Friday, November 5, 2010

Tyler Cowen on the Past and Future

. Friday, November 5, 2010

Tyler Cowen gave a talk at UNC today, in what appeared to be a class taught by Mike Munger. It was open to the public, so I went. Cowen introduced it as a mix of his last book and what will become his next one. The former considered micro and micro-micro economic development; the latter concerns the macro economy. He closed by discussing implications for the American political economy.

Cowen began by arguing that the most notable economic developments in the U.S. in recent times has been the ability to collect and manipulate information, especially what he calls "cultural information". The ability of individuals to collect and readily access culture at very low marginal cost through social networking and digitized media has allowed us to create our own economies. These have dramatically improved our quality of life, but unlike previous inventions they have not increased GDP by much or employed many people.

Then he shifted to his macro view, which is most heavily influenced by two events: the stagnation of median wages since 1973, and the financial crisis. The former indicates, to Cowen, that we haven't been as innovative as we thought. Most of the important inventions (which he loosely defines as mixing fossil fuels with machines) occurred well before 1973, and we've spent the time since making marginal improvements to the same technologies. As we've done so we've increased productivity, and that's why everyone has a refrigerator and a telephone. But we haven't really come up with new innovations; we've just improved the old ones. The exception to the rule -- information technology -- has improved quality of life but not measured GDP.

Cowen brings this together by saying that he is a "utility optimist" but a "numbers pessimist". He thinks that we'll continue to improve the ways we can collect and manipulate information and this will have important real benefits for people, but they will not create many jobs or provide a large boost to GDP. He says that we cannot expect to maintain a trend rate of real GDP per capita growth of 3% a year; 1% -- which is more than what the median earner has had since 1973 -- is the new normal. That doesn't mean we're stagnating; it just means that we have poor measures of progress. He recommends the Wolfers/Stevenson happiness research as an ongoing attempt at correction.

But this divergence between numbers and utility is where he sees the problem for political economy. Voters will demand 3%, rather than accepting 1% plus non-monetary improvements in standards of living. Politicians will thus promise 3%, and will pursue policies that generate it. That means encouraging a debt-based economy, encouraging too much consumption, and encouraging bubbles in asset prices that lead to financial crises. He didn't explicitly say it, but it sounds like he expects boom-and-bust cycles to continue until the American public is willing to accept 1% growth, or until we break through the "innovation plateau" that we've been stuck in since 1973.

I think I've summarized his argument correctly, and I'm sure he'll be writing much more about it in the future. I think it's a compelling story, but I'm not yet completely convinced. Here's how I see the world since 1973:

1. The natural advantages of the U.S. economy post-WWII had mostly dissipated by 1973. This was inevitable, indeed it was something the U.S. strove for, so the previously-high growth rates were simply not sustainable. This isn't about innovation; it's about competition. As W. Europe and and Japan "re-industrialized" and were able to productively mobilize labor, they narrowed the U.S.'s margins. At the same time, the U.S. had mostly already reaped most of the GDP benefits of mobilizing female workers and integrating minorities by 1973.

2. Somewhat related to #1, I think Cowen has the wrong level of analysis. While it may be true that median incomes have stagnated in the U.S. since 1973, real global GDP/capita has nearly doubled since 1973. Even allowing an increase in inequality, global median incomes has certainly increased markedly, probably well more than 3% a year. (A quick search didn't turn up a global median income growth time series, but I can't imagine this isn't true.) We would expect this to happen as more countries employ their populaces in industrialized work. In other words, the experience of the U.S. from 1900-1973 has become the experience of the world from 1973-2010. This has put pressure on American middle class wages, as we should expect it would: when the supply curve of less-skilled labor shifts right, the returns to less-skilled labor goes down. But the returns to more-skilled labor have not gone done, which is why the American mean and median have diverged.

3. I don't think the new normal has to be 1% growth. It could also be 3% growth, but not broadly dispersed. That has, in fact, been the story of American post-1973. Not all of that growth was a myth. After all, before we got the micro-micro innovations like Twitter and iTunes we also got the micro-macro innovations like the PC. These did raise the real productivity of the economy, but not necessarily for the factory worker or custodian. Those initial innovations made Bill Gates much richer in monetary terms than Joe the Plumber, but Joe the Plumber got psychic benefits that he would not have otherwise had. In Cowen's language, numbers and utility went up, but not necessarily in equal amounts for everyone. I don't see that that process has run its course. Facebook and Twitter may hire many fewer people than GM and Ford hired when they boomed, but Mark Zuckerberg is the youngest billionaire in history.

4. If #3 is correct, then the political economy dimension becomes about distribution of monetary gains, not divergent perceptions of utility vs. numbers. Interestingly, this will not be a battle between capital and labor, but between labor and labor. (It doesn't take much capital to create Facebook; Zuckerberg did it in a few months on an IBM.) Maybe labor becomes more of a lottery. If that continues to happen, I'd expect the political equilibrium to be a strengthened welfare state. I don't think recent political swings necessarily contradict this, since the best political models are the most structural political models. Additionally, public anger over the bailouts is much stronger and deeper than many expected, and no one is interested in weakening the major entitlement programs.

I'll have to think about this more for than just an afternoon/evening to form stronger conclusions, but that's where I'm at now. Perhaps as Cowen develops his thesis more fully he'll address some of this, and especially consider if/how the story changes when we think globally. Either way I'm looking forward to seeing how his thoughts develop.

P.S. I live-tweeted the lecture, and asked the Twitterverse for questions. Daniel Davies asked me to ask Cowen what he thought of Keynes' "Economic Possibilities for Our Grandchildren". Cowen's response was essentially "It is one of the more interesting intellectual mistakes of the 20th century." I don't think Davies liked that response too much, but I'll let them speak for themselves if they like. I'd never read the essay before. It is interesting. And it is, I think, mistaken, although not entirely. A pdf is here.


Dan said...

I'm not sure what the implications shifting the level of analysis out are for Cowen's argument: since fiscal policy is still made on a national level, I would think that his point about boom-bust cycles would hold. (Though I'm not totally sure how his argument fits with the literature on economic voting in the U.S. I would want to go review my notes on it before saying one way or the other. Did he address this in the lecture?)

I think some of the implications of points 3 and 4 are interesting; there's a lot in there, though. I would dispute the idea that technological developments haven't had productivity consequences for factory workers. In fact the problem is, I think, that productivity increases has created less demand for labor in the face of relatively static demand for its output (e.g. cars or what have you).

I do like this Rawlsian idea of a labor lottery leading to an increased welfare state - or God forbid a better education structure - but I'm pretty skeptical of growth in the short-term given Tuesday, even though you're obviously right that we won't see significant rollback.

Tyler Cowen on the Past and Future




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