Are Stagnating Living Standards in the US the Worst Thing in the World?

9 02 2017

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It is rare moment when I disagree with the great economic historian Adam Tooze, the author of such magisterial works as Wages of Destruction: The Making and Breaking of the Nazi Economy. Any academic who critiques such a formidable intellectual is skating on thin ice. However, I really need to dissent from something he has just said. In a thoughtful blog post on some newly published data on inequality in the United States, Adam Tooze opined that

The fact that pre-tax incomes for the least favored half of American’s citizens have not risen, but have fallen slightly over the last forty years ought to be a show stopper. Literally, all other policy discourse should surely cease.

Tooze is right to argue that the accumulating evidence that the living standard of the median American is stagnating, or at least growing at a much slower rate than it did in the long boom following 1945. He is also probably correct to link this phenomenon to rising inequality and to the post-1980 decoupling of median incomes and productivity growth (see image below, which is taken from the June 2015 issue of the HBR). I agree with Tooze that figuring out how to start increasing median living standards in the US and other advanced economies is a central challenge facing our generation.

r1506d_mcafee_whenworkersfallbehind

 

 

I do not, however, agree that stagnating US living standards is a policy issue of such overwhelming importance that all other US policy discussions– ranging for marijuana legalization to police brutality towards Blacks to climate change to refugee policy should stop. Even during the Second World War, when Britain faced an existential threat, discussions of non-war policy questions continued– the famous Butler Act was passed in 1944, reshaping the education system. Is it really the case that stagnating living standards are such an emergency issue that all other policy questions should be put on the backburner until it is resolved by the leadership of the US? It is indeed unfortunate that the growth of living standards has, by many metrics, slowed down.  However, I would reject the view that it is a show-stopper that requires us to stop talking about all other issues.  Particularly when viewed from the standpoint of cosmopolitan prioritarianism, it is easy to see that stagnating median living standards in the US aren’t the worst problem in the world. I would say that malnutrition in sub-Saharan Africa is actually a worse problem.





Gordon Crovitz, Government, and the Internet

30 07 2012

In the past week, the blogosphere has witnessed an ideologically-charged debate about the role of the State in the creation of the Internet. The debate was prompted by President Obama’s recent statement that “Internet didn’t get invented on its own. Government research created the Internet so that all companies could make money off the Internet.” Obama’s point was that successful entrepreneurs, including those who make their money online, owe the State a portion of their profits because they function in an environment created by the State.
The historical accuracy of Obama’s statement about the creation of the Internet was then challenged in a piece in the Wall Street Journal by Gordon Crovitz. Crovitz argued that the idea that the internet had been created by government employees was myth and that many of the real technological breakthroughs were achieved by employees of Xerox’s PARC research lab in Silicon Valley. Crovitz also credits Vinton Cerf with developing the TCP/IP protocol and Sir Tim Berners-Lee for inventing hyperlinks. Crovitz cited “Dealers of Lightning” by Michael Hiltzik as his source. Crovitz concluded:

It’s important to understand the history of the Internet because it’s too often wrongly cited to justify big government. It’s also important to recognize that building great technology businesses requires both innovation and the skills to bring innovations to market. As the contrast between Xerox and Apple shows, few business leaders succeed in this challenge. Those who do—not the government—deserve the credit for making it happen.

Crovitz’s piece has been mercilessly attacked by a number of commentators (see here and here), as well as by Vinton Cerf himself. Vint Cerf, who now works for Google, was asked to comment on Crovitz’s argument.
Q: In his Wall Street Journal column, Gordon Crovitz writes that the federal government’s involvement in the creation of the Internet was modest. Does that jibe with your recollection?
Vint Cerf: No. The United States government via ARPA started the project. (Bob Kahn initiated the Internetting project when he joined ARPA in late 1972. He had been principal architect of the ARPANET IMP (packet switch) while at BBN. Bob invited me to work with him on open networking in the spring of 1973. We also both worked on the ARPANET project starting in 1968. ARPANET was funded through 1990 by ARPA and other USG agencies. The Internet work was funded from 1973 to about 1995 (and beyond) by ARPA, NSF, DOE, NASA among others. It took 10 years of work to get from the original paper published in May 1974 to the rollout of the Internet operationally on January 1, 1983. It combined the ARPANET, MILNET, some number of Ethernets, two Packet Radio networks, the Packet Satellite network, and other local networks in England and Norway. Note that University College London and the Norwegian Defense Research Establishment were involved in the implementation and testing of TCP/IP as was Stanford and BBN.
Michael Hiltzik, who was cited by Crovitz as an authority on the history of the Internet, had this to say about Crovitz’s opinion piece in the WSJ:
And while I’m gratified in a sense that he cites my book about Xerox PARC, “Dealers of Lightning,” to support his case, it’s my duty to point out that he’s wrong. My book bolsters, not contradicts, the argument that the Internet had its roots in the ARPANet.

Perhaps the best of the many responses to Crovitz’s piece was by Slate’s Farhad Manjoo, who wrote:

Crovitz’s entire yarn is almost hysterically false. He gets basic history wrong, he gets the Internet’s defining technologies wrong, and, most importantly, he misses the important interplay between public and private funds that has been necessary for all great modern technological advances.

