Unemployment and the great stagnation

In the past week or so I wrote a summary post on how the people I read think about unemployment and the new American economy.

I also wrote a related post on how little medicine has progressed over the past 27 years. That lack of progress has a lot to do with why health care costs have risen faster than GDP. In the absence of substantial innovation the only way to improve outcomes is to spend more.

These memes are in the air. Two days ago Paul Krugman claimed that the large surge in US productivity from 1995 to 2004 was largely due to Walmart-style retail innovation (which, of course, required advanced IT support).

Yesterday Sewell Chan tagged the financialization [1] of the US economy as big contributor to the (second)  great crash of '09 (emphases mine) ...

Looking for a Legacy of the Financial Crisis Inquiry - NYTimes.com

... Greta R. Krippner, a University of Michigan sociologist whose book “Capitalizing on Crisis: The Political Origins of the Rise of Finance” (Harvard University Press) comes out next month.

“The report reinforces the view that financial activities should serve the nonfinancial economy, rather than the other way around, as has been the case in the U.S. economy over the last several decades,” she said.

That orientation toward finance — rather than the deregulation and avarice — is the real source of instability, according to Judith Stein, a historian at the City University of New York Graduate Center and the author of “Pivotal Decade: How the United States Traded Factories for Finance in the ’70s,” published last year by Yale University Press.

“Low wages, low interest rates to encourage consumption, and too much investment in housing and financial services because of the decline in manufacturing and other tradable goods – those are the underlying causes.”

That same day Tyler Cowen tied some threads, while plugging his Great Stagnation book in the NYT (emphases mine) ...

Incomes Are Stuck on Technology’s Plateau - Tyler Cown NYTimes.com

... From 1947 to 1973 — a period of just 26 years — inflation-adjusted median income in the United States more than doubled. But in the 31 years from 1973 to 2004, it rose only 22 percent. And, over the last decade, it actually declined.

Most well-off countries have experienced income growth slowdowns since the early 1970s, so it would seem that a single cause is transcending national borders: the reaching of a technological plateau. The numbers suggest that for almost 40 years, we’ve had near-universal dissemination of the major innovations stemming from the Industrial Revolution, many of which combined efficient machines with potent fossil fuels. Today, no huge improvement for the automobile or airplane is in sight, and the major struggle is to limit their pollution, not to vastly improve their capabilities.

Although America produces plenty of innovations, most are not geared toward significantly raising the average standard of living. It seems that we are coming up with ideas that benefit relatively small numbers of people, compared with the broad-based advances of earlier decades, when the modern world was put into place. If pre-1973 growth rates had continued, for example, median family income in the United States would now be more than $90,000, as opposed to its current range of around $50,000.

... there have certainly been gains in medical treatment, we may be overvaluing them. In education, we are spending more each year, but test scores have stagnated for decades, graduation rates are down and America’s worst schools are disasters.

There is an even broader problem. When it comes to measuring national income, we’re generally valuing expenditures at cost, rather than tracking productivity in terms of results. In other words, our statistics may be deceiving us — by accepting, say, our health care and educational expenditures at face value. This theme has been emphasized by the PayPal co-founder Peter Thiel in his public talks and by the economist Michael Mandel in his writings. And I’ve stressed it in a recent e-book, “The Great Stagnation.”

Sooner or later, new technological revolutions will occur, perhaps in the biosciences, through genome sequencing, or in energy production, through viable solar power, for example. But these transformations won’t come overnight, and we’ll have to make do in the meantime. Instead of facing up to this scarcity, politicians promote tax cuts and income redistribution policies to benefit favored constituencies. Yet these are one-off adjustments and, over time, they cannot undo the slower rate of growth in average living standards...

Cowen is infected with the Marketarian meme [3]. Since the Market is divine, the failure must be in innovation. Even so, I think he has some important things right.

He is too tentative though when he questions how much progress medicine has really made over the pasts quarter century. If we went back in time, and told doctors of 1984 what medicine  in 2011 was like, they would weep. "Surely", they would protest, "we must at least have beaten something like Rheumatoid arthritis or Multiple sclerosis".

On the other hand, I think Cowen (and, for that matter, Krugman), are missing the enormous impacts of IT innovation. Our Finance innovations were IT enabled, and our disastrous inability to measure and manage them arose in part from our inability to understand the systems we'd created.

So we've had three new additions to my summary article in one week. I think we're closing in on what whacked America between 1999 and 2011. Congress may again need four tries to get it right [2], but we are making progress. Once we understand what the heck happened, we have a start at recovering.

- fn --

[1] I point to the "virtual economy", more in my summary post. The rise of Finance was driven by both IT innovations and the rise of the vast manufacturing powers of China, Brazil and India.

[2] Washington’s Financial Disaster - Frank Portnoy - NYTimes.com - "Few people remember that the early investigations of the 1929 crash also failed due to political battles and ambiguous missions. Ferdinand Pecora was Congress’s fourth chief counsel, not its first, and he did not complete his work until five years after the crisis. Congress should try again."

[3] He is in denial about the extent of income skew vs. income growth. For example.

See also

• Japan Blocks the Young, Stifling the Economy: Another example of asymmetric distribution of employment. In the US we bias to the Finance industry, in the Japan it is biased against young workers. Same problems, different biases.
• Unemployment and the new American economy - with some fixes 1/22/11
• The Great Stagnation – Medicine or Who Ate My Prosperity «  Modeled Behavior: Smith agrees with me about medicine
• Krugman agrees with Tyler on the failure of technological innovation. As noted above, I think he's off about IT. Problem is IT is an enabling technology, not an end in itself.