Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Monday, February 21, 2011

The Great Stagnation - a (Partial) Critique of a Critique

I just read this review by R.A. Washington of Tyler Cowan's The Great Stagnation - a book that I am not going to be able to put off reading for very much longer, I'm afraid.  What I've gleaned from this type of second order view is that Cowan considers the comparative  low growth of recent decades to be an artifact of having picked all the low hanging technological and economic fruit - thus every bit of advance is a bit harder to attain.  (Typical Elliott 5th wave syndrome, BTW.)  By way of example, Cowan cites a lack of life-changing technological advances.  If you don't agree that technology has plateaued, feel free to call him on your i-Phone or Droid and demur. There's probably a GPS app to help you find his house, if you'd rather do it mano a mano.  I have rather a different view, but that is not the current topic.

Something in Washington's article struck me as being utterly wrong.  Let's have a look.

But I really like the book, and I like the trains of thought it suggests. For instance, his views on educational low-hanging fruit suggest that the rich world is likely to reap far bigger benefits from growth in developing countries than from improvements in domestic education and research. While America tries to wring additional innovative capacity out of an already well educated population, the developing world is home to billions of people, including hordes of potential geniuses and innovators, living in poverty and ignorance. Getting their economies rich enough to move people into classrooms and laboratories is far more likely to yield growth-boosting innovations than trying to get a marginal college grad to get a PhD. Mr Obama's State of the Union theme was precisely wrong, in other words; America needs to focus on helping the rest of the world catch up as fast as possible. Meanwhile, looser immigration rules in America would also provide a big boost to American growth potential.

The idea here is that all the smart people in America already go to college, and increasing enrollment will just dilute the gene pool.  On the other hand, third world countries have education-deprived populations, and improving conditions in those places will enable their best and brightest to do great things.  Therefore, they can gain more in the way of opportunities for technological breakthroughs from eduction than we can.

This strikes me as being 1) wrong; 2) wrong; and 3) wrong.

First off, there is a new crop of college entrants every year.  What possible difference can it make that last year's smart people are already in school?  Now, there is some possibility that lowering entry standards might dumb down the curriculum a bit, but I seriously doubt that the marginal students will be taking nuclear physics or molecular biology anyway.  Far more likely is the possibility that short sighted austerity policies will reduce education and research opportunities for the truly gifted.  But that is rather a different story.

Second, better educating the populations of backward countries ought to have many benefits.  But what reason is there to expect that higher levels of innovation, vis-a-vis the U.S. or any other first world country, would be among them?  Lets just set aside Bill Gates, for example, and accept the idea that a more educated population, world-wide, will increase the chances for innovation.  Probabilistically, that makes sense.  And more innovation might occur in countries with large, educated populations.  But that is probabilistic, as well, and has absolutely nothing to do with either Cowan's thesis or Washington's take on it.

Third, there is an inherent tension - perhaps even a conflict - between progress at home and progress abroad.  Our economic partners are also our economic competitors.  What's good for China might in some way be good for the U.S., but it's inherently a whole lot better for China.  Helping the rest of the world catch up is high-minded, and in some ways moral.  But it is not without risk.

A bit off the main topic topic, but I can't let the last sentence of the Washington quote go by unchallenged.  Employment has stagnated in this country for a decade, with the last three recessions being essentially jobless.  The recent Great Recession was the worst of all, and might or might not be finished.  A vexing question now is - have we moved into a different economic realm with a new normal level of permanent high unemployment?  It's important to realize that high unemployment is not regional or limited to specific industries.  It is effecting most areas of the country, and all industries.

We are in an economic environment that most of us have never before experienced.  Only octogenarians were alive during the great depression, and they were small children at the time.  But again we now have, along with high unemployment, a liquidity trap at the 0-interest bound, near deflation, and a serious aggregate demand shortfall.  Looser immigration policies will have the short run effect of further increased competition for a limited number of jobs.  Currently, applicants outnumber openings by about 5 to 1.  Bringing in more immigrants - irrespective of education and skill  levels, will simply drive down wage levels at a time when greater wage flexibility may actually make things worse.

