'The Great Stagnation' by Tyler Cowen

The Great Stagnation by Tyler Cowen is a very short book; I read the hardcover edition that clocks in at fewer than 100 pages but the work was originally published on kindle only. Though it’s short enough to not be considered a full length book I would prefer if more books were this length. I’ve found that it has the effect of focussing the authors attention on what is truly important in their thinking and their contribution to the wider literature.

Cowen writes about an apparent decline in the rate of growth of living standards and speculates as to its cause. He attributes the slow down, not to any individual policy problem or projection, but instead to society exhausting all of the available near-term low hanging fruit. Growth rates have declined not because of anything policy related; instead because the challenge of making a developed economy richer is actually a lot harder than we initially presupposed. Now that we’ve exhausted the low hanging fruit of the industrial revolution and the initial rounds of globalisation we are seeing growth rates return to low levels. Cowen is in essence arguing that our current situation is the norm and that the previous situation was a divergence from the mean.

Cowen is ultimately concerned with the material wealth of a group of people once you net out all of the debt. He points out that taking on huge amounts of debt to finance a short term increase in living standards is not sustainable policy. In short, without real income and wealth growth, the short term increase in debt is a single-use policy which cannot be repeated by future generations. In a low growth world, we’re using up all of our descendants’ options by placing them in debt. There’s also a parallel here to climate change, potentially we’re using up all of our descendants’ environmental resources as well. No wonder children are so depressed, we’re collectively stealing from them.

I am not entirely sure of the correctness of Cowen’s thesis. Are we wealthier in the intangibles of life? I’m not sure. What I did takeaway is that my life would not be completely unrecognisable to the childhood version of myself. I don’t have anything that would be consider truly transformative, I do have a lot of incremental improvements and access to a wider set of choices though. Something to think about.

From the book itself my key takeaways were:

Government is valued at cost not at market prices: If I spend $50 on a jacket, it’s because the market values the jacket at $50. If the Government spends $50 on something then it’s valued at $50 regardless of it’s worth. There is no real market for government services. Cowen uses the simple thought experiment of whether a dollar spent on building a new road is worth the same to society as a dollar spent maintaining it. It’s clear to me that the value spent building it is worth a lot more as it opens up society to a whole new realm of economic activity that was previously unavailable. The GDP measures don’t care when it comes to Government, A dollar is a dollar.

This is interesting when we look at Governments spending more money on various services, ignoring transfer payments. Governments love to promise that they’ll spend more money on healthcare as an example, people love hospitals. We never really consider whether we’re getting value for this. What we’ve collectively managed to do is convince ourselves that the input is worth the same as the output. We don’t measure the health of the nation, we measure how much we spend on healthcare. In a parallel, we don’t measure the education of the nation, we measure how much we spend on education. In this world view, any dollar spent on health is a good thing, regardless of the outcome. It’s not hard to see how graft, incompetence and inefficiencies can flourish in such an environment.

If we consider productivity gains, it should be possible to achieve the same outcome without expending any more resources. That is, should we not be aiming to maintain or improve our level of healthcare and education by using less? This happens in almost every other sector except the ones that governments tend to monopolise. Maybe it’s just less sexy? Politicians and bureaucrats want to be able to cut the ribbon on a new stadium, a new school or a new hospital, it’s a great photo op. Releasing some statistics that we’ve been able to achieve the same outcomes with 10% fewer resources. A lot less sexy. No photo op either.

This strikes me as something that needs to change. If we can see improvements in these areas for the same effect then we’ll free up resources that could be used in other areas. We need to start measuring outcomes not inputs.

Governments lie about what is possible: I cannot count how many times I’ve seen a rosy projection from a government body about returning to a much higher growth rate. There seems to always be something that gets in the way though. Whether it’s a financial crisis, oil prices, inflation, a pandemic, asset bubbles or the like. When almost every single forecast has proven to be false, it’s potentially time to rethink what is possible for Government.

I’m thinking more specifically here of the “Big Budget” mindset that exists within most of the population. Budget day is eagerly awaited by special interest groups as they wait to see how much of the economic pie they’ve been able to capture. In a world where growth rates are low there isn’t really room in a budget to spend except by taking on debt. This then is the lie. Our governments talking and spending as though we’ve got much higher growth rates than we actually do.

Basically, we need to stop pretending that our governments will be able to magically solve our problems.

Transport and Communication ability let organisations scale: This is something that struck me as true immediately upon reading it. Without low cost, fast and reliable transport and communication technologies our organisations are fundamentally limited in size. A large organisation will implode under its own mass if it cannot communicate with its distant parts. Alternatively, it can survive only through decentralising control and power to autonomous regions or business units.

Looking back over the last few decades the key change has been the size of our organisations, in particular, the size of our Governments and our corporations. We now have the means and technology to support huge sprawling bureaucracies relatively efficiently. I guess the question Cowen wants us to ask ourselves here, should we be supporting such large organisations?

Files versus Documents: Another little thing, not a major point but an interesting concept to me, we have produced documents since the earliest part of written culture but a document is not a file. A file is an organised piece of information that is readily available. To manage a large organisation requires the shift to files from documents. We’ve moved on from European and Chinese scholars copying manuscripts by hand to the internet where we’re able to automatically generate files on people based purely upon their metadata.

Perceived Growth versus real Growth leads to Crisis: This struck me as being true as a first take but I’m not entirely sure how well it holds up. The concept is simple. When we believe that our economic future is looking rosey we’re more inclined to take on debt, that is, to bring forward the future gains into today. This, as a strategy, works swimmingly if the growth materialises. We’re better off today and we pay down the debt with our improved earning potential in the future. A win for everyone.

But what happens if the growth never materialises? In this case we still have the debt, we’ve still borrowed against those future years but we now no longer have the increased earning potential to pay down those debts. In fact, if our earnings remain the same we’re now poorer in real terms in the future as we’ve consumed some of that potential today. This is what leads to the crisis. As we become poorer we begin to default on our debts, this causes a ripple effect and eventually the whole house of cards comes crashing down. In other words, a Minsky Moment.

The reason I’m not entirely sure on this one is that it seems too simplistic too be true? Perhaps this is my own personal bias though. Maybe the simplest answer is of course the correct one. On the other hand, maybe this just shifts the question to be why are we perceiving growth to be higher than it actually is?

Make Science a higher social status: This is the primary solution that Cowen offers and I must admit it’s a bit lacklustre though it does ring close to home. In a previous life I completed a Ph.D and was on the pathway through Academia. The experience was, quite poor, to say the least. I’m glad I switched away. Would I have stuck it out if science had a higher social status and more pedigree? Possibly? On the other hand, there is something that would need to fundamentally change about the hyper-optimised, stress riddled paper mill that is modern day academia to make me want to go back.

Of course, we have a massive glut of Ph.Ds which Cowen ignores. We are churning them out at a rapid rate without anywhere to put them. Why would this occur if the social status was so poor? It’s a massive issue in the sciences. Perhaps the challenge here is the same as in healthcare and education? We’re looking at the inputs. Perhaps not all science is created equal? Perhaps we’re misallocating our resources here and we need to spend more on things that will improve our material wealth versus the softer sciences? Hard to say but making science a higher social status would most likely attract and retain a stronger cohort of individuals.

Conclusion

Overall, it’s a short(ish) read that you can smash out in an hour or two. It’s relatively good and thought provoking though has some gaps. No real solutions are offered. A 4/5 read for using so few words to make me think.

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