Russ Roberts

Cowen on the Great Stagnation

EconTalk Episode with Tyler Cowen
Hosted by Russ Roberts
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0:36Intro. [Recording date: February 9, 2011.] Let's start with what you mean by "the Great Stagnation." When you talk about the Great Stagnation, what phenomenon or phenomena are you referring to? If we look at the earlier part of the 20th century, standard of living for the average family increased very rapidly. If we compare, say, a 40 year period--1917-1957--people are getting electricity, flush-toilets, automobiles; very rapid increases in the standard of living. If we look at the same data or the anecdotes, post-1973, there is a slowdown in growth of living standards for the average person or the average family. That's what I mean when I refer to the Great Stagnation. My grandmother saw a lot more change in her life than I have in mine. I think there's some truth to that obviously, but I'm also a little bit of a skeptic, so one thought is: In the 1917-1957 period of course there was an immense amount of ups and downs. We had a world war, we had a depression; and yet as you point out, at the end of that period, the standard of living in 1957, was much, much different--very dramatically different--than in 1917. The 1973 cut-off, though, I find a little bit strange. If we look at the post-WWII period, say 1946-1973 as you do in the book, and then 1973 onwards: Talk about the distinctions there. If you look at median family income since 1973, it doesn't even double. There are various ways of measuring it. Under one plausible estimate, from 1973-2004, it's only gone up 20-30%. In the last decade, it's actually declined. There has not been net jobs growth in the last decade. So, one can think of the Stagnation as coming in phases. Different starting points for different parts of it. Let's consider education. From 1900-1960, rates of graduating high school went from very low to 60%. The rate has stagnated now for several decades and is actually declining. So, when it comes to education, which is a big part of our economy, labor accounts for almost 70% of economic output, it's not obvious we're really doing better, at least at the K-12 level. Seems we are moving backwards. There's some change in the data on completing high school. But of course proportion of Americans attending college and finishing college has gone up dramatically if you go back to 1946, say, right? But it hasn't lately. It's stagnated again. I also worry about what people study; I think that's a separate question. Let's talk a little bit about the data, because the data are a little bit tricky. In particular, you talk about median income. The reason we usually look at median income as opposed to mean income--mean income would be the average, and that would include very high income people who would pull the average up and would not represent the typical American--which is what you are really talking about. You are talking about mass affluence and the slowdown of that affluence from the 1970s onward. If we look at the actual median income--which would seem to better than the mean income for that reason--there still seem to be some problems. The most obvious few, three or four I'd like to look at: First, there is the price level. Comparing income in 1995 to income in 1973 or 1946, you are measuring in nominal dollars. You don't want to look at that, obviously. You want to deflate it, because what we are interested in is purchasing power. So, when we are trying to assess purchasing power, we are inevitably going to struggle with how we define the price index. A lot of people argue--I'm one of them--that the price index is not well-measured. It may be overstated; therefore, it understates the growth in income. What's your assessment of that? There are some biases in how we measure inflation. But whenever those biases are most likely to be very large--those biases will be largest in periods when you have fundamentally new goods, in the marketplace and spreading. Think back to radio and flush toilets. So, we may well be over-measuring inflation throughout all of history. But if we were to have correct measurements, the indication is that the growth gap between early and later periods would in fact be bigger than we are currently measuring, not smaller. I agree with that. The problem for me--I think most people would agree it's very problematic to compare, say, real income in 1900--hard to measure precisely. One reason is exactly what you talk about. When we try to figure out what purchasing power is, looking at various price indices--the example I like to use is portable music. Portable music in 1900 was four violinists following you around. In 2000, it was an iPod. Very difficult to correct. You wouldn't want to just use the nominal prices of the two items. The quality differences aren't just a little bit different; the quality differences are enormous. With four violinists, you take up a lot of room in your car--of course, you don't have a car in 1900--they take up a lot of room in your wagon. Your iPod fits in your pocket; it knows thousands of songs. The musicians only know 70. We understand that that comparison is very difficult. I think it's harder to make the case that CPI (Consumer Price Index) problems in say, the 1946-1973 period are worse than they are in the 1973-onward period. It's not like there were a lot of new product introduced in that post-war period. In terms of spread--you have a big difference in terms of spread. In 1946 in this country, you still have a lot of homes that still don't have absolute basics. And by 1973, virtually all of them do. That's true. Even if it's the same, the bias, we still have the measured growth gap being quite different. And keep in mind it's not just median income. Productivity statistics point us in the same direction. And statistics on education. And test scores. So, we have a bunch of different facts, which broadly speaking are independent, pointing us in the direction of a slowdown of some kind. Hate to say this within the confines of George Mason University: Measured education is a little over-rated as the determinant of growth. We have a lot of people who learn things outside of classrooms and they change their lives in a lot of extraordinary ways. Podcast education has improved. Just to take one example.
8:16Two other things I just want to mention on the median income. The measure of income everybody uses in these examples--you and others--is from the Census. It doesn't include compensation, full measures of compensation--it doesn't include benefits, which over the course of the period post-War, there is a lot of increase in the value of those benefits. As we'll talk about, I'm sure, sometimes the actual value to the consumer is not so large because a lot of those benefits are health care. The other measure, I think unappreciated: a lot of what we are arguing about here is magnitudes. There may be a slowdown. The question is: How big is it, and whether these factors dent it, chip away it, largely mitigate it, etc. What most people don't think about is in the 1970s, started I think in the 1960s but accelerated in the 1970s, there was a rather large increase in the divorce rate in the United States. Which means that the number of households or families increased much more dramatically than the population growth. Which means that the median shifted down and to the left among the existing people. So we take the people say in 1973, the median family in 1973, and say by 1993 there was very little growth in their income over 2 decades--of course it's not the same people. Not only is it not the same people because some people have been born and some people have died. The unit you are examining, households, families, there was an enormous increase, especially among single women, people who weren't ready to go into the labor force, hadn't planned on it. And that's going to distort your measure of the changes in the standard of living for the average person. When we follow the same people over time, which there are a few data sets that do that, the increases are quite dramatic and certainly much larger than just looking at snapshots of the median over time. There are a lot of different issues packed into what you are saying. If you look at the new Becker and Gordon paper, uses panel data, they get results on income stagnation which are very similar to what the Census gets. Are you sure they look at panel data? Absolutely. Do you know what panel they are using? Is it PSID? Also, there is another bias in the data: some of the gains we have gotten are women working outside of the house, not productivity gains. Those are changes that we can't repeat and do involve some serious costs, in terms of stress and foregone household consumption which we are not measuring; but I'll also point out that post-1989 median income for household adjusted--that numerical series--behaves in exactly the same way as the non-adjusted series. In the 1960s households are shrinking even more rapidly than they have in recent times and yet you still have robust growth for the median household. So most people in this area don't see median household size as fundamentally overturning that we now have a slower rate of growth in average living standards. I don't think that's been looked at very carefully, but we'll look at that another time.
