The Great Stagnation

NATIONAL POST: U.S. has run out of ‘low-hanging fruit’ and needs the next generation of innovation

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This article originally appeared in National Post

Hailed by Foreign Policy magazine and The Economist as one of the world’s most influential thinkers, Tyler Cowen, an economics professor at George Mason University, has also won a devoted following for his writings on eclectic subjects — from American arts funding to the nature of fame and the economics of lunch. His book, The Great Stagnation, argues the U.S.’s current economic slump is just part of a decades-long period of stagnation. This is not the result of policy, but because the country has run out of “low-hanging fruit.” The National Post’s Jen Gerson interviewed Mr. Cowen before his visit to Calgary Thursday to speak in the Post-sponsored Teatro Speaker Series. Here is an edited version of their conversation.

Q Your book offers a surprising thesis for most people who are Internet addicts.

A People who love the Internet are much better off than people who do not. But if you look at the median family, they have Internet instead of TV, and their real-estate, health-care and education costs are much higher, and the net gain there isn’t that strong.

Q So having an iPhone doesn’t necessarily negate the fact it costs me a lot more to get ahead and to live, essentially?

A Correct.

Q In Canada and in the U.S., we believe getting a college education or a higher education degree is a universal good, that it will lead to a bigger middle class and a wealthier society. Your thesis seems to argue this isn’t the case.

A Obviously, it’s still better to go to college — and a lot of people who don’t go could go and should go — but it’s not going to save us. If you have a lot of stagnation, that little pie is only increasing so much and any group of people going to college doesn’t make that big of a difference.

Q There’s a notion a college education is a ticket to a middle-class life, but it seems the middle class only gets so big and then you wind up with a lot of people with a college education that doesn’t do them much good.

A You see in Europe, the Middle East and a lot of countries a large number of people with college educations and there’s literally nothing for them to do. We’re not at that stage, but education without the surrounding infrastructure is of limited value.

Q What needs to happen so the innovation jumps we’ve seen over the last 100 years can continue into the future? How do we restart this machine?

A I think a lot of it is just time. The arrival of innovations are lumpy: a big thing happens, there’s a lot of spin off and a long period of consolidation. Science hasn’t slowed down. There is still a lot of new things being discovered, but they don’t translate right away into new products. Like genomic medicine, it’s really not a thing yet, but the science is there.

So a lot of what we need to do has already been done. That’s the optimistic spin, it’s just going to take another 10 or 20 years for things to pay off. For some time to come, people are going to be very disappointed.

Q Do people need to re-adjust their expectations?

A In the meantime, absolutely. We’re spending and borrowing as if we lived in a world of 3% growth and we do not.

Q Is there anything else you’re going to discuss while in Calgary?

A Canada is a special case because it has a lot more resource wealth per capita than do most countries. Resource prices are generally high and they have been high, but the thing to keep in mind [this is] because other countries have to pay a lot for stuff. The success of Canada and Australia has, in some regards, been premised on the slowdown of other countries — that your country does better when other countries have to pay more. Canada and Australia are in fine shape, but should also be a little more nervous than they are.

THE WASHINGTON POST: Can We Ever Do Better Than the Toilet?

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This article originally appeared in The Washington Post

The cover story for this week’s Economist is on one of our favorite topics: the debate over the state of innovation — whether its slowing down, speeding up and what it means for economic growth. In the grand tradition of the magazine, the authors are anonymous, but there are two pieces on the debate over whether innovation has slowed. The shorter of the two asserts that we have yet to develop “an invention half as useful as” the toilet, going on to state that “the biggest danger” to the fast-flowing juices of innovation in the 21st century is government. The second, longer piece is a tour of the current debate over whether innovation and new technology have stopped fueling growth. The conclusion: take claims that innovation and new technology are no longer fueling economic growth with a grain of salt. The innovation engine continues to churn, just not in the way it once did.

“There will be more innovation,” writes the cover-story’s author, “but it will not change the way the world works in the way electricity, internal combustion engines, plumbing, petrochemicals and the telephone have.”

The longer piece also addresses the work of George Mason University professor and economist Tyler Cowen, mostly from his 2011 book titled “The Great Stagnation.” Asked what he thought of the piece, Cowen said via an e-mail Friday that he thought it was “excellent.”

He went on to say that a “key distinction” needed to be made between ”whether we have had lots of recent innovation” — he thinks we have — and “whether those innovations have much raised typical standards of living for Americans,” which he says is “much less clear.”

“Looking forward, I am optimistic actually,” Cowen said. ”Science has not stopped, it simply gets turned into practical products at a very uneven rate.  The new question will be who is poised to benefit from the forthcoming stream of advances.”

The debate over whether innovation has stalled will very likely continue well after this and many other pieces are written. That said, at least in so far as the toilet is concerned, the Gates Foundation already has an initiative to fund inventions to improve that particular technology. The Foundation’s work, however, did not make an appearance in either piece. So, while they may not be inventing something new, different and completely earth-shattering, at least there are people trying to improve on our existing commode technology.

Notable in the longer cover story, although perhaps not central to it, was this drawing of a thick line between innovation and technology:

Innovation and technology, though talked of almost interchangeably, are not the same thing. Innovation is what people newly know how to do. Technology is what they are actually doing; and that is what matters to the economy.

It’s an important distinction to consider, particularly as the consumer electronics show winds down — an event that was greeted with arelatively loud, collective yawn on the part of tech writers. The next, great, industry-transforming invention may not have been unveiled in Las Vegas this week, but an absence of new technology, as outlined above, doesn’t necessarily mean a slowing of innovation.

 

TIME: What If America’s Best Ideas Were Behind It?

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This article originally appeared in Time

This is a “what if” interview from the World Economic Forum’s Risk Response Network. To view the rest of the series, click here.

As the U.S. stands at the brink of the fiscal cliff, the narratives of decline are legion. The World Economic Forum, in collaboration with TIME, spoke with Tyler Cowen, a professor of economics at George Mason University and author of The Great Stagnation, on the economic history underlying the current dysfunction. He warns that innovation in the U.S. has reached a plateau and a long period of stagnation awaits.

What makes you think America’s golden age of innovation is in the past?

I was born in 1962. When you think back to the world of my childhood, in the Sixties and Seventies, it’s not that different from the world of today, in many ways. The experience of driving a car or flying a plane hasn’t changed much. A person from that time would be able to use a modern kitchen without thinking twice. Computers represent a big difference in our daily lives, but that’s just one dynamic sector. In contrast, if you think back to the period from 1900 to 1950, everything changed, in the United States as in Western Europe: people moved off the farms, people got electricity, people got running water, people got antibiotics, people got automobiles, planes started flying, radios and televisions appeared in ordinary homes. There were huge advances in just about every sector, and we’re not keeping up with that now. We had this unprecedented burst of progress and it’s really hard to have a comparably impressive second act.

How has this played out in the economy?

Well, since the recession ended in 2009, median income has actually gone down by about five to six per cent, which is not a good sign. Over the longer term, median income now is about where it was in the late Nineties, so that’s more than a lost decade in terms of progress in living standards. Interestingly, there’s a gender split. Median male wages were actually higher in the Sixties than today, which is stunning, while women have reaped the benefits of more education. Although there have clearly been gains, overall it’s far, far slower progress than anyone expected.

Do you expect more stagnation ahead?

If you just look at the last quarter as an example, the U.S. had just two per cent GDP growth, with a huge chunk of that coming from the Defence Department, which does not represent an improvement in how people live. The recession is supposed to be over. We have slow growth – and we’re still the envy of the developed world. We’re already mired in stagnation. So I think what it will look like say 10 to 15 years down the road is that the United States will be in a fiscal position similar to where Italy is today. Italy has not had rapid economic growth for quite some time. I don’t think the U.S. will ever look like Greece or Spain, but if you spend a lot and accumulate debt and don’t have much growth, things become very dire. At some point people start wondering if you can actually pull off the mix of spending cuts and tax increases which you will need.

Why has innovation stagnated?

There’s a bunch of different reasons, but the most fundamental is that there are some plateaus beyond which further innovation is hard. So say you invent the car and then you give people cars. It’s an awesome advance. Then you spend 60 years improving cars, giving them more comfortable seats, better sound systems and side air bags, that’s all great, but it just doesn’t match up to developing cars. So, you might think that in a much longer term future, we’ll have flying cars or teleporters, and maybe we will, but that’s not in the next 10 years.

Weren’t we supposed to have flying cars by now? What happened to the utopian predictions of the Sixties?

