Wednesday, March 02, 2011

The Great Stagnation

Tyler Cowen's new e-book The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better has attracted a lot of attention from a variety of econ-bloggers as well as mainstream voices such as David Brooks. For those unfamiliar with the general thrust of the book, Kelly Evans provides a good overview:
[Cowen's] essential point is that economic development and technological innovation have reached a plateau, and unfortunately we in America are only now just realizing it: “Political discourse and behavior have become highly polarized, and what I like to call the ‘honest middle’ cannot be heard above the din. People often blame the economic policies of ‘the other side’ or they belligerently snipe at foreign competition.
But we are failing to understand why we are failing. All of these problems have a single, little-noticed root cause: We have been living off low-hanging fruit for at least three hundred years. We have built social and economic institutions on the expectation of a lot of low-hanging fruit, but that fruit is mostly gone.”
Cowen's thesis that a stagnation has occurred is probably best captured by this chart:

While he concedes that progress has occurred since 1973 and that life has improved, Cowen argues the Great Stagnation is still evident through a lack of revolutionary innovations. As he says in this interview:
We have more stuff, it's better, our lives are more comfortable. There's been some low hanging fruit in health care. But the basic look of how a life lives and what we have and what we do is not that different. We don't have the jet pack, the robot, the Mars colonies. And in that sense for the average person growth has slowed down.
Let us count some of the ways in which life has improved since 1973:
  • A 19 inch television cost $390 from Sears in 1975 ($1537 in 2009 dollars). $1500 will now get you this. A VCR in 1983 would run $380 ($807 in 2009 dollars), while numerous Blu-Ray players can now be had for under $200. The mp3 has replaced the 8 track player and the difference in computers is almost beyond description. The Walkman (1979) and point and shoot camera have been replaced by the cell phone.
  • In 1970 the average US home was 1,400 square feet. In 2004 it was 2,330.
  • In 1978 there were about 44 breweries in the United States. There are now over 1,400. And it isn't just beer, with more choice than ever before in all sorts of food items. In 1973 Trader Joe's was confined to a handful of stores in California while Whole Foods didn't exist. Both now have over 300 stores across the country, often times providing previously inaccessible foods.
  • This is small potatoes, however, in comparison to the explosion of overall consumer choice. In 1973 shopping choices were largely confined to whatever stores were within driving distance of one's house along with the selection offered by catalogs one subscribed to. Now, sky's the limit.
  • A Toyota Carolla in 1974 looked like this. It now looks like this. Suffice to say the 1974 model didn't come standard with a keyless entry system or CD/mp3 player, and GPS navigation was not an option.
  • In the medical field we have seen the advent of PET and MRI scanners, LASIK, vaccines for hepatitis A and B, and antiretroviral drugs among other advances. Oh, and how about an artificial hand that can be controlled with one's nervous system.
  • The explosion of information technology, of course, is simply stunning. In 1974 much communication was via letters, especially if they were overseas, and long-distance calls were reserved for special occasions. Now emails arrive instantaneously and cost nothing while video chat is had for free with Skype. Good luck finding international news in 1974, while now it is readily available via the websites of hundreds of newspapers and magazines from around the globe. The internet, the greatest library the world has ever known is available on one's phones.
  • Think about the difference in something like planning a vacation. Hotels, car rentals and airfares can be booked online, user reviews are easily found and maps are available on one's phone. Getting there is cheaper too, with average domestic airfares declining by over $200 in real dollars since the early 1990s alone. Once on the airplane there is chance that internet will be available with in-flight wifi.
  • Imagine trying to sell a piece of used art in 1973. How would it be done? Perhaps a garage sale? Now it's simply a matter of uploading a picture on to Craigslist and setting a price (I have done this myself, finding a buyer in only a few days).
I think Don Boudreaux's critique is on point:
I have a different hypothesis: what has stagnated isn't the economy but, rather, economists' and statisticians' capacity to measure economic activity and its contribution to human well-being. Rather than stagnating, our economy and our wealth continue to grow so impressively that they are outstripping last-century's economic categories and measurement techniques.
Indeed, how does one statistically measure the benefit of increased choice? Of increased convenience (streaming a movie at home versus driving to Blockbuster)? Of being able to more easily find what one is looking for? Of being better able to coordinate with friends and be more spontaneous in one's activities?

If this is stagnation, then vive le stagnation -- and be prepared to be simply stunned when we finally break out of it.

Related: This seems to be essentially what I am saying, except in cartoon format.

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