11:44Explanations. Why do you think this has happened? Whether this is a small or large decrease in the rate of growth, what's the reason? There are a few reasons. One I think is that technologically, there are technological plateaus. If we look at the broader sweep of history, growth tends to come in spurts. The car was a big deal but the next thing after the car, while it will come someday, is really hard. Not saying it will take forever; may not be flying cars; but to replace the car with something fundamentally better is a very hard problem and it will take us a while. So, we had the industrial revolution; we worked out the logic of combining fossil fuels with sophisticated machines; we reaped a lot of gains pretty quickly, which were awesome; and now we are waiting for the next big thing. Another reason I think has to do with government. If I think, say, of Russ Roberts, one of my favorite economists, and if I think of all the policies I've heard Russ criticize--we've done most of those policies. Distorting incentives in the marketplace. The main criticism is that they will lower economic growth. So, I'm coming along and saying the rate of growth for the typical family has declined, and oddly I'm hearing skepticism from a lot of the same economists who are criticizing current policies for lowering the rate of economic growth. That's always fun. Considering our economy right now: about 17% of it is health care; about 6% in terms of GDP is education; and with some overlap, 15-20% is what we call government consumption--government activity, not just transfers. At all levels of government, including state and local. Add those all up, take out the overlap, and it's a pretty big chunk of the economy, like 20-30%. Those are all sectors where there are massive subsidies, massive distortions of incentives, a lot of bad policy; and it's hard to measure value. So, when we talk about biases in measuring output and living standards, the bias I worry about the most is we're spending a lot of money and simply writing it down as value added when it might not be. Final factor I think has to do with who is most easily educated. Anyone in college at the beginning of the 20th century, it was very easy to educate the marginal person. You get a big gain out of it and it's easy to do. The marginal student now--think of the people who don't get in to George Mason, much less the worst student in your class. To make them much more productive through education is simply a much harder endeavor. And, we are relying on distorted institutions. Those are the three main reasons. On the education front, a lot of what we call education spending is consumption, not investment. It's leisure, it's fun. If you looked at a dorm room today in a modern American college and compared it to one in 1972 when I went off to college, one was a little more Spartan than the other. One looks more like a hotel, one looks more like boot camp. Obviously we've spent a lot of money there that isn't going to transform itself into higher productivity. True at high school; when you look at administration costs, physical plant; and the quality of the gym--those are just consumption; aren't going to lead to higher rates of growth. That's true; the education question is: I don't think that's the only way we get more productive, but it's an important way. Let's take them all together. What your claim is--a clever debating point for your host to try to get him more sympathetic to your ideas--that: All the market-oriented economists who have been saying markets are productive--these are three sectors which are big and growing, health, education, and government where we use prices less or not at all--health care, where there is less and less role for prices; certainly government is not exactly a competitive activity; and education at the K-12 level is not terribly competitive. The problem I have with that argument--Scott Sumner podcast--it's so easy for left and right to cherry-pick things that go against their worldview and say that's the cause of what's gone wrong. If you really say: What's your assessment of the role of government in the economy from 1950-1973 onward, a lot of people would say there's a lot of deregulation. Others would say there's a lot more intervention, a lot more government spending. How would you assess that? There's a lot more spending, there's some additional deregulation; but I think if you look at the overall trend, it's toward a larger and more active government. Since the 1980s that growth has mostly been state and local, not Federal. In dollar terms. In earlier times it was Federal in many cases. But the net direction I think is pretty clear. What about the rest of the economy? You've picked three sectors that are dramatically unattractive to those of us from a market perspective. A lot of the rest of the economy has done quite well. The Internet has been probably the single most important technological marvel in very recent times. I think the Internet has a few implications. One is that it has made capital more substitutable for labor. This has helped people like you and me an enormous amount; we have not seen a great stagnation. People who I called Infovores in a previous book have had phenomenal increases in our well-being; and that includes the two of us. The benefits are smaller I think for the median American. If you look at the biggest Internet-based firms, like Facebook, they employ remarkably small numbers of people. This is a benefit in many ways--produce great output. Feature, not a bug; but it does mean, in terms of job creation, median income, there has been a change in the distributional pattern itself, at least over the last 10 years--less geared toward the median and more geared toward Infovores and the top 10%. I find it strange that you suggest that because the Internet is not job intensive--which is a plus: in the 1980s and 1990s, we had very good job growth overall, very few economic downturns, two small ones. In the last 10 years, not so typical. Recession at the beginning of the 2000s and the noughts; financial disaster in the middle. Not sure it's typical in the innovation area. We'll see what comes next.
20:07Let's talk about the top groups--top 10%, top 5%. What's happened to them and why? There are a bunch of standard arguments out there. Give me some of those arguments and what you think is the right one. There are still plenty of creators, entrepreneurs, geniuses--an enormous amount of innovation. Even during what I'm calling the Great Stagnation. The question is: Where is that innovation geared? How is it pointed? The goods and services that most readily benefit the median, a lot of those spaces already have been filled out. Like, we have toilets. There may some day be something better than the toilet, but that will take a while. Hard to imagine. Though I must say that one of my favorite innovations is the bowed shower rod. You go into a hotel today and the shower rod is bowed out so that while you are taking a shower in a place where strangers have been showering, the shower curtain doesn't come suck up against your leg while you are showering. Not the same as having no rod at all, but it's an improvement. But the toilet, I agree with you. It's done. Even the bowed shower rod, which I don't know much about; but I wonder what is the distribution of that innovation? Who is staying the most in hotels? That's right. In general I don't blame the distribution on politics, the way I think Paul Krugman would or Jacob Hacker would. I simply think innovations come in waves; some periods you get more of one kind of innovation. The innovations we've been having, really about information processing in different forms. Google, Facebook, e-bay; a lot of people benefit from those, but the people who benefit from those tend in cognitive terms to be better prepared, and it's not quite the median American who is the main beneficiary there. Part is because the lag in educational achievement in this country that these innovations have had these skewed distribution of benefits. There is no doubt that a lot of the great devices of the 20th century are now widely available. Even in 1970--hard to be precise but I think the 1970s and 1980s were pretty good times for the average American in the sense that they did get access to, say, central air conditioning in the South; dishwashers, microwaves. A lot of the gadgets that were embryonic or had come along before; but we got rich enough so that a lot of people could have them. The average American has all that stuff already. Of course, new stuff comes along. So, the average American doesn't have an iPad right now, but I suspect in 10 years the average American will. Just like the average American has a smart phone already. You can debate whether it's more important than a dishwasher. Hard to say. Market prices do measure these to some extent. Most people don't find an iPhone worth the money right now; statistics we have for income and productivity are mostly picking up those gains. Keep in mind, it's still a minority of people who find it worthwhile to buy smart phones. Growing like crazy. But in the next 20-30 years, there is a great chance we will climb out of the Great Stagnation. One of the great benefits of the Internet is how much it eases scientific communication. This will, in the longer term, lead to significant productivity gains. It could be the next technological wave is in the bio-sciences, genome-related medicine; any number of areas. Internet having a big payoff--electricity took actually decades to have a significant impact on productivity. The computer took decades. Completely fair to assume