Wednesday, February 16, 2011

Caplan, Lindsey, Boudreaux: The "Slight Stagnation" Using Machine-Age National Income Accounting


Brink Lindsey writes on the Growthology blog about Tyler Cowen's e-book "The Great Stagnation," and Bryan Caplan comments here on Econlog in a post titled "Lindsey on the Great Slight Stagnation." 

Brink provides some data on real GDP per-capita in different periods back to 1820, and Bryan reproduces those data in his post.  The charts above (unadjusted dollars and semi-log form) show annual real GDP per-capita back to the year 1800 using data from Global Financial Data (paid subscription required), and growth rates in real per-capita during different periods.  The chart helps to support Brink's comment that:

"From this broader perspective, what Tyler calls the Great Stagnation [the post-1973 period] looks like a return to normalcy after the "Great Boom" of the post-WWII decades. Indeed, recent growth rates are better than those of all other earlier periods. So yes, growth has cooled down since the postwar "Golden Age," and that fact poses real economic and political challenges. But the Golden Age was the outlier, not our present era; it just doesn't make sense to talk about the present period as stagnant after centuries of easy growth."

MP: The 2% annual average growth in real per-capita GDP since 1973 is the same growth rate as the first half of the 20th century, higher than economic growth during the 19th century, and slightly higher than the 1.8% average since 1800. In that case, the description of the current period as one of economic "stagnation" does seem exaggerated, as Bryan's blog post title implies.

And perhaps the national income accounting developed during The Machine Age, doesn't even accurately capture economic well-being very well in the new Information Age, a point made by Don Boudreaux:

"I have a different hypothesis: what has stagnated isn't the economy but, rather, economists' and statisticians' capacity to measure economic activity and its contribution to human well-being. Rather than stagnating, our economy and our wealth continue to grow so impressively that they are outstripping last-century's economic categories and measurement techniques."

Update: If median income is the appropriate metric, there sure hasn't been any stagnation there, see chart below of "real median income per household member" from 1967 to 2007.  Between 1973 and 2007, median income per household member increased by almost 35% from $15,127 to $20,376 (in 2007 dollars).



29 Comments:

At 2/16/2011 4:39 PM, Blogger Junkyard_hawg1985 said...

It is a great chart, but I think it would be more appropriate to plot the per capita GDP on a log scale.

The second comment is that this great improvement in per capita GDP comes with a corresponding increase in per capita CO2 emissions. This increase cuts across globally (countries with low CO2 = low GDP). If the greens win the fight to limit CO2, the stagnation will become pronounced.

 
At 2/16/2011 4:51 PM, Blogger Matthew said...

Per capita GDP isn't what Cowen's claim deals with. It's median income or median economic well-being.

 
At 2/16/2011 5:49 PM, Blogger morganovich said...

while comparing such numbers across such long time period is seductive and interesting, it has some serious methodological flaws as well.

real GDP has not been calculated nor deflated the same way across this period leading to potentially serious comparability issues, especially since 1984.

this is a good primer on the topic:

http://www.shadowstats.com/article/gross_domestic_product

 
At 2/16/2011 5:56 PM, Blogger theshoe said...

I find it interesting in all this discussion on the great stagnation that very little is mentioned on life expectancy. According to the World Bank life expectancy in 1973 was 71.4 versus 78.4 in 2008. Calculating the economic value of rising life expectancy is difficult but it strikes me that not taking this into consideration lessens the analysis.

 
At 2/16/2011 7:05 PM, Blogger morganovich said...

theshoe-

increased life expectancy also increases the % of the population that is not working which distorts per capita income numbers.

take a look at japan for an extreme case.

 
At 2/17/2011 5:56 AM, Blogger Jet Beagle said...

theshoe,

I haven't read Tyler's book, but based on the reviews, I'd conclude that his focus is on innovation and progress in the U.S. Tyler uses life expectancy as his indicator that innovation in medical care has stagnated.

Life expectancy is an irrelevant measure for medical innovation in the U.S., of course. Until science comes up with a magical solution for aging of the brain, there seems little point to further increasing the life expectancy of the very aged.

