tyler cowen systemic slowdown

The subject of Tyler Cowen’s book—the slow and at times even negative economic growth of the American economy for almost the past forty years, with all its distressing social and political consequences—is of singular importance; given that all the advanced capitalist democracies are experiencing the same protracted stagnation, the subject is perhaps the most serious systemic question of our time. We would all wish for a better understanding of the causes of the slowdown, in order to find ways to break free of the quandary that is increasingly threatening the workings of democratic polities across the developed world.

From the web, we quickly learn that Cowen is a professor of economics at George Mason University in Virginia with two personas: he is an able economist, reputed to be influential not just because he has published several books, but because his views on diverse issues appear frequently in several leading newspapers; but he is also a polymath or a dabbler, depending on how one evaluates his voluminous publications and blogs on numerous topics relating to the economy, politics, philosophy, culture and even ethnic cuisines. Regrettably, The Great Stagnation is an intellectual trompe l’oeil by a dabbler. The book is reminiscent of a campaign speech by a politician on the stump, touching eloquently on any subject that might beguile the populace to vote for him, while cherry-picking the facts to enhance his arguments. So Cowen, writing with undoubted journalistic facility, has enchanted enough readers to make his little book a bestseller, while often making dubious use of the data and of the results of other economists’ research.

Cowen, however, differs from the average politician in two, closely related respects. Firstly, a candidate generally speaks as a member of an identifiable political party, while Cowen has for some reason decided to obfuscate his own ideological leanings, proposing himself instead as a spokesman for ‘the honest middle’—a piece of campaign-trail hokum if ever there was one. In claiming to speak ‘above the din’ of partisan debates, Cowen avoids the kind of ideologically principled discussion indispensable for real debates over strategic decisions in a democracy. Secondly, politicians are expected to propose credible policies that will deliver tangible goods to their electoral base. In contrast, Cowen has eschewed rigorous, fact-based analysis and properly evaluated policy proposals in favour of catchy phrases about ‘low-hanging fruit’, ‘getting sick’ and ‘feeling better’, suggesting a cartoon Uncle Sam with a temporary bout of dyspepsia. As a result, his slender volume has garnered at least eighteen high approbations, listed in the opening pages as well as on the back cover; all by well-known journalists, mostly from leading newspapers.

Nevertheless, this strategy has exacted a very high price on the book’s argumentation, with the result that both its portrayal of the principal reasons for the prolonged stagnation affecting the capitalist democracies and, above all, its proposal for reinvigorating an anaemic economic order are largely meretricious. This is evident in Cowen’s core observation, on which all the rest of his discussion is directly or indirectly based:

In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labour, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. That’s it. That is what has gone wrong.

This is fallacious in several respects. First, Cowen fails to establish the validity of his broad assertion that the us enjoyed ‘low-hanging fruit’—that is, easy pickings—from the 1600s to the 1970s. He does not offer even the minimum necessary historical discussion of the roles played by politics, culture, education, institutions, trade and other factors in shaping us development; this is American economic history without slavery, the cotton trade, the Monroe Doctrine, the Civil War, Bretton Woods, the Marshall Plan or the fiat dollar system. Nor does Cowen ever explain the interrelations, or relative specific weight, of the three factors he identifies—free land, immigrant labour, technological change—as having been responsible for American growth rates up to the 1970s. In fact the important matters of land and labour turn out to be little more than stage-setting for Cowen’s real preoccupation, the ‘technological plateau’.

