David R. Henderson  

Scott Sumner on The Great Stagnation

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Scott Sumner writes:

In other words, most economists now see the US trend rate of RGDP [real GDP] growth as being something like 1.5%. After 150 years of 3% trend, that's a startling downshift. Tyler Cowen is no longer a contrarian; The Great Stagnation is now conventional wisdom.

The last sentence would be close to accurate if the only thing that Tyler said in The Great Stagnation is that there is a great stagnation. [Why "close to accurate" as opposed to just "accurate?" Because 1.5% growth is better than stagnation in an economy whose population is growing by less than 1.5%. But that's a minor quibble.]

But Tyler said more than that. He gave three reasons for the great stagnation and in my review of the book [scroll down], I showed why all three were faulty. My impression, after reading the various reviews of Tyler's book, is that I'm the only one who carefully considered all three of his reasons. Virtually everyone else focused on whether there is a stagnation and not on whether Tyler's reasoning for the alleged stagnation made sense.


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COMMENTS (7 to date)
William Bruce writes:

Regarding the review, you had me at "real median family income." Paging Dr. Sowell...

But, in all seriousness, are these not all issues related to complex sociological and cultural phenomena? How can Cowen expect such a simplistic analysis to draw any useful conclusions? The whole affair comes across as the prophetic equivalent of post hoc ergo propter hoc.

Jim Glass writes:

A fine review, succinct and on point. About the base "stagnation" claim ...

'real real median family grew more rapidly during 1945 to 1973 than it has since then'

... forget all the evidence to the contrary provided by Bruce Meyer in his Econtalk podcast.

Whenever I see this claim my first reaction is: Well, it certainly *should* have!

In 1945 incomes and the income distribution had been flattened by a decade-and-a-half of Great Depression and World War with universal conscription, rationing and wage and price controls. One would think that during a subsequent period of catch-up growth incomes and the spread of their distribution *would* increase at a rapid rate for good while -- but not at that rate forever.

So even on the simple face of things, are we talking about a reduction of the long-term growth rate post-1973, or instead a return to it following a plunge far below it 1929-45 then a period of rapid catch-up back to the long-term trend, 1946-73?

J Storrs Hall writes:

One of Tyler's favorite examples of technological stagnation (e.g. in the intro of his Singularity Summit talk) is that we don't have flying cars. I don't know how much this is a tongue-in-cheek throwaway line on his part, or how much a serious observation. However, I've been doing a lot of research on the issue for a forthcoming book, and general aviation absolutely got crushed in the '70s by a combination of regulation and litigation (see, e.g. http://www.econlib.org/library/Enc/Liability.html ).

There are several sectors that got crushed the same way: Nuclear power is an example. One reason the computer revolution was so explosive is that a lot of innovative people who would have contributed toward advances in all other areas were pushed into computers because that's where you could actually do something without being choked.

IMHO as a professional technological historian/futurist, and contra Cowen, I would claim that there is a major overhang of ripe technological opportunity -- "pent-up innovation" if you will -- available to us now. The open question is whether we will regain the confidence of culture and freedom of experiment that characterized us a century ago, and take advantage of those opportunities.

I would claim that, for example, in today's timid culture and prior-restraint bureaucracy, if we didn't already have automobiles, and someone invented them, they would remain a plaything of the rich and never achieve universal ownership as they did then. (cf private jets!)

Something wonderful, but desperately rare in human history, has been lost.

Samuel writes:
One of Tyler's favorite examples of technological stagnation is that we don't have flying cars. I don't know how much this is a tongue-in-cheek throwaway line on his part, or how much a serious observation.

If you read MR regularly the topic of driverless cars is a favourite of his, along with the regulatory inertia that postpones their adoption.

mike shupp writes:

In ballpark figures, US expenditures on research and development have been about 2.75% of GNP since the mid 1960's. The bulk of this spending back then came from the Federal government -- over 2% of GNP. In the Nixon era, things changed. NASA was cut back (1970). Non-immediately applicable DoD R&D spending was cut, thanks to the Mansfield Amendment (1971). Health R&D spending was increased. And after the dust cleared, government R&D had fallen to about 3/4% of GNP. Industry picked up the slack, but there seems general agreement that industry-funded R&D is more focused on projects with near-term payoffs, less on long range and blue sky projects. And this has been the case for 40 years.

In other words, the distribution and focus of R&D spending in the USA changed at PRECISELY the point that Cowen identifies as the start of his Great Stagnation. Tyler doesn't recognize this shift and I don't recall any mention of it in reviews I have seen of his book. My impression is economists 40 years ago would have found that shift quite important, and modern ones do not.

What changed?


ilsm writes:

There are opportunity costs from investing in war.

http://www.project-syndicate.org/commentary/the-global-innovation-revolution

"The US remains the global leader in R&D investment, spending an estimated $400 billion in 2009 – a total boosted by President Barack Obama’s stimulus package, and higher than China, Japan, and Germany combined."

In terms "of GDP, the US ranked only eighth in 2009 (at 2.9% of GDP)."

"The US share remained above the OECD average, but this was mainly the result of national differences in the amount of R&D defense spending."

"Indeed, defense accounted for 52% of US R&D in 2009, and for more than 50% during the last 25 years. The defense share of R&D in the European Union and Japan has been and remains markedly lower – less than 10% in the EU and less than 5% in Japan in 2009 (no comparable data are available for China and South Korea)."

A lot changed in the 1980 presidential election.

mike shupp writes:

ILSM: Your numbers don't make sense. Begin with 14 trillion dollars for US GNP in 2009; 2.9% of GNP gives about $400 billion for R&D. So far, so good.

But DoD spending that year ran to 700 billion bucks. Adding in FBI spending on war-related security, NSA, Veterans Affairs, Veterans pensions, Homeland Security, military-related spending by the Energy Department and NASA, and the figure approaches 900 billion dollars. Depending on your view of things, from one to four hundred billion of interest payments on the national debt can be added to the total.

Even at the largest figure, 1.4 trillion dollars, there is NO PLACE in this sum for 200 billion dollars of R&D. And in fact, the expressed figure for RDT&E (Research Development Testing & Evaluation) in FY 2010 is just under 80 billion dollars. Granted, common report has it that there's a substantial hidden ("black") budget for R&D in the budget, but no one puts it as high as 1.5X the expressed figure.

I have to conclude there's an error in your reckoning of military R&D costs. I notice they're quite close to the sum for R&D plus military procurement (220 billion dollars for FY 2010). Perhaps you've been lumping them together?

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