Not So Stagnant
Are the good times really over for good?
By the time you make it through the fashionably prolix subtitle of Tyler Cowen's provocative new e-book, you'll have the gist of his argument. In The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, Cowen, a George Mason University economist, argues that since colonial times the American economy has benefited from "low-hanging fruit"—i.e., bountiful opportunities for growth. He singles out three in particular: free land, technological breakthroughs, and "smart but uneducated kids."
"Yet during the last forty years," Cowen writes, "that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. That's it. That is what has gone wrong." Cowen identifies the exhaustion of that low-hanging fruit as the main culprit behind the slowdown in growth during recent decades, rising inequality, the nastiness of present-day politics, and even the recent global financial meltdown. Looking forward, he admits the possibility that innovation and growth will pick up again, perhaps catalyzed by the rise of China and India. Cultural change would help, he argues. Specifically, his chief prescription is that we somehow raise the social status of scientists.
Cowen is hardly the first boy to cry wolf. In previous periods of deep economic distress, other prognosticators have grabbed attention by claiming that innovation and growth are at long last winding down. During the Great Depression of the 1930s, the "secular stagnationists," led by Keynesian economist Alvin Hansen, argued that falling population growth and dwindling prospects for technological progress meant that "mature" economies could combat chronic underinvestment and unemployment only through massive government spending. And during the stagflation of the 1970s, the Club of Rome and many others warned that ecological constraints were finally imposing "limits to growth." So here we are: another macroeconomic crisis, another gloomy prophet.
We should remember, however, that at the end of this story the wolf actually does come. So could Cowen be right this time?
He certainly is correct in identifying a poorly understood phenomenon of fundamental importance: Innovation and economic growth are getting harder. During the last few decades, rapid growth in the number of scientists, engineers, and researchers has not resulted in a corresponding acceleration of economic growth or new inventions. Indeed, the number of patents per researcher has been falling steadily. "In each industry the most obvious ideas are discovered first," explained Paul Segerstrom of the Stockholm School of Economics in a 1998 American Economic Review article, "making it harder to find new ideas subsequently."
Cowen is also right that a big source of relatively easy growth during the 20th century—investment in education—has been exhausted. In 1900 only 6 percent of American kids graduated high school, and only 0.25 percent went to college. The high school graduation rate peaked at roughly 80 percent in the late 1960s and has slipped a bit since, while some 40 percent of college-age kids are now in college. Moving these numbers upward without cutting standards further may be possible, but it certainly won't be easy, and in any event the biggest gains in improving educational attainment are likely behind us.
But there is another side of the coin. Yes, pursuing any particular avenue of scientific research or technological development yields diminishing returns. But it is often the case that advances in one area open up entirely new avenues of progress in others. To put it another way, we keep discovering previously hidden orchards of low-hanging fruit. The microelectronics revolution of the last half-century is a spectacular case in point: Continuing exponential growth in information processing capacity has made possible sweeping innovations in a host of industries unrelated to silicon chips. Looking ahead, exciting developments in biotechnology, nanotechnology, and artificial intelligence promise future waves of revolutionary innovation.
Furthermore, even as growth gets harder, our institutions of wealth creation have improved. The number of scientists and researchers has grown, and their tools keep getting better. American corporations have undergone wrenching restructuring in recent decades to make them more innovative and responsive to change. On the whole, government policies today are much more favorable to entrepreneurship and innovation than they were a half-century ago. And continued progress on all these fronts remains possible.
How do these countervailing forces balance out? My reading of the evidence doesn't support Cowen's sweeping historical narrative that centuries of easy progress are now behind us. Much of the force of his argument comes from contrasting America's 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, Cowen'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 a "technological plateau."
Cowen correctly points out that median family income rose smartly after World War II, only to fall off sharply in the 1970s. Per capita GDP figures reveal the same trend, albeit a little less dramatically (because of the rise in income inequality, which means most of the income gains have come among higher earners). Between 1950 and 1973, the average annual growth rate of real GDP per capita was 2.5 percent; for the period between 1973 and 2007, the corresponding figure was only 1.9 percent.
But what happens when you put these figures in a larger historical context? Using calculations by the late British economic historian Angus Maddison in his 2001 book The World Economy: A Millennial Perspective, combined with U.S. Census figures for the years after World War II, we see these annual growth rates:
1820–1870: 1.3 percent
1870–1913: 1.8 percent
1913–1950: 1.6 percent
1950–1973: 2.5 percent
1973–2007: 1.9 percent
From this broader perspective, what Cowen calls the Great Stagnation looks like a return to normalcy after a Great Boom. 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, not our present era, is the outlier; it just doesn't make sense to talk about the present period as stagnant after centuries of easy growth.
Now let's focus on trends in recent decades—in particular, productivity growth. If we have reached a technological plateau, it should show up most clearly in a fall-off in labor productivity. But look at the growth of output per worker-hour, according to Bureau of Labor Statistics data for the nonfarm business sector:
1947–1973: 2.8 percent
1973–1995: 1.4 percent
1995–2007: 2.7 percent
Again, there was a big drop-off after the postwar boom. But then look what happened: Beginning in the mid-'90s, fueled by advances in information technology, productivity growth came roaring back, nearly equaling the record of the Golden Age. It's hard to look at these figures and conclude, with Cowen, that the trees in the orchard are becoming bare.
Granted, the productivity comeback offers no grounds for complacency. The numbers look better than the per capita GDP figures, in large part because the labor force participation rate peaked in the late '90s, fell during the dot-com bust, and only recovered to early '90s levels by 2007. (Superior growth in output per worker thus was partially canceled out by sluggish growth in the number of workers.) Meanwhile, the per capita GDP figures look better than the median income figures cited by Cowen because of the rise in inequality—that is, because income growth has been concentrated at the top of the socioeconomic ladder.
These facts point to real challenges for future growth. One reason the labor force participation rate has stalled is the aging of the population, a trend that will cause all kinds of economic and political headaches in coming years. And rising income inequality is due in significant part to slumping human capital formation. Educational attainment at both the secondary and postsecondary levels has stagnated since the '70s even as the demand for highly skilled workers has continued to climb.
I've focused on criticisms here, but I want to close by stressing what an interesting, intelligent, clearly written, and thought-provoking book this is. Growth has gotten harder, and there are mounting obstacles ahead. For pointing out these sobering facts, and doing so in such an engaging manner, The Great Stagnation deserves a wide readership.
Brink Lindsey (email@example.com) is a senior scholar in research and policy at the Ewing Marion Kauffman Foundation.