More on the Great Stagnation

by Russ Roberts on October 11, 2011

in Uncategorized

Tyler responds to my response.

Karl Smith joins in. (I agree with Karl that regression to the mean is part of the story. Just don’t know how important.)

More below the fold on Tyler.

Here is Tyler’s response:

1. Male median wage data (down since 1969) suggest divorce is not the main issue; in any case divorce is an economic and psychological catastrophe for many people, and defending living standards by invoking the effects of divorce in the data strikes me as actually more pessimistic than my view.  I suspect Russ’s own cultural values are in accord with this perspective.  Russ’s postulated effect also does not explain 1998-2011 median wage stagnation very well.

Does Tyler really believe that the median male worker of today has the same standard of living today as in 1969? My original challenge to Tyler was to give me his interpretation of data points like the one he invokes here. It is certainly consistent with his story but it’s too consistent. Per capita GDP has increased a lot since 1969. Did none of it go to the median male worker? Besides problems with inflation measurement in the wage data, there is also a problem with benefits. By the way, the income data leaves out a great deal as well.

I bring up the distorting effect of divorce on the data not because I think it redeems the last 40 years. That’s not what we’re talking about. We’re talking about whether the economy is broken. If the average person does not share in economic growth of the magnitude we’ve had in the last 40 years then we should have a revolution not a modest increase in taxes on the rich or a hike in the minimum wage.

I have no problem with the 1998-2011 “stagnation.” That is not the Great stagnation. That’s what happens when you have a horrible recession. Different argument.

3. The key question is the net bias of statistics, not the bias for consumer durables alone.  Our real economic performance on a lot of services — a huge and growing part of the economy — is extremely weak.  As durables get cheaper, the biases in measuring their quality become less important.

I am not editing Tyler. His numbering is erratic…

The net bias is the key. Could be that the deterioration of services offsets the gains from durable quality improvements in measuring overall inflation. The question is an empirical one.

4. I don’t see that Russ has made an actual counter to my argument here.

Agreed. Didn’t really try. It’s a small point.

6. In successful periods growth shows up in the major mainstream economic statistics, including the median.  If it doesn’t, at the very least we should conclude that growth is considerably slower than usual.

9. There is no measured median income progress since 1997 and very little since 1973; that’s not just a cyclical phenomenon.  The supposedly good years of the noughties now look like a bubble, not the reality.

I don’t have anything new to add to these points that I haven’t said before.

On panel data, I read the Pew Report which Russ cites.  Over a more than thirty year time period, only 63 percent of children had incomes exceeding those of their parents, and that comparison includes some pre-TGS, quite high-growth years.  I don’t find that number impressive at all.  In any case the key question is a comparative one, and while the study has not been done, it is highly likely one would find much stronger cross-generational measures of progress for earlier generations.

The median data by quintile in that chart suggests that much of those who do gain are in the bottom half of the distribution. But this is an empirical question. I bring up the Pew study because it shows that the median has grown substantially when you follow the same people. There is a lot more to be done with panel data.

On reconciling the per capita gdp and median stories, the concept of rent-seeking — most of all through the service sectors and finance and government — will suffice.  I know that Russ already agrees with the finance side of this story, maybe the government side too and who knows, perhaps education and medicine as well?

I certainly agree with Tyler that there has been a lot of waste in education and medicine and that the growth in rent-seeking is destructive.

 

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{ 26 comments }

Matt October 11, 2011 at 11:41 pm

Is Tyler genuinly arguing that the median worker is not better off today than the median worker in the 1970s? That would seem to be an extremely difficult position to defend.

Karl Smith October 12, 2011 at 12:37 am

Matt – median male worker. I am not sure that is so hard to defend.

Also Russ, if you believe that lack of income in the United States to spill down to the lower classes is cause for a revolution I think you are going to be very upset about the future, which is likely to show declining income for most beings and almost no possibility of revolution.

Economic Freedom October 12, 2011 at 3:33 am

I am not sure that is so hard to defend.

