Tuesday, February 22, 2011

Part 1 - Why Tyler Cowen is (probably) wrong

Since 1973 the US economy has experienced a slow down in growth rates. In particular, median household income has stagnated. This is linked to a slowdown in measured productivity growth. The reasons for this are not understood.

This is the first in a series of posts which will examine the issues raised by Tyler Cowen's e-book 'The Great Stagnation'. In this book Professor Cowen argues that a slowdown in technological progress was the reason. This book has been generally well received in the media.

Initially, I found this idea persuasive. From 1880 to 1970 the US underwent profound change. In 1880 41% of the labor force worked in agriculture. By 1970 this had fallen to 4%. Life expectancy at birth rose from 39 to 71. Per capita GDP rose by more than a factor of 5, from $3380 to $18400.

I think that a lot of this was driven by 3 major areas of technology. One was the oil fueled, mass produced internal combustion engine. This enabled the automobile, the airplane and the mechanization of agriculture. Another was the electrical power grid. This provided electric lighting at night, and allowed factories to be reorganized for better efficiency. Eventually, electric motors would drive refrigeration and air conditioners. The third was the near elimination of deaths from infectious diseases among children, thanks to vaccinations and improved sanitation.

Thinking about this further, I realized that there are some very significant areas of technological progress which Professor Cowen overlooks. There is a group of technologies I will call the globalization cluster. These are the shipping container, the jet airplane, the telecommunications satellite and the fiber optic cable. These helped to enable the global supply chain.

A far more important area is semiconductor technology. This lead to vast improvements in electronics, which lead to a revolution in office machinery. This should have been very significant for GDP, since much of America's GDP is produced by offices. Semiconductor based technology, which includes the Internet, is still a very active area of development.

I'm going to divide technological history into the period before 1880, 1880-1970, and 1970 to the present. Why those dates? Because the first power grid in the world was switched on in Lower Manhattan in 1880. Then in 1886 Benz introduced the first automobile. Those two inventions would define the 20th century. I choose 1970 because that was around the time that the US economy started to slow down.

In my next few posts, I will look at a few major threads of technological development, including ones that Dr Cowen ignores. Then I will look at what industries make up the US economy, and how they have changed over time. I will develop a simple model of the economy that just focuses on the major industries. Finally I will go on to look at how technology has affected each of those major industries.


  1. Actually, wages rose dramatically in the 1970s, causing a wage-driven inflation spiral that was ultimately crushed by Paul Volcker at the Federal Reserve. Wages have stagnated since that time. Why? The low-interest, low-inflation economy we've operated under since 1982 has made it much easier to underwrite debt, and the free availability of cheap debt to households has suppressed worker demands for higher wages. Debt has made up where wages left off.

  2. Real wages (ie inflation adjusted wages) did not do particularly well in the 1970s. See the chart posted at:


    I don't accept that debt has reduced the demand for higher wages. People are going into debt in an attempt to maintain living standards. Because fees and interest have to be paid on that debt, people end up being with less money to spend in the long run.

  3. "Professor Cowen argues that a slowdown in technological progress was the reason."

    Technological progress did not stop, but in order to actually contribute goods and services to the economy, every new technology had to devour ever-increasing amounts of cheap energy, mainly in the form of petroleum products.

    Unfortunately, U.S. production of crude oil, measured in barrels per day of crude oil drawn from wells, peaked in 1971, then began a slow decline, while America's minimum daily requirement of energy continued to rise.

    The unfortunate response to this discrepancy was the quick ramp-up of large-scale importation of oil and petroleum products. The U.S. began gorging on oil from the Persian Gulf.

    Within 2 years of the U.S. extraction peak, OPEC organized its members to sharply raise oil prices, resulting in a series of oil-price shocks which, continuing in very irregular form up to the present day, have gradually drained the health of the U.S. economy and drawn our country into a series of catastrophic oil wars.

    What happened, then, isn't really much of a mystery. The key U.S. mistake was continuing to use ever more oil per day while extraction of domestic crude oil went into decline.

    Since Jimmy Carter's loss to Ronald Reagan in 1980, as rising petroleum-related costs led the country into an inflationary wage spiral, neither political party has had the courage to make a significant effort to limit consumption of the aptly-named "black gold."

  4. "...every new technology had to devour ever-increasing amounts of cheap energy, mainly in the form of petroleum products. "

    This was very true from 1920 through to the 1960s, as things like cars, tractors, trucks and airplanes were fueled by large increases in oil production. Since 1970 growth has tended to shift towards semiconductor based technologies, and things like finance and healthcare, which don't use a lot of oil.

    Now it is true that oil imports suck wealth out of America and are bad for the trade deficit. The oil crisis was in 1973, so the timing is about right for it to have played a role in America's growth slowdown.

    My current opinion is that oil is not to blame for slowing growth and stagnating median incomes. However, this is an important topic which I hope to someday (but not soon) write a proper post on.