phase - create substantial economic growth through substantial increases in productivity. They do this by picking off the "low-hanging fruit" of productivity. In the case of the U.S., a vast, relatively unpopulated continent allowed for rapid expansion of population and production. Technological advances of the 19th century also expanded productivity rapidly. In the 20th century, an increasing fraction of the population graduated from high school, and now a substantial fraction graduates from college. These educational achievements allowed American society to transform from a largely agricultural/industrial society to a higher-payout ideas society.

Second, we've largely tapped out the easy ways to increase productivity. We can put more people through college, but we're increasingly tapping those who can benefit only marginally from the additional education. We continue to make improvements in farming efficiency, but so few people still farm that such increases in efficiency don't free up substantial numbers of people to do other things with their lives. Indeed, with all the examples of low-hanging fruit, Cowen makes the point that further advances are more costly than those that came before.

Third, the implication of the first two points is that we should expect lower productivity growth - and hence lower income growth - going forward than what we have become accustomed to. The 3% annual growth rate that was once considered "normal" has become a 1% growth rate.

Fourth, our financial problems are largely a result of failure to recognize the previous point. We're spending as though we're still in the 1950s, even though growth rates have been low for several decades and likely will remain so.

Cowen ends on a positive note, however, suggesting that technological breakthroughs - perhaps the development of the Internet, perhaps ones not yet widely known or yet developed - will ultimately usher in a new age of low-hanging fruit that we can use to become more productive and, therefore, better off.

The book is largely apolitical, focusing on why we've been stuck in a low-growth economy and not on the political decisions that have been made along the way. When he does mention politics, both major parties are in for their share of criticism.

I'm perhaps not as optimistic as Cowen about the likelihood that we can grow our way out of our economic doldrums through new technological breakthroughs. I suspect we need to become accustomed difficult times continuing. That's not to say that subsequent generations will be worse off than earlier ones; merely that we should not become used to rapid growth in national income. In that kind of world, disputes about how to share the wealth are likely to continue.

The Great Stagnation is a quick read, short and non-technical, and continues the worthwhile trend of making economics more accessible to people with non-technical backgrounds.

No comments: