Review of The Great Stagnation

How great was Tyler Cowen’s marketing coup?  Well he forced a technophobe like me to actually learn how to use Kindle.  I wasn’t too happy about that, which makes me inclined to write a very negative review.  But that’s kind of hard to do credibly when I agree with the central proposition of the book; that technological progress (at least as traditionally measured) has slowed dramatically, and will continue to be disappointing for the foreseeable future.

In an earlier post I argued that my grandma’s generation (1890-1969) saw the biggest increase in living standards; most notably a longer lifespan (due to diet/sanitation/health care), indoor plumbing and electric lights.  Less important inventions included home appliances, cars and airplanes, and TVs.  From the horse and buggy era to the moon landing in one life.  And all I’ve seen is the home computer revolution.  Not much consolation for a technophobe like me.  I’m probably even more pessimistic than Tyler.

The parts of the book I liked best were those that discussed governance.  I had noticed that there was a correlation between cultures that are good at governance, and cultures that are good at running big corporations.    But Tyler added an interesting perspective, arguing that the technologies that facilitated the growth of big corporations also facilitated the growth of big government.  I don’t recall if he made this point, but I couldn’t help thinking that the neoliberal revolution, which led to some shrinkage in government size, was also associated with a move away from the big corporate conglomerates of the 1960s, towards smaller and more nimble businesses.

Tyler has a long list of complaints about the wasteful nature of our government/education/health care sectors, which he hinted is really just one big sector.  While reading this section I kept wondering when he was going to mention Singapore, which has constructed a fiscal regime ideally suited for the Great Stagnation.  When he finally did, on “Page” 830-37, he did so in an unexpected context, as an example of a society that reveres scientists and engineers.  He had just suggested that the most important thing we could do to overcome the stagnation was:

Raise the social status of scientists.

My initial reaction was skepticism.  First, how realistic is it to expect something like this to happen?  I suppose the counterargument is that every new idea seems unrealistic, until it actually occurs.  But even if it did, would it really speed up the rate of scientific progress?  My hunch is that if we doubled the number of people going into science, there would be very little acceleration in scientific progress.  First, because the best scientists (think Einstein) are already in science, driven by a love of the subject.  Second, with a reasonably comprehensive research regime, progress in finding a cure for cancer may require a certain set of interconnected discoveries in biochemistry that simply can’t be rushed by throwing more money and people at the problem.  Similarly, progress in info tech may play out at a pace dictated by Moore’s law.  Given Moore’s law, no amount of research could have produced a Kindle in 1983.  Could more scientists speed up Moore’s law?  Perhaps, I’m not qualified to say.  But that’s certainly not the impression I get from reading others talk about information technology.

Here’s another exhortation that caught my eye:

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.

I couldn’t help thinking of Paul Krugman and Tyler Cowen, the two brightest stars of the economic blogosphere.  If only one of those two are able to have this sort of dispassionate take on policy strife, how likely are the rest of us mere mortals to be able keep a clear head and remain above the fray?  Still, it’s great advice.

There was only one place where I thought the book went slightly off the rails.  Toward the end of chapter three Tyler Cowen suggests:

Another way of putting this is, you can be an optimist when it comes to our happiness and personal growth yet still be a pessimist when it comes to generating economic revenue or paying back our financial debts.

And now we come to the book’s greatest flaw.  Tyler forget to discuss the all-important concept of . . . you guessed it . . . NGDP!  If we had more NGDP, we could pay back all those nasty debts.  Now before everyone starts madly typing out angry comments, I do understand the difference between nominal and real debts, I do realize that Tyler is looking and long term secular problems, not short term cyclical problems, and I do realize that the Fisher effect holds in the long run; you can’t inflate away debts forever.  But that got me thinking, and I started wondering whether Tyler is making an analogous error.