I think back then people overestimated the extent to which we would be able to get our hands on ever cheaper and cheaper energy. Fossil fuels powered the huge advances of the first half of the twentieth century, but the same won’t be said of the twenty first century. Also, I think improving transportation is just harder than people realise. Flying cars do actually exist, but they are expensive and dangerous. Driverless cars are probably the next big advance, and those will be great, but again you are talking 20 years out from now.

Another reason for stagnation is that our educational system isn’t improving at a very rapid pace anymore. So if you look back to 1900, when only six per cent of the US population graduated from high school, you could get huge gains by just sending more smart, motivated kids to school. Now the graduation rate is in the high sixties in percentage terms. You could make sure those students are getting a better education, or you could get better at reaching out to that remaining 30% or so, but all of that is much harder to do and I would say that institutionally, we’ve not always made the best decisions compared to some other countries.

If there’s no follow-up to the great burst of innovation, what will America look like in the future?

Well, I think the most likely scenario is that computers and the internet and smart phones will continue to form a dynamic sector. Artificial intelligence will improve. You’ll have a subset of the population who are very good at using those things, and very good at working with them. It won’t be just a small handful of people — we’ll be looking at maybe ten or 20% of the population. They will become much, much wealthier. For everyone else, wages will be stagnant in real terms, with a slight decline if globalization intensifies.

Even though it’s already brought us real gains, computing is still in its infancy, I’d say. The 21st century will come down to the question: is the computer as important as fossil fuels were? The answer depends on for whom. The fossil fuel boom benefitted almost everyone, but computers may not quite work out that way.

Who will be worst off in a stagnant America?

The people who do jobs where they’re basically competing against computers or against artificial intelligence. People with good technical skills, or just people who are really good managers or marketers, will do phenomenally well.

How will this play out on the world stage?

The other developed nations, like Japan and the countries of Western Europe, will follow broadly similar patterns. In terms of America’s influence, that’s been diminishing for a while, but you have to bear in mind that other countries have been diminishing too. If you look at the difference in clout between the U.S.S.R. to Russia, that’s taken a bigger fall. China, meanwhile, is an open question. It could get a lot stronger, but it could actually get weaker too. I don’t think there’s any simple narrative.

For the last 40 years or more, the Western world hasn’t actually changed that much. Now, all of a sudden, it’s starting to change more rapidly. I think people will be surprised by just how many institutions or even countries can get left behind. That’s part of the underlying tale of the Eurozone crisis. Everyone is focused on the bond rates and the currency, overlooking the notion that the world is totally changing, and if some countries aren’t right on it, it’s going to be pretty dire for them.

What can be done to reinvigorate innovation?

We should pay greater heed to science, both in terms of its social standing, but also in terms of public policy. We should get much more serious about education. While the government does need to provide better schools, ultimately just spending more money won’t do it: it has to be a cultural shift. Some modified model of the Asian style of parenting needs to spread to more families.

On the business side, there’s too much regulation and litigation, which stifles innovation. In my view there are two main areas that we don’t regulate nearly enough: finance and climate change. In most other areas though, regulations have become obstacles, and I would get rid of 70 to 80% of them.

Is there any silver lining to a stagnant future?

Well, I sometimes say I am a wage and revenue pessimist, but a happiness optimist. I think people will adjust in a lot of ways and in fact will, on average, be happier than they are today. Looking at the US, in terms of issues like diversity and social tolerance, I think it’s a much better country than it was a few decades ago. People with stagnant wages move and breathe life into new areas. Although you can’t avoid the reality on the revenue side – people need to pay bills, governments need to pay off their debts – this isn’t just some tale of unrelenting misery.

 

NATIONAL JOURNAL: Technology Is the Way Out of Economic Doldrums

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This article originally appeared in National Journal

FAIRFAX, Va.—Tyler Cowen says he’s a “small-l libertarian,” but as the prolific George Mason University economics professor talks about jump-starting the economy, it’s clear his ideology isn’t easy to pigeonhole. Cowen says he believes government can spur innovation, but he’s skeptical of regulations and would slash 80 percent of them. In his 2011 book, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, he argues that we can fix things. The United States, he says, hasn’t lost its greatness.