Medical innovations developed since the 1970s have been targeted not so much at increasing life expectancy, but rather towards inproving quality of life. Here's three amazing examples:

1. laparoscopic surgery enables much faster recovery times numerous types of routine surgeries;

2. brain pacemakers significantly reduces the symptoms of Parkinson's deisease, epilepsy, and clinical depression;

3. cochlear implants enable millions of deaf and hearing-disabled persons to communicate in ways thought impossible just a few decades ago.

These and thousands of other recent medical innovations have done little to increase life expectancy. But they represent amazing medical progress - the opposite of the stagnation Tyler Cowen would have us believe in.

 
At 2/17/2011 5:57 AM, Blogger Jet Beagle said...

Oops. Still sleepy this morning. Sorry for the grammatical errors in the last post.

 
At 2/17/2011 8:13 AM, Blogger VangelV said...

I believe that, as Matthew pointed out, Cowen is concerned about median income, not per capita income. Nobody would argue against the fact that socialization of risks and economic bailouts have been great for the top 1% of earners who are now much wealthier than before. But the majority of individuals have not had their incomes and wealth protected by the taxpayer and there is an argument to be made that the median has struggled to keep up when we look at after tax purchasing power.

Then there is the fact that the inflation figures used come from the BLS, which has not adjusted its reported income to reflect for methodological changes. If the true CPI had been used we might see that the real income growth has been zero or negative in the past two decades.

 
At 2/17/2011 9:22 AM, Blogger morganovich said...

vangel-

"If the true CPI had been used we might see that the real income growth has been zero or negative in the past two decades."

shhhh. it's not polite to point out that the emperor has no clothes.

gee, i wonder if our stagflation could be being caused by things like this:

"In fiscal 2011, according to these tables, the Department of Health and Human Services will spend $909.7 billion. In fiscal 1965, the entire federal government spent $118.228 billion.

What about inflation? According to the Bureau of Labor Statistics' inflation calculator, $118.228 billion in 1965 dollars equals $822.6 billion in 2010 dollars. In real terms, the $909.7 billion HHS is spending this year is about $87.1 billion more than the entire federal government spent in 1965."

http://cnsnews.com/commentary/article/jeffrey-socialisms-trajectory-obamas-hhs

that's a helluva lot of crowding out by unproductive programs and debt accumulation...

 
At 2/17/2011 9:25 AM, Blogger Junkyard_hawg1985 said...

Mark,

Thanks for the log chart. It somewhat surprised me to see no change in per capita GDP between 1800-1825. The oter dips are obvious (civil war, great depression).

What happened around 1825 that allowed a long period of economic growth in America? The implementation of the steam locamotive comes to mind (first city-city steam trains in 1830). This allowed a much better division of labor and allowed goods to be transported with far less human effort.

 
At 2/17/2011 12:04 PM, Blogger VangelV said...

shhhh. it's not polite to point out that the emperor has no clothes.

Did you see this little criticism of China's National Bureau of Statistics? It seems that the WSJ does not like the methodology changes and the lack of true transparency. Do you think that they would have had the same criticism if the NBS used the same scam as the BLS?

 
At 2/17/2011 12:21 PM, Blogger VangelV said...

Thanks for the log chart. It somewhat surprised me to see no change in per capita GDP between 1800-1825. The oter dips are obvious (civil war, great depression).

Mr. Madison's War was one obvious problem for the US. But on its own, the War of 1812 was not as much of an issue as the changes it brought to the economy. The war was financed by heavy borrowing and the issuance of paper money. (Some things never change.)

In order to borrow, the government needed many note-issuing banks to provide it with loans. But the borrowing could not overcome the discipline imposed by the gold standard which put a great deal of pressure on banks’ reserves. The flood of notes lead to an artificial boom and the inevitable wave of malinvestments that went with it. Once the war was over the resumption of trade made many of the new factories unprofitable and the economy began to unravel. The inevitable panic that ended the boom came in 1819 and the foundation for a lasting improvement was set.

You can find a great explanation here. The interesting fact is that the great panic of 1819 was a blip that was not noticed in the general statistics because in the absence of intervention it ended very quickly just as the depression of 1920 ended without becoming a full blown crisis.