In my eyes, this is the key issue—the interplay between government and the private sector in advancing technology. You are more likely to get rapid technological growth in a mixed economy. A society without a private sector would likely be technologically stagnant—consider the old eastern bloc countries, which generated vanishingly view genuine technological advances, notwithstanding a publicity stunts involving captured German rocket scientists. I also believe that there would be problems with the opposite socio-economic model, a pure free-market economy in which all economic activity took place in the private sector. It is true that many of the technological advances that drove the First and Second Industrial Revolutions were made without the active involvement of the State (e.g., Watt’s steam engine), but some of the other key technologies of those eras were indeed funded by the government, such as the precise chronometers that allowed us to determine longitude. Many of the technologies we have today came about because of the advent of Big Science in the United States during and after the Second World War: the Internet, nuclear power, jet aviation, all of these exist because of cooperation between researchers in the private sector and researchers in the public sector.

There is a growing body of evidence to suggest that we are living in an age in which the rate of technological progress is slowing in many fields: by many statistical measures, progress was faster in the forty years before 1970 than in the forty years after. The pre-1970 period saw the advent of products ranging from dishwashers to antibiotics to intercontinental jet aviation that transformed everyday life. Since then, there have been relatively few breakthroughs, a state of affairs Tyler Cowen calls the Great Stagnation. The economic, political, and social impact of the Great Stagnation has been massive. For instance, the standard of living of the median American family hasn’t changed much since the 1970s, even though it increased dramatically in the generation before that. It is therefore very important that we think clearly about how technological progress comes about. Perhaps this is the greatest intellectual challenge facing the social scientists of our generation. I certainly don’t have the answers to this question, which lies well outside my research, as opposed to teaching area. However, I do know that simplistic ideological narratives such as that of Crovitz are untrue and thus cannot aid us in designing national innovation systems.

It is disturbing that the Wall Street Journal, which is read by many people who invest in technology companies, would allow such a low-quality piece to appear in its pages. The investing public deserve better.





Tyler Cowen and the Great Stagnation

18 02 2011

Did the rate of technological innovation slow down around 1973?

 

1973 AMC Gremlin. Photo by Christopher Ziemnowicz

I’m much more interested in economics and economic history than the average historian, certainly the average historian based in a pure history department. However, every so often there is a book about an economic-historical topic that is so important that every historian ought to read it, regardless of how far their particular research specialism is from the domain of economic history. I think that one such book recently appeared. Tyler Cowen’s new e-book has attracted considerable attention in the American and international press and may well become the most talked about non-fiction title of the year.

For references to this book in the press, see here, here, and here.  For blogosphere reaction, see here, here, and here. I also suspect that the ideas in this book may influence public policy debates in the coming years. So if you have to read one book about the economy this year, this would probably be the one to read!

Tyler Cowen’s book The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better is currently available online in Kindle from Amazon. This means you have to download it to your computer rather than getting a hard copy in the mail. I will refer to the technology Cowen has adopted to publish ideas a bit later in this blog post, because I think it calls into question Cowen’s thesis that technological innovation plateaued around 1970 and that American material lives haven’t really changed that much since then.

In an interview about the book Cowen gave a few days ago (see here) he shares an anecdote about his grandmother. (Cowen was born in 1962, which gives you a rough idea of when his grandmother lived). Cowen remarks that his grandmother, who was from rural Wisconsin, died in a society that was radically different from the one in which she had been born.  Rural Wisconsin in the early 20th century was a world of horse-drawn buggies, gas lamps, and iceboxes. Hunger was common even in the United States. Cowen’s grandmother died in a world of freeways, air conditioning, supermarkets full of cheap food, and colour TVs in wood-grain cabinets.

Cowen’s point is that since his grandmother died, everyday life in the United States has remained more or less that same. Median incomes, which increased dramatically over the course of his grandmother’s lifetime, have remained stagnant since the 1970s, which means that the material lives for most American families hasn’t changed that much in the last 40 years. GDP per capita, life expectancy, they have all continued to go up, but at a far slower rate than in the period before the 1970s. We appear to have hit a sort of plateau, at least according to Cowen.

 

Suburban Sprawl

Cowen admits that a few little gadgets have come along (mobile phones, Skype, YouTube,  downloadable music, books on economics becoming available through Kindle), but he says that these really haven’t added that much to the welfare of the average person.  In terms of the number of square feet of living space, the number of pieces of furniture in their living room, the amount of meat they have for dinner, things are pretty much where they were in the 1970s.

IBM 360 Computer, late 1960s

Five main points about this book occurred to me.

First, predicting a long period of technological stagnation is not new. In each generation, there are people who confidently declare that technology has peaked and that nothing new remains to be invented. They have been proved wrong, so far.

