'The Great Stagnation'
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.
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