Cowen, 50, earned a Ph.D. in economics at Harvard but has further-flung interests. After watching the legendary Spassky–Fischer chess match in 1972, the 10-year-old Cowen started playing the game and, five years later, became the youngest state champion in New Jersey history. He gave up chess for economics. “More interesting,” he says. “And it pays better.”

His curiosity is eclectic. His most recent book, An Economist Gets Lunch: New Rules for Everyday Foodies,explores the food marketplace, which has interested him since age 20, when he first lived abroad in Germany.

“Food is about innovation, small business and big business, entrepreneurship. How do you judge quality? Globalization. Key themes for the world.”

Edited excerpts from an interview follow.

How big an economic fix are we in?

COWEN: It depends on relative to what. We’re still one of the richest countries in the world. A lot of the nonmaterial aspects of our life have gotten a lot better, including social tolerance. So it’s hardly dystopia. But it is still the case we’re planning and spending as if we’ll grow 2 to 3 percent [annually], and we might just grow 1½ percent. That is a disaster. We are not adjusting our expectations to the reality. That said, I do think we will get out of the great stagnation. A lot of the stuff that will get us out of it, we’ve already done. 

Such as?

COWEN: The Internet. The Internet is still [a] somewhat immature technology, and you’ll see education, health care, and retail all fundamentally restructured for the better through the Internet. The Internet and smart machines, software, artificial intelligence—that conjunction of concepts is getting better rapidly. 

Can we return to economic greatness?

COWEN: We have never left greatness. In some ways, you could argue we are the only great country in the world—though Canada and Australia have good claims. In absolute terms, this country has never been better. It’s just the rate of economic improvement has slowed.

Does government have a role in spurring innovation?

COWEN: If you turn on a TV show from, say, the early 1970s, it is remarkable how much life looks familiar. You could take the people from that show and put them [here and now]. Except for computer Internet stuff, they could operate everything. That suggests progress has been slower than [since] earlier in the 20th century. But Internet, computers, artificial intelligence, smartphones—all that has been phenomenal. The government should fund science much, much more—basic research. 

Must we change our expectations of what government will do for people?

COWEN: In terms of spending and borrowing, our expectations have been out of whack with reality since the end of the Clinton administration. Now, these forthcoming technological breakthroughs will help, but we shouldn’t always assume they will translate into tax revenue. You can see a lot of great things coming and still worry about the budget. Take the music sector, which for listeners is better now than it ever has been by a lot. But the revenue in that sector has kind of collapsed. Journalism, too: A lot of stuff is great for readers, not good for revenue. It’s because of technology. We need to be very careful about equating progress with more revenue. For now, this connection between revenue and well-being is a much bigger disconnect than in the past. I sometimes say I am a “happiness optimist” but a “revenue pessimist.”        

THE KOREA TIMES: KT Plans to Expand Fixed-Line Investment

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This article originally appeared in The Korea Times

KT said Thursday that it will expand investment on its fixed-line network to realize an efficient network infrastructure.

The firm’s business plan was revealed during its 17th IT CEO Forum under the theme “The Great Stagnation & Korea’s Transition” at the Renaissance Hotel in Gangnam, Seoul,

As the market wants access to the best network due to the widening use of long-term evolution (LTE), KT plans to save on costs and increase quality competitiveness by strengthening its “Fiber to the Home” fixed-line project for seamless connections everywhere by installing more local area networks (LAN) and upgrading LTE download speeds.

The mobile operator’s ultimate expansion goal is to lessen data traffic and expand its wired and wireless product portfolios.

KT is the largest fixed-line operator in Korea and is planning to use that advantage to assist its growing mobile business, the second-largest in the country, according to industry officials.

“No one can deny that KT is the largest and most powerful company among competitors when it comes to fast-speed LAN and fixed-line services. These projects can support its growing LTE business,” said one official.

The three domestic mobile carriers, KT, SK Telecom and LG Uplus have chosen different strategies to mark their respective services. SK Telecom offers free content downloads, while LG has opened up a cloud-based game platform.

The plan falls in line with George Mason University professor Tyler Cowen’s forum lecture on how the Korean economy will pull through the global recession using its growing power in Internet and cultural content businesses. Cowen was chosen as one of the most influential economists of the past decade by English weekly the Economist.

The professor met with KT Chairman Lee Suk-chae at the forum and discussed the future vision of the Korean economy and business philosophies.