What happened around 1825 that allowed a long period of economic growth in America? The implementation of the steam locamotive comes to mind (first city-city steam trains in 1830). This allowed a much better division of labor and allowed goods to be transported with far less human effort.

What happened was the classical gold standard. It set the stage for rapid and sustainable growth.

 
At 2/17/2011 12:29 PM, Blogger Tom said...

Government is taking an increasing share of GDP every year. Govt spending is now 44% of GDP, and regulations are another 20% of GDP and growing fast - total 64% of GDP. By shrinking govt we could add a great deal to private income.

US life expectancy among adults is increasing by about one year per decade. Drugs and medical procedures continue to extend life and its quality.

 
At 2/17/2011 1:23 PM, Blogger Ron H. said...

Junkyard

"What happened around 1825 that allowed a long period of economic growth in America? The implementation of the steam locamotive comes to mind (first city-city steam trains in 1830). This allowed a much better division of labor and allowed goods to be transported with far less human effort."

Well, James will tell you it was the Tariff of Abominations, but I agree with you, that it was the railroads and other technological advances that allowed it.

 
At 2/17/2011 1:25 PM, Blogger Ron H. said...

VangelV

Your link doesn't work.

 
At 2/17/2011 1:49 PM, Blogger morganovich said...

ron-

the railroads were just the last piece of the puzzle.

lots of places got railroads but not all grew.

bernstein wrote a fantastic book called (the birth of plenty" about this in which he identifies 4 factors that all need to be in place for growth to take off.

it's a great read. i recommend it strongly.

 
At 2/17/2011 2:35 PM, Blogger VangelV said...

Your link doesn't work.

Sorry. I must have messed up. Try the link below and you will get a free copy of the Panic of 1819, PDF. If you like it, you can purchase the book as I did.

http://mises.org/rothbard/panic1819.pdf

 
At 2/17/2011 4:50 PM, OpenID Sprewell said...

Cowen really doesn't have much of a case so he tries to dress up a weak one and oversell it for his book, knowing that a negative outlook will have some currency right now while the unemployment rate is still up. Of course we're not going to completely replicate the big jump from inventing a car or TV again, the future is squeezing all we can out of that basic tech, which the internet will enable. Great point, Jet, about medical innovation moving from quantity of life to quality of life. :) Ironic that even though he's selling an ebook, he's still using the classic book publishing techniques of trumping up bad arguments in order to sell. In fact, listening to his EconTalk interview this week, I realized that all he's doing is taking the familiar income inequality argument and dressing it up in more market-oriented clothes. His main problem is that the median person's income hasn't grown as much as he'd like, so he then casts that as a govt regulation/spending problem, saying that the inevitable bad results have arrived. Russ calls him out on that strategy, to cull favor with the more market-oriented for the same income inequality argument, early in the interview. Of course, that may be the reason but he doesn't make much of a case for it.

I'm skeptical that his favored median income stat can tease out much of the gains from technology. Today you can video conference at standard TV quality with almost any home in the US, at a very cheap price. That would have been impossible for even the most powerful CEO 30 years ago, or at the very least prohibitively expensive even for him. With the new smartphones and tablets coming out these days, you'll be able to do it on the go, even in 3D! Information work is primed for another boom, all that's holding it back is that the techies are as yet too dumb to implement micropayments.

 
At 2/17/2011 11:14 PM, Blogger VangelV said...

Cowen really doesn't have much of a case so he tries to dress up a weak one and oversell it for his book, knowing that a negative outlook will have some currency right now while the unemployment rate is still up.

Do you mean that Cowen should be much more positive? Why? From what I can see we had years of massive spending by the federal, state, and local governments that piled on debt that had to be repaid by future taxpayers or inflated away by the Fed. Neither option is positive for the US.

And no, with debts and unfunded liabilities adding up to more than $100 trillion there is no way to pay off that debt and make good on those promises. So why should we be positive again? Just because several trillion of stimulus and QE managed to keep unemployment at 17%? Or because that spending caused more public 'servants' to be hired by government and added more burdens on future taxpayers?