Cowen bases his central claim that the average rate of innovation peaked in 1873, and hence that the ‘fruit’ of technological change had already been plucked by the 1970s, on the work of Jonathan Huebner, a Pentagon scientist. As everyone familiar with the history of technological change knows, Huebner selected data for the table which Cowen reproduces to show ‘the rate of global innovation relative to population since medieval times’ using highly subjective criteria to define technological change, as well as patent data, which is notoriously problematic. Without offering any intellectual justification for it, Cowen uses Huebner’s global data, divided by global population, to derive a rate of innovation for his discussion of the effects of technological change on American economic performance. Apparently he agrees with Huebner who, unaccountably, believes that the average person’s capacity for invention is affected by the size of the total global population. The Great Stagnation’s assertion that the rate of innovation peaked in 1873 ignores the question of quality. For Cowen, a technical advance in the nineteenth century—when ‘innovation was easier’ and ‘could be done by amateurs’ with little education—has the same value as a twentieth-century innovation, an era when virtually all higher quality advances were made by extremely well-educated specialists. These modern innovations transformed human life far more fundamentally than did those of the fifteenth, sixteenth and seventeenth centuries, which Cowen, drawing on Huebner’s work, includes in his table.

More fundamentally, The Great Stagnation’s account of the ‘technological plateau’ fails to grasp the actual historical processes by which far-reaching technological innovation interacts with economic growth. The successive industrial revolutions have each experienced a prolonged ‘breakthrough’ phase, during which labour productivity, the major determinant of the wage level, grew quite slowly. This is followed by a ‘maturation’ phase, when productivity rises much more quickly. In the first industrial revolution, led by steam energy, beginning in the 1760s, it took decades of time-consuming training and experience to turn an English peasant into a skilled textile worker. The same occurred in the breakthrough phase of the second industrial revolution, beginning in the 1880s, led by heavy industry and the use of electricity and petroleum. It took many years to transform immigrants and their sons into competent employees in factories mass-producing automobiles. In the mid-1970s, when the output of computer chips began to increase exponentially, what we can call the third industrial revolution began. This is an ongoing revolution based on computers and a wide range of new manufacturing methods, products and services that have been created due—directly or indirectly—to the Information Technology revolution.

This has meant that labour productivity could and did increase only slowly, just as had occurred during the first 30–40 years of ‘the breakthrough’ phase of the first two industrial revolutions—and for essentially the same reasons. To transform a draftsman into a cadd (computer-aided drafting and design) specialist or to enable a typist to become a proficient user of a computer has taken a long period of learning and experience. It is little surprise, then, if since the 1980s us labour productivity has risen at rates mostly between 1 to 2 per cent per year, during this breakthrough phase of the it revolution. This slow growth, in contrast to the much higher rates of labour productivity during the 1940–80 period, is misinterpreted by Cowen as proving that the American economy had reached a ‘technological plateau’, as well as blindsiding many economists who are uninformed of what had happened during the breakthrough phase of each of the two preceding technological revolutions. In this phase, as the work of Yasusuke Murakami and others, myself included, has shown, firms have to struggle to devise a new business model as the capital markets, legal systems, social institutions and many other behaviours and practices continue to change, responding to the evolving needs of the phase.

Cowen claims that if the third technological revolution is yielding any new fruit today it is only ‘in our minds and in our laptops and not so much in the revenue-generating sector of the economy’. This is an unsupported, impressionistic assertion. To see why, we need to consider what is happening in the ‘maturation’ phase of the it revolution, a stage that lasted about 60–70 years in each of the preceding two industrial revolutions. History, to be sure, does not repeat itself. But the insights gained from studying the maturation phase of the first two industrial revolutions, taken together with what we are observing today in many industries and in a wide range of innovative efforts, would flatly contradict Cowen’s assertion that all the ‘low-hanging fruit’ has already been plucked.