According to KT, they pointed out some structural problems of the domestic economy and proposed solutions to bolster job creation in addition to finding a new business paradigm that will propel the information technology industry to become a new growth engine.

Since the completion of its nationwide LTE network earlier this year, the mobile operator has repeatedly stated that it plans to build other network equipment such as fixed-line telecommunications and WiFi to facilitate wireless connections. “We want to ensure that consumers from home to work or any other place are assured a stable connection,” said a KT executive.

“KT’s upgrade of its backbone network can impact not only its domestic telecom equipment businesses but the global competitiveness of domestic IT businesses,” said Kim Sung-man, head of KT’s network division. “We plan to cooperate with domestic manufacturers that have the technology and quality that is up to the global standard.”

Cowen also acknowledged in his speech that the proliferation of Korea’s creative industry offers significant gains to the domestic economy.

Around 300 executives from domestic information technology firms including 50 from startups attended the forum. The KT chairman also met Ofcom CEO Ed Richards Thursday on the sidelines of the conference, to discuss the future direction of telecom regulations. The two talked of the rising role of regulators as networks become increasingly important in the current era of smart devices.

“Though network-based businesses are growing rapidly, the value of telecommunications companies is declining,” said Lee. “Data traffic and revenue are disproportionate, which is weakening incentives to invest in networks.” Richards said, “The role of the regulator is becoming more and more important for the telecommunications market to develop continuously. Regulations should head towards the direction in which the interest of companies and consumers do not collide.”

The Globe and Mail: The World According to Tyler Cowen

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This article originally appeared in The Globe and Mail

He’s not as famous as Nouriel Roubini and has far fewer Twitter followers (roughly 23,000 versus 194,000 for Dr. Doom). And he hasn’t, like New York Times columnist Paul Krugman, won a Nobel prize. Yet 50-year-old Tyler Cowen is a formidable presence on the American economic landscape. Chairman of Economics at George Mason University in Virginia, he is a prolific writer and editor and blogger; his Marginal Revolution – co-written with his Canadian colleague Alex Tabarrok – is among the best read blogs in the field. His last book,The Great Stagnation, was a bestseller. His next, he told Globe and Mail reporter Michael Posner in an interview, will explore what the path out of the great stagnation will look like. Mr. Cowen will deliver a lecture Tuesday evening at Toronto’s Isabel Bader Theatre.

COWEN:When I wrote The Great Stagnation, I thought it would take 20 years for us to get out of it. Now, I think it will be 10 years. I don’t think the great run of innovation is over. I just think it’s on pause. The Western world has excellent institutions. Science is still vital. But part of our problem is behavioural – getting people to be motivated. Throwing more science at things isn’t always the answer. Insofar as I’m pessimistic, it’s behavioural issues, especially in education and health care.

 

How volatile will markets be?

We’ll see levels of market volatility and stock price collapses that will be, to many people, horrifying. So the headlines a year from now – I’m very pessimistic. But if you’re asking about the real economy several years down the road, I do not think we are headed for doom.

 

What sectors will lead the next great boom?

Artificial intelligence [AI] will be a significant breakthrough. There are new developments almost every day. Cheaper fossil fuels, particularly natural gas, will spur short-run growth. And an increasing share of national income will go to capital and high productivity. It may not feel like an end to stagnation for many workers, but in terms of aggregate output, the U.S., Canada and Mexico are poised to do extremely well. Mexico will find its way around the drug problems and become more integrated into the U.S. economy. It’s the great underrated nation in the world right now.

 

Can advances in AI create great numbers of jobs?

No. A lot of people will be hurt by it. Owners of intellectual property, and capital and manufacturing plants will do very well. Output will go up a lot. But in many areas, wages will fall and jobs will disappear. So the U.S. trend – falling labour force participating rates – will continue. But people who get quality education will be better off.

 

Many economists see China as the great growth saviour. You don’t.

You can’t grow at 10 per cent per year forever. It’s already been 30 years – the greatest growth streak in history. But China is slowing down very rapidly. It’s been investing about 50 per cent of GDP [gross domestic product] for a long time. It’s very hard to do that well. And they are massively corrupt. I tend to think they will never be as wealthy per capita as Mexico. I would call that a medium-hard landing. It’s here now. The slowdown will be very bad for parts of Africa and it will hurt Canada. But Canada has other strengths and will be fine. It will hurt Brazil and other resource-rich economies. I don’t think it will hurt the U.S. I don’t adhere to apocalyptic scenarios – no riots or rebellion. I just think they will grow much more slowly. The same thing is happening in India.