that the Internet also--its biggest impact will come not in a few years but over decades. So, I think we can look to a time, not next year, not in 18 months, but probably within our lifetimes, when this stagnation will come to an end. We'll have another very large burst; it will play itself out with a lot of innovations, which almost everyone benefits from a lot; and after that, we'll have another slowdown, as we've seen. I think that's the more common historical pattern. Like, man invents fire. This means a lot of benefits, like you can hunt different animals, live in different places. But at some point this plays itself out. You then stagnate for a while; then have the next wave of innovation. But it's always been uneven. Somebody figures out the wheel. You want to speculate on the singularity, now that we are on this topic? You think it's going to be another upward kick or you want to comment on the idea that it might be massively better? I am a big skeptic about the singularity. My colleague, Robin Hanson, his version of the singularity is that within 50-100 years, our brains are uploaded into computers. Podcast, interviewed him about a month ago. I do this over lunch every day. I still have browsers that crash. It's 2011. Browsers have gotten better, but I think we are a very, very long way from what people call the singularity. I think it's likely, if anything, that civilization as we know it would end before we get to something like a singularity.
26:07You talked earlier about that not all technology is neutral. Some people benefit from it more than others. The idea of low-hanging fruit is appealing: the idea that you exhaust the easy possibilities or potential and then have to move on to something else. I think it's easy--you and I do get a lot of benefit from the Internet; but perhaps the average person doesn't get quite as much fun as we get from it. But I think they get a lot of fun from it. Other part: emphasis on clever ideas versus implementing ideas. Just to take one example: the change in retailing over the last 50 years. Walmart, which in some sense does just what any store did in 1950 or 1920--they buy a bunch of stuff and they sell it to people. But because of their ability to use technology, the Internet, computers generally, they've made it easier for a lot of people to get access to cheap goods. That's important. One period, post-1973, where you have big productivity gains and they show up in typical wages, and that's the late 1990s. Wages at the median go up quite a bit. A lot of analysts believe that a lot of those gains came from retailing institutions such as Wal-mart. Bit of a puzzle. The last ten years--you are calling them atypical, and they are. But I think in part they are atypical because productivity has slowed down; because it's harder to get employment jumping up coming out of a recession than it used to be. And I think we are seeing that, which is very clear in the data. When we see recoveries, they are called jobless recoveries. There are fewer job-creating innovations going on in the background than in previous recoveries. Apple is employing plenty of people. Not as many as General Motors did in 1950, for sure. Generally a good thing. Those jobless recoveries--very clear in the data, not just 1991, 2000, the current one, say 2007 onwards--they don't look like the recoveries of the past, which were spikier. Sharp changes in employment. Not only are they much slower to recover, but increasingly slower. 2001 is slower than 1991; this is much slower than either of those two. Talk about why that is. I think it's another piece of evidence for the Great Stagnation. A lot of people are not convinced just by talking about median income or productivity. If you think of there being a background rate of innovation: you have a cyclical downturn, financial crisis, something's caused that; and then during the recovery, you have a stronger recovery when there are a lot of fundamentals-based innovation, a lot of new ideas, new businesses, wanting to hire new workers generates income, employment, output. You get this self-propelling process. You don't have to be a Keynesian to think that this feeds upon itself and makes a recovery strong. That the last three recoveries in this regard have been successively weaker I take as kind of background evidence for the notion that this underlying rate of innovation and dissemination has been falling. We see it in the recoveries in the labor market. Somewhat testable, right? We could look at differences in some recent data on how much does the increase in employment after a recession come from new firms coming into existence versus existing firms expanding. But existing firms innovate also. I think there's a way to test it, but it may not be exactly that comparison. One problem with this explanation--and by the way, you've left out the financial sector, which has also grown in innovation. I think that would also enhance your argument, right? Also defense spending, but that's trickier. It's not obvious what we are getting with a lot of that money. It may be useful in the sense that it's defending us against some threats that were not there before. But that's not the same as being better off. Worth spending the money. In the financial sector, really blossomed in the numbers; 2006 I think is the peak. Over a third of corporate profits in that year and big percentage of GDP. It seems in retrospect it wasn't productivity. It was a kind of rent-seeking, a lot of it, not all of it. You can add that to a list of reasons to believe in a Great Stagnation. Health care--different from education in that there's clearly a lot of observed innovation. Whether that's a market-based innovation with a return in real terms is questionable. In 1963 people were not very good at playing "Heads, I win; tails, you lose." By 2006 they had become masters at it. It's a kind of innovation, but it's more value-destroying than value-creating.
31:59You started off by saying your grandmother saw many more changes in her lifetime than you have in yours. One of the people who disagree with the underlying hypotheses about that would say: Well, how would you like to go back to 1973? As you point out, you might feel very differently about that than the average person, but in the areas we are talking about, health care being the most obvious one--would you want to go back to 1973 health care? I don't want to go back; I don't think most people want to go back. I think we are better off. But even in health care, the big gains are like penicillin; life expectancy goes up from like 40 to 70 by the 1960s; big rapid gain. Since the 1960s, there's been big, rapid progress, which I'm all for; but at a slower pace. Also in health care. Most of the gains in life expectancy over that period were reductions in mortality. That's the low-hanging fruit. Then it gets harder and harder to live longer. Not through anyone's fault. We do have some messed up health care institutions. Some of the problem is simply the idea that we pluck the low-hanging fruit first--which is as it should be--and succeeding gains become harder. But I think we will see some other wave at some point due to understanding of genetics and the genome and other facts about how human beings work. In the health care example, there are physical limitations; challenges of physics and biology. I assume if you look at times in the world record for the mile or other measures of human physical achievement, that they fall at a decreasing rate. That there's improvements in nutrition, training, knowledge; but we eventually exhaust those. Do you know if that's true? I had a blog post on Marginal Revolution a few weeks ago on Track and Field, and that's definitely true. So, if you look at areas where we can absolutely measure quality--Track and Field, how good is your pole vault, how fast do you run--there we also see a slowing in the rate of progress. In what you would call new sports, new games, I think that's not necessarily the case--you are plucking low-hanging fruit. But in things we are doing for a while, there is a slowdown. Again, at some point in the future, maybe it will be new nutrients, genetic enhancement, some other way of conceptualizing the endeavor. Better steroids that don't harm your body. Another growth spurt. How do you think about this relative to Julian Simon, influence on me; one of his themes is that brains are the ultimate resource, right? They don't have the same limitations as physical resources. You start off carrying a load of stuff in your arms, say a load of books; then later someone has the idea of creating a backpack, with straps, help you distribute the load more comfortably; then somebody invents the Kindle--by the way, the book we are talking about is an e-book; I don't know if it's gotten to the average American yet. Not even the average reader. You go from carrying 10 books uncomfortably to 10 books comfortably in a backpack to carrying around a few thousand in digital form. The human brain allows us to overcome a lot of physical limitations. I still admire Simon's work greatly--great economist and great man. I don't think we'll ever exhaust innovation. In that sense I think he's absolutely correct. Did he ever argue that innovations would arrive smoothly and evenly? I haven't read everything he's written but I don't know that he did. I don't think there's anything I'm saying which runs counter to Julian Simon. I also don't worry about us running out of physical resources. He was absolutely right on that.
