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Posted at 9:02 AM ET, 01/31/2011

'The Great Stagnation'

By Ezra Klein

Book reviews tend to force the author to combine two questions that don't go very well together. The first is, "Should you read this book?" The second is, "What do I think about the thesis of this book?" So in the spirit of Tyler Cowen's decision to slip loose from the bonds of publishing convention and experiment with a 15,000-word e-book, let me try to organize my comments here a little more coherently.

First, the review: Is this a good book? Yes, very. Should you purchase and read it? Absolutely. At $4 and the length of two New Yorker articles, it's well worth the time and the money. The work, I think, is actually improved by its brevity: It's not pockmarked by slow chapters that tempt you to put it down. And what's actually there has a very high signal-to-noise ratio. I tend to highlight interesting passages out of books and then copy them into Evernote when I'm done. My file for Cowen's e-book was longer than my file for most books, despite the fact that his book was 15,000 words long, while most books stretch far beyond 100,000 words.

Now, some thoughts: The basic thesis of the book is that advanced economies are slowing down because the pace of innovation is slowing down (you can read a shorter version of the argument in this op-ed from Cowen). This isn't because we're getting dumber, or because constant nuclear wars are distracting scientists. It's because in the 20th century, we benefited from, in Cowen's words, a lot of "low-hanging fruit" before, and that fruit is basically picked. You can only move your smartest people from the farm to the school system once, after all. As for China and India? Glad you asked. They're mostly picking the same fruit we've picked -- and grown -- over the past century or so, bringing electricity and schooling and modern medicine and management techniques to people who never had them before.

Cowen's characterization of plumbing, fossil fuels, public education systems, penicillin and so forth as "low-hanging fruit" bugs me a bit. It took human beings quite a while to figure all that out. But Cowen is right to say that once discovered, those innovations produced extremely high returns. From the economy's perspective, the difference between having cars and not having cars is a lot larger than the difference between having cars and having slightly better cars. A 1992 Honda Accord and a 2010 Honda Accord aren't the same, but they're pretty close.

The obvious rejoinder to this is, "What about the internet?" The problem, as Cowen points out, is that the Internet is not yet employing many people or creating much growth. We needed a lot of people to build cars. We don't need many people to program Facebook. It's possible, Cowen thinks, that the Internet is just a different type of innovation, at least so far as its ripples in the labor market are concerned. "We have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy," he writes. "When it comes to the web, those assumptions are turning out to be wrong or misleading. The revenue-intensive sector of our economy have been slowing down and the beg technological gains are coming in revenue-deficient sectors."

Maybe the Internet just needs some time to come into its growth-accelerating own. Or maybe the Internet is going to be an odd innovation in that its gains to human knowledge and enjoyment and well-being will serve to demonstrate that GDP and even median wage growth are insufficient proxies for living standards. Either way, we're still left with a problem: Stagnant wages are a bad thing even if Wikipedia is a big deal.

And it's not just the Internet. Even when we're growing, things look bad. The sectors that are expanding fastest are dysfunctional. We spend a lot of money on education and health care, but seem to be getting less and less back. The public sector is getting bigger, but it's not at all clear it's getting better. For much of the last few decades, the financial sector was was generating amazing returns -- but that turned out to be a particularly damaging scam. And economic malaise is polarizing our politics, leaving us less able to respond to these problems in an effective or intelligent way.

The political system -- and even the economics profession -- tends to be most comfortable talking about the things it knows how to talk about. Immigration, education, health-care costs, tax policy, labor density and so on. The major contribution of Cowen's book is to focus our attention on an explanation for our economic woes -- or at least some of them -- that's not currently central to the debate, and that's somewhat difficult to talk about. I don't think the book has enough data to say definitively how central the declining pace of innovation is to our economy. But there's more than enough to suggest it's a real factor, and one we need to do a better job thinking about and discussing. Indeed, if you take Cowen's book seriously, then going forward, we should be focused on a few questions:

1. How do you accelerate the pace of innovation? Cowen's answer on this front -- give scientists more social cachet -- isn't convincing. If that's really the direction he wants to take this, the answer is, "Give them more money. A lot more money." That, after all, is why Wall Street and law command such respect. If the salaries for entry-level engineers beat the salaries for entry-level bankers, more kids would become engineers, and being an engineer would seem a lot cooler. Status follows money, and the problems Cowen is pointing out are too large for quarter-measures.