 

What’s your call on the future of the euro zone?

I think multiple countries will leave, but I’m not sure that’s the pessimistic forecast. The pessimistic forecast might be they stay in forever and all get dragged down by deflation. I’m a pessimist about the euro, but not about Europe. So the southern periphery, Spain, Italy, Greece, leave – Italy might be the first to go – and the rest stay. That will work just fine. But unless they want to give up democracy, I don’t see greater fiscal union as the answer. The economies will eventually recover. There is great human capital, a lot of strengths, and mostly good institutions. Austerity is not the main problem – it’s that their banking systems are coming apart at the seams.

 

Do you play the stock market?

I’ve been heavily in cash for some time, and paying down debt. I thought stocks were overvalued in the early part of the last decade. I was right too early, but I did not suffer in the financial crisis.

 

What’s the likelihood of a major war?

I’m worried about it, especially in the Middle East. I don’t think it would be good for the U.S. economy. Energy prices would go up. There’d be a lot of uncertainty, which the world does not need more of. And the issue of nuclear weapons is not trivial. It’s hard to get a good understanding vis-à-visIran. There’s a lot of misinformation. But we seem to be on a collision course.

 

Does it matter who wins the U.S. presidency?

It’s hard to tell. As people, [Republican leader Mitt] Romney and [U.S. President Barack] Obama are not that different. Both are in bad situations, for reasons not of their own making. If Obama wins, which seems more likely, we probably get more of the same – gridlock, nastiness. If Romney wins, we have to ask, ‘Do Republicans really mean what they’ve been saying?’ I think they don’t. It’ll be like the Bush years – right-wing versions of left-wing ideas.

 

Does Obama get enough credit for saving the global economy from collapse?

George Bush doesn’t get enough credit. He basically said, ‘This is over my head, but I’m going to back [then-U.S. Treasury Secretary Henry] Paulson and [U.S. Federal Reserve Board chairman Ben] Bernanke to the hilt,’ and he did. I give most of the credit to Bernanke. He was an absolute genius.

 

What about Russia?

I see a big brain drain, too heavy a reliance on resource prices and their politics is far from settled. And they are not reinvesting in education. So I’d say I’m a pessimist.

 

What credence do you attach to the Black Swan scenario – the possibility of a completely unanticipated event having a major impact?

It’s an interesting theory, but it’s miscategorized. These so-called unpredictable events are actually the classic events of history – war, financial panic, maybe pandemic in the future. They’re unpredictable because we make mistakes. The problem is us. They’re not actually black swans – not bolts out of the blue.

 

To what extent was America’s sense of exceptionalism damaged by 9/11, the Iraq war, and the 2008 financial debacle?

We have a much stupider version of exceptionalism now. It’s less fact-based. The better version has to do with our ability to reinvent ourselves, be self-critical and, if we screw up, come back to better ways of doing things. The stupider version is jingoistic and patriotic, and gets you into mistaken wars. So our exceptionalism has been traded in for a weaker version and it’s distressing.

 

Canadian exceptionalism often focuses on the virtues of our health-care and banking systems. Justified?

Canada has done extremely well in controlling health care costs. The question is how much is that because the system is better, and how much because health care doesn’t matter – Canadians are just healthier behaviourally. As for the banks, I’d say that when you have two countries next to each other, you’re best off if they’re run on different principles, say with respect to of risk aversion, as Canada and the U.S are. The banking systems are thus complementary. On our side, it’s not clear we’ve done anything to corral the banks. It’s not clear we will. I think we’re in denial. This is very worrying. As in the auto industry, where there is still excess capacity, the underlying problems have not gone away.

Business Insider: The End Of US Economic Growth

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This article originally appeared in Business Insider

Are the good times really over for good? A provocative new paper from economist Robert Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” makes just that case, or at least questions the assumption “that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely …  the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.”

Indeed, as the above chart shows, growth may be headed on a trajectory back to the zero-growth (or super slow growth) era before the Industrial Revolution.

