We spend more on health care than ever before, but we are less healthy. We spend more on education than ever, but our children are poorly educated. And in all the ups and downs of the economy of the last decades, we are about where we were in the 1970s. Also, the internet has had far less impact on productivity and economic growth than we think. Our economy is plagued by the law of diminishing returns. So says economist Tyler Cowen, as discussed by Steven Perlstein:
Cowen’s thesis is that the period of 3 percent 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 realized 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.
As you might imagine, a spirited debate is underway on economics blogs about Cowen’s view that the Internet may not really be the productivity bonanza that was once predicted. So far, he notes, the Internet has generated far less income and far fewer jobs than earlier innovations – think of the automobile – and the benefits it has yielded have been confined largely to the upper end of the income scale.
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 math 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.
For Cowen, the central economic reality of the past three decades is that median household incomes have barely budged, even after adjusting for inflation and other factors. And his hypothesis is that too much money and talent and effort have gone into sectors where real productivity gains are hard to find. Once Americans became rich enough to satisfy ourselves with the basic necessities of life, it was only natural that we would decide to spend our additional income – our marginal dollars – on health care, education and financial services. We now discover, however, that each of those marginal dollars has generated less than a dollar of real value.
Does he have a point?