Innovation and Income Stagnation

Do we have too few inventions, or not enough money?

Do we have too few inventions, or not enough money?

Moneybox
A blog about business and economics.
Nov. 29 2011 12:27 PM

Innovation and Income Stagnation

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I believe portions of a debate I recorded last week with Tyler Cowen aired on NPR this morning, which reminds me that I've been meaning to do a post outlining an area in which we disagree -- how to draw the causal arrow between stagnating incomes and the relative paucity of widely adopted cool new inventions. Cowen's view, which is also being pushed by libertarian billionaire Peter Thiel, is that a slowdown in innovations is causing the slowdown in incomes. I see it as more likely going the other way, a position that I think is re-enforced by things like Megan McArdle's lead to a review essay on consumerism:

A few months ago, I became the proud, and slightly sheepish, owner of what must be the world's most expensive food processor. The Thermomix costs about $1,500. It not only chops the food but weighs the ingredients and cooks them for you while stirring constantly. Perfect hollandaise and flawless béchamel can be produced in minutes with virtually no effort.

That sounds really cool. But like most Americans, I'm not prepared to spend $1,500 on an awesome food processor. And that's true even though I'm pretty financially secure. When you stop and think about it, though, most somewhat prosperous households I'm familiar with have at least one item that's like this. Something that's unquestionably useful but that just doesn't seem to worth it to most people, even those who aren't suffering from acute financial distress. One friend of mine owns a vacuum sealer and an immersion circulator. My dad has one of these single-shot Nespresso machines. I have an iPad 2, which is awesome, but as my colleague Farhad Manjoo writes realistically many people are going to be more attracted by the less-awesome more-affordable Kindle Fire.

Now take a look at this chart showing the divergence between productivity and median household income.

Suppose that hadn't happened to such an extreme extent and the average family had 50% more income. Suddenly those Thermomixes and Nespresso machines look much more reasonable. Keep in mind that income is a flow, while we're talking about amassing a stock of consumer goods. Instead of each upper middle class yuppie household having one or two extravant devices, any prosperous professional would have all this stuff and people around the median would own a fair amount. That on its own would make technological progress look and feel a lot more impressive. The invention of things like dishwashers and washing machines seems really incredible, but that's primarily because households had the income for those to become mass market goods. Today, thanks to sluggish income growth, new inventions become niche products for the elite. Not only does that limit the extent to which innovations transform everyday life, it means there's relatively little incentive to invest in product development that doesn't take the form of "let's make a somewhat cheaper version of this thing that's already out there."