Doubling the standard of living took five centuries between 1300 and 1800. Doubling accelerated to one century between 1800 and 1900. Doubling peaked at a mere 28 years between 1929 and 1957 and 31 years between 1957 and 1988. But then doubling is predicted to slow back to a century again between 2007 and 2100

Or to put it another way, per-capita real GDP growth could slow down to a rate of a mere 0.2 percent by 2100. That is roughly what it was for the 400 years before the Industrial Revolution.

The core of Gordon’s argument is that we’ve already picked the low-hanging fruit of innovation and new advances have provided less economic oomph:

The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers, the web, mobile phones) from 1960 to present.

It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004.

Many of the original and spin-off inventions of IR #2 could happen only once – urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.But Gordon thinks just maintaining current levels of growth will be difficult for six reasons:

1. Demographics:

The “demographic dividend” is now in reverse motion. The original dividend was another one-time-only event, the movement of females into the labor force between 1965 and 1990, which raised hours per capita and allowed real per-capita real GDP to grow faster than output per hour. But now the baby-boomers are retiring, no longer included in the tally of total hours of work but still included in the population. Thus hours per capita are now declining, and any tendency for life expectancy to grow relative to the average retirement age will further augment this headwind. By definition, whenever hours per capita decline, then output per capita must grow more slowly than productivity.

2. Education:

The second headwind already taken into account in the 2007-27 forecast is the plateau in educational attainment in the U.S. reached more than 20 years ago, as highlighted in the path-breaking work of Claudia Golden and Lawrence Katz (2008). The U.S. is steadily slipping down the international league tables in the percentage of its population of a given age which has completed higher education. This combines several problems. One is the cost disease in higher education, that is, the rapid increase in the price of college tuition …  This cost inflation in turn leads to mounting student debt, which is increasingly distorting career choices and deterring low-income people from going to college at all. Not everybody gets a scholarship … . There is an ongoing achievement gap between whites and Asians on the one hand and Hispanics and Blacks on the other, while the Hispanic percentage of our nation’s schoolchildren keeps increasing, dragging down the national average. Making matters worse is a new and growing gap between the educational preparation and achievement of American girls and boys; the female share of college graduates is now up to 58 percent.

3. Inequality:

The growth in median real income has been substantially slower than all of these growth rates of average per-capita income discussed thus far. The Berkeley web site of Emmanuel Saez provides the startling figures. From 1993 to 2008, the average growth in real household income was 1.3 percent per year. But for the bottom 99% growth was only 0.75, a gap of 0.55 percent per year. The top one percent of the income distribution captured fully 52% of the income gains during that 15-year period. If what we care about when we talk about “consumer well being” is the bottom 99 percent, then we must deduct 0.55 percent from the average growth rates of real GDP per capita presented here and elsewhere.

4. Globalization:

Foreign inexpensive labor competes with American labor not just through outsourcing, but also through imports. And these imports combine lower wages in emerging nations with growing technological capabilities there.

5. Energy and the environment:

Part of any effort to cope with global warming represents a payback for past growth. In 1901 the environment was not a priority and the symbol of a prosperous city was a drawing of a factory spewing pure black smoke out of its chimneys. The consensus recommendation of economists to impose a carbon tax in order to push American gasoline prices up toward European levels will reduce the amount that households have left over to spend on everything else (unless it is fully rebated in lump-sum or other payments). India and China are both growing more rapidly than the U.S. and taken together those two nations are responsible for double the carbon emissions of the U.S.,but they resist suggestions that their growth to high-income status should be curtailed by energy restrictions, since today’s rich nations of North America, Europe, and Japan were not regulated in the same way during their 20th century period of high growth.

6. Debt:

Already in 2007 U.S. households suffered from an unprecedented overhang of debt equal to 133 percent of disposable income. The government debt was then manageable but has since begun to explode. Consumers have gradually been paying off debt, and this is one reason why the economic recovery has been so tepid. As a matter of arithmetic the ratio of government debt to GDP can be reduced by a mix of higher taxes, lower expenditures, and lower entitlement benefits (including higher retirement ages). But the same arithmetic implies that higher taxes and/or lower transfers

So what to do to avoid the Great Slowing? Gordon isn’t too optimistic:

Some of the headwinds contain a sense of inevitability. The most daunting is the interplay between globalization and modern technology, which accelerates the process of catching up of the emerging markets and the downward pressure on wages and real incomes in the advanced nations. …

