The Great Stagnation: We Need More Innovation

Why does it seem like America is in disarray?  Why are median wages rising only slowly?  What caused the financial crisis in the last few years?  Why do both Democrats and Republicans hold positions that are bound to end in fiscal disaster?  These are just some of the questions that Tyler Cowen addresses in his new book, “The Great Stagnation.”

Innovation

After reading an article in Business Week about Tyler Cowen entitled “America’s Hottest Economist,” I found myself wanting to read his latest book.  I was not disappointed in it; it was a very good, short read (it’s only 69 pages long).

“The American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies.  Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there.”

The basic premise of the book is that, as a society, we’re entering a new phase in our economy, when we can no longer count on the rapid innovation that we’ve experienced in the last 200 years.  In the last 200 years, we’ve had a HUGE amount of innovation:

  • Electricity
  • Electric lights
  • The telephone
  • Indoor plumbing
  • The tape recorder
  • The television
  • The Internet
  • The computer
  • In agriculture, we’ve also seen the invention of the harvester, the reaper, the mowing machine, and the development of effective fertilizers.

In the last 20 years, there hasn’t been innovation that’s been as significant to our economic growth as any of these things.  Most innovations in the last few decades have been refinements of earlier inventions.  With the exception of computers and the Internet, life isn’t so different than it was in 1953.

In short, we’ve picked all of the low-hanging fruit in terms of economic growth, and we will have to propel much more innovation in the coming years to match the economic growth of the last 200 years, or we’ll enter a period called “The Great Stagnation.”

Cowen also talks about the cause of the recent financial crisis.  He says that the core problem in our economy is that “we thought we were richer than we were:”

In essence, we’ve been making plans—whether consciously or not—as if we would have ongoing productivity growth of 3 percent or more, along with asset prices that would accompany such a boom.  When you combine plans based on a 3 percent gains with a reality of much inferior performance, sooner or later you get a crash.

Cowen lays the blame not solely on those in the financial industry, but says that “millions of people were complicit, whether intentionally or not.”  The financial crisis happened because people over-leveraged themselves, their companies, and their communities.

How do we avoid the Great Stagnation?  Cowen says that future innovation is the key, and offers several solutions:

  1. Take advantage of China and India—if we take advantage of their manufacturing and services efforts, it will “free up a lot of our time and energy for innovation.”
  2. Use the Internet to encourage more productivity in the scientific community
  3. Raise the social status of scientists
  4. Bring greater quality and accountability to our K-12 schools
  5. Be ready if more low-hanging fruit comes our way – new technologies can upset old balances of power, and we need to respond to new technologies well.

Questions: Do you agree with Cowen that the United States may be in for long-term economic stagnation? You can leave your comments by clicking here.


Great StagnationOverall Rating:
Title: The Great Stagnation
Author: Tyler Cowen
Publisher: Dutton Adult

The publisher provided me a free copy of this book for review purposes.

  • http://brocmiddleton.blogspot.com/ Broc

    I do not agree with Cowen’s premise at all, from what you have said about his book it find it to be kind of “prisoner of the moment”. You can not simply throw out computers and the Internet and say besides those two things nothing big has happened. Especially when the internet has had more of a global effect than arguably an other invention/discovery in the history of man, with the exception of fire.  I disagree with Cowen because of one primary principal – Moore’s Law.
    Moore’s Law – describes a long-term trend in the history of computing hardware. Basically computer processing performance is DOUBLING every 2 years. That is an exponential gain, and it has increased on that path for the past 20+ years.  20 years from now we can not even image the ability computers are going to have, and with that the tools that humans have the potential to create, innovate, and research the in the world around us.  The more tools we have the more innovations we can generate and computers are growing at a rate that nothing else ever has. 

    • http://bobewoldt.com Robert Ewoldt

      Broc, I may have not represented Cowen’s premise very well. It’s not that
      he says that we’re not innovating. We are innovating. But the innovation
      that we’re doing today does not add as much to the growth of our GDP as it
      did in the past. Increasing processing performance by 100% over 2 years
      gets us only marginal improvement in our lives. It helps us get information
      faster and faster. it doesn’t help us live our lives that much better.

      His data is showing that in the period from 1880-1960, innovation added 3%
      to our overall growth per year. From the period 1960-present, it’s adding
      0.5% to our overall growth. And, when you compound that lesser growth over
      time, you see a large impact.
      On Tue, Jun 7, 2011 at 1:03 PM, Disqus <

  • http://brocmiddleton.blogspot.com/ Broc

    The longer Moore’s law stays consistent the more dramatic the effect it will have, but perhaps innovation comes in waves…but how does the old saying go…”necessity is the mother of invention” so perhaps as things level off,  the greater the need for invention. So do I fear a long stagnate period…no

    • http://bobewoldt.com Robert Ewoldt

      And Cowen says that he doesn’t think that we’re just done with innovation.
      At the end of the book, he says there are several things that we can do to
      return to a huge innovative period.