Washington's thinking is not just trite and by the book, it is sloppy and unrealistic.   This is the kind of thing that makes me think the whole edifice of Economics is a house of cards.


Jerry Critter said...

For one person to have a livable wage, you need to make something of value. We did that up to the '80. Then we began shifting to a service economy and our manufacturing moved offshore, along with the well-paying jobs.

There is not much skill required to flip burgers or sell a shirt.

Peter Kurze said...


Steve Randy Waldman has a great take on this over at Interfluidity:


I think Tyler's evil brother Tyrone gets pretty close to it:

“The concentration of economic power that attends technological changes demands countervailing state action if any semblance of broad-based affluence and democratic government is to be sustained.”

His [Waldman's] most recent post addresses some of the responses to his piece on The Great Stagnation. For me, the money quote is:

“It is not those who advocate, but those who prevent, stabilizing transfers of purchasing power, who are the true Marxists. These self-styled capitalists do not espouse Marx’s theories, but they do something much worse: They perform them. They behave in precisely the way that Marx expected capitalists to behave. They cripple the American system’s greatest strength — its ingenuity, flexibility, adaptability. They prevent the sort of collective action through which earlier generations proved that capitalism could be made consonant with decent, stable, and broadly prosperous societies. In doing so, they risk proving Marx right.”

I've downloaded 'The Great Stagnation', but have not read it yet. It's hard for me to develop any enthusiasm for spending a few hours carefully following arguments intended to answer the question “How can we get supply-side economics to work?”



Jazzbumpa said...

Jerry -

In a broader sense, what we have seen - most especially in the last decade, since Glass-Steagall was undone - is a grotesque misallocation of resources, with financial tail-chasing replacing actual investment.

That, in combination with offshoring, has been ruinous.

Peter -

Thanks for the lead. And that quote is awesome.

I think reading Cowan is useful, if for no other reason than to organize your counterrguments.


BadTux said...

This is the kind of thing that makes me think the whole edifice of Economics is a house of cards.

What gets me peeved is that the economists who were, like, wrong about everything in the runup to the Great Recession, still have their cushy jobs in think tanks and universities while folks like us who were warning that the economy was on a precipice were pooh-poohed as "not serious" and "ignorant". The astounding thing is that the same people who were wrong about everything still pooh-pooh anybody who disagrees with their pet theories (which, I remind you, failed miserably both as a predicator and a prescriptive) as "not serious" and "ignorant".

What we have here is a case of Soviet-style ideological capture, where the Soviet intelligentsia became so enamored of their beautiful theories about the glorious victory of Communism that they overlooked the simple fact that, err, it wasn't working -- i.e., that unlike what their theories said was supposed to be happening, their economy was in freefall. Just goes to show that ideologues are ideologues, regardless of which overhyped ideology they're pushing...

Welcome to Soviet America, comrades, where ideology is king and reality... well, who cares about reality, anyhow?

- Badtux the Sovok Penguin

BadTux said...

For one person to have a livable wage, you need to make something of value.

Not necessarily. For example, do you get a haircut from time to time? That barber or stylist performs a service of value to you, and should be paid accordingly. Furthermore, the United States still makes plenty of stuff. It's just the cheapest stuff whose manufacturing has been moved overseas. For example, in the semiconductor industry, every leading-edge Intel microprocessor and chipset is still made here in the United States, it's only less expensive microchips that are made overseas.

That said, it is clear that the emphasis of the U.S. economy over the past thirty years has changed from producing to grifting -- siphoning off value as money moves around. The audacity of the grifters in claiming that they "produce" wealth is astounding. Wealth is not money, wealth is goods and services that are of utility to people. The only utility money has is as a medium of exchange so that you don't have to arrange a long series of barters in order to produce and consume goods and services. That is, it's an efficiency enhancer for an economy, not the point of an economy. The success of the grifters in convincing the majority of Americans that a) money is wealth, and b) thus people who don't produce anything but merely move money around (and have a lot of it stick to their hands in the process) are actually creating wealth, is astounding. The kleptocracy has truly managed to master propaganda, making Hitler's techniques look as crude and primitive as a bronze sword in the age of steel.