There is also an inevitability to the subtraction from growth implied by headwind, the future repayment of consumer and government debt. U.S. consumption grew faster than real GDP over a long period, fueled by increasing consumer and government debt, a process that cannot continue forever. Over a substantial number of years in the future consumption must grow more slowly than production …

It is headwind (1), the demographic turnaround, that seems on the surface to be the most inevitable but is could potentially be counteracted. The retirement of the baby boomers causes hours per capita to decline and thus reduces growth of income per capita relative to productivity. A method to raise hours per capita is to increase the ratio of those of working age to those of retirement age. As a matter of arithmetic, this could be achieved by a more rapid inflow of immigration. One potential option would be unlimited immigration of high-skilled workers. As Steve Jobs is reported to have told Barack Obama shortly before he died, “we should staple a green card to the diploma of every foreign worker who attains a graduate degree in science or engineering.” For decades Canada has encouraged the immigration not only of skilled applicants but also those who are already rich and by so doing has transformed its culture from British colonial blandness to international world-class diversity.

I will have much more to say about the paper later — there is something in it for everyone — but its overall argument does sync with the Great Stagnation thesis of Tyler Cowen in that an innovation slowdown has led to a productivity slowdown and a growth slowdown. And of course what alarms me is that Washington is current pursuing a government-centric redistribution agenda rather than a market-centric innovation and growth agenda, which makes Gordon’s dire scenario all the more likely.

the Atlantic: Innovation, It’s the Best of Times and the Worst of Times

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This article originally appeared in the Atlantic

Two radically different ways to view the state of innovation in America.The fabulous rise of wireless communication allows us to video chat across continents for free. Then again, we still don’t have flying cars.If you want to have a polarizing conversation about the state of American innovation, you can do no better than sitting down George Mason University professor Tyler Cowen, who thinks the last 40 years of innovation have been “meh,” and MIT’s Andrew McAfee, who’s adamant that technologically innovation is accelerating at a pace most people aren’t even comprehending. That’s what happened today at the Aspen Ideas Festival in Colorado.

In Cowen’s opening remarks, he compared the technological changes in the second half of the 20th century to those of the first half. “In 1900, most American lived in farms,” he said. “By 1950, we had a fundamentally different world.” If he were to introduce his grandmother to a modern American kitchen, it wouldn’t be all that earth-shattering for her, he insisted. “My grandmother, who was born in 1905, spoke often about the immense changes in electricity, automobiles and household appliances,” he said. “We have simply not had that many life-altering innovations since 1973.”
On the flip side, McAfee insisted that Cowen’s grandmother would practically lose her mind if shown a modern day smartphone. That’s a “tough lady to impress,” he said, if she’s not bowled over by the ability to video chat “with someone across the world for free” or look up an answer to almost any question in the universe. The awesome march of technological innovation, in McAfee’s view, is best crystalized in his new book, Rage Against the Machine, which was reviewed in the Financial Times here:
Computers now exhibit human-like capabilities not just in games such as chess, but also in complex communication such as linguistic translation and speech. These new abilities stem from “pattern recognition” technologies – the same techniques that underpin, for example, the Siri voice recognition tool in Apple’s iPhone 4S.
Pattern recognition … will quickly allow machines to branch out further. Computers will soon drive more safely than humans, a fact Google has demonstrated by allowing one to take out a Toyota Prius for a 1,000-mile spin. Truck and taxi drivers should be worried – but then so should medical professionals, lawyers and accountants; all of their jobs are at risk too.
Meanwhile, Cowen’s views on innovation can best be summarized in his book, The Great Stagnation: 
Although America produces plenty of innovations, most are not geared toward significantly raising the average standard of living. It seems that we are coming up with ideas that benefit relatively small numbers of people, compared with the broad-based advances of earlier decades, when the modern world was put into place. If pre-1973 growth rates had continued, for example, median family income in the United States would now be more than $90,000, as opposed to its current range of around $50,000.
Will the Internet usher in a new economic growth explosion? Quite possibly, but it hasn’t delivered very good macroeconomic performance over the last decade. Many of the Internet’s gains are fun — games, chat rooms, Twitter streams — rather than vast sources of revenue, and when there have been measurable monetary gains, they often have been concentrated among a small number of company founders, as with, say, Facebook. As for users, the Internet has benefited the well-educated and the curious to a disproportionate degree, but apparently not enough to bolster median income.
So which do you think it is?
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