36:27Let's talk about the political economy, the role. Rent-seeking: explain what you mean by that term, why you think that has partially contributed to the problem and how you think it might affect us going forward. Rent seeking is a term that refers to when people invest their energy, resources, and money in taking things from others rather than in creating value. This is often done through politics, but not always. Simple fraud is also an example rent seeking. One trend I've seen--I don't think it's the main driver of the stagnation--but there is an awful lot of innovation in rent seeking in lobbying, in moral hazard, financial sector playing the "heads, I win; tails you lose" game. Notable factor, even though I don't think it's the biggest factor. If you look at a graduating class from Harvard, I think it's striking how many of the smartest, most ambitious ones want to go into finance. I don't think that's healthy. I don't think it's investing human capital in the best form of innovation. But the political economy problem is broader than that. I think the Great Stagnation would be much easier to live with, and we would be much happier with it, if we had better fiscal policy and simply a better realization at the political level that politics can't do everything; the President can't always fix the economy; we are not going to grow at x% every year; that we really do need fiscal discipline and a sense of limits. And if we had that--and you and I know we don't; we are not close to it from either party--the Great Stagnation would be much less of a worry. Part of the problem, a big part, is simply we are not psychologically equipped to deal with this slowdown. Hard to know. I agree with that; great point; but hard to know the implications of that for political outcomes. There is no doubt that we hear a lot about what government can do to fix the economy--whether it can fix it or not. Whether fixing it means getting the unemployment rate down, increasing the growth rate. Talk about what you think would be, in a realistic world of political economy, if we came to grips with your thesis and accepted it: How might that change public policy? It would change a lot of what we are doing. In terms of health care and education, we would do much more to introduce healthy incentives, take on special interests. The rate of increase of Medicare spending would be slowed. That's really the driver of our current fiscal problems. Probably unlike you, I absolutely favor subsidies to research. I think it's a public good. I think it speeds technological progress. I think the NIH (National Institute of Health) for the most part has been a good investment. I don't think that alone gets us out of the rut. In principle I favor the idea of government subsidies to science. But a lot of what I think we're doing in a lot of different policy areas, you and I would agree they are not 100% but have the same basic diagnosis and remedy for the ways in which we have bad incentives in the marketplace right now. But those are true whether we have a 3%, 4% annual rate of, say, growth for the average person--which as you point out appropriately and powerfully in the book, there's a huge difference between 3% and 4% a year. Four percent a year, you double your standard of living in 18 years, roughly. At 3%, it takes 24. And if you are down to 2%, it's 33-35 years. It's a big difference. So, it's always good to get more growth. So, the standard arguments--you and I might differ here or there--that it doesn't matter, that government should pursue policies and 3 is better than 2 and 2 is better than 1. How does somebody more favorable to government interaction react to your thesis? Should it change the way they look at the world? I think for a lot of reasons, a lot of people who look at themselves as being on the left don't stress the importance of economic growth as much as they ought to. I think there are exceptions to this. Matt Iglesias, one prominent example. I think psychologically it's somehow hard for that to become a ruling idea. Distribution, social justice are more important ideas. There's a fear there's a clash. Someone like Gene Sperling, wrote the book Pro-Growth Progressive, didn't agree with all of it, but loved the idea of economic growth. I think since the Clinton years, the Democratic Party, on the left, there has arisen what you'd call a pro-growth coalition; and I view that as a very positive, favorable sign. I agree with those people about a lot of things. But the challenge, I think, is that the traditional pro-growth policies--which I think would be Smart Regulation, Price-based regulation, lower marginal tax rates, policies that encourage savings or at least don't discourage it artificially, policies that change the allocation of capital to productive things rather than tax evasion or unproductive rent-seeking like you talk about--a lot of those, people don't trust, certainly on the left, the ability of the system to steer those rates of growth toward the average person. I think one of the challenges--you are giving a very nuanced view of growth and political economy. It seems to me what people on the left want, their story, is that the rich have just stolen a bunch of stuff from the rest of us. Although you and I agree that some rich people have through the political process, a lot of that quality change at the upper end is from productive things like the Internet, etc. Keep in mind, there have been median growth slowdowns in most of the OECD (Organisation for Economic Co-operation and Development) nations since 1973. That to me militates against what I would call the crudely political stories--that the rich people control the government and have somehow stopped the worker, typical family, from organizing a trade union or whatever. I don't think that's really what's going on. It's more about the real economy, technology. There is a lot of evidence, which I've written about in my review of the Jacob Acker book, it's not this crudely naive story of the rich seizing everything from the poor or passing pro-rich laws at the expense of the poor. My story, part of it, is this demographic: a lot of OECD--the so-called West. Europe, Japan, the developed nations. They also went through the same demographic we did: a big increase in divorce, big change in family structure, move away from 2-parent families; a lot more people marrying later, single who didn't expect to be find themselves in the workforce who didn't expect to be in the 1975-1995 period. That's a social adjustment.
44:21But going back to the political economy on the left: How are you going to convince people on the left to be pro-growth if they don't think it goes to the average person? I don't think of myself as trying to convince them or anyone. For me, it's trying to figure out what it is for me, what I think is correct. I understand full well that in the political policy arena might make good policy harder to achieve. It will sound sometimes correctly like the connection between good policy and good results is looser than we used to think. This may make it harder to achieve good policy. This may be one reason some people don't like the book, or don't like the thesis. But I don't think it's an argument against the thesis being true. I don't have any particular claim that my thesis will persuade people in a useful way. I just don't know. What's been the reaction on the left and right to the book? You've had a lot of reaction. A lot of reaction, very quickly. It's been fun. Brink Lindsey, Nick Schultz--I guess you'd call them broadly on the right, liberaltarian--didn't like everything in it but found it broadly intriguing; here's a new slant on ideas, integrated framework for thinking about inequality, median income stagnation, financial crisis. People on the left have been intrigued: Kevin Drum, Matt Iglesias, they've all covered it a lot. I think some of them worry that I am not giving enough emphasis to distribution, that the effect of policy is to shift distribution is in their view part of the problem, not only about technology. They like seeing someone not thought of as being on the left acknowledge that there is something going on at the median that is strange and we should think about it more seriously. Of course, there is not a lot of evidence that government is very good at influencing the distribution of income. We'd like it to be so if we are interventionists. People who are interventionist clamor for changes in tax rates or changes in other policies that don't have a great track record of being effective. I think here there is a difference between one-off changes and ongoing changes. Government is pretty good at making one-off changes in the distribution of wealth. In Sweden, the distribution of wealth is more equal than in the United States. Partly that is because of how Swedes are. But I don't think it's all that. There is a policy that takes a dollar from one person and gives a dollar to another person. You lose some of that by the bad incentive effects; but you keep some of the distributional change. But those one-off shifts over time get dwarfed or swamped by changes in rates of growth, which stem from more fundamental factors. So I'm not more skeptical about the ability of government at any point in time to benefit some group. That's why they all rent-seek. If there were nothing in it for them, there wouldn't be Washington, D.C.; there would be no K Street. At the same time, over longer time horizons, it is about productivity, labor productivity, technology, and innovation; and repeating that core key message that we tend to lose sight of in these daily political battles--I view that as one of the main things the book is doing. Refocusing the attention of economists on science.
