Tyler Cowen has established himself as the indispensable economics commentator. The general director of the Mercatus Center and holder of the Holbert C. Harris chair of economics at George Mason University (where he also earned his undergraduate degree), Professor Cowen has a Ph.D. in economics from Harvard and an extensive academic publishing record. But he’s perhaps best known for — and most influential in — his work outside of academe, as an author on the popular Marginal Revolution blog and as a commentator for the New York Times, Slate, and The American Interest. He’s also published several accessible books, including Create Your Own Economy, The Age of the Infovore, and Creative Destruction.
His most recent work, The Great Stagnation, has quickly become one of the most talked-about books of the year among economics wonks. Its thesis: The U.S. has seen a slowdown in the growth of median wages since the 1970s because we have eaten “all the low-hanging fruit” in technology, education, and resources — innovations that increased the efficiency of industry, facilitated the provision of new skills to capable but previously deprived students, and expanded access to freely available land. But ever since those gains were realized, our productivity, and hence our average income, has slowed its forward march, leaving us on a technological and economic plateau. Our more recent innovations, like the Internet, improve our quality of life but don’t show up in the material measurements of Gross Domestic Product. This makes Cowen pessimistic about our prospects for regaining 1950s-style economic growth in the near term, but he has some ideas for brightening our future, or at least having more fun under gray skies.
Cowen spoke with NRO’s Matthew Shaffer about The Great Stagnation, income inequality, politicians, Dodd-Frank, Austrian economics, politicians, and more.
MATTHEW SHAFFER: The Great Stagnation is a quick read. But can you give us an even quicker taste? What’s your three-paragraph summary?
TYLER COWEN: The three-paragraph summary is that the rate of technological innovation has been slowing down in American society. Living standards for the typical household rose at a very rapid rate from the late 19th century up through the 1970s. In every generation, living standards for the average household would double.
Now they’re rising at a very slow rate, not much more than zero. In the last ten years, average living standards have fallen. In the past ten years there has been no net job creation in the U.S. economy. I refer to this as a Great Stagnation.
And it is a revolution for our economy, our politics, and our way of life.
SHAFFER: What’s the cause of the slowdown in technological change?
COWEN: Most accounts of this create some set of villains. So commentators on the Left think it’s because the rich or the Republicans now control the U.S. government. But when you look at the actual data on technological innovation, one thing you see is that what I call the “low-hanging fruit” has been exhausted. So radio, flush toilets, electricity, and automobiles — a lot of very basic inventions — have spread to almost all households. [The fact that] they’ve successfully spread means the rate of growth must slow. And other than the Internet, there has not been a comparable breakthrough in technology for quite some time.
The other factor is that we have a malfunctioning education system. [High-school] graduation rates in this country actually have been falling for several decades. Go back to, say, 1900 or 1910 — the marginal student you’re educating is both easy to educate and quite possibly brilliant, or at least going to be highly productive. So education was bringing us significant gains for most of the 20th century — at least the first half. But now the marginal student who is not getting educated, or who is getting educated, is very difficult, and not that productive, and hard to teach. And that’s another way in which this low-hanging fruit has been taken off. It means that at the margin we find it harder to make progress. So in part it’s hard to make additional progress precisely because we’ve done so well in the past.
It’s not a tale of villains. It’s a tale of technological progress.
SHAFFER: So the major technological gain of recent years is the Internet, but the gains of the Internet are not reflected in GDP or median income?
COWEN: That’s correct. Some are, but most are not.
SHAFFER: You dedicate The Great Stagnation to Peter Thiel. But he told us just a few weeks ago that higher education is part of the problem — a bubble we need to pop, a bloated signaling mechanism that’s detaining people from productive market activities.
COWEN: I’m more pro-education than Peter is. I think higher ed in the U.S. is fairly healthy, and by global standards it dominates, and it makes people more productive. But a lot of our K-12 is a disaster. And the single most important reform would just be to fire the worst ten or 15 percent of teachers in the lot, and we would have massive improvements. Because we’re a federal society, there’s no single top-down law that would get us there. But cities, communities, counties are working toward that.
