The Great Stagnation

Book notes for "The Great Stagnation", How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better


Last annotated on March 24, 2017

Political discourse and behavior have become increasingly polarized, and
what I like to call the "honest middle" cannot be heard above the din.
loc 56

We have failed to recognize that we are at a technological plateau and
the trees are more bare than we would like to think. That's it. That is
what has gone wrong. loc 65

Around the globe, the populous countries that have been wealthy for some
time share one common feature: Their rates of economic growth have
slowed down since about 1970. That's a sign that the pace of
technological development has been slowing down. It's not that something
specific caused the slowdown, but rather we started to exhaust the
benefits of our previous momentum without renewing them. loc 69

Today, in contrast, apart from the seemingly magical internet, life in
broad material terms isn't so different from what it was in 1953. We
still drive cars, use refrigerators, and turn on the light switch, loc

One might argue that we have ongoing and future low-hanging fruit in the
form of limiting job market discrimination against women, African
Americans, and other unfairly treated groups. The more that women and
African Americans move into higher-productivity jobs, the more the
economy benefits. Still, we've already seen a lot of these gains in the
last forty to fifty years, and that is another reason why future growth
may continue to be relatively slow. When it comes to boosting the rate
of economic growth by discarding discrimination, many of the most
important advances lie behind us. loc 125

we might be due for some more of it in some form. This makes me an
optimist for the longer run. The point remains that we don't have so
much low-hanging fruit today. The internet aside (I'll cover that in
chapter three), we're trying to eke out gains from marginal improvements
in how we've done things for quite a few decades. That kind of process
isn't going to yield massive improvements in our living standards. loc

A lot of the world, by the way, has a form of low-hanging fruit that the
United States does not, to wit: Borrow and implement the best
technologies and institutional ideas of North America, Europe, and
Japan. Sometimes economists call this "catch-up growth." By definition,
the world economic leader can't do that, but we can see that countries
such as China are learning how to pluck low-hanging fruit, and to their
benefit. loc 134

For instance, at a growth rate of 2 percent a year, an income or economy
doubles in size about every thirty-five years, and living standards
double, too, at least as measured by dollars and cents. At a 3 percent
rate of growth, living standards double about every twenty-three years
or more, or less than once every generation. After seventy years' time,
the one society will be about twice richer than the other; that's
comparable to the difference between the United States and a country
like Portugal or Slovakia. loc 155

A dollar spent on welfare for the poorest is more valuable than a dollar
spent extending the program to better-off but still poor cases. And so
on. Yet when it comes to national income accounting, and measuring GDP,
we are valuing every one of these different expenditures at \$1. In our
measurements, we are assuming that the quality, importance, and efficacy
of government stays constant as the size of government grows. Over time,
an increasing percentage of what we spend on government is spent on
optional rather than core services because the core services tend to
have been around longer. Another way of putting it is to say that the
marginal value of added government, even if positive, falls as
government grows larger. This statement is not antigovernment; it's just
common sense. Thus, usually, when we spend another dollar through
government, it is worth a bit less-on average-than the last dollar we
spent on government. Government, at the margin, is becoming less
productive. Yet, when measuring GDP, we treat each dollar of government
spending as if it is equal in value to the previous dollars that were
spent. We're valuing dollars spent on highway extensions as if they were
worth as much as the dollars we spent on building the core roads that
link major cities. loc 266

Government consumption spending, education spending, and health care
spending overlap to some extent, but in total, without double counting,
they still exceed 25 percent of U.S. GDP. They are also three of our
most rapidly growing sectors, and at least two of them-health care and
education-ought to be two of our most dynamic sectors. Those are also
three sectors where it is especially hard to measure value and
especially hard to bring about accountability and clear results. They
are, to my eye, also three sectors where there is massive government
distortion of incentives. Arguably, those are three sectors where we are
overestimating quality and overestimating results and thus not getting
enough for our money. That means we may well be a good deal poorer than
the measures of productivity and gross domestic product indicate. loc