47:42Let's talk about the three sectors you focus on, and we may add the fourth we've added in this conversation, finance; but the three sectors, health, education, and government. What explicit policies to you think would make those sectors more productive and less of a drain on the country as a whole? In terms of finance, I think the best way to proceed is to have a minimum of explicit regulation, but really pretty tight restrictions on leverage. I think it's pretty hard to regulate banks; but leverage has proven dangerous. I don't think we can pre-commit to no bailouts. But the best we could do is greater transparency; real restrictions on leverage, and get rid of a lot of Dodd-Frank. That would be my preferred recipe for finance. The leverage measure, which clearly would be very useful for restricting recklessness: we haven't been very effective at keeping it rigorous. But we haven't tried. It used to be 12 to 1, and it went up to 30 to 1. That was the mistake. Now, it's not easy to go from 30:1 back to 12:1. There's a lot of pain. But the world didn't end when it was 12:1. And the people who enjoyed the move from 12 to 30 got a lot of cushion for the move back to 12. They lived really well. It's not that much pain for them. Or not that much pain for the rest of us. The point is they have a lot to mitigate, a big cushion. The other three are health, education, and government. Let's talk about health. Medicare: what would you do practically? Depends on how practical I have to be. I think ideally Medicare should be for catastrophic expenses and not for the elderly, per se. I think the best health care system in the world is Singapore, where you have health savings accounts for smaller expenditures; single payer accounts for catastrophic; and a savings mandate integrated with the retirement system. Now, is that practical for this country at this point? No. We voted for something else; it's passed into law. So, in that sense, I'm not sure there is any practical solution. The current system is not sustainable, in any case, even pre-ACA. People say such and such is not viable politically; there are going to be a lot of things that are not viable politically that are not here now. They are going to have to be. Education? We live under Federalism. So, there is not a single stroke educationally that we can have or even should have. I think we are seeing a lot of green shoots, a lot of experimentation at the state and local levels. We are seeing better ideas spread. Charter schools are good. School choice. Mostly I think we need more experimentation, more interest in being able to fire bad teachers. The Obama Administration is very unpopular with Teachers' Unions. I take that to be a very good sign. Not sure they have succeeded that much yet. But the fact that a Democratic President would be willing to be extremely unpopular with teachers and teachers' unions I think shows the political equilibrium on that issue has shifted and we will see continued experimentation and improvement. Interesting to see whether that unpopularity persists in 2012. What about government itself? Some of these changes would naturally lead to smaller government. Piecemeal approach. I would decriminalize. Most are all drugs. I would cut defense spending. I would eliminate all foreign subsidies. Long list of ideas; I think none would come as a surprise to you. What would be the consequence? I think when you improve policy there is always going to be the question: Is this improvement a one-off change--which is fine, I'm all for a one-off change--or will it improve the long-term rate of growth? You'll find economists from all points of view pretend to know: this will be a one-off change or will improve growth. In most cases, we don't actually know. We should institute as many policy improvements as we can. We won't know in advance which ones will improve the growth rate and which ones will just give us one-off improvements; and do them all, and let it all kick in and see how good it's going to be. That's my basic attitude.
52:25And going to the fundamental--maybe a natural argument at the heart of this book, which is that innovation is a trial and error process, not smooth; and we have this illusion of 3% a year, that that's the growth rate of the U.S. economy, and that's a bad bird's-eye view. And that's become a dangerous view. Why is it dangerous? For fiscal reasons. Our combination of spending and taxing decisions is leading us off the precipice. It was not as dangerous to have that illusion in 1985 as it is today. It's partly why the illusion has persisted. You could believe it at very low social cost, certainly no private cost. But I think we are finally reaching the time fiscally, some time in the next 20 years, well before then given bond markets, something will have to give. We'll need to reorganize. So are you an optimist, pessimist--where would you put yourself right now? Well, compared to whom is always the question. Some people are calling the book pessimistic, but I don't see it that way. Obviously it's pessimistic compared to someone who completely doesn't see any problem of the growth slowdown. But I think we'll get out of the growth slowdown. I think we're already doing a lot of things right, especially with the Internet. We are starting a bit with education. I'd like to see a bit higher status given to science and the science enterprise. But the Progressive story is in my view the pessimistic one. It's like: the rich have taken over the government and we need to seize it back and institute 90% marginal tax rates and 50% unionized economy to get it all back. And that, in my view, is never going to happen, not even possible it's going to happen. Those people ought to be pessimistic. My view is that the economy is deeply uneven. We're in a slow patch. It will come back; I don't pretend to know when. I see a lot of positive developments. I think the time between productivity bursts is smaller than it used to be. In large part because of science and capitalism in the modern world, and decentralization of governance and the Internet. That makes me pretty optimistic. But I'm reframing the boxes in ways that people feel challenged. They tend to think of me as a pessimist. You haven't mentioned venture capital. You mentioned subsidies to science through government. What role does venture capital and private funding have to play? Immensely important. Note that venture capital has been pretty slow lately. It's recovered from the crisis but it is not impressing people. Whether private innovation comes through venture capital or not, we'll see. But the fact that venture capital is in a slow patch I think is another result of being in a somewhat stagnant period.
55:54Let's talk about innovation in the book world. You can't get it physically in a book store. How can people read the book right now? You don't need a Kindle or e-book reader to read it. You can download it to your computer and print it off as a PDF or you can get a free ebook reader from the Penguin website. It's $4, by the way. It's short. 15,000 words, which is the original length of 17th century economics pamphlets. Kindle is a clunky technology. I love my Kindle; it's a benefit to me, but I think it could be a lot better and it will be a lot better. Another example of an innovation that benefits the Infovores but not yet the median. Let's go back to your book. You can read it on your computer, on your Kindle; I read it on my iPad using the Kindle app. Penguin tried to send me a free copy; you are supposed to reveal when you get a free copy. I couldn't get at it so I paid $4 in a desperate measure of generosity to you. But it's cheap. Interesting distribution method. What do you think is going to be the significance of your book just for that? Stephen King tried something a little off the beaten path a while back, serializing a book; and people paid a little a time. What does Pengiun think? Penguin seems to be happy. People like short books. Many books way too long, long magazine articles; I thought, let's have a book, cut to the chase, and then end it; and charge people a commensurate price. I think the prices of books should be lower, books should be shorter. This was my attempt to do it. I think it is being seen as a marker of some kind, heralding a new world. I'm pleased to have been a part of that innovation. I'd like to do another one. Thought of doing one on successful case studies of innovation and how they work. Like Cal-tech, Singapore, someone like you in podcasts. Look at people who have broken through this barrier in a somewhat stagnant time and see what were the factors behind that. Are you an optimist or a pessimist on the political side? Politics has become uglier, stupider, more polarized for the most part. I'm somewhat pessimistic there. I don't see a path toward it improving, but if you look back toward the history of the American republic, politics, especially in the 19th century has been very partisan, polarized, and stupid, based in lies. So, it's not an innovation; actually something quite old. I think we'll manage to survive it. What I do see is more smart people than ever before; and they work really hard, and they want to innovate. That absolutely is true of 2011; big reason to be optimistic.