I agree with Peter that when it comes to both education and health care, we’re adding these expenditures into our measure of GDP, and we’re valuing them at cost, as if every dollar we spend is creating a dollar worth of value. And that isn’t close to being true. It’s one reason why our measured GDP is perhaps higher than our actual living standard.
SHAFFER: One recommendation you have for increasing technological innovation is changing the culture — giving more prestige to scientists and innovators rather than politicians and other celebrities. Are there any policy changes we can make?
COWEN: The most important thing is really bottom-up change. A lot of U.S. norms have changed since the 1960s, on all sorts of issues, including gender, race, discrimination. But in this area — respect for science and scientists as role models — we’re going backward. We should be more like Singapore in this respect. But for that to work, people have to really believe it. So the notion that the president goes on TV and gives some medals to scientists — I’m not against that, but I think it’s barking up the wrong tree. People in the country really have to believe this stuff matters and put their hearts into it.
SHAFFER: Your thesis contradicts one of the other most-buzzed books of the year, Matt Ridley’s The Rational Optimist — a striking fact, since you’re both focused on technology and innovation, and are both fairly libertarian. Ridley thinks that the exchange of ideas, promoted by the Internet, leads to innovation, hence inexorable economic growth, and that the current economic downturn is, relative to that rising tide, just one small wave. Where do you differ?
COWEN: Well, all of that I agree with, and I actually consider myself an optimist in this book. I’m not as optimistic as people who just deny that there’s been a problem with a slowdown in living standards and growth. In my view, we’re at a plateau. We are seeing local diminishing returns, but there are going to be other breakthroughs in science, probably in our lifetimes. So that’s an optimistic point of view.
But when I hear people express extreme optimism about the Internet, I say, we’ve had it in mature form for about ten years. Macroeconomically speaking, those are about the worst 10 years we’ve had since about the 1930s. I don’t blame the Internet for that — that would be ridiculous. But nonetheless, it’s yet to really kick in as a major positive moving force at the economic level. It has just a small amount. The best is yet to come.
Look at electricity in human history — it took a few decades for electricity to really revolutionize the American economy. And the Internet will be the same. At some point in the future we will arrive at a new era of low-hanging fruit. We’re just not there yet, and the optimists tend to forget just how long those lags are.
SHAFFER: David Brooks seems to borrow an idea from you, that some of our economic slowdown is attributable to people feeling economically secure (a good thing), and consequently pursuing careers for aesthetic, moral, cultural, intellectual, and leisure benefits, rather than purely for financial compensation. Paul Krugman doubts that. What’s your response?
COWEN: I agree with Brooks. Sometimes I call these people threshold earners. You’re calling me from New York. There was a very good article in the New York Times about how many young men, especially in the New York area, are delaying growing up, they have extended adolescence, they move back in with their parents, they’re not that ambitious. And that’s precisely because they can have so much free or almost-free fun through the Internet, and our lives are so good in terms of comforts.
We’re seeing society grow more rapidly along the happiness or utility dimension than we had expected, and seeing it grow more slowly across the jobs-and-revenue dimension than we had expected. And that’s a disconnect. It doesn’t have to be a fatal problem. The problem is when you don’t plan for that and don’t understand that that is happening.
A major issue is that we have a lot of debt commitments — some privately, but mostly in the public sector — that were premised on robust growth in revenue and jobs. But we’re taking a lot of our social dividend out in the form of happiness or utility — which, by the way, is harder to tax.
But that does mean that our fiscal crisis is going to come more quickly and be a lot worse than many people expect, even fiscal conservatives. They still think it’s only a matter of time before we revert to 1968 levels of growth for the typical families. And I don’t see us as being there.
