Just finished a book by Tyler Cowen, “The great stagnation : how America ate all the low hanging fruits”. It is a short book with depth, which lays out facts and ideas in a very crisp and engaging manner.
The author’s theory is that the US have reaped the low hanging fruits of productivity, and that its future material and financial growth is at risk. He details three key areas that fueled past productivity, but will not drive progress going forward :
– access to free land, from the 17th century to the end of the 19th century
– improvements in education. The percentage of the population graduating from High School grew from 6% in 1900 to 60% in 1960, and 74% today. Only 0.25% of people went to college in 1900, a number which has grown to 40% today. But we seem to have reached the limit of these improvements, as college drop-out rates have grown from 20% in the 60s to 30% now …
– a host of technological breakthroughs from 1880 to 1940. These have slowed down since then, and as the author puts there is not much difference between a kitchen or a house) today and one in the 50s in terms of the basic functionalities that had then become available (fridge, TV …). 80% of the economic growth from 1950 to 1993 actually came from innovations that happened before that time.
The author links that last point with the drastic reduction in the rate of growth of the median income, starting in 1970. His view is that discoveries since then have been geared towards private goods rather than goods for the larger public. The impact of the Internet is much more complex though and there is a whole chapter on that, which I will comment on later.
There is a whole section then looking at how we have tended to overestimate productivity through the GDP calculations :
– government spending is always factored in the GDP at cost, regardless of the utility or value created. This does not take into account the fact that as government grows there will be a diminishing return on that value. Since the 19th century the cost of government (excluding redistributions) has grown from 5% of GDP to 15-20%, which means we have overestimated the GDP growth, and the productivity, derived from that growth in spending.
– there is a similar issue with Healthcare, which is 15% of GDP in the US. Its efficacy is impossible to determine, and there is an established disconnect across modern countries between the spend, and metrics such as average life span.
– same thing with Education, which represents 6% of US GDP. Reading and mathematics scores at the age of 17 have not changed since the early 70s, while the expenditure corrected for inflation has doubled per pupil.
The looming question that the author then tackles is of the impact of the Internet. To summarise, he says that the Web provides huge innovation for the mind, not for the economy. It makes us happier and enables personal growth, but does not impact the economy very much, as so much of the content is free or very low cost.
So the Internet is also not properly reflected in GDP and productivity metrics, and that is one area where GDP underestimates the positive impact of technological change.
The issue though with the Internet revolution are the following :
– we have been counting on real productivity and material economic impact to generate future revenues and pay off our debts …
– the benefits from that revolution are unequally shared. Using the Internet positively is a function of one’s cognitive powers, while past inventions were usable equally by everyone.
– it creates few jobs. Google 20 000 employees, Facebook 1700…
The author then goes into an analysis of the current Economic crisis, which he sees as a result of overconfidence across our society in productivity. I am not convinced that should be the only explanation, but this is at least a refreshing view and a new angle.
Looking forward, despite the gloomy title of his book, Mr Cowen sees some positive future trends :
– india and china growth will create larger markets that will reward innovations again. They have so far grown by imitating the west, they will probably fuel innovation in the future.
– Internet might start generating growth. It creates a “cognitive surplus” (Clay Shirky) as billions of people are getting smarter and better connected, which would have positive effects on innovation.
– the Obama administration has taken steps to reform education
He conclude with an appeal to raising the status of scientists in our society, to make science and technology aspirational and rewarding careers for our children … Could not agree more !