Is the Great Stagnation Real?

In many ways yes, but there is still room for hope and even celebration.

In his new book The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, George Mason University economist and New York Times columnist Tyler Cowen argues that our current economic woes are the result of running out of cheap land and big technological breakthroughs, and the faltering of public education. As a result, Cowen claims the United States' economy has been essentially stagnating since about the 1970s. In addition, he identifies three areas of the U.S. economy in which productivity has likely been getting worse. Specifically, Cowen makes persuasive arguments that productivity in the government sector, public education, and health care have stagnated or fallen since the 1970s, dragging down the average performance of the whole economy. 

As his chief evidence of stagnation, Cowen cites the fact that the growth in median American family incomes dramatically slowed down around 1973. After World War II, median family income had doubled in real terms by 1973. Since then it had increased only 22 percent by 2004, and now has fallen during the recent economic crisis.

Let's take a general look at Cowen's argument. Cheap land might have jumpstarted capital accumulation back in the 19th century, but that's old news. Agricultural production has not been a big part of our economy for some time. In 1930, 21.5 percent of the workforce was employed in agriculture and agricultural production representing about 7.7 percent of national GDP. By 1970, 4 percent of the workforce was employed in agriculture and agriculture's share of GDP had dropped to 2.3 percent. By 2000, the percent of workforce and GDP share had fallen even further to 1.9 percent and 0.7 percent respectively.

Cowen is certainly right that the accumulation of human capital has been a crucial factor for explaining economic growth. The network effects of working in a society of relatively literate and numerate people must be huge. Cowen argues that once most everyone is educated that means that the boost to growth from consuming that particular low-hanging fruit dissipates. As Cowen observes, in 1900 only 6 percent of Americans had graduated from high school. That figure had risen to 60 percent by 1960. The high graduation rate peaked at about 80 percent in the late 1960s and has fallen back a bit lately. Similarly, only one in 400 Americans were college-educated in 1900. By 2009, 40 percent of us are.

Interestingly, Cowen notes that since 1970 we've doubled real per pupil expenditures in public schools; yet average reading and math scores have not improved [PDF]. He concludes that productivity in public education must have significantly worsened over the past 40 years. In fact, U.S. economic growth is at the low end of the scenarios laid out by Hudson Institute founder Herman Kahn in his 1967 book, The Year 2000. In Kahn's optimistic scenario, U.S. per capita GDP in 2000 would have been $55,500; his pessimistic scenario projected per capita GDP in 2000 at $36,800. Actually, per capita 2000 GDP was $34,600, or about 60 percent lower than the optimistic projection. I suspect that Cowen would agree with the analysts at the Hudson Institute who blame the breakdown in American public education as a major cause for this lower-than-expected GDP growth.  

Let's turn to Cowen's argument that a good bit of the stagnation can be blamed on the fact that we are stuck on a technological plateau. The explanation for modern economic growth must depend, for the most part, on technological innovation. We grow richer not just by using more stuff, but by chiefly using the stuff we have in smarter ways. Cowen's pessimistic conclusion about the role that a technological slowdown has played in the current economic stagnation is based in part on the research of Jonathan Huebner. Huebner parsed trends in patent data relative to world population and alarmingly concluded [PDF], "The rate of innovation peaked in the year 1873 and is now rapidly declining." 

Cowen argues that the low-hanging technological fruit has been consumed. "The period from 1880 to 1940 brought numerous major technological advances into our lives," he writes. "The long list of new developments includes electricity, electric lights, powerful motors, automobiles, airplanes, household appliances, the telephone, indoor plumbing, mass production, the typewriter, the tape recorder, the phonograph, and radio to name just a few." Then Cowen concludes that, apart from the Internet, "life in broad material terms isn't so different from what it was in 1953. We still drive cars, use refrigerators, and turn on the light switch." Well, yes.

Although I find a lot of Cowen's arguments for recent disappointing economic performance persuasive, I think his argument for a technological plateau is not. Unlike the first cars, refrigerators, typewriters, and so forth, a lot of technological improvement is hidden under the hood, as it were. Median incomes may not have grown much but the products people can buy have not only improved but become cheaper relative to their stagnating incomes as well. Let's take a look.

What about those refrigerators that Cowen dismisses so cavalierly? The modern electric refrigerator was invented in 1914 and proved so useful that 85 percent of U.S. households had one by 1944. In 1970, a refrigerator measuring 14 cubic feet would cost $288 ($1600 in 2009 dollars). Today a not especially fancy Frigidaire, measuring 26 cubic feet costs $800, and is frost free and equipped with an icemaker. In addition, nearly 20 percent of households now have two refrigerators.

In 1970, a 23-inch color television cost $368 ($2,000 in 2009 dollars). Today, a 22-inch Phillips LCD flat panel TV costs $190. In 1978, an 8-track tape player cost $169 ($550). Today, an iPod Touch with 8 gigabytes of memory costs $204. In 1970, an Olympia adding machine cost $80 ($437 in 2009 dollars). Today, a Canon office calculator costs $6.65. In 1978, a Radio Shack TRS80 computer with 16K of RAM cost $399 ($1300 in 2009 dollars). Today, Costco will sell you an ASUS netbook with 1 gigabyte of RAM for $270. The average car cost $3,900 in 1970 ($21,300 in today's dollars). A mid-sized 2011 vehicle would cost somewhere around $20,000 and last twice as long.

Another very crude way to look at it is that Americans are four times richer in terms of refrigerators, 10 times richer in terms of TVs, 2.5 times richer when it comes to listening to music on the go, 3,000 times richer in calculators, about 400,000 times richer when it comes to price per kilobyte of computer memory, and two times richer in cars. Cowen dismisses this kind of progress as mere "quality improvements," but in this case quality becomes it own kind of quantity when it comes to improved living standards.

Finally, Cowen believes that the next wave of American income growth will be sparked by big, but currently unknown, technological breakthroughs. Well, such breakthroughs certainly wouldn't hurt, but the average quality of our lives steadily continues to improve without them.

Science Correspondent Ronald Bailey is author of Liberation Biology: The Scientific and Moral Case for the Biotech Revolution (Prometheus Books).