Here we can only summarize the examples, but little effort is needed to discover that the range and quality of products and services, productive efficiency and revenue-raising capabilities are today manifesting sustained upward trajectories in numerous industries, thanks to increasingly sophisticated and varied uses of computer-related technology, including rapidly multiplying utilization of computer chips in cars, appliances and many other products; fast-developing cloud sourcing of data; the growing use of nano-technology, laser technology and 3d ‘printing’; accelerating uses of expanding knowledge in genomics, such as ‘personalized’ medical treatments based on each patient’s dna; rapid progress in a wide range of technologies being put to use in the energy sectors; and the rapidly increasing and unprecedented uses of more ‘intelligent’ machines of all types, including robots. It should be noted that the most recent figures from the us Department of Labor show that the annual rate of increase in labour productivity for the 2002–12 period ranged between 0.6 and 4.5 per cent, with an average rate of 2.06 per cent. This figure should be seen in contrast to the well-known pessimistic estimate made in a 2010 nber paper by Robert J. Gordon, under various stringent and subjective assumptions, of 1.7 per cent for the 2017–2027 period. (Indeed, given how much Cowen’s arguments on the third technological revolution and on low productivity growth seem to echo Gordon’s earlier accounts, it is surprising to see no reference to his work in The Great Stagnation.)

The reasons why the living standard for a large majority of Americans has stagnated for the past forty years is not because the pace of technological change reached ‘a plateau’ during the 1970s, as Cowen claims. Rather, the causes lie in the persistent shortage of demand, the result of the combined effects of consumer satiety, on the one hand, and of the downward pressure exerted by globalization on American wages and widening income inequality, on the other. There is compelling evidence that, by the 1980s, a majority of consumers in the us and the other advanced-capitalist economies had reached a point of satiety, thanks to the fruits of the previous two industrial revolutions. Even without examining the data, we know that more and more Americans began to indulge in the excess consumption of food, their closets were filled with clothes they rarely wore, and they had begun to buy numerous things that, by any standard, they did not ‘need’. The same point can be made in other ways: American firms have been spending ever-larger sums on advertising, to convince consumers they have unmet needs they didn’t even know existed. By 2012, total advertising expenditures stood at 2.2 per cent of us gdp, or about $330 billion. Firms have steadily increased the number of products they offer, often by creating largely illusory or frivolous differences among products; as a result, the number of items carried by an average American supermarket quadrupled from around 10,000 in 1975 to a little over 40,000 in 2011.

These sales strategies were adopted by us firms, like those in other advanced-capitalist economies, because they had become saddled with a large amount of excess productive capacity. With only a few exceptions, the utilization rate of productive capacity has stood below 80–85 per cent since the 1980s. Not surprisingly, the rate fell in most industries to 60–70 per cent during the Great Recession of 2008–10. These levels should come as no surprise for the automobile and steel industries, where firms have been forced to merge, suffer losses, slash wages, adapt aggressive sales tactics and more during the past few decades. But we should note that the same excess supply situation is manifest in the service industries, where high rates of unemployment and underemployment, bankruptcies and a static real-wage level have been even more pronounced than in other industries over the past thirty years.

Furthermore, because of the increased globalization of trade that has dramatically raised imports from the low-wage, developing economies, many low-skilled workers in us manufacturing industries have joined those in the service industries to swell the ranks of the poor—those who can scarcely even afford to buy daily necessities, let alone live in adequate housing or take out health insurance. To make a very long and, by now, very well-documented story short, during the three decades of 1980–2010 the us Gini coefficient steadily rose from 0.372 to 0.451, the level it reached during the Gilded Twenties, known for the gaping chasm that existed in wealth and income distribution in the run-up to the Crash. In 2010, America’s Gini coefficient was the highest of all the oecd countries due to the stagnation of wages for employees in the service and manufacturing industries. Few would dispute the fact that the major tax cuts under Reagan and George W. Bush, which disproportionately favoured those in the highest income brackets, made a substantial contribution to disparities in income distribution. Simply put, although there were varying estimates because of varying methods of calculation, in 2012, 17.2 per cent, or approximately 60 million Americans are poor when poverty is defined—as it is by the oecd—as workers earning less than half of the median gdp per capita income.