If we use the real numbers as they are we see that there is a huge problem for the real economy that has not been resolved by more borrowing and spending. We see that the USD is in big trouble as are fiat currencies across the globe and that we have unsustainable programs in the developed world that will have to end. When they do you will see the same type of public protests as we have seen for years in China, France, and the UK that will quickly escalate to resemble the Egyptian riots.

The US is still the best country in the world and still has a great deal of hope. But for things to get better we have to recognize the reality and ensure that the reckless spending that created the mess is stopped before it destroys the country.

 
At 2/18/2011 12:19 AM, OpenID Sprewell said...

Vange, I agree that govt is out of control, but there are two main problems with Tyler's argument. One is that despite all those govt constraints innovation has kept the economy and productivity surging, particularly in the last 15 years, as Lindsey points out. The second is that he blames a supposed dearth of recent innovation, when the truth is that it's as vibrant, if not more so, than ever, with the caveat that it's just not being monetized well right now. If he just limited his critique to govt spending/regulation and articulated the point that reducing govt would be worthwhile regardless of innovation making it less of a burden than it otherwise might be, he'd have a good case. But the problem is that the innovation approach he's chosen just leads to him tacking on the govt problem as almost an alternate hypothesis, taking him into territory that he doesn't understand very well and makes silly guesses and statements about.

 
At 2/18/2011 11:18 AM, Blogger VangelV said...

Vange, I agree that govt is out of control, but there are two main problems with Tyler's argument. One is that despite all those govt constraints innovation has kept the economy and productivity surging, particularly in the last 15 years, as Lindsey points out.

I am sorry but I do not agree that the economy and productivity have been surging for the past 15 years. While we did have the IT boom, which has had a very positive effect, we have seen the biggest growth of government in many decades. All of those bureaucrats and the new rules and regulations have reduced productivity and have added a massive burden on future taxpayers which will have to pay back a massive debt that has been accumulated over those 15 years. We now see the total unfunded liabilities and debt stand over $100 trillion. That would not have happened if there were a true boom over the period that you are talking about.

I believe that Tyler recognizes that the great stagnation has hurt the ordinary 'middle class' family, which has fallen behind and not participated in the reported gains that are being thrown around. This is why the Main Street people are pissed off and angry at the inside-the-beltway and Wall Street commentators who only see the accrued gains that went to the political class and their financial sector sponsors.

The second is that he blames a supposed dearth of recent innovation, when the truth is that it's as vibrant, if not more so, than ever, with the caveat that it's just not being monetized well right now.

Without the meddling by governments and their monopoly on using funding to pick winners innovation would be significantly higher. And Cowen may be right to suggest that the level of innovation is not high enough to ensure the same level of advancement as we saw in the past. While that is not a problem globally where there is a lot to be gained by implementation of past innovations the gains are not the same for the developed world, which needs much more just to stay even.

If he just limited his critique to govt spending/regulation and articulated the point that reducing govt would be worthwhile regardless of innovation making it less of a burden than it otherwise might be, he'd have a good case. But the problem is that the innovation approach he's chosen just leads to him tacking on the govt problem as almost an alternate hypothesis, taking him into territory that he doesn't understand very well and makes silly guesses and statements about.

Well, Tyler is just being his controversial self and getting what he wants; a lot of discussion on both sides and more attention to his book. It looks to me that he is just doing what his book, Create Your Own Economy, suggested.

 
At 2/18/2011 6:02 PM, OpenID Sprewell said...

Vange, the growth of government doesn't mean that productivity growth didn't happen, govt just stole more of that growth. As for the middle class squeeze, nonsense, watch this video about how they're living. Admittedly that was right after the peak of the recent bubble, but as Mark's last chart above shows, people are much better off than they were decades ago. I agree that we'd have more innovation if we got govt out of it, but unfortunately, Cowen actually calls for more govt funding, so he clearly doesn't have a grip on the problem. As for Tyler attracting attention, I don't think criticism will generate the same sales as positive attention. More likely, the type of people who might buy that ebook will read the blog posts criticizing it and say, "Eh, I'll skip it." ;)

 
At 2/18/2011 7:29 PM, Blogger VangelV said...