But even more money may not good innovation. After all, there'd already be more money in science and engineering if those who're already in the profession were coming up with lots of marketable ideas. The grimmest section of the book, in fact, is the optimism Cowen brings to the conclusion. Unlike the rest of the book, this is little more than a loose assertion. He thinks we'll find more fruit, but it's not clear why he thinks that. Perhaps there'll just be less innovation in the years to come. This is, however, something the American political system is both bad at talking about, and scared to talk about. In the State of the Union, for instance, Barack Obama essentially presented the problem as too much innovation coming from China. Which brings me to No. 2.

2. How do we make developing countries into advanced countries? China and India and other rapidly growing companies are currently picking a lot of fruit we've already picked. That's to be expected. But we need them to start growing their own fruit. The faster they educate their populaces and move people from low-productivity jobs with little opportunity for innovation and into higher-productivity jobs with more opportunities for innovation, the better off we'll be. Part of the reason that Europe enjoyed fast growth in much of the 20th century is that America invented things that improved Europe's economies, and Europe, in turn, made advances that helped us. When China begins inventing things that we need -- say, an extremely cheap way to do MRIs -- and demanding more of the products we make, that'll be a big help.

3. How do we get more value out of our health care and education dollars? This is where a lot of our money is going, and it's also where advances could do the most good. Unfortunately, the current trend is toward rapid growth in costs and, at best, stagnation in quality. If health care comes to consume 25 percent of our economy and we're not living substantially longer or healthier lives than we are today, that'll be a lot of growth we wasted. And growth we waste is little better than growth we don't have. But education and health care are firmly part of the political argument, and the political argument is becoming less and less focused on solutions and more and more about acting out resentments and anxieties and arguing about things we know how to argue about. In the health-care sector, for instance, we spend a lot of time talking about insurers and very little time talking about how to coordinate care for the chronically ill. Given what we want out of the system -- lower costs and more health -- that's downright backwards. In education, we talk often about unions but rarely about poverty or early-childhood programs.

4. How do we improve our political system? "We should have a greater awareness that there's a political malaise and should not add to it" strikes me as a little passive. If, as Cowen says, our political system is going to become increasingly polarized, then perhaps it's time to consider reforming it such that polarization doesn't bring it to a halt. A world in which we're innovating less and our political system is becoming more sclerotic and divided does not sound like a world in which America is going to prosper.

5. What exactly do we want? In the case of health care and education, we're seeing increases in GDP and in spending and in jobs but we don't seem to be getting much back. As such, the focus has turned to cost control. But cost control isn't really what we want. In a world where we were getting more than a dollar of value for every new dollar we spent in those sectors, we might want to spend much more on them. The problem in those sectors is insufficient value more than exploding costs, and it might be helpful if we thought about that more clearly.

Conversely, in the case of the Internet, there's certainly a sense that it's adding a lot to our lives, but we're not seeing much in the way of GDP increases or new jobs. Maybe the problem isn't with the Web so much as it is with how we're trying to measure it. An Internet that delivered more in revenue and jobs might deliver less in value and increased living standards.

And then there's the case of the financial sector, which was adding quite a bit to GDP but very little to the actual economy -- and that was before the bust. Perhaps we need to think harder about how to measure value, as chasing some of our current measures for progress might not leave us with as many actual improvements as we hope.

By Ezra Klein  | January 31, 2011; 9:02 AM ET
Categories:  Books, Inequality  
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Comments

It sounds like what Keynes wrote about regarding shrinking marginal efficiency of capital and "euthanasia of the rentiers." So far those predictions have been wrong - hopefully they will continue to be wrong as we surprise ourselves with new innovations.

Posted by: jduptonma | January 31, 2011 9:32 AM | Report abuse

"The problem, as Cowen points out, is that the Internet is not yet employing many people or creating much growth. We needed a lot of people to build cars. We don't need many people to program Facebook."