We await the defense.

you are going to be very upset about the future, which is likely to show declining income for most beings

The thing I especially love about Keynesians, both neo and paleo, is their breezy penchant for making grand gnomic utterances about some impending doom. I love it because historically, they have been 100% wrong, and I love seeing the egg on their faces — egg that everyone sees except them.

Paul Samuelson foretold doom and gloom about the returning GIs after WWII — “a huge depression” would occur as the US economy “struggled” to absorb all that incoming labor. Result? The exact opposite: within a year after they returned, we had 3% unemployment; pretty close to full employment. Samuelson performed a brilliant encore in the late 1980s when he predicted that the “mighty” Soviet Union, with its economic prowess, would overtake the economy of the US. Result? The exact opposite: the Soviet Union collapsed entirely. I have every confidence that Karl’s prediction will follow this impressive track record.

I think I even understand the public-choice explanation for it: “You had better follow our policy recommendations. If you don’t, catastrophes will occur from which you will never recover . . . you won’t even be able to revolt!”

To which I reply: “I love scary stories at bedtime! Tell us another one!”

Karl Smith October 12, 2011 at 2:44 pm

A complete defense is a good excercise. I’ll work on that for a major post. I’ll tell you my strategy is how many hours work it would take for the median male to purchase various items now versus then. And, then we can look at how important we think those items are to folks well being.

However, I do suggest looking at the massive divergence in gender results.

As for the predictions, if Samuelson had, had BL-MP he never would have made some of those errors.

But more importantly my prediction has nothing to do with not following my recommedations. I think it is baked in to the cake of the evolution of technology and the eventual creation of artificial beings who will be mass produced until their wages drop to subsistence.

This has nothing to do with being gloomy or sunny. As one of my favorite economists wrote:

“The future is not the realization of our hopes and dreams, a warning to mend our ways, an adventure to inspire us, nor a romance to touch our hearts. The future is just another place in spacetime”

Economic Freedom October 12, 2011 at 4:00 pm

I’ll tell you my strategy is how many hours work it would take for the median male to purchase various items now versus then.

That was already done by Don as a PowerPoint presentation a few weeks ago. Upshot: all items have gone down in price as a function of labor hours.

And, then we can look at how important we think those items are to folks well being.

I don’t think so. Outside of a cave, a bearskin, a hunk of raw meat, and some water, there’s nothing that objectively can be judged as necessary to one’s well-being. It turns out, however, that the vast majority of people become so accustomed to the marginal satisfactions they get from televisions, radios, computers, air-conditioning, refrigerators, food supplements, antibiotics, colonoscopies, smartphones, etc., that these goods move from the category of “nice but not necessary” to that of “must have.” Nothing entitles anyone to make judgments on someone else’s scale of preferences as to which goods are “important” to his or her well-being. “Important”? By what standard? “Well-being”? Measured how? Your statement is pure scientism.

As for the predictions, if Samuelson had, had BL-MP he never would have made some of those errors.

I doubt it. As one of our favorite economists once wrote: All Keynesian models assume the same basic dyanmics [sic] in the background. Whether we choose IS-LM, or IS-MP, or IS-PC-MR or what I am pushing here, BL-MP, is really just about terminology and helping us easily relate what happens in the real world to what happens in the picture.  The deep underlying models are all the same.

Since the deep underlying models of different Keynesian sects are all the same, their predictions will be all the same, and will all be just as wrong. The different sects, however, will all give slightly different reasons for their predictions, ex ante, and give slightly different excuses for being wrong, ex post.

This has nothing to do with being gloomy or sunny.

But it has everything to do with being correct or incorrect. And like any “futurologist”, Hanson is about as correct as old Herman Kahn was in his book “The Next 200 Years” and inspires just as much confidence.

Karl Smith October 12, 2011 at 5:47 pm

That’s good then cause I can just riff off of Don’s thing

Also, Samuelson would have seen the healing of the banking sector as more important than military spending and that the BL curve would not contract.