Vange, the growth of government doesn't mean that productivity growth didn't happen, govt just stole more of that growth.

Come now. We have seen the debts and unfunded liabilities grow from less than $25 trillion to more than $100 trillion. If we had real growth in the real economy that would not have happened.

As for the middle class squeeze, nonsense, watch this video about how they're living.

I saw the video, thank you. But what was not mentioned was that those $50,000 boats were purchased on credit. But if you are expecting me to argue that prices for many goods are not falling you will not get that from me. I can buy a nice computer that was designed in Texas, had its parts made in Taiwan, Japan, and Korea, and was assembled in China for $500. And I would get a machine more powerful than the computers used to put a man on the moon. I can also go to my local grocery store and purchase some sweet Xianjiang pears for $0.65 a pound. Obviously that could not have happened 25 years ago, or even 15 years ago.

But in the 1960s the average guy could work 40 hours a week and afford a modest home, a car that he would trade in every four or five years for a newer model and the typical 2 week vacation in some local resort. The wife did not usually work until the kids were grown and going to school.

Today the average middle class worker does not work 40 hours a week. In fact, many work 60 hours or more and are on call and in touch with their work almost all of the time, including when they are supposedly on vacation. We have both husband and wife in the workforce because few can afford to purchase a house, lease a vehicle, buy health insurance, and set aside money for retirement and tuition for the kids on one salary. Yes, $50,000 boats are available. But they are usually purchased on credit that will require interest payments over long periods of time right along with the interest payments on the house, car, and other things purchased but not paid for in full in cash.

What you see depends on the approach that you use. If you are willing to ignore the fact that we live in a society where fewer people own their homes outright and have enough set aside for a comfortable retirement than it is easy to ignore Cowen's argument. But if you look at the whole picture and look at the both sides of the balance sheet things become a lot different and Cowen begins to make a lot of sense.

 
At 2/18/2011 7:36 PM, Blogger VangelV said...

I agree that we'd have more innovation if we got govt out of it, but unfortunately, Cowen actually calls for more govt funding, so he clearly doesn't have a grip on the problem.

He seems to have gone over to the dark side and is not the wild and crazy libertarian type that he used to be when he was younger and wiser.

As for Tyler attracting attention, I don't think criticism will generate the same sales as positive attention.

We live in a society that buys more and more material on line. At $4 a lot of people will simply purchase the article so that they can look for themselves just because of the publicity. The essay is his version of an app and given the fact that it has reached #116 in the Kindle store I would say that Tyler was very successful.

 
At 2/18/2011 11:15 PM, OpenID Sprewell said...

Vange, how do you have the time to write so many long-ass comments? ;) What do unfunded liabilities have to do with growth? The politicians can promise trillions in future handouts with little connection to actual growth. But as Tyler points out, actual govt spending and debt was only able to grow so much because GDP gave the govt thieves so much more to play with. As pointed out by the economist in that video, you are not comparing the actual middle-class lifestyle from the '60s to today. If you bought the type of smaller home people had in the 60s, the junky cars they had back then, and no iPods or other modern conveniences, you could easily afford it on 30 hours per week.

What's changed is that people expect a lot more from an "average middle-class lifestyle," including all kinds of luxury health goods and education that was unheard of decades ago, the kinds of stuff Jet listed. No doubt some people live large these days on debt, including probably some of those people in the video, but nobody's holding a gun to their head to make them buy a boat or jetskis. :) I have no problem with debt, such as people owning less of their houses, but obviously if some people abuse it to buy SUVs or huge flat-screen TVs every year, they will pay the price. As for Tyler's ebook, I don't know how successful it has been, but I don't think the publicity that helped was because of controversy or discussion, as you said. It's because he put forth a pessimistic argument, which always sells in a recession. Add in whatever blame he gives to the govt and he hopes to sell to the market-backers too.

 
At 2/19/2011 3:38 AM, Blogger Ron H. said...

morganovich

"bernstein wrote a fantastic book called (the birth of plenty" about this in which he identifies 4 factors that all need to be in place for growth to take off.

it's a great read. i recommend it strongly.


Thanks for the recommendation. Sounds interesting. I will check it out.