I'm struggling with gtting past this assertion. Facebook is not the Internet. There are a huge number of people who are employed because of the internet - people like me who work for a company you've never heard of, who are delivering services online in a way that was impractical 10 years ago and impossible 20 years ago. And the internet isn't just software - its companies like Cisco, Intel, Motorola, and whomever manufactures fiber-optic cable.

The notion that innovation overall is slowing is laughable as well. People now carry telephones with more storage & raw computing power than the desktop I bought 15 years ago.

Posted by: bsimon1 | January 31, 2011 9:33 AM | Report abuse

" In a world where we were getting more than a dollar of value for every new dollar we spent in those sectors, we might want to spend much more on them. The problem in those sectors is insufficient value more than exploding costs, and it might be helpful if we thought about that more clearly. "

Except we get much less from that when we try to give expensive healthcare to unproductive people, or build $500 million schools, or hire 15 teachers to do the job 12 teachers used to do.

Posted by: krazen1211 | January 31, 2011 9:38 AM | Report abuse

Ezra,
Will definitely get the ebook.
Quick tech-y question. How do you get passages from your ebook into Endnote? When I read paper books, I use a pen scanner for long passages. But the frustrating thing about my Kindle is I can't export my highlights and annotations.

pheidole

Posted by: pheidole1 | January 31, 2011 9:40 AM | Report abuse

Delivering the same product capability at a lower cost actually decreases GDP. Most of the 'internet' stuff is very productive and doesn't require much in the way of employees.

And the stuff that gets made using lots of employees is increasingly being made where employees are cheap - China and India.

Now the stuff that is lagging and increasingly expensive is the stuff that requires high levels of manual work -- education and health care.

There are very few examples where the capability of automation have been used to displace manual efforts in education. (In health care the substitution of automation for manual efforts continue where it is possible, but the demand for services grow. And there is no substitute for manual changing of dressings and elderly nursing care (yet, although Japan is working on robots for those tasks).

Some of the gains in education are hidden - what used to take a long time to research is now available via the internet almost immediately. Teaching math in school, still being done by hand by the teacher. A good video game would eliminate much of this work but that is not where the money flows.

The financialization of the economy has certainly moved the most capable intellects towards non-productive use and there has been little government guidance towards the R&D that would lead (in the future) to higher returns.

Posted by: grooft | January 31, 2011 9:47 AM | Report abuse

"In the case of health care and education, we're seeing increases in GDP and in spending and in jobs but we don't seem to be getting much back. As such, the focus has turned to cost control. But cost control isn't really what we want. In a world where we were getting more than a dollar of value for every new dollar we spent in those sectors, we might want to spend much more on them. The problem in those sectors is insufficient value more than exploding costs, and it might be helpful if we thought about that more clearly."

I am glad to see a liberal admit the former!

Unfortunately, millions of dollars in healthcare spending for the unproductives, $500 million schools in Los Angeles, and hiring 15 teachers when 12 would suffice is the definition of insufficient value.

Posted by: krazen1211 | January 31, 2011 9:51 AM | Report abuse

Railroads, Interstate Highway System, Public Health system, Water Sanitation, Public Education system all had HUGE expenditures of government money for these infrastructure projects.

All of them produced HUGE economic returns but would not have been funded otherwise.

The Post-Reagan political world is one where one party is actively campaigning against an organizing principle to effectuate these kinds of investments.

What do you think we could do if we channeled the expenditures on 2 wars into investments in social/public institutions and infrastructure?

California build a university system that grew their economy tremendously. Prop-13 was the beginning of the end, realized under the Governator to kill off public institutions or make them accessible only to those who can ALREADY afford them.

Posted by: grooft | January 31, 2011 9:58 AM | Report abuse

There is a lot of low-hanging fruit still to be picked in healthcare and education. Just for example, have you ever wondered why we endlessly waste time filling out the same personal information and then taking the same tests over again when you see a new doctor? Electronic record keeping has a long ways to go. Same in school. Every job requires computer skills, and yet most classes even in high school do not require the use of computers. Every test should be taken on a computer, and every class should incorporate computers in the classroom, not just techy classes.