COMMENTS (27 to date)
Nathan writes:

For the toilet of the future look to Japan. (although there are some things I don't want my toilet to do)

Floccina writes:

I do not disagree with Tyler but though there are fewer big innovations there are many more small innovations today. Just about everything is getting better all the time, there are far more engineers, scientists and inventors today.

Peter writes:

@ Nathan.. Yes, it does look like toilets will be able to analyze our health.

Robert Kennedy writes:

At about 37:30, Tyler says:


I don't get that connection. Why would the populace worry less about stagnation if the government ran a balanced budget? I certainly agree that better fiscal discipline would have all kinds of good outcomes. I just don't see how "less worry" would be one of those outcomes.

Robert Kennedy writes:

I agree with Tyler's point that the great innovations of history take a long time to have their impact.

One of the impacts of the Internet that I think we are in the midst of feeling the impact is labor portability. For many workers, particularly "infovores", the Internet allows them to work for any company, from almost anywhere in the world. The only barrier of consequence is time zones. I think that will have a growing impact on commuting patterns, the growth or lack of growth of extended cities, where businesses locate, etc., etc. Silicon Valley happened because the wealth of local talent available in that geographic area. Today, companies can tap into talent from almost anywhere. I think this one will continue to have more & more of an impact on how businesses are run.

Max writes:

I am disappointed there has been no connection made between this conversation and oil. It seems pretty obvious to me that all the major advances in human technology have followed the discovery of better (more dense, more powerful) energy sources. Agriculture resulted from humans harvesting solar energy more efficiently. Animal power made a lot of gains too. The discovery of electricity and steam power started the industrial revolution. The discovery of oil and coal power accelerated the progress of the industrial revolution. Is it a coincidence that Tyler's 1973 start date is very close to peak oil production in the United States? I think the Great Stagnation (and possible future decline) will continue until humans find a better energy source to replace fossil fuels.

