Wednesday, March 2, 2011

Part 9 - Conclusions

Since I started writing these posts, I have changed my mind about Professor Cowen's hypothesis. Looking at recent technologies, and comparing them with older ones, I struggle to find anything which had as much impact as farm mechanization or mass production. From a productivity point of view, those two innovations were huge.

If they drove the economy forward, then economic growth should have picked up after they were introduced. This is exactly what is observed. From 1880 to 1920, per capita GDP growth ran at about 1.3% per year. From 1920 to 1970 it grew at 2.4% per year. In 1914, mass production was perfected with the introduction of the assembly line, and by 1917 mass produced farm tractors were leaving the factory.

By about 1960 there were still a few million work animals left on American farms. After that date the Agriculture Department stopped tracking their numbers. By 1970 the fruits of farm mechanization and mass production had been fully harvested. Perhaps that is why per capita GDP growth slowed down after 1970. From 1970 to 2010 it grew at 1.8% per year.

However, if median incomes had grown along with GDP then they would have doubled over the period. A great deal of the reason for the stagnation in family incomes is the shift in income distribution towards the wealthy. After 1965 large numbers of entry level workers entered the workforce due to immigration, the baby boom, and the trend towards working women. However, entry level workers are not able to compete for the best paid jobs, which require years of experience. Given the expansion in the labor force, it is not really surprising that median wages stagnated, while a few continued to do very well.

There's another factor which is important for the slowdown in economic growth and  stagnation in the median wage.


As I showed in Part 6, the composition of the US economy has shifted greatly since 1970. Agriculture and manufacturing are industries which historically had excellent productivity growth. As their contribution shrinks, it is not surprising that growth in the overall economy slows down. Health care in particular does not have a good track record of productivity growth.
It is also possible that health care and finance require a different mix of skills from agriculture and manufacturing. That could explain the stagnation of median wages, combined with strong wage growth for those with the right skills.

Why has this shift happened? Foreign trade obviously plays an important role in manufacturing. A saturation of the market for manufactured goods and agricultural products is a more important factor. Government wealth transfers in the form of Medicare payments are a hugely important factor in the growth of health care.

The shift in economic activity towards health care and finance poses problems for the US economy. Agriculture and manufacturing are both industries with well functioning, highly competitive markets. In health care, markets do not function well because bills are paid by intermediaries. Consumers are weak and poorly informed. Medicare spending is mandated by the government.

In finance, many consumers are not really aware of the cost of financing a purchase rather than paying cash. People have to pay bank fees and charges, even if they feel they are unreasonable. Many end up paying far more to their bank or credit card company than they ever intended.

As health care and financial industries take a greater bite out of stagnant median incomes, it is not surprising that many people feel squeezed. A new car or  a steak dinner can be delayed when finances are tight. Mortgages, insurance, credit cards and medical bills are a must-pay. New products and services, like cable television, compete for a stagnant or shrinking number of discretionary dollars. It is not surprising that many Americans feel the squeeze.

1 comment:

  1. I struggle to find anything which had as much impact as farm mechanization or mass production. From a productivity point of view, those two innovations were huge.

    Yes. They completely changed the structure of societies, driving them from mostly agrarian (with a few exceptions, like the Netherlands) to mostly urban.