Posted by: AuthorEditor | January 31, 2011 10:07 AM | Report abuse

Or maybe Cowan just doesn't know much about the things that the internet has enabled: more efficient brokerage and sales of goods, small businesses able to advertise and compete on a global scale, distribution of entertainment, especially comics and pornography, and supply chain integration.

Posted by: albamus | January 31, 2011 10:21 AM | Report abuse

I have yet to sit down with the book, and maybe this is an exception to the rule, but does he mention the Green Revolution (agriculture not Iran). The idea that China and India, or a growing population in general, is using the same technological advances that were invented a hundred years ago is off (if we there would be a lot more poverty). For example, here is the Wikipedia entry relating to India and rice production:

“In the 1960s, rice yields in India were about two tons per hectare; by the mid-1990s, they had risen to six tons per hectare. In the 1970s, rice cost about $550 a ton; in 2001, it cost under $200 a ton. India became one of the world's most successful rice producers, and is now a major rice exporter, shipping nearly 4.5 million tons in 2006.”

I will need to read the book to understand the other points, specifically about the internet (i.e. is he leaving out service providers, the vendors building the physical computers that the internet runs on, etc.).

@Chris_Gaun
chrisgaun@gmail.com

Posted by: chrisgaun | January 31, 2011 11:02 AM | Report abuse

While its very difficult (maybe impossible) to empirically quantify the rate, or even amount, of innovation, there is great rational appeal to the "low-hanging fruit" thesis. I've always wondered if this thesis is truly a logical extension of the fact that intelligence is not cumulative. the comical example i read somewhere once was that if a puzzle requires an IQ of 80, and there are two monkeys with an IQ of 50 each, together they will not be able solve the puzzle. This is reflected in a shift from individual innovation to institutional innovation as well. Not long ago, individuals with ingenuity were regularly solving incredible problems with limited resources. That is less true today, where R&D is really an institutional effort. I think this is because as our problems become more complex, there are less 50 IQ puzzles, and our institutions do not aggregate our intelligence in a linear fashion.

Posted by: ethanadennison | January 31, 2011 11:10 AM | Report abuse

don't have a kindle. Is the article the length of 2 New Yorker articles circa 1970s or circa today?

Posted by: bdballard | January 31, 2011 11:11 AM | Report abuse

"After all, there'd already be more money in science and engineering if those who're already in the profession were coming up with lots of marketable ideas."

I don't know how true this necessarily is. I'm thinking of a story Richard Feynman tells where at the Manhattan Project, a guy from the government came around and asked them for ideas on how nuclear technologies could be applied to various things. Feynman pushed back at the guy, saying "oh, it's obvious," and the guy said "no, it's NOT obvious!" Feynman finally rattled off a list of ideas (electricity generation, nuclear subs, etc). 3 months later the guy came back and said he'd filed patents for various things in Feynman's name. Now, as far as I know, none of them made him rich, but I don't think we can deny nuclear energy has had a MAJOR impact on GDP, quality of life, etc. Somehow, this guy running around Los Alamos was part of a system that was successful in moving new ideas to the right market.

This is all a long way of saying that one of the tricks to innovation is that the people and institutions who figure out how to apply and monetize it aren't necessarily the same folks as those who invent and really understand it. There's different kinds of IP rules needed for different kinds of innovation, and entirely different structures to make these things fulfill their potential.

The problem we may face is less one of innovation dearth, and more of institutional un-fitness: we appear to be unable to bring the innovations of our era into the areas of our economy and society where they could have a greater ROI. Kind of like the Inca had wheels on toys, but not on wagons. It wasn't a lack of innovation that held them back, but a lack of institutions that could make an idea move from the "toy" category to the "transportation" category.

I think we are seeing something similar here. And on a smaller note, it is yet another indictment of Wall Street--their entire raison d'etre is the efficient allocation of capital, and they appear to really, really suck at it. We need a new model, and they're standing in the way.

Posted by: theorajones1 | January 31, 2011 11:31 AM | Report abuse

I agree with bsimon. This thesis could have been recycled from 50, 100, 200 years ago. Every author who has posited that all the "big" or "easy" innovations has already been discovered has been wrong and likely will continue to be wrong.

Not to sound like Wired magazine, but it's more likely that the speed of innovation is actually increasing. In so many areas of science, monumental breakthroughs are being made and then applied.