Doc Merlin writes:

No no NO!
VC isn't slow because of technological or social reasons. It is slow because of purely political ones. Laws have been changed recently to greatly increased the barriers to receiving VC. These new laws go beyond Sarbanes-Oxley which just greatly increased fixed costs to going public (and thus also harmed the VC market).
This administration implemented waiting periods, required SEC filings, and set other barriers for VC funding.

James writes:

The next big innovation after the car (personal vehicle, the internet. As a guesstimate, I use my car 50% less than I did in 1973. Other than work, to which I can't telecommute, most of my other reasons for using the car can be done online. Banking, shopping (I haven't been to a mall at Christmas in years), research, buying books, communication with friends,etc. While these activities may generate an increase in other vehicle traffic, it has significantly reduce my personal transportation. If I could telecommute I would get rid of my car altogether.

T L Holaday writes:

@Doc Merlin: How would recent changes in the law cause a stagnation commencing in 1973?

AHBritton writes:

Doc Merlin,

Your comment interests me, I was wondering if you could point me to links, bills, regulations, other references, etc. pertaining to "implemented waiting periods, required SEC filings, and set other barriers" that you speak of.

I also second T L Holaday as to what this has to do with stagnation pre Obama, going back to the early 70's

Dave Taylor writes:

Comment on the exchange between Max and Doc Merlin.

It is interesting to look at the utilization of different energy sources as a signature of overall technological activities. This changes with shifts to coal and then oil, but the price changes have consequences. For example, if transportation costs increase enough then the present patterns of trade will change. An environment of falling or very low energy prices is quite different from the alternatives for overall economic activity.

Doc Martin
VC funding patterns have changed many times in this time period since around 1973. At the start of it material processing technologies were viable, whereas now most of the interest seems to be in software or information manipulation technologies. Are all startups equal? I think not. There is a huge difference between the invention Russ Robert pointed to of the curved shower rod and the invention of the transistor. Also, there are cycles in the scale of activity required for invention: in some times a technology start-up can be a garage activity at other times a technology can require a huge investment. Government can certainly make these situations worse, and possibly even kill them, but it is more of a risk-reward calculation for vulture investors and angel investors in individual cases.

chitown_nick writes:

Russ & Tyler, thanks for the great conversation, again.

I was interested by this discussion, both for its take on the comparison of medians and panel data that Russ so often cites as a source of bias often found in studies. The assertion that panel data show a stagnation in this period is an interesting note.

Mostly, though, in the segment of the discussion that Robert Kennedy pointed out, the expectation of smooth growth causes problems for policy, social unease, and government. This is an interesting idea, but what are the implications of what could change? Government could plan based on what other metric that projecting a continuation of the previous few years' growth? How might policy change? Should it be more open to promote more entrepreneurship, more trial and error, to hopefully reduce the time until the next surge growth period?

I agree that some of the policies included in the discussion "I would decriminalize [most or] all drugs. I would cut defense spending. I would eliminate all [farm] subsidies. Long list of ideas..." obviously could be increased to include fossil fuel subsidies and others. These policy changes could help free up resources for more productive endeavors, as well as opening the door for entrepreneurial experimentation in "mature" fields like agriculture and energy.

Are any changes to bankruptcy law warranted? Are regulations protecting environments or worker safety within a new entrepreneurial atmosphere a reasonable check on what can be done in an otherwise free market growth system?

AHBritton writes:

One quick comment.

It is obviously difficult or impossible to "measure" market interference or distortion in the economy (depending of course on what is meant by these terms), but I am skeptical as to the claim made by Cowen and others that "of course" there has been more government interference and regulation in the economy over time.

After all, haven't MANY of the things free market people were advocating in the 60's, 70's and 80's gone by the way-side?

For instance price-controls, the breaking up and privatization of various state controlled monopolies and utilities, lower taxation (I know it is hard to believe but there was a time when 90% taxation was not unheard of), etc.

It seem like there are PLENTY of examples of things that would be considered IMPOSSIBLE to implement in todays world that were common practice in the not too distant past.

Just look at the scope of political debate, it wasn't too long ago that Republicans were proposing health care plans similar to the current "Obamacare," now it is seen as "leftist" state intervention.

There are MANY policies advocated even by Reagan that would appear "leftists" and state-interventionist by todays standards.

Jeremy H. writes:

Tyler mentions a Dew-Becker and Gordon paper, probably:

See also Gordon's more recent work on inequality, for a slightly different view:

Seth writes:

I'm half way through so far, while I was getting my "podcast education" on the treadmill today I discovered that Tyler makes an excellent point up front (around 11:44):


Are libertarians skeptical of Tyler's hypothesis because they doubt the negative growth impact on government policies? Do they think the government impact on growth should have been bigger or less in Tyler's first period?

I'm undecided, leaning toward Tyler.

I also really like this one:

Scott Packard writes:

I'm still trying to get through this Standard Chartered report on super cycles, authored in part by Dr. Gerard Lyons, Chief Economist and Group Head of Global Research, released in November 2010.

"The world has seen two such super-cycles before. The first ran from 1870 until 1913, the eve of the First World War. The second began with the end of the Second World War and lasted until the oil crisis in 1973. The current super-cycle started at the turn of the 21st century and is likely to extend until at least 2030."

a) This is a different way of looking at things than I've heard from Russ's shows in the past

b) Since it frames the end of a super-cycle in 1973 then we should not expect rapid growth in this country again similar to that super-cycle.

(Towards the bottom of the above URL is a link for downloading the whole paper, about 120 pages if memory serves.)

Andrew Fischer Lees writes:

Regarding the discussion on jobless recoveries:

Are you aware that you have only three data points? Are you honestly surprised to find a pattern in three data points?

As Leamer would doubtless say, "Humans are pattern-seeking, story-telling animals"


Adrian A writes:

Cowen totally sounds like John Hodgman. Deadpan delivery and all.

Jim Feehely writes:

Firstly, thank you for making all these fascinating discussions available.

