Great Stagnation or Return to Normalcy?


Reason contributor Tyler Cowen argues in a new e-book The Great Stagnation: How America Ate all the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Get Well, that having run out of the historical advantages--"low hanging fruit" as per his subtitle--of free land, immigrant labor, and technological advantages, the glory days of amazing economic growth are likely over.

Reason Contributing Editor Brink Lindsey sees us not so much entering an unprecedented era of lousy growth, but returning to a sustainable historical trendline of growth that a postwar boom departed from.

A lot of the force of [Cowen's] argument comes from contrasting the United States' glittering economic performance in the decades following World War II with the decidedly less impressive record in recent decades. But if you zoom out and look at the larger historical record, Tyler's Great Stagnation more or less disappears. And if you zoom in and examine recent trends in detail, the numbers likewise belie the claim that we have hit some "technological plateau."

Tyler correctly points out that median family income rose smartly after World War II only to fall off sharply in the '70s. GDP per capita figures reveal the same trend, albeit a little less dramatically (because of the rise in income inequality). Between 1950 and 1973, the average annual growth rate of real GDP per capita was 2.5%; for the period between 1973 and 2007, the corresponding figure was only 1.9%

But look what happens when you put these figures in larger historical context (note: I'm using calculations by Angus Maddison for earlier periods and Census figures for post-WWII periods):

1820 - 1870            1.3%

1870 - 1913            1.8%

1913 - 1950            1.6%

1950 - 1973            2.5%

1973 2007              1.9%

From this broader perspective, what Tyler calls the Great Stagnation looks like a return to normalcy after the "Great Boom" of the post-WWII decades. Indeed, recent growth rates are better than those of all other earlier periods. So yes, growth has cooled down since the postwar "Golden Age," and that fact poses real economic and political challenges. But the Golden Age was the outlier, not our present era; it just doesn't make sense to talk about the present period as stagnant after centuries of easy growth.