It has become a cliché: the new normal. Indeed, so accustomed have Americans become to slow economic growth and stubbornly high unemployment, more than three years into the “recovery,” that it may not even seriously threaten Barack Obama’s re-election prospects. No one thinks the economy would be doing much better with someone else in the White House.
They are probably right. It is telling that neither Obama nor his Republican opponent has offered much of a plan to spur the economy, at least in the short term. So far as anyone has any short-term impact on the economy, it is the Federal Reserve, and even it is limited in what it can do. As it has been said, the Fed can print money, but it can’t print jobs.
It is common to fix the blame for this on the banking crisis. Economies typically take a long time to recover from “balance-sheet” recessions, as businesses and households focus on paying down debt and rebuilding savings. But what if the problem of slow growth has deeper roots than that? What if slow growth caused the crisis?
That’s the provocative thesis of the American economist Tyler Cowen, who spoke in Toronto Tuesday night. In his most recent book, The Great Stagnation, Cowen argues that slow growth is more the old normal than the new: Median incomes in the United States have been moving sideways for the better part of four decades, as have most measures of productivity.
While others have made much the same point, Cowen locates that decades-long slump in a still larger historical frame. Indeed, it may not be the era of stagnation that is the anomaly, but the long period of rapid growth that preceded it.
For the first three centuries or so of European settlement, he argues, America enjoyed the benefits of a number of “low-hanging fruit.” It had an abundance of arable land, for starters, which settlers could claim for free — and not only land, but resources. As the industrial revolution took hold, it had access to a similar abundance of labour, as millions left the farms for the cities; as, later, it could call upon seemingly endless reserves of skilled labour, as more and more of these new workers went on to get an education.
And, perhaps most critically, it profited from a truly astonishing series of inventions, from electricity to the light bulb to the automobile to the telephone. Much the same story could be told of other industrial countries, of course. But nowhere did land, labour and technological progress combine to produce such enormous wealth as in America.
But, one by one, the low-hanging fruit were eaten up. The land was soon allocated, tilled and mined. The movement of population into the cities and schools was completed: from 6% in 1900, the high school graduation rate peaked at 80% in the late 1960s. And, somewhere around 1970, technological progress seemed to hit a plateau. Indeed, by some measures the pace of innovation stalled some decades before that.
This seems hard to believe, in this age of technological marvels. But set beside Cowen’s list of revolutionary advances from the early 20th century, from the airplane to the assembly line to indoor plumbing, the point is at least arguable. What’s inarguable is the abrupt decline in productivity growth since the early 1970s, not only in the U.S. but over much of the industrial world — including, needless to say, Canada.
The problem, Cowen argues, is that Americans carried on (as to some extent we all did) as if nothing had changed — as if they would continue to grow steadily richer, just as they had before. When actual earnings failed to keep track with projected, they borrowed the difference. The financial crisis was the end result.
Is that, then, the future to which we are condemned, at least until some new burst of innovation lifts us off our technological plateau? Or are there still some low-hanging fruit within reach?
Imagine if investment decisions were based on the real economic costs and benefits of each, undistorted by tax preferences or business subsidies
I’d argue there are. Globalization is one. The migration into the cities and schools that Cowen describes is going on today across the Third World. Trade allows us to benefit from that enormous increase in productive resources, as much as they.
The Internet is a second. Two decades on, it is still very much in its infancy: We have not begun to realize its potential. The Gutenberg revolution made books widely available: Why, even an ordinary person could own one — several, if he could afford them. Today, a smart phone makes all of human knowledge available, to everyone, everywhere, all the time, instantaneously. If we have not yet figured out how to take full advantage of that, we will surely do so in time.
And last, there is policy. Of all the things that determines how different nations will perform at different times, the most important by far, more even than land, labour or technology, is the organization of economic life. Russia has tons of land, lots of labour, brilliant scientists. What it hasn’t had, historically, is good policy.
I’m not suggesting we should look to some dazzling policy breakthrough to save us. Quite the contrary: we need only to abandon some of our worst policy mistakes. Imagine if investment decisions were based on the real economic costs and benefits of each, undistorted by the present welter of tax preferences or business subsidies. Suppose we permitted competition to flourish within our moribund public education and health monopolies. Imagine if, rather than allow traffic to choke our cities, we put a price on road use. And so on.
It’s not quite the light bulb. But it’s a start.
< http://fullcomment.nationalpost.com/2012/09/12/andrew-coyne-economic-recovery-wont-happen-until-we-kill-off-bad-policies/ >
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