And this:

"The Internet is not yet employing many people or creating much growth. We needed a lot of people to build cars."

Really? You know what employed more people than auto manufacturing?

Driving people where they needed to go in horse-drawn carriages; breeding and maintaining horses; building wagon wheels, etc. And when people were not able to pay for these services, they had to expend their own time and energy -- while not making money.

Every innovation reduces the total (hu)manpower required to do a job or it's not an innovation. That's not a bad thing, it's a good thing.

We don't employ people just to keep them busy; we employ them to provide value. And a true innovation allows people to enjoy the increased output of the innovation while providing opportunities for them to contribute to its value.

The internet (and thousands of other modern innovations) are exactly that.

Posted by: dpurp | January 31, 2011 12:24 PM | Report abuse

Given your analysis, policy sounds easy.

You say reduce incentives to go into law and finance. An easy way to do that would be higher taxes on high incomes. It is easy to reduce economic incentives and, if they push people in the wrong direction as you believe, it's a no-brainer.

On education you just said that you think that early childhood education is low hanging fruit.

On health care reform you mainly argue that no one (including Cowen) pays any attentions to the parts of the ACA which might improve efficiency. I'd say the political system addressed health care rather well and you are more enthusiastic than I am.

Frankly, given your analysis, the problem seems to be that we have this Republican party, when we would be much better off with a debate between Social Democrats and new Democrats.

I'm pretty sure Cowen doesn't feel this way. But it sure seems to follow from his analysis.

Posted by: rjw88 | January 31, 2011 2:55 PM | Report abuse

"China and India and other rapidly growing companies are currently picking a lot of fruit we've already picked. That's to be expected. But we need them to start growing their own fruit. The faster they educate their populaces and move people from low-productivity jobs with little opportunity for innovation and into higher-productivity jobs with more opportunities for innovation, the better off we'll be."

Um, educating kids and moving them from less productive to more productive jobs is one of the low-hanging fruits that Cowen was talking about China and India copying. That is NOT an example of them picking their own fruit...

Posted by: davefs | January 31, 2011 3:20 PM | Report abuse

"The basic thesis of the book is that advanced economies are slowing down because the pace of innovation is slowing down"

I don't think that's the point, it's that the job generating impact of innovation is slowing down. We aren't inventing things that require that many more workers (like the automobile).

"Cowen's answer on this front -- give scientists more social cachet -- isn't convincing. If that's really the direction he wants to take this, the answer is, "Give them more money. A lot more money." "

That's not the answer. The way to do it is to not allow government funded education in other fields. The number of people getting a BA in English or Psychology far outstrips the demand for those degrees. The other way to do it is to restructure the financial system so that we don't have these huge government backed risks. Pull back on the amount of risk the government is capable of backing. All of sudden, the short term high risk profits of the financial sector will be smaller.

Posted by: staticvars | January 31, 2011 3:46 PM | Report abuse

"This thesis could have been recycled from 50, 100, 200 years ago. Every author who has posited that all the "big" or "easy" innovations has already been discovered has been wrong and likely will continue to be wrong."

The difference is that he is saying it has been increasingly true for the past forty years, not the present. And he is not saying exactly that, it's just that the recent inventions aren't causing job growth in the US, because a lot of our labor is too expensive.

Posted by: staticvars | January 31, 2011 4:31 PM | Report abuse

@staticvars: I realize I didn't read Cowen and I'm only reacting to a quick blog post. But, fine, if his point is as you say -- which seems a different interpretation than Ezra expressed -- I can't argue with that. (He might be right or wrong, but I'm not equipped to know.)

Posted by: dpurp | January 31, 2011 8:15 PM | Report abuse

We are stagnating because we have become fat, dumb and lazy. We innovated ourselves out of jobs by making it easy for people more industrious than us to do the work. When you live in a society where Snoki and the Kardasians are role models, and teenage pregnancy is more common than not, you need not ask anymore questions. of course, you Liberals will promote more spending on education, even though we already spend more than all other industrialized countries other than Luxenborg.

Posted by: marknelso | February 2, 2011 6:56 AM | Report abuse

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