Economic Freedom October 12, 2011 at 9:39 pm

I can just riff off of Don’s thing

Riff away:

http://cafehayek.com/2011/07/stagnating-middle-class.html
Stagnating Middle-Class?

by Don Boudreaux on July 25, 2011

in Creative destruction, Myths and Fallacies, Standard of Living, The Economy, The Hollow Middle, Video, Wal-Mart, Work

Here’s a PowerPoint presentation that I gave as part of a lecture that I delivered today at Cato University. It’s an updated version of these two posts – here and here – on shopping today in a Sears catalog from Fall/Winter 1975.

In this presentation, I calculate how many hours each non-supervisory worker earning the average nominal hourly wage of such workers had to work in 1975 to buy a variety of ordinary goods, and how many hours each non-supervisory worker earning the average nominal hourly wage of such workers must work in 2011 to buy similar (or, really, in almost every case far superior) or comparable goods.

The dollar figure beside each photo from the 1975 Sears catalog is the 1975 price(s) of that product(s) adjusted, using the CPI, into 2011 dollars. (The photos of the various pages of the 1975 Sears catalog, BTW, were taken with the camera in my iPhone. Just FYI.)

Before starting this PowerPoint presentation, I showed this recent clip from Robert Reich – one of many, many instances of people insisting that ordinary Americans are no better off today (at least materially) than they were since just before the age of alleged laissez faire descended upon us circa 1980.
This presentation, of course, does not prove that middle-class Americans are today better off than were middle-class Americans of the 1970s. Other factors must be controlled for and considered and factored in. But this presentation, I fancy, does strongly suggest that the oft-heard claim of middle-class stagnation should bear a much heavier burden of proof than it seems to bear in popular discussions.

Economic Freedom October 12, 2011 at 4:22 am

The more I read of Tyler Cowan’s blog, the more I’m convinced that he has glommed onto this mental construct — “The Great Stagnation” — and is currently zooming high over the stratosphere on a huge ego trip. He wants the name “Tyler Cowan” and the words “The Great Stagnation” to become as synonymously intertwined as “Alvin Toffler” and “Future Shock”, “Paul Erlich” and “The Population Bomb”, and “Fat-Beached-Whale Al Gore” and “Global Warming.” Here’s the ad slogan: When you think “Stagnation,” think “Cowan.”

Remove all sharp objects in the room, ladies and gentlemen. Tyler Cowen’s ego is inflating!

Slocum October 12, 2011 at 7:09 am

The net bias is the key. Could be that the deterioration of services offsets the gains from durable quality improvements in measuring overall inflation. The question is an empirical one.

But services, in general, have not deteriorated — transportation, entertainment, and telecommunications are all much cheaper and better than 30 years ago. Deterioration in services really means just education and health care — both badly distorted by heavy regulation, rent-seeking, government cash, and consumers not paying directly for the services they consume. And even in health care and education, things have not deteriorated where this distortion is absent. All-you-can-eat, free online lessons and lectures are available to anyone who has the time and energy to consume them — it’s only the cost of official credentials that have skyrocketed. Similarly, lasik and plastic surgery are competitive, people pay out of pocket…and services have improved while prices have dropped.

Jon October 12, 2011 at 9:08 am

In Dr. Cowen’s defense, his argument does have legs. Also, my interpretation of his essay (booklet? pamphlet? e-essay?) was not so much that our living standards have not changed, it’s that they have not changed as much in the past 40 years as they did in the centuries beforehand. If I recall correctly, he uses technology as an example. What was the last, great, life changing technological achievement we’ve had? Personal computers and/or the Internet? Where as in the late 1800′s, early 1900′s, you had the inventions of the automobile, the Industrial Revolution, the assembly line, telecommunications, flight, etc. etc. etc. Those inventions greatly changed the standards of living for even the most common of men. We’ve not had one of those inventions in a while. That, I believe, is the thrust of Dr. Cowen’s argument.