Tyler Cowen argues that the internet might produce all sorts of neat applications that give us endless pleasure and amusement, but without generating much revenue.  He used the term ‘revenue’ over and over again, but I always felt there was something missing.  Why should it matter if it generates much revenue?  One answer is so that we can repay our debts, but that doesn’t really answer my question.  More NGDP allows us to repay our debts.  Fiscal and regulatory reform can prevent us from becoming over-indebted again.  Sure, we might not do those reforms, but Tyler seems to be getting at something deeper, an unavoidable problem with the modern economy.  He seems to imply that even a well-regulated modern economy may not generate enough revenue.  I think that’s wrong.

Consider the following thought experiment.  All sorts of technological innovations on the internet cause our consumption (in real terms) to double, even though they don’t create any more revenue.  Because revenue is unchanged, NGDP is also unchanged.  But by assumption RGDP has doubled, meaning the price level has fallen in half.  In that case why shouldn’t we double NGDP, allowing people to repay their debts?  And even if we don’t double NGDP, people’s real incomes will have doubled, at a constant level of NGDP.  Progress will benefit society whether it generates revenue or not.  Real GDP is real, whether it generates revenue or not.

Tyler also argued that we faced a great recalculation problem, with lots of jobs opening up that need high tech skills, but way too many poorly educated workers.  Yet the facts he presents seemed to point in the opposite direction.  He mentions that the new high tech firms like Facebook can get the job done with an extremely low number of workers.  This webtopia that Tyler foresees won’t require many workers at all.  In that case, what should all our surplus workers do?  How will they find jobs?  Not in agriculture, 2 million farmers can feed the whole country.  Not in manufacturing, we are falling below 10% in that sector.  And most people don’t want three washing machines and four cars.  Where would they put them all?  Here’s what I think most people still want:

1.  A bigger and nicer house, with granite counter-tops.

2.  More restaurant meals.

3.  More fun vacations.

That means we need more construction workers, and granite miners (quarriers?)  We need more cooks and waiters.  We need more hotel receptionists and maids.  More people to work on Carnival cruise ships.  I think our workforce is skilled enough to fill those jobs.  It’s very lucky that the high tech companies that will provide all sorts of wonderful services do not need many workers.  We aren’t Singapore, and would have trouble supplying them.

I’m kind of surprised that Tyler Cowen got detoured into the “where will the jobs come from” cul de sac, as it’s usually associated with people who have very different views from Tyler.  Indeed I’m so surprised that I assume I must have misread him somewhere along the way.  Here’s how I think about jobs.  First, what do we want?  If those things can be provided with very few workers, don’t despair, ask what we want after we have gotten our first wish granted.  And so on, until all the workers are employed.

I also have a slight quibble with his views on education.  I share his intuition that the education/health care/government sector is highly wasteful, but I don’t agree with those who measure the output of education with test scores.  When I went to school I recall sitting in a class of 30, bored out of my mind as the teacher droned on, mostly staring at the clock.  My daughter is usually in a class of 20, often with 3 or 4 teachers in the room, doing all sorts of neat activities.  I hated school, she likes it.  You might argue that we live in a rich suburb, but the city of Boston spends just as much per pupil.

I’m guessing Robin Hanson must have said something to the effect “schooling isn’t about learning.”

FWIW, here are my policy suggestions for the Great Stagnation:

1.  Most important by far; end the war on drugs.  Big pharma can’t cure cancer, but they can end the pain.  But our government won’t let them.  Here’s a government “torture” problem 10,000 times bigger than waterboarding, which is tragically under-reported. (Although Matt Yglesias has a nice post.)

2.  Adopt Houston zoning laws everywhere.  There’s plenty of land around Boston, no reason for houses to be so expensive.

3.  Singapore-style HSAs, pensions and tax regime (including carbon taxes.)

4.  Education vouchers.  It won’t improve tests scores, but it will save boatloads of money.

My review hasn’t given readers a very good summary of this excellent and timely book.  It only costs $4 and one hour—read it yourself.  The best part is a very interesting and perceptive discussion of how the Great Stagnation is putting great strains on many aspects of governance, from political discourse to our ability to finance entitlements and public debts.  I probably agree with 90% of the book.  Even where he has different views from me (say on the social utility of modern finance) he probably has the stronger argument.  My review focused on the 10% where I don’t agree.