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Saturday, January 29, 2011

Cowen: Innovation Is Doing Little for Incomes

I need to think about this more before responding:

Innovation Is Doing Little for Incomes, by Tyler Cowen, Commentary, NY Times: My grandmother, who was born in 1905, spoke often about the immense changes she had seen, including the widespread adoption of electricity, the automobile, flush toilets, antibiotics and convenient household appliances. Since my birth in 1962, it seems to me, there have not been comparable improvements. ...[C]ompared with what my grandmother witnessed, the basic accouterments of life have remained broadly the same.
The income numbers for Americans reflect this slowdown in growth. 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. ...
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. ...
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.
It’s unclear whether Americans have the temperament to make a smooth transition to a more stagnant economy. After all, we’ve long thought of our country as the land of unlimited opportunity. In practice, this optimism has meant that we continue to increase government spending, whether or not we can afford it.
In the narrow sense, the solution to the stagnation of median income will not be a political one. And one of the hardest points to grasp about this quandary is that no one in particular is to blame. Scientific progress has never proceeded on an even, predictable basis, even though for part of the 20th century it seemed that it might.
Science should be encouraged with subsidies for basic research, as well as private charity, educational reform, a business culture geared toward commercializing inventions, and greater public appreciation for the scientific endeavor. A lighter legal and regulatory hand could ease the path of future innovations.
Nonetheless, advancing discovery is not a goal to be reached by the mere application of will. Precisely because there is no obvious villain and no simple fix, and many complex factors behind success, science as a general topic doesn’t play a big role in American political discourse. When it comes to understanding our macroeconomic predicament, we often seem to be missing the point.
Until science has a greater impact again on average daily living standards, the political problem will be in learning to live within our means. Because neither major party seems to support a plausible path to fiscal balance, or to acknowledge how little control politicians actually have over future income growth, we unscientifically keep living in an age of denial.

I can't help myself -- one quick response: The uneven technological progress described above seems to provide a good reason for the government to be the agent of intertemporal transfers from the booming times to the times that are stagnating. In essence, this is just a business cycle with a long and uncertain periodicity, so the same types of stability arguments apply (particularly since "Scientific progress has never proceeded on an even, predictable basis," i.e. being alive during a boom time is mostly due to luck, not an individual's superior skill). Thus, while the argument above is that we are at a low point of the cycle, therefore the government should be less active, I think there is just as strong or stronger argument on the other side, i.e. that this is when government needs to become more active (both in terms of promoting innovation and in terms of smoothing the income variation due to uneven growth in productivity). The difference between us, perhaps, is that Tyler sees the technological plateau as permanent, or at least very long-lived (though he does say that sooner or later technological advances will come). I do not, I see the plateau -- if it exists at all -- as part of a longer up and down cycle.

Okay, that's not the strongest argument ever made, so one more quick response: More importantly, I also can't resist wondering whose incomes are stagnating and why. The economy will continue to grow. Yes, we've had a recent recession. But GDP has not and will not be stagnant over a longer time frame. Productivity increases will still drive economic growth. The question is how that growth will be shared.

The stagnation of income for typical (median) households in recent decades has little to due with stagnating productivity -- productivity has still been rising. It has much more to do with how the gains from rising productivity have been divided up. This is yet another reason why complaints about active government and "income redistribution policies to benefit favored constituencies" ring hollow. When you leave out that a mal-distribution of income already exists, i.e. when your implicit underlying assumption is that the people who did get the growth over the last few decades deserved every penny of it (despite bubbles giving false gains to people at the top, and many other problems), of course you'll oppose redistributive policies. But I tend to think that the gains were not distributed according to changes in productivity -- labor did not get its share -- and government intervention to correct that is appropriate.

    Posted by on Saturday, January 29, 2011 at 03:06 PM in Economics, Income Distribution, Productivity, Technology | Permalink  Comments (101)


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