Wednesday, March 15, 2017

The Complacent Class by Tyler Cowen

I recently finished reading The Complacent Class by Tyler Cowen. It’s an interesting book that covers a lot of ground, but one of the things I found most interesting is a response to criticism of one of Cowen’s previous books.

In The Great Stagnation, Cowen argues that income growth has stagnated since about the 1970s, a claim that I (and I'm in good company here) find pretty implausible. I the early half of the 20th century, we went from indoor plumbing being a luxury to it being a necessity. We saw automobiles, refrigerators, televisions, and other appliances completely penetrate the market, approaching ownership by 100% of households in most cases. We saw massive growth in the 3-4% per year range (as in, you could expect your wage to grow at 3 or 4% per year on average over these decades). By some time in the 70s, the story goes, the low-hanging fruit had been plucked at growth slowed. It’s been at about 1-2% per year since. (Some even claim that wage growth has stopped completely for the middle class, but I think this uses implausibly pessimistic assumptions and ignores a lot of relevant facts.)

The response to Cowen’s stagnation argument is that official income and growth statistics miss a lot of the picture. Official inflation numbers overstate inflation, which has the effect of pushing up past wages when we put them in current dollar terms. (If past wages are overstated, then total growth in wages is understated.) Technology improves the quality of various products, so it’s hard to compare a “phone” from the 80s to a “phone” today (or a TV or a washing machine or an automobile). Some products were not widely available or didn’t even exist in the 80s. How do you measure “inflation” on computers and cell phones (oops, I mean smart phones)? Houses have gotten bigger, food at the grocery store comes in wider varieties, etc. Also, the internet. Some of these new items dominate how we spend our leisure time. We literally could not have purchased them in previous decades. In short, “stagnation my butt.”

Cowen responds to this response by trying to measure the value people objectively place on things like smartphones and the internet. He points to studies of the elasticity of demand for internet service; when the price goes up, people cancel their subscription. If these things were so valuable, you'd expect demand to be much less elastic than it apparently is. Presumably something similar happens with smart phones. He also does a simple calculation to check the overall plausibility of the “unmeasured growth” claims. He points out that if the pre-70s growth rates had continued, today’s median income would be in the $90,000/year range, as opposed to the $50,000/year range we actually see. So are the anti-stagnationists actually saying that we’re willing to pay $40,000/year for all these technological improvements? (Smart phones, the internet, laptops, etc.) Admittedly this sounds implausibly high. It’s hard to imagine someone literally forking over $40,000 for internet and a smart-phone plan.

My response is to say, “What was economic growth supposed to look like?” The early part of the century saw an enormous build-up of “stuff.” Massive amounts of steel and copper and energy were required to make all those cars and the plumbing infrastructure and the household appliances. Supposedly continuing on the pre-70s trajectory would have made median household incomes grow from $50k/year to $90k/year; let’s round up to $100k and call it a “doubling” for shorthand. So, were we supposed to double the amount of steel and energy and cloth we used? Were we supposed to have twice as many clothes and cars and washing machines as we had in the 70s? Was the sheer tonnage supposed to have doubled? Some anti-stagnationists (I’m thinking Matt Ridley’s book The Rational Optimist, though I don’t have any one passage in mind) like to argue that recent growth has been about doing more with less, not simply having more stuff. We turn the same amount of cotton and wool into nicer clothes with fewer manufacturing imperfections. We make a car of similar size and structural integrity out of less steel; its lighter engine delivers more power using less fuel. It’s not obvious to me how this would affect national income statistics. If you make more cars out of the same amount of steel, does rising GDP totally capture this? If those cars last twice as long as older 70s-era cars, they essentially have double the value to their users. But they aren’t going to double in price, because everyone else is selling cars like that now (price is a function of supply as well as demand).

Cowen conjures the image of a median household earning $90k a year deciding whether or not to fork over almost half of it for internet, a smart phone and maybe a couple of other devices. We’re supposed to scoff at the implausibility of it, but I think that’s more or less the decision American consumers have made for themselves. It didn’t happen all at once, but incrementally we scaled back parts of our economy as the internet and devices have made leisure more readily available. People who partake of these new options (which is most of us) spend a very large portion of their leisure time on them. Many of these services are free, at least at the margin. I can use Youtube, Instagram, Facebook, Twitter, and Google as much as I want without incurring any extra charge beyond the monthly cable/internet bill. And I can watch as many movies as I like on Netflix and similar services once the monthly fee is paid. We are better connected to our fellow creatures, we have more entertainment options than ever before, and we have all the knowledge of humankind at our fingertips (if there’s an ungated link), mostly for free. It’s misdirection to fixate on the amount of money spent on these services; these are extremely important parts of our economy as measured by the time people spend on them.

Contra Tyler Cowen, I think Mr. Ninety-K-a-year would soon get bored of his pre-70s technology and shell out enormous sums trying to replicate what we have today, and mostly failing to do so. If we managed to get him a smart phone and a home internet connection, he’d scale back his work hours and spend more of his time on leisure. “Pre-1970s work hours are for chumps! I’m spending more time at home, and more ‘work’ hours screwing around on the internet!” (Average annual hours worked fell by about 100 hours/year since 1970, from ~1900/year to ~1800/year. I’m not sure Cowen addresses this rise in leisure hours in his books, but it seems like an overlooked point. My apologies if he did address it and I missed it.)

I can imagine some material innovations that would be enormously enriching. Nuclear fusion, or something else that brought us nearly unlimited cheap energy. Faster air travel, or automated cars, or modernized computerized rail transport, would make it easier to visit people and places at great distances more cheaply. Cowen discusses these potential improvements and bemoans their failure to materialize. But a question interrupts this daydream: “To what end?” Cheaper energy would be welcome in the third world, where lack of cheap energy is a real killer. But to the American middle class? Our biggest household energy use is climate control. Is it that big a pain to throw on some socks and a sweater if your house is inadequately heated? Or to remove layers in the summer?  Skype and Google Hangouts aren’t perfect substitutes for a real-space visit, but couldn’t better virtual reality eventually substitute for faster travel? It’s easier to move bits than atoms across the globe. No doubt we’d find new uses for all that cheap energy. I don’t want to suggest that it would simply lighten the load of our current biggest energy hogs (climate control and transportation). But it’s hard to imagine what “sustained growth” of the pre-1970s type looks like. Our demand for sheer “tonnage of stuff” has been nearly satiated. We’ll probably keep getting better and faster computers and devices. We’ll get better communications technology and entertainment options. These changes will come gradually and will not be reflected in national income statistics, but once they happen nobody will seriously want to return to a previous decade’s technology. Leisure will increasingly look more attractive than work at the margin (or entirely for some people!).  We’ll see working hours for the median worker fall, and we’ll see a relatively few mega-productive workers from the entrepreneur/hacker culture creating enormous amounts of value, most of which doesn’t get captured in GDP (because much of it will be given to the consumer for free).

I’ve rambled on for two-and-a-half pages about a small piece of Cowen’s book, which is not really central to his overall thesis. Do read The Complacent Class. There’s much in it I liked. I just don’t quite buy the notion (what follows is my completely unfair summary of his thesis) that we should have been taking big risks and living less comfortable, cozy lives in pursuit of space travel and faster airplanes and flying cars. Read Arnold Kling’s review here, my favorite so far.

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