Sunday, March 06, 2011

The Near Future of American Economic Growth

The inspiration for my series against self-verification was inspired by this final example of where I used to be wrong. A common theme of this blog is the recognition of just how rich we are. Whether you're an American, a high school teacher who's married to a social worker, a breakfast eater, a person with too many hobbies, or almost anyone who's been alive for the last 200 years, you're historically very rich. Along with that assumption, I've argued that economic growth will continue as it has since the Industrial Revolution. I'm less sure of that now.

If there was ever a person who could challenge such an important presupposition of mine it's Tyler Cowen. He's smart, well-read, and most of he's reasonable. He's also the only person with his own tag on my blog. Wikipedia (and his wife) describes him as a ""libertarian bargainer", a libertarian who's not so radical that he can't influence those in power. Tyler recently published a new short ebook, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better. Thanks to my friend with a Kindle, I was able to read it this weekend.

The thesis of the book is clear and the facts are to deny. Median income growth is down. The economic growth and technological innovation that began with the Industrial Revolution has slowed. From the late 19th century to the mid-20th century technological innovation changed the face of America. The use of fossil fuels and electricity, telegraph/telephone, radio, car, refrigerator, penicillin, light bulb, airplane, nuclear power, running water, and germ theory are many examples. Now compare those to the important inventions for last 75 years. Spaceflight, lasers, solar power, DNA/genome/stem cell discoveries, credit cards, heart surgery, cell phones, smaller better computers, and of course the internet. Although those are all very important, collectively they have made less of an impact on the human race.

It's the simplicity of his claim that makes it so believable. The world is not ending and is in fact is still getting better, just more slowly. Per his book's subtitle, he describes the problem as an issue of "low hanging fruit". The first set of inventions I described are fairly simple and more important compared to those in the second list. Finding out mold kills disease is much easier than how to successfully remove and replace a human heart. We've picked the easy inventions off the tree of innovation. The next ones will require more effort. Also, the benefit of the more recent innovations are also not as evenly spread as the earlier ones. The poor gain a lot from running water, light bulbs, and penicillin and very little from Google, smart phones, and heart surgery.

However the biggest problem with this new reality is what it means for debt and investing. Originally I was less worried about our government's debt because, like it has in the past, economic growth can help pay most of it off. If we're richer in the future, it's easier to pay off poor debt. Without even counting the Great Recession, if economic growth will continue to slow down, it will make paying those debts off much more difficult. Less economic growth also means less growth in the stock market. Which means less growth for retirement and savings accounts which can have important changes on how we invest.

But remember this is bad news, not tragic news. The world is still great and getting better. In many ways the irony of this ebook is that it is an ebook. The internet is the great shining hope for, as Tyler predicts, another spurt in economic growth. The book is an example of how good the great stagnation can be. Four dollars for a lesson on American economic growth doesn't add much to GDP, but it sure made a huge impact on my economic and political perspective. I highly recommended the book and for the author's personal words on the book I recommend the interviews from EconTalk, The American, and BloggingHeads.

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