I had the chance of reading Tyler Cowen’s ‘The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better’. The title is a bit of a mouthful (for which good reason I shortened it to ‘The Great Stagnation’ in the title) but the ideas presented in this short book (short and cheap, let me say; also note-worthily first published on the Kindle Direct Publishing meaning as an e-book) are very interesting and thought-provoking.
More skilled and informed people have written reviews of this book describing them in great detail (a few noteworthy ones: the Economist’s Economics blog‘s and the National Review Online’s Reihan Salam’s) so I will try not to re-write one. Suffice to say that the book presents a new(er) view on how we should think of the 2008 Recession as well as of the general decline in the growth rates that has been a prominent feature of the last thirty-fourty years in most Western countries. This era has been termed by Mr Cowen as the Great Stagnation and a short summary of this period stands as follows:
If one sentence were to sum up the mechanism driving the Great Stagnation, it is this: Recent and current innovation is more geared to private good than to public goods. That simple observation ties together the three major macroeconomic events of our time: growing income inequality, stagnant median income, and […] the financial crisis.
This view is further described through defining the ways the Western world and the US in particular have driven their growth for most of the 19th and 20th centuries, extending these to the growth of government (as per cent of GDP) and lastly explaining the financial crisis. The given explanation and reasoning for the financial crisis sounds (at its most basic level) as follows:
… there are truly dozens of reasoned, persuasive, articulate explanations. But let’s place them in a broader context. How did we make so many bad mistakes at the same time, all pointing in more or less the same direction?
Here’s the eight-word answer: We thought we were richer than we were.
And he continues with a description of how this overconfidence actually brought about disastrous results. As part of the problem that we are facing today he brings that the decision-makers, politicians, cannot think long-term since they are more interested in the next re-election and whether they’ll get their seat back or not than in issues which could profit the country in a score of years (might be worth thinking whether this aspect makes the authoritarian Chinese or Singaporean models better suited; and how the Australian governments of the 80’s and 90’s managed to push through reforms which have established the continent as one of the so-to-say winners of this recent Recession). Here’s the exact words of Mr Cowen:
It is easy to see why politicians might wish to allow or encourage this kind of risk taking. Many politicians have time horizons of only two, four, or six years, if that. The short-run gains in consumption were evident, everyone seemed happy, and after all, most of our congressmen get reelected. Why shut down the game?
The book does offer a solution (or close enough to one). What he does suggest us to do, mostly to boost our innovation to get us all back on the track (innovation drives growth, especially if we can manage to cross the new technological barrier as we’ve previously done), is to support science. Namely, as he says:
Raise the social status of scientists. […] We shouldn’t trust individual scientists uncritically, but we should respect the scientific enterprise in general at a much higher level.