- Badtux the non-grifter Penguin

Jazzbumpa said...

What we have here is a case of Soviet-style ideological capture . . . ideologues are ideologues

One thing that struck me way back before the USSR came unzipped is that the ossified old fogies in the Politburo had more in common with Strom Thurmond than they did with anyone on the American left. (I seem to recall that we used to have one, back in the day.)

This validates Russell Kirk's point that conservatism is mind-set, not an ideology. He got that much right. Ideologies as far apart as you can imagine, but conservative minds, through and through.

Wealth is not money, wealth is goods and services that are of utility to people.

But cutting hair (an honorable profession, that I will not disparage) generates no wealth. It transfers money, in exchange for an ephemeral utility enhancement, and aids the economy by circulating money, but does not generate wealth.

I lean toward Jerry's position. A robust economy is built on value-added activities: farming, manufacturing, mineral extraction, too, I suppose. Services are important in their own way, but it's very hard for me to believe that a service based economy can be stable and robust over time.

Help me out if I'm wrong.


BadTux said...

So cutting hair produces nothing of value to you? Maybe if you're bald. For the rest of us, barbers and stylists provide service of value to us -- cut hair is easier to keep clean and pest-free, and enhances ones's sexual attractiveness (probably not a concern if you are a single retiree with no plans for a sex life, but a bit of a concern for the rest of us -- we *are* sexual animals, after all). Sort of like someone who cooks food at a restaurant -- yes, this person did not produce the food and you *can* do it at home if you wish, but cooking the food is a service that people are willing to pay for and adds value for which the cook should be compensated.

Moving money around, on the other hand, is a service that is worth paying for, but no more so than cutting hair. The purpose of money is to move around, after all, and helping it to do that is a useful service. But so is cutting hair. In a just world, people who make a living moving money around would be paid the same as a hair stylist -- i.e., the same as a person who provides a valuable service, but does not himself or herself create actual goods in the economy. But the grifters who've moved into that area are making billions of dollars of other people's money stick to their hands as it moves from place to place, then puffing themselves up and claiming that it is they, not the producers, who "create" wealth. And people actually *buy* that nonsense! It is to marvel...

- Badtux the Economics Penguin

Jerry Critter said...

I agree that "barbers and stylists provide service of value to us", but I agree with Jazzbumpa also that it does not create wealth.

Wealth is an increase in value. Getting a hair cut is a valuable service and may make you feel good, but it does not increase wealth. It does make anything of value.

Jazzbumpa said...

Eco Tux -

So cutting hair produces nothing of value to you?

How can you draw that conclusion from what I said. Clearly the haircut has value to me. That is what I meant by "utility enhancement." And I always give the barber a nice tip.

Just to make it clear, I'm a very happily* married retiree.

Moving money around, on the other hand, is a service that is worth paying for, but no more so than cutting hair.

You see - we're actually in agreement here. Services, collectively, are an important part of the economy. My point is that they can't be the basis for an economy. If you cut my hair, and I saute your herring, we're both getting something worthwhile.

But neither of us is generating wealth. On the other flipper, though, catching the herring, and waving the hair into a shirt (Lent is coming) are both value adding and therefore wealth generating activities.

* with all that might imply

nanute said...

On the other flipper, though, catching the herring, and waving the hair into a shirt (Lent is coming) are both value adding and therefore wealth generating activities. (Waving,or weaving?) Either way, both the waving and fish catching have POTENTIAL wealth generating capability. No? I always get confused by the idea that accumulating money does not equal wealth appreciation.

Jazzbumpa said...

nanute -

I can think of specific situations where hair waving is utility enhancing (I have certain Victoria's Secret models in mind here) but weaving is what I intended to say.

What the herring in the sea and the hair on the floor have in common is potential wealth generation.

Catching the herring generates wealth, preparing and serving it adds value.

Similarly, weaving the hair into an uncomfortable article of clothing suitable for penitents and masochists is value adding - albeit to a rather small market.


nanute said...

Does serving the fish add value if I eat it myself? (My life may not have any value.) Or, is it only if I can exchange the serving for something of equal or greater value? How would you define wealth?