Tuesday, March 15, 2011

Takeaways from The Great Stagnation

As I described in an earlier post, I recently finished Tyler Cowen's ebook The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better. You can read more at his blog Marginal Revolution. Here are my takeaways that didn't make it into the original post:

Things are still great, but paying off debt will be very difficult. In the past it's been useful to have a divided government, it's hard to pass bad laws. But now that we've set things into motion that need to be stopped (Social Security, Medicaid, Medicare, war), something needs to be done. Sadly, what our debt has done is actually encourage us to spend more (perceived price of government is down because it's all borrowed). The "low hanging fruit" mentioned in the subtitle is divided into three categories:

*Land: initially America had a lot cheap western and and easily accessible natural resources.
*Labor: in the beginnings of American education, there were huge gains to be had. Educating the brightest and hardest working can lead to huge innovation. Today, we educate everyone. The gains from and time needed to educate all will result in less gains.
*Technology: the technology created initially after the Industrial Revolution were more valuable than the inventions created later.

The difference the technologies that have been created recently is that they lead to a lot of private good, not public good. Think about how many spillover benefits there we to the invention of the printing press or running water. But most of the inventions recently, like smart phones and heart surgery, have seen the benefits centralized on the upper half of society.

The thesis only applies to the Western world and those that have already gone through industrialization. For the next century global growth will continue to surge under the "low hanging fruit" from the rest of the world. Hopefully by the time they are done we will be out of our innovative plateau (I'm hoping for teleportation).

One of the reasons innovation has slowed is because it has become more and more difficult for science to be done by amatuers (like for example Gregor Mendel and Thomas Edison).

The exception to this is the internet. From the accuracy of Wikipedia to the great things open source has created, the internet is the last place for smart nonprofessionals to leave their mark. But, as Cowen notes, the internet has not greatly increased GDP nor does it increase median wages. Though some claim it is worth at least a couple thousand dollars.

Cowen cites specific industries that he believes still have some "low hanging fruit" to be had: health care, education, financial, and government services. Each of these are full of inefficiency and often bad rule writing. Sadly, they are all also becoming bigger parts of our economy. Cowen wisely notes that as technology made large corporations possible, it also made big government possible. Could you imagine a welfare state without computers or even the printing press?

Here are his solutions to the stagnation: 1) shrink/improve government (easier said than done), improve science by making scientists rock stars (from the Onion), 2) look forward to and beware of the next big time of economic growth (after all the industrial revolution brought better technology in the form of medicine and weapons).

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