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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

Highlights

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 89

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 130

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 425

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