Second, I’m certain how reliable the GDP stats cited by Cowen are. Obviously GDP per capita is a pretty important metric, but there are many goods and services it doesn’t capture. Many of the post-1970 technologies that give me happiness (talking on Skype with distant families, keeping in touch with friends on Facebook) or that make my work easier (e.g., Jstor) cost very little, certainly compared to the price of a 1958 Chevrolet Bel-Air. It is hard to compare the price of a base-model Chevrolet in 1958 with a base-model Chevrolet today, since the latter car has airbags and a CD player. GDP stats don’t do a good job of capturing these sorts of qualitative improvements in products. There is a tremendous irony in Cowen using the internet to distribute a book claiming that we are in a state of technological stagnation. A blogger named Dirk has dealt with this issue much more eloquently than I could in his post on The Great Stagnation. Dirk asks whether a teleportation machine that would allow one to travel instantaneously to any point on the planet would raise or lower GDP.

My hypothetical example was a teleportation machine. What if some physicist discovered some new laws to the universe and suddenly invented one?  A few hours later I discovered that on page 11% Tyler writes: “It would make my life a lot better to have a teleportation machine.”

So at least for a drunken moment I was thinking along similar lines. So I ask: what then? Would a teleportation machine improve median income?  My guess is that the invention of a teleportation machine would increase median income a lot if it were costly to manufacture. If it were cheap to manufacture and cheap to use, it probably wouldn’t increase median income much, just like the internet. Yet it would surely increase the standard of living for nearly everyone. So now I’m confused. Isn’t it a good thing when great innovations happen to also not cost much to implement? Isn’t that a win/win?

Third, I think that the title of this book has a parochial American element. I’m not saying that Cowen is a parochial person who is only aware of developments in the US. In fact, Cowen mentions globalization and outsourcing in this book. He also recognises that some of the innovations that have made the lives of Americans (and others) better in recent decades were developed by non-Americans, chiefly Europeans and Japanese. But perhaps the problems he is talking about are common to the developed world as a whole, not just the US. The title of this book is misleading, since it suggests that it was only Americans who ate the low-hanging fruit.

It seems to me that one of the big themes of the last 60 years of world history in convergence towards American living standards. Sadly, Cowen says little about this. What do I mean by convergence? In 1950 there was a massive gap between American living standards and those of most other countries, with the trivial exceptions of Canada and Australia, two other white settler economies which had per capita incomes similar to some US states. In 1950, the gap between bombed-out Western Europe and the United States was huge. Japan was even poorer.  During WWII, there was an obvious physical difference between Americans of Western European ancestry and Western Europeans: the Americans were taller. Although GDP per capita is still a bit higher in the US than in these other countries, the gap in living standards has narrowed, especially when we take non-GDP measures of well-being, such as average height, into account.

In fact, people in some Western European countries today are taller than white Americans, which suggests that young people there now eat better than Americans. It used to be that Japanese people were much smaller than Europeans, but Japanese men born in the 1970s are nearly as tall as Englishmen born in the same decade. As more and more countries acquire quasi-American standards of living (drive-thru Starbucks), we can expect more countries to converge in this way.

Fourth, I’m wondering about the political implications of Cowen’s argument that developments in the fields of science and technology are to blame for the post-1973 slowdown in the growth of American living standards. At least one blogger has already dealt with this issue, but here are my thoughts.

People on the left of the political spectrum in the US have their own explanation for why economic growth has slowed down since the mid-1970s: growing inequality and the Republicans’ attacks on the redistributive state. Paul Krugman and others argue that the stagnation in median incomes since the 1970s has a political origin: Reaganite Republicans.

In what has been the conventional wisdom among left-wing Americans who think about such issues, the United States between the New Deal of the 1930s and the 1970s was dominated by centre-left policies: labour laws were pro-union, union membership was high, and tax rates were very progressive, which meant that measurable inequality was low. There was a consensus in favour of Keynesianism and the idea that the government needed to put purchasing power into the hands of the poor, so that they could stimulate the economy. During this same period of centre-left policies, the United States saw massive improvements in human welfare for the average person.

Since 1980, Republican free-marketeers have dominated the US.: taxes and social programs have been cut and inequality has gone up at the same time that the rate of economic growth has fallen. (For inequality, see this graph, which shows that while the average income in the US has increased dramatically since the 1970s, the gains have essentially been confined to the elite).

 

According to left-wing Americans, had the US persisted with FDR-Kennedy-Lyndon Johnson style after 1980, the country would today have a more dynamic economy and would be a more equal society. Progressive take the stagnant living standards of the typical American and fact Dutchmen now tower over visiting Yanks as proof of the bankruptcy of the Republican/libertarian agenda.

Cowen, who is a prominent libertarian, says that the true causes of the post-1973  slowdown have nothing to do with the policies of Reagan and the Bushes or the distribution of wealth within American society. Instead, the post-1973 stagnation in median incomes in the United States is due to a slowing of the conveyer belt of inventions linking the laboratory to the average person. Cowen’s claim has massive political implications.

Fifth, a think tank recently released some predictions about GDP per capita in various countries in 2050 (see image below).

 

GDP Per Capita in 2050

I’m skeptical of all such efforts to guess what the ratio of, say, German to American per capita wealth will be in 40 years because I suspect that countries will be using totally different technologies to compete in 2050. I wonder what Cowen would think of these prediction games.