We're living the age-old wish of getting away from money, money, money
and finding some of our biggest innovative successes in sectors that are
good for us but not revenue intensive. We're getting away from
materialism, at least in some critical regards. We may still lust after
the fancy car, but I see a lot of people looking inward. They are taking
lower-paying but more interesting jobs, which offer a greater sense of
challenge and control. I see a lot of well-off people cruising the Web,
and cherishing their Twitter feed, rather than shopping for diamonds.
loc 525

I can understand the sentiment, since the 1950s brought a lot of growth,
based on a lot of low-hanging fruit. Yet Krugman wants to mimic some
very particular features of the 1950s: high marginal tax rates, high
rates of unionization, and a relatively egalitarian distribution of
income and wealth. Those are all possible when the low-hanging fruit is
there to be plucked, but we can't just wave the policy wand and
re-create the crucial features of that earlier world-namely rapid
economic growth-by passing laws. Krugman is pushing policies that
require high real income growth, precisely when real income growth is
relatively low. He is putting the cart before the horse and asking for
some burdensome policies precisely when they would be toughest to bear.
loc 540

The current claim, circa 2010 and endorsed by the Republican Senate
leader Mitch McConnell, is that these income tax cuts pay for themselves
by generating extra revenue. Of course the economic evidence very much
suggests the contrary, namely that most cuts in tax rates also will
lower government revenue, as did the Bush tax cuts. loc 563

Lower levels of economic growth make it harder to satisfy the swarms of
interest groups in Washington, DC, and around state and local government
buildings across the nation. A simple model of American politics is that
interest groups are threatening to seize most of the economic pie but we
pay them off by throwing them some subsidies to maintain political
order. Think of tax breaks for corporations, excess job security for
K-12 teachers, or high reimbursement rates from Medicare for medical
device makers, to name a few examples among thousands. The interest
groups pick up the crumbs, they are sated for a moment or two, and the
economy meanwhile grows enough to finance the side payments or bribes.
Without these payoffs, the interest groups would not accede to the
status quo; their appetite for special privileges would eventually choke
the economy. As the rate of economic growth slows, well, you can see the
problem. It's hard to buy off the various interest groups because
government revenue is down, and they become more and more likely to
engage in a "fight to the death" over political control. loc 576

> rent-seeking reminicent of French oligarchy pre-revolution

Transportation allows published bureaucratic dictates to be distributed
and shipped at relatively low expense. "Government by ox cart," so to
speak, cannot be very large or very powerful. loc 605

> Qin dynasty managed it, although the outskirts did split again and
> again, or in later dynasties were in-effect small countries in
> themselves, rules by a nespotic aristocracy

Prior to the American railroads, which arose in the middle of the
nineteenth century, private business corporations also were not very
large. The costs of control and large-scale organization were too high;
no single business had a truly national reach, and government did so
only very feebly. loc 637

> East-india company? they had *global* reach. Can wonder what who
> happen with a Mars colonly, so far away from its parent government,
> although they would have fast communications compared to 1800s.

Madoff's fraud was possible only because so many people trusted him. The
more people trusted him, the easier it was for Madoff to gain the trust
of yet others. A small amount of initial trust snowballed into a larger
amount of trust, yet most of that trust was based on very little
firsthand information. Rather than scrutinizing the primary source
materials behind Madoff's venture, people have told reporters again and
again, they looked first and foremost to the reputations of those who
trusted Madoff. loc 739

there remains some argument for fiscal stimulus as a braking measure on
the downside. Still, replacing private debt with public debt won't
restore prosperity because it doesn't create anything. loc 768

What else can we do? My recommendation is this: Raise the social status
of scientists. loc 806

Yet the move from rapid economic growth to very slow growth hasn't
ripped apart their government or their social fabric. Japan is seeing
relative economic decline, but life in Japan for most people is still
pretty good. At the microlevel, Japan has instituted a lot of small
quality improvements, everything from better French pastries to
automatic umbrella wrappers at the entrances of the major department
stores, for rainy days. It was a common platitude-during the boom years
of the 1980s-that Japan was the future and that America needed to follow
and learn from Japan. The funny thing is, those claims might have been
true, but in the opposite direction of how they were intended. Japan is
an object lesson in how to live with a slow-growth economy. loc 846