Slocum October 12, 2011 at 12:43 pm

What was the last, great, life changing technological achievement we’ve had? Personal computers and/or the Internet?

Mobile phones, digital cameras, GPS for starters. And ‘The Internet’ isn’t one ‘thing’ any more than ‘electricity’ is one thing (imagine the absurdity of lumping every use of electric power together — lighting, refrigeration, air-conditioning, TV, radio, vacuum cleaners, etc, etc into a single category called ‘The Electricity’). Electric power delivery was a fundamental enabling technology that enabled a century and more of follow-on innovations and fundamentally changed the way we live. ‘The Internet’ should be thought of in the same way.

Jon October 13, 2011 at 9:10 am

Forgive me, Slocum, but I don’t think mobile phones, digital cameras and GPS have done a whole lot to advance society. They are nice luxuries, sure, but compared to what the personal computer or the Internet has facilitated, they really are small fry. Even the iPhone I’m not thrilled with, technologically (yes, I know that I speak blasphemy).

You are correct, however, about my use of the word “Internet.” I meant it in the context of your last sentence, but I must not have done a good job conveying that message.

John Dewey October 12, 2011 at 7:25 pm

Jon: “That, I believe, is the thrust of Dr. Cowen’s argument.”

I think most of us understood the thrust of Dr. Cowen’s argument. And many, if not most, of the Cafe Hayek commentors vehemently disagree with it.

Jon: “We’ve not had one of those inventions in a while.”

First, the list you provided spans about 140 years if you are going to include the Industrial Revolution. Even if you just include the other four, I think that’s about 77 years (Joseph Henry invented the telegraph in 1830, Henry Ford the assembly line in 1907). Furthermore, those inventions have been perfected over the past century to such a degree that the inventors could never have imagined.

Over the recent comparable period – the past 77 years – humans have realized some pretty amazing technological breakthroughs.

If you know very much about the medical field, you would know about the life-altering changes made in just the past 30 years. I can provide you a list if you doubt that is true.

“Jon: What was the last, great, life changing technological achievement we’ve had?”

I don’t think technological achievements work that way. Only rarely does a person or company develop at one point in time a life-changing product or service. Rather, the development of what we view in hindsight as “life-changing achievements” were actually the product of many years and often decades of small steps. Personal computers, the internet, cell phones, magnetic resonance imaging machines, artificial limbs, genetically-engineered disease-resistant crops, GPS aircraft guidance systems, and almost everything else one can think of were the product of decades of development.

Tyler’s arguments are highly subjective. We could argue for days about what is and what isn’t a “life changing technological achievement”.

John Dewey October 12, 2011 at 7:26 pm

Oh, I’m sorry. I didn’t realize how long that last reply was.

Jon October 13, 2011 at 9:13 am

I must say that I do not disagree with anything that you have said (and the medical industry I know very little of).

I think your final sentence is probably the most correct item I have read on this thread: The definition plays a major role in our discussion and if we do not agree on a definition, how can we agree on a point? Maybe, if we want to reach some kind of truth on this topic, we should establish a definition?

John Dewey October 13, 2011 at 9:28 am

“we should establish a definition?”

Sorry, but I don’t think those who believe what Tyler argues would ever agree with me on what is a “life-chaging achievement”. Furthermore, I also believe that “life changing achievement” are not by themselves sufficient to determine the amount of technological innovation.

This is the statement I most wished you would agree to:

“what we view in hindsight as “life-changing achievements” were actually the product of many years and often decades of small steps”.

Was the internet as we know it today developed mostly in the 21st century? in the 1990s? in the 1980s? or was it the result of technological developments of the 60s and 70s?

The same questions could be asked about brain pacemakers, which today are frequently used to treat those suffering from epilepsy. Parkinson’s disease, and dystonia. By the way, brain pacemakers may not be life changing achievements for you, but these devices have definitely changed the lives of many sufferring the three diseases I listed.

