Sunday Review: The great stagnation: how America ate all the low hanging fruit, got sick, and will (eventually) feel better, by Tyler Cowen

by Anthony Painter

There is a complacent assumption that austerity will pass. As soon as our course is corrected, then the upward charge begins again. The sunny uplands of things only getting better will return. Just in case you were feeling a wave of optimism, these assumptions that have served us well for a couple of centuries and more may no longer apply. We have entered a great stagnation. Or so Tyler Cowen thinks.

Whenever things are bad there’s always a Malthus on the scene and in his short book, The Great Stagnation, Cowen is one of the candidates for the vacancy of pessimist for our times. He tells America that it will eventually feel better, but that’s just the soothing words of a doctor refusing to dispirit a terminally ill patient. You’ll have more bad days than good with this illness. This is not to dismiss this pacy and powerful book or the argument he expounds within it. It’s just not ultimately convincing.

The thing about Malthus figures – and I’m using this in a broad sense of pessimistic accounts about our economic future – is that they are occasionally right. There are occasional disasters – economic or otherwise – so if you predict them you are going to be right now and again. When you are right then you become a global celebrity. Just ask Nicholas Nassim Taleb. It is important, though, to be right for the right reasons a much as it is to be right per se.

In fairness, Cowen’s argument is more sophisticated than simple prophesies. His basic point is that over the course of two centuries America (though this does apply to the UK too) has plucked all the low fruit of economic growth: free land, an uneducated yet bright population, and technological breakthrough. It built on the land, educated its kids, and invented things in the communications, electrical, consumer goods, medical, transportation industries and so on. Global innovations per head of population are diminishing. What innovations there are can often be jobless or revenue-less. The internet is the big example here. It has improved lives but it doesn’t have the revenue streams to match. The iPod has generated less than 14,000 jobs in the US according to one estimate.

What goes for the private sector economy applies to government also. Early expenditures are efficient. They solve problems like the absence of education, subsistence, healthcare, and legal order. The problem is that expenditures come up against a productivity barrier. It’s a public sector law of diminishing returns.

This was a dilemma faced by Labour in office. It massively increased public investment in, say, the NHS but productivity improvements slowed. Outputs such as reduced waiting times and outcomes such as higher survival rates from cancer were achieved, but the marginal costs were increasing. In other words, it’s cheaper to vaccinate against polio than it is to provide top-notch long-term care for someone with Alzheimer’s.

Cowen is sceptical about government investment. He takes Krugman on. He describes public expenditure almost as a false economy. He makes some pretty debatable claims such as this one on the stimulus:

“Replacing private debt with public debt won’t restore prosperity because it doesn’t create anything”.

Well, if you use the stimulus to build roads, bridges, renewable energy, transport infrastructure, housing, schools, etc then you clearly are creating something. You are raising your production horizon. Public sector workers do produce services that have measurable value – why would a private refuse collection service be real and a publicly provided one not so? So to describe the state almost as not a real economy seems perverse. Krugman seems to have a better grip of economics than Cowen. The latter’s ideas are more saleable unfortunately.

This is all well-trodden ground. What of the core thesis? We’ve consumed the low hanging fruit so productivity will slow, and growth with it. The first part of this is more convincing than the latter. There is no doubt that the age of big discoveries, big industry, and big government powered our societies towards undreamt of private and public wealth. It is equally unarguable that those gains have slowed in the last two decades. There is something going on that is beyond temporary.

The shift from a manufacturing to a service economy where “productivity” is notoriously difficult to measure must be a central factor. Cowen focuses intently on scientific discovery. But how do we measure the increased productivity of a waitress who develops a friendly patter that makes people love her restaurant? Or the doctor who learns how to use empathy to properly diagnose and comfort their patient? Or our cultural experiences being so much more varied and accessible? These don’t fully appear in GDP figures. Yet they are real. Maybe our modern innovations are human innovations that we don’t capture.

Notwithstanding this, the presumption that new fields of growth won’t return seems to be overly pessimistic. A third of the world’s population or more lives in rapidly developing countries which are potential markets as well as competitors. The internet will spawn economic opportunities as yet unimagined. As Cowen acknowledges, it allows collaboration hitherto incredibly difficult. Where humans collaborate, growth and opportunity follow. That’s why cities are so important to our economic future. Watch our world change as medical science, new markets, new service quality, a new green economy, educational space, 100 millions more middle-class consumers and a spread of entrepreneurship takes hold.

So I’m optimistic that our growth journey is far from over. Yet, Cowen has a point about our present and it is one that social democrats must adapt to. This new economy may take some time to arrive. In the meantime, the left can’t afford to make itself a luxury product in austere times. It needs to demonstrate responsible leadership. What it can do is argue that these new opportunities can either be secured here or they will go elsewhere. On the basis of that we need the institutions to secure the opportunities: education; regulated finance; state-supported investment; energy regulation and market-creation; home construction, financing, and distribution; science; and so much more.

These institutions won’t necessarily spontaneously appear. We will have to create them. In that, government absolutely does have a role. Yet Cowen’s scepticism about the place of the state in creating the economy of the future becomes a self-fulfilling prophesy. If we follow the logic of the argument of the Great Stagnation then we should also accept its pessimism. Fortunately, there is another way. I’m optimistic.

Anthony Painter is an author and critic.

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2 Responses to “Sunday Review: The great stagnation: how America ate all the low hanging fruit, got sick, and will (eventually) feel better, by Tyler Cowen”

  1. Harry Lime says:

    Cowen’s thesis sounds unconvincing to me, too, but what about the rise of India and China? It has to threaten the economic prosperity of the west, doesn’t it? At the moment, they make everything, and we consume it, but as they become richer than us, they will do more of the consumption, too. What do we have to sell to the world? I’ve heard it said that the only fields in which we in Britain are still world leaders are the arts, higher education and arms manufacturing. It’s not enough, is it?

  2. No, it’s not enough. Which is why we need new institutions- vocational learning, capital investment, cluster formation, infrastructure investment, regulatory innovation, science and development- in order to compete in the new global economy. China and India are competitors *and* potential markets.

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