These critical facts are central to any answer to the real question posed by the American economy: why is it that, with more fruits of the maturation phase of the third industrial revolution becoming available, and with average labour productivity higher than Gordon and other economists have predicted, the us economy is not doing much better? A serious answer to this question would need to ask what social and infrastructural changes may be needed, in order to take maximum advantage of the maturation phase of the ongoing technological revolution. How can we enable more poor citizens—whose number has been rising because of the reasons already discussed and as a consequence of the recent austerity policy—to escape their grinding poverty? Shouldn’t we have policies to increase demand, both public and private, and thus employment, by finding ways to upgrade infrastructure, reduce the disparity in income distribution, prevent further degradation of the environment, offer better, affordable medical care to more people, and spend more on education and research by increasing tax revenues? We would need to ask why the wealthy, whose income has risen disproportionately during the past forty years, should not be able to ‘bear’ a higher tax burden, before the government pursues further austerity policies to achieve the fiscal health of the nation. Evidence from the Bush era has entirely discredited the argument, based on supply-side, trickle-down economics, that taxes on the rich must be low because they are providers of capital; indeed the data suggests that the us economy has more than sufficient capital, given that corporations currently hold more than $2 trillion in cash and short-term papers, just waiting for investment opportunities.

In other words, the question posed by ‘the great stagnation’ is a political or systemic question that requires a principled answer, based on one’s own perspective on American capitalist democracy—one that Cowen takes pains to evade. All he can offer is the flippant suggestion that, for the us to get off its ‘technological plateau’, the status of scientists should be raised. This, he hopes, will help encourage more innovation: ‘We simply need to will it’, he adds. It would seem to be the inevitable outcome of Cowen’s rhetorical claim to stand in ‘the honest middle’ of the ideological spectrum that he clings to a brittle, technological-determinist explanation and avoids the larger social and political questions raised by the stagnating advanced-capitalist economies. In fact the book supplies evidence enough of his real political leanings, as a devotee of the free market and a languid White House; he singles out Ayn Rand’s view on the importance of science and refers at length and incongruously to the view of Peter Theil, co-founder of PayPal and a major financial contributor to the Republican right, that ‘technology is broken’. Paul Krugman’s well-known advocacy of the use of tax dollars to reinvigorate the economy is peremptorily dismissed as ‘putting the cart before the horse’.

Cowen has few qualms about wading into topics on which his command of the essential data is less than adequate. On both education and health care, Cowen offers only glib conclusions, plus pages of cursory observations pandering to both right and left, spiced by remarks on the ‘massive government distortion of incentives’ he detects in schools and hospitals, as well as government administration itself—as if their role was simply providing rents. And had Cowen been better informed, he could not have opined that Japan—with its almost annual turn-over of prime ministers, its national debt-to-gdp ratio exceeding 200 per cent and still increasing, its economy mired in a prolonged deflation, its Gini coefficient fast approaching the American level—‘is an object lesson in how to live with a slow-growth economy’.

Cowen’s brief chapter on the financial crisis has some damning criticism of the principal culprits—bankers, regulators and various groups of opportunists. But the upshot of his argument that the Fed and the bankers were basing their assessments of the risks involved in the asset-price bubble on estimates of 3 per cent annual growth is to let them off the hook—‘many millions of people were complicit, whether intentionally or not’. Cowen offers no critical assessment of the systemic failure that resulted from the abrogation of the Glass–Steagall Act and the passage of the Commodity Futures Modernization Act, which legalized over-the-counter trading of derivatives, or any of the other legal changes and lax enforcement of pertinent laws that attest to the political power of the financial institutions and their ability to influence decision-making in American capitalist democracy.

Had Cowen made serious efforts to answer these systemic questions, his book could have been a valuable contribution to the discussion. Instead, we are offered only such hortatory and platitudinous counsel as: ‘We should have a greater awareness that there is a political malaise and we should not add to it. Be tolerant, and realize there are some pretty deep-seated reasons for all the political strife and all the hard feelings and all the polarization’, and other similarly hollow advice. This book missed an opportunity to help a broad readership to wrestle with some of the most important issues of our time. For we should end by noting that The Great Stagnation could not have become a bestseller were it not for the great hunger in the us and elsewhere for a hard-headed discussion about the realities of the stagnant capitalist economies, and about the ineffectual or even detrimental policies that are currently being applied.