We’re going to have slow growth and persistent, fairly high unemployment. The Great Stagnation view is what I’ve been predicting for a long time — that high unemployment will persist. And that seems to be happening. Other views don’t predict that.
SHAFFER: Politicians, including our president during his State of the Union address, like to talk about promoting “competitiveness” — retaining our “competitive edge” over China in particular. This is a metaphor that seems to have wide appeal. Is this an intelligent way to talk about the economy?
COWEN: No, it’s a lot of empty words. It’s not a zero-sum game where we or China come out on top. The increase in the prosperity of China has helped out the U.S. economy. And it will do so a lot more in the future. We’re now at a funny point in time where China is rich enough to compete with us, but not scientifically advanced enough to be creating new ideas at the frontier. So we don’t feel all the gains from China that we’re going to get in the future. The major gains will kick in when Chinese science and technology in many areas are equal to or past where we are, and then we’ll get new products, new breakthroughs — whether it be solar energy, or computation, whatever they do. That’s when China will really pay off for us. But trade is about cooperation. And fundamentally U.S. and China is a cooperative relationship, even if politicians don’t always portray it as such.
SHAFFER: You wrote a well-regarded piece in The American Interest about growing income inequality — something that is beginning to make even some conservatives nervous. How should those of us who are generally pro-market think about rising income inequality in the United States?
COWEN: A lot of the increase in income inequality doesn’t matter, or it’s not objectionable. So, for instance, as the population grows older, inequality naturally rises, because the older people are, the more chances they have to experience different fates and different outcomes. And a lot of what people are complaining about is this quite natural phenomenon. The inequality that is striking in numbers, and I think at least some if it is objectionable, is really in the top 1 percent. And there are various studies trying to figure out how much of that comes from finance. We’re not sure, but quite a bit of it does.
In the financial sector there has been a lot of innovation, but it’s not a socially beneficial one — that is people are figuring out trickier ways to play the game of “heads, I win; tails, you lose.” The bailouts are one form of that, but it’s a much more general phenomenon.
Starting in the 1980s, returns to finance keep going up. They really have been skyrocketing. And I’m not sure that is backed by healthy innovation. I think the number of healthy financial innovations we’ve had since the 1980s isn’t as high as would be necessary to justify those increases in income. It’s a political-economy problem, where there’s an unholy alliance between finance and big government. And it’s led to an objectionable form of income inequality.
SHAFFER: So you’re saying it’s wrong to attribute growing inequality to the Reagan revolution, or insufficient taxes on the wealthy — it’s a problem of incentives and the structure of the financial industry.
COWEN: Correct. It’s clearly not the Reagan revolution, and whether you look at post-tax or pre-tax income, you see basically the same trend. I think we don’t understand very well exactly what shifted in the early 80s. But it was something from the natural growth of capital markets, and people understanding arbitrage better. And over time that led to them figuring out different ways to manipulate what is partially a political system. And I don’t think any of that was due to the Reagan administration. Sometimes Krugman blames the Garn–St. Germain Act, but you look at what that act did and it’s simply not at fault. Repeal of Glass-Steagall was not at fault. It’s really a much more general and fundamental trend than you could explain with either of those two legislative changes.
SHAFFER: So growing income inequality in the U.S. essentially reduces to outsized returns to the financial sector. Are there any efficient ways in which we could restructure regulations and/or incentives in the financial sector to broaden the distribution of its gains?
COWEN: I think it’s a very hard problem to solve. In general I’d like to see the financial sector shrink. I wouldn’t talk about broadening distribution of the gains, because a lot of it is not net social gain to begin with. So we just want to stop some of what they’re doing — not redistribute what they’re doing more broadly. A lot of my friends favor no bailouts, but I think it’s very hard for us to commit to that, especially after everything that’s happened. My best guess, which may well not be good enough, is to not regulate finance too much, but to put very binding and very simple restrictions on leverage. So limit leverage and past that, let them do a lot of what they want.