However, my concern, even dread, is that what underlies all economic discussion is the rarely examined assumption that economic growth is essential. Economic growth necessarily requires growth in consumption, whether for productive capital investment or mere personal gratification. But increased consumption mean accelerating the diminution of finite physical raw materials and resources.

Why is there no discussion amongst economists of the fundamental sustainability and morality of this embedded and unchallenged obsession with 'growth'? I suggest that we need a serious discussion about how to achieve satisfactory prosperity in a low growth or no growth economy. It seems to me that involves an examination of the concepts of 'productivity'; ie efficiency based on declining consumption. Necessarily, this entails an examination of happiness that is not glibly tied to monetary wealth.

Seb writes:

This was one of those podcasts that did not make a huge impression on first listen. But then the more I chewed on it and thought about it the more I liked it.

What I am curious about is what justifies the optimism about massive job creation in the future. Honestly in a well functioning relatively liberalized global economy new jobs for "the masses" should be created in the developing world. New jobs in the service sector seem to go somewhat counter to current trends of automation and reduction in labor intensity even of stuff like medical care.

Is it really economically unthinkable to have job creation more or less stagnate relative to workforce growth for the next decade or two? I definitely think it goes against prior experience but "It didn't used to happen this way" is a pretty bad argument.

There's no inherent reason why an economy should be fully employed, or, hell, mostly employed. Isaac Asimov's thought experiment of societies supported purely by robots was a really good way to think of how something like that would work.

On a slightly related note: Do you think we need a morality of capitalism? Something that goes well beyond Greed Is Good. I was very skeptical of moral arguments(because I think we heavily overeemphasize the morality of past generations) for a long time. However I am increasingly inclined to think that we are dealing with an almost solipsistic degree of selfishness that would have astounded classical economists.

It is always dangerous to talk about norms and morals when trying to fix social issues, because they are virtually impossible to really direct and attempts to do so usually end in disaster. That being said "virtually" is the key word. We also have ample examples of extraordinary and swift shifts in mores throughout history(attitudes towards slavery, pacifism after WW2, the 60s-70s social issues shifts). There are also cases of groups of people throughout history identifying good or bad aspects of the greater societies in which they lived and working to isolate themselves from or cultivate those aspects.

Maybe my concern is that we are living in an ethically drifting world. The majority is complacently self-congratulatory, and the few that still care about ethical issues are basically isolated intellectuals or increasingly uncritical(uncritical, in that religion is nowadays far more about socializing and an ethical echo-chamber than it is about actual world-views; or it's dying like in Europe) religious leaders.

Justin Leavesley writes:

I think Seb makes a good point concerning job creation.

There is no reason why the rate at which technology can automate jobs out of existence should be matched with the rate of creation of new types of jobs.

But destruction of jobs by automation would be a massive increase in our aggregate wealth but for one flaw in the political economy of post industrial capitalism.

That flaw is that we don't think a citizen should have a direct share in aggregate wealth. People can share in wealth only through what they own or the labour market or state charity. For most people that is really means just the labour market and where the supply demand for there skills is at.

But the whole system does not work with out the citizen, without the consumer. Therefore the citizen should have a direct share. Or put another way, the act of being a citizen and consumer is productive in itself, the choices made at the shops is the very stuff that drives competition and capitalism, it is even more fundamental than production.

There should be an additional way of sharing in aggregate wealth. There should be a citizen dividend paid from company profits, individual income and any government budget surplus to every single citizen.

That way as technology progresses it actually generates more freedom for everyone rather than causing massive over supply in the labour market and the resultant low and stagnant wages. Everyone has a personal vested interest in the success of the economy and its companies.

By providing an alternative means of income to the labour market, it would also cause some wages to rise which would make those jobs more economic to automate.

Having an alternative income would also allow many more people to take the risk of being innovative or entrepreneurial.

The main aim being to increase the number of people who are financially independent of work and therefore freer in a true sense of having a real choice of have to spend your very precious life day by day.


Jeff writes:

It was amusing to me to hear Mr. Cowen provide a point of view that government intervention in the economy had an inevitable negative outcome and then to provide the Internet as one example of a bright spot in the future of the economy. Perhaps Mr. Cowen's perspective would benefit from some time looking into the history of the Internet and the history of the creation of the computer.

A. Zarkov writes:


There pretty much is no better energy source than fossil fuels. Not from the standpoint of energy density. Hydrogen is a little better but has obvious drawbacks with regard to safety and transport. More importantly we have no hydrogen wells. We could generate electrical energy using reactors, but that still leaves us with a need for a transportation fuel. So far our best batteries have only 1/80 the energy density of gasoline. We could run our cars hotter with ceramic engines, but we still need fossil fuels to get reasonable performance.

Don't count on finding a better fuel, for quantum mechanical reasons hydrocarbons are very near optimum.

John Berg writes:

After a quick trip through this podcast and being delighted with Dr. Roberts guidance through Dr. Cowen's mind, I spent the next couple of days going through the other available Cowen podcasts. The many insights I gained prompted collecting notes for future checking and admiration for the two discussants. Again, Russ has the heart of a teacher and Cowen is a very organized, bright mind.

First insight, museums and universities serve their doners and if either PLANNED to serve their clients (students) they might have no customers.

Second, the best way to turn your kids into readers is the conversation during family meals.

Third, a method for focussing the kids that trail you to the museums, galleries, expositions, etc.

John Berg

Capitalism is not some vast, complex system imposed from above. It is simply what happens when people are free to dispose of their lives, their time, and the products of their labor as they choose. The issue, then, is not providing a "morality of capitalism," rather it is articulating and defending the moral arguments for freedom.

J Palmer writes:

Anyway you guys can put links up for both Amazon and Barnes and Noble. Not all of us are Kindle owners..

[Hi, J Palmer. The link given for the book is at Amazon. Although it is an e-book, you do not need to own a Kindle. You can purchase and download it to your computer.--Econlib Ed.]

Raja writes:

The rate of tech advances is accelerating. Do you realize the iPhone didn't exist 4 years ago? Today we have all the information in the world literally at our fingertips, near-instantly. (Network signal willing.) And yes it even benefits the unwashed masses. What measure of growth or inflation accounts for that?

The real issue is that the maelstrom of creative destruction and (slow) liberalization of the Third World are rendering vast swathes of people obsolete and chronically unemployable. But at least they have votes to sell.

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