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.
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