I don’t think Dodd-Frank was a very good bill; it’s too complicated, it doesn’t strike at the real problems, and it politicizes the sector more.
SHAFFER: What else about Dodd-Frank?
COWEN: It’s really a monstrosity of sorts. If you think of the recent crisis as having two somewhat separate problems, the first was the collapse of the real-estate bubble, which was extreme, and the second was this bank run on the shadow banking sector — and that’s what turned it into this scary event in which people actually wondered if the payment system would freeze and the U.S. economy would more or less shut down. And that was caused by some initial problems in real estate, but it’s logically speaking a separate development.
So those are the two main things. Now if you wanted to address the housing market, what one could do is require higher down payments, limit leverage, and get rid of the mortgage agencies. I can see a lot of merit in those ideas, but they’re not what the act did. Alternatively, on the shadow banking system, preventing runs there, fixing the problems with money-market funds (which is a market-based problem — that problem was not the fault of government) — I don’t see that we’ve fixed that either, or even that we know how to fix it.
So when I look at the two main problems we’ve had, and I see that they’re not addressed, and I see large number of regulations being applied to other parts of the banking system in very complicated ways — some of which might work out, but a lot of which we don’t understand very well, it just strikes me that it was a rushed and not very well thought-out piece of legislation.
SHAFFER: I know your university, GMU, offers some classes on it, but otherwise the Austrian school of economics doesn’t seem to be taken too seriously in most corners of academe. Many of my libertarian friends think that this is a bias. What do you think about academia’s stance toward the Austrians?
COWEN: Most academic economists have been skeptical of the Austrians. But I think the Austrian business-cycle theory in particular is getting renewed interest, because it is a tale of having a boom and a bust with a lot of credit expansion going on at the same time. In my view, it’s a very incomplete account of what happened, but it’s part of the story. I think it blames too much of what happened on the central bank, when I think there was a private-market bubble, and it wasn’t just because of what the Fed did or didn’t do. But it is one part of the overall explanation, and I think people are beginning to see that.
Part of the problem is you have a lot of Austrians who overclaim for the theory, where it becomes a kind of religious dogma, where it’s presented in a very take-it-or-leave-it way. Sometimes the Austrians are not the best ambassadors for their ideas. But it’s receiving new attention and it ought to be.
SHAFFER: Would you call yourself an Austrian?
COWEN: Absolutely. Austrian economics is what I grew up with. I wouldn’t call myself a capital-A Austrian, but the Austrian economists have been among the biggest influences on my thought — then and still now.
SHAFFER: What’s one economic lesson you wish all politicians would learn?
COWEN: A simple one is to do the right thing. That sounds naïve, but if you think about these people, if they don’t get reelected, the jobs and lives they fall into are remarkably good. And I don’t just mean by the broader historical standards of the human race, compared to the Stone Age, but even compared to other wealthy people in 21st-century America. So most politicians ought to have the stones to vote for what they think is right, even if it may be an idea I disagree with, and say to the voters, “Send me back to my life as whatever. I’m willing to do this to address our fiscal problems, or fight for the right kind of reform, and risk my office.” And I just don’t see much of that. And that’s disheartening.
SHAFFER: What’s with the peculiar publication of The Great Stagnation?
COWEN: The Great Stagnation is an e-book only. It’s an e-special published with Dutton, which is a branch of Penguin. So there is no physical book, and this is my innovation. I think this is a publishing model for the future. It costs only $4, and it’s a fairly quick read. But you don’t need to have a Kindle or an iPad to read it. You can also buy it, download it to your computer, and print it out. A lot of people don’t seem to understand that. So I see The Great Stagnation as an attempt to innovate and realize that we have a lot more flexibility. There are a lot of other publishing models. I’m against too-long books, which are just run-on magazine articles with only a single point. And this book, I think, is the length it ought to be, and it was written with that in mind.
— Matthew Shaffer is a William F. Buckley Fellow at the National Review Institute.