The Wall Street Journal's Bob Davis and David Wessel are perhaps the two best business reporters working in newspapers today. In 1998 they published a book that Paul Krugman praised as "the best … I've ever read about how a changing economy affects the lives and work of real people." Its unblinkered reportage, sweeping historical research, and lucid analysis of previous economic trends make the book a compelling and informative read 13 years later. But when I tell you the title, you'll wince: Prosperity: The Coming 20-Year Boom and What It Means to You. Davis and Wessel argued that productivity gains from computers combined with rising enrollment in community colleges were poised to rescue the middle class from a quarter-century of economic stagnation. It didn't happen. You can buy Prosperity today for a penny.
I thought of Prosperity while reading The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, an essay that George Mason University economist (and prolific blogger) Tyler Cowen recently published as an e-book. Cowen is a libertarian who is sufficiently non-doctrinaire to have won a respectful mainstream following, and David Brooks recently did Cowen the great favor of declaringThe Great Stagnation "the most debated nonfiction book published this year." That's an exaggeration (the most debated nonfiction book published this year, for better or worse, is Amy Chua's Battle Hymn of the Tiger Mother), but Cowen's book has stirred much discussion. Though shorter and less deeply researched than Prosperity, The Great Stagnation covers a lot of the same ground. Cowen's book is similarly compelling and lucid in its interpretation of past economic trends. But like Prosperity, The Great Stagnation makes an ambitious argument whose chief present advantage (and greatest eventual liability) is that it's impossible to assess in real time.
The same puzzle lies at the heart of both books. Median family income, which more than doubled between 1947 and 1973, increased by less than one-quarter between 1973 and 2004. (Whatever gains have been made since then have been wiped out by the economic downturn in 2008.) Davis and Wessel argued, in effect, that America was catching its breath. American ingenuity in technology (computers, the Web) and education (community colleges that train workers for 21st-century jobs) would revive the economic fortunes of America's middle class. Cowen believes the opposite. As recently as the 1960s, the economy lifted the American middle class, but that stopped because a limit was finally reached. "We have been living off low-hanging fruit for at least three hundred years," Cowen writes. "We have built social and economic institutions on the expectation of a lot of low-hanging fruit, but that fruit is mostly gone."
The low-hanging fruit, Cowen says, falls into three categories.
Free land. This became unavailable after the closing of the American frontier at the end of the 19th century.
Technological breakthroughs. Obviously these still occur, but none can compare to those of the late 19th and early 20th centuries: electricity, telephones, automobiles, airplanes, radio, TV, etc. Cowen reproduces a zany chart devised by a Pentagon physicist named Jonathan Huebner showing the per-person rate of innovation from the 15th century to the present; it peaked in 1873. In the U.S., the number of patents issued per capita fell for most of the 20th century. Innovations still occur, but they are no longer the kind that benefit society as a whole. They make Wall Street financiers rich. Or they make Steve Jobs or Mark Zuckerberg rich without creating much employment. The iPod has created fewer than 14,000 jobs in the U.S.; Facebook employs fewer than 2,000 people; Twitter, fewer than 300. More than one-quarter of Gross Domestic Product is spent on "government consumption" (i.e., what government does exclusive of entitlement spending); education; and health care. These economic sectors are at worst failing to contribute meaningfully to economic growth and at best are contributing to an extent that can't be measured.
Smart, uneducated kids. At the start of the 20th century, almost no young Americans—a mere 6.4 percent—graduated from high school, and well under 1 percent went to college. Today, three-quarters graduate from high school, and about 40 percent enroll in college. The high-school graduation rate peaked in the late 1960s, dropped a few percentage points in the 1970s, and has been stuck at the same level ever since. If you don't finish high school, you can't go to college.
Cowen's first piece of fruit—the American frontier—is pretty clearly gone, unless you want to talk about the distant possibility of space colonization. But it's not clear its disappearance is the brake on middle-class prosperity that he claims. After all, for most of the frontier-less 20th century, economic growth was both brisk and widely shared: Inequality either declined or failed to increase between the 1930s and the 1970s.
Cowen's second piece of fruit—technological innovation—may or may not resume delivering broad-based prosperity. Davis and Wessel were wrong to predict that computer technology was on the verge of boosting middle-class incomes, but Cowen seems equally wrong to suggest that computer technology is not on the verge of doing so. Indeed, Cowen eventually concedes that the Internet, by facilitating the spread of scientific learning, "may do more for revenue generation in the future than it has done to date." It's hard to know how to assess Cowen's views about the possible uselessness, economically, of existing spending on government consumption, health care, and education, because they're pretty vague.