 
At 2/19/2011 9:11 AM, Blogger VangelV said...

Vange, how do you have the time to write so many long-ass comments? ;)

Call it the luxury of early retirement and having a lot of time on my hands when looking after my kids. That retirement came courtesy of the ability to shed emotion and see things as they are. I am merely writing to clarify what I see.

What do unfunded liabilities have to do with growth?The politicians can promise trillions in future handouts with little connection to actual growth.

But those promises are seen as real and you have people buying things that they could not afford and public sector unions getting raises that the taxpayers cannot afford to pay for. That is not true growth. It is a false boom.

But as Tyler points out, actual govt spending and debt was only able to grow so much because GDP gave the govt thieves so much more to play with.

But Tyler does not believe that the BLS fraud is as large as it is and does not see that the 'growth' of GDP was overstated because of false adjustments. The $500 sale of a computer this year, which is the same as the $500 sale of a computer last year, is counted as a $800 sale by the BLS because of the extra memory and faster processor. But the $300 dollars was not received by anyone. Tyler ignores this fact. And all of those financial sector earnings that come from creative (but legal) accounting assumptions are accepted without question. I maintain that the deceptions should not be accepted and that they will show up once again, just as they showed up in 2007.

As pointed out by the economist in that video, you are not comparing the actual middle-class lifestyle from the '60s to today. If you bought the type of smaller home people had in the 60s, the junky cars they had back then, and no iPods or other modern conveniences, you could easily afford it on 30 hours per week.

But the people in the video had not savings to afford the bigger homes and the expensive power boats. They came from borrowing, usually by extracting 'equity' from homes during a real estate bubble. You may not have noticed but that bubble has now burst and all those loans still have to be paid off from incomes that cannot support the payments and a decent lifestyle.

I think that a more apt story than the one told in your video would this one.

 
At 2/19/2011 9:35 AM, Blogger VangelV said...

What's changed is that people expect a lot more from an "average middle-class lifestyle," including all kinds of luxury health goods and education that was unheard of decades ago, the kinds of stuff Jet listed. No doubt some people live large these days on debt, including probably some of those people in the video, but nobody's holding a gun to their head to make them buy a boat or jetskis. :)

My point is that real and sustainable growth cannot be based on people spending money that they have borrowed but could not pay back. Having mechanics buy $50K boats or stables of motorcycles does not seem to me to be a sign of huge productivity increases when those purchases came via excess borrowing.

I have no problem with debt, such as people owning less of their houses, but obviously if some people abuse it to buy SUVs or huge flat-screen TVs every year, they will pay the price.

But my point is that they have never been made to pay the price because the Fed was always there to bail out the reckless idiots who had no common sense. While its main concern are its owners and supporters in the financial sector by debasing the currency and printing money the Fed was able to allow the people who made those bad decisions to postpone the difficult choices that they had to make and to continue faster towards the abyss.

As for Tyler's ebook, I don't know how successful it has been, but I don't think the publicity that helped was because of controversy or discussion, as you said. It's because he put forth a pessimistic argument, which always sells in a recession. Add in whatever blame he gives to the govt and he hopes to sell to the market-backers too.

I do not believe that Tyler is a pessimist. He argues that things will get better and that the US will recover. Given the foundation on which the argument was based I do not see how he can be that optimistic.

I see a hyperinflation coming down the road and at least a 30% devaluation over the next two years. I maintain my belief that silver will wind up over $100 and that $2000 gold is a given. While I expect that oil, coal and natural gas will go up sharply, it is possible that an economic contraction could bring down prices temporarily. And if there is not a great harvest this year you will see many more riots as food prices explode. At that point not even the naive optimists will be buying the BLS fraud.

 
At 2/21/2011 11:38 AM, Blogger Tom said...

Per capita income growth has slowed, contrary to the 200 year patter of acceleration, because of the growth of government. Govt is now 64% of US GDP (44% govt spending, 20% cost of regulations).

Households are smaller, as we get richer, which shrinks household income, and thus per-person figures.

PCI ought to be growing at about 3%, but cannot because govt is consuming 2/3 of the economy.

 

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