George Mason University economist Tyler Cowen has published a new e-book that is getting a lot of attention in policy circles. The book is entitled “The Great Stagflation.” In it, Professor Cowen sets out to explain the relatively slow growth and widening income disparity of the last 35 (or so) years. Washington Post columnist Steven Pearlstein has a quick run-down of Cowen’s main points:
Cowen’s thesis is that the period of 3 per cent annual growth in incomes that stretched back to the 19th century ended in the middle of the 1970s as the pace of innovation slowed. Before the slowdown, he argues, industrial economies realised rapid income and productivity gains by picking the “low-hanging fruit” offered by the industrial revolution’s key innovations. While we like to think the Internet, the iPhone and microsurgery have dramatically altered the way we live, those changes pale in comparison to the impact on living standards from the introduction of electricity, motor cars and penicillin. Cowen’s claim is that the industrial world has hit a growth plateau as innovation confronts one of the most enduring principles in economics: the iron law of diminishing returns…..
For me, however, the more intriguing argument in “The Great Stagnation” is that much of our recent growth may, in fact, have been a mirage. It is no coincidence, he writes, that during the recent decades of slow growth in incomes and productivity, three of the fastest-growing sectors of the economy have been education, financial services and health care. And while government statistics show productivity in those sectors growing at the same pace as the rest of the economy, other data suggest otherwise.
Although the United States spends at least twice as much on health care, per person, as other industrial countries do, Americans do not live any longer and often have measurably worse health.
Although spending on education has doubled in recent decades, average scores on standardized maths and reading tests have remained about the same.
And what does the average American have to show for all that innovation and job growth in financial services over the past 20 years? A series of booms and busts that has left stock prices roughly where they began.
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