Becky Hargrove October 12, 2011 at 9:09 am

Just want to add a little clarification to this argument: some who look at such patterns (stagnation is not apparent across the entire spectrum) do not necessarily believe the solutions belong to government. In fact, often the only thing required from government is the affirmation, and validation of solutions by individuals. For some time now, individuals have not had the chance to put their (potential) solutions put into action.

scott October 12, 2011 at 10:46 am

Peter Thiel has a good essay to augment Tyler’s thesis of the Great Stagnation. http://www.nationalreview.com/articles/print/278758

Apart from the computer industry, it is hard to see an improvement in my life of 40 years. Commodities are more expensive (wheat, copper, oil ..) in real terms (or units of labor) than at any time in my life. Transportation is abysmal. I am admonished today to ride a bus, or light-rail, when I grew up watching the Jetsons. I could go on with many things that are far worse than when my parents grew up, (ie, land planning, EPA, passports)

It seems the concept of rapid economic growth is an undeniable fact to Cafe Hayek readers. While arguing about median incomes, divorce rates, households vs. individuals etc are mildly interesting detours, they miss the inability of aggregate statistics to accurately measure economic growth. Instead authors like Francois Braudel, Tyler and Peter Thiel provide narratives on economic growth that are compelling.

The history of the world’s economy is complex and clearly shows periods of waning- even while the long-term pattern is towards growth. Since the 20th century is an exceptional period when compared to history- a more common sense forecast would be that we are destined for a destructive period, rather than a glorious upward interminable upward rise.

Russ- maybe you could interview Peter Thiel?, and continue to embrace economic narratives over poorly measured government statistics.

John Dewey October 12, 2011 at 7:35 pm

Scott: “Apart from the computer industry, it is hard to see an improvement in my life of 40 years.”

I don’t think that’s fair. It’s the application of computers which has changed almost everything we do today. It’s not just that computers have improved. It’s what we do with them – what airlines, refineries, hospitals, hotels, mega-farms, automobiles, broadcasters, professional sports teams, power plants, oil exploration firms, and others do with computers – that is an indicator of how much humanity has progressed in your very brief lifetime.

Jim October 12, 2011 at 11:36 am

Actually the rent seeking of the whole professional class has become a tax on society with very little value add. It is not a small problem.

We have audits that don’t find fraud or going concern problems, unreadable Balance Sheets, more lawyers than engineers, and we have licensing and land and employee regulations and liabilities that have all jumped the shark. In many cases we have made the work place a class war and a caustic culture.

In most sales and vendor deals, the longest part of the process is waiting for the lawyers. We are top heavy, and the toll is growing. Heck, banks are taking 40% of corporate profits while the SEC shreds its past fraud investigations.

And after a self-induced recession, none of these professions, including the politicians, find there is anything special they need to do. In fact, I see Dick Durbin just ranted on Bank of America for charging service fees to customers, right after he signed the Dodd-Frank Bill that reduced their credit charges to businesses.

spencer October 12, 2011 at 3:24 pm

If you follow the same people you can not get a mean.

For example, in year 1 you get 20 year olds.
in year 10 you get 30 year olds.
till in year 30 you get data on 50 year olds.

This would be a very different sample than a sample that gets a mean of the labor force.

But income has always tended to rise as people age.

Actually from the 1970s till recent years the average age of the workforce
was rising as the baby boom population bulge moved through the labor force. This factor alone should have generated a one to two percentage point increase in average hourly earnings from 1980 to 2000.

So from this perspective the wage stagnation has actually been worse than the raw data implies.

spencer October 12, 2011 at 3:43 pm

Moreover, by using the per capita GDP comparison you are using data that biases the comparison in your favor.

If you based your comparison on per employee GDP o– — to reflect that the typical middle class family has two workers now compared to one worker 50 years ago — the comparisons would not be nearly as strong as the ones you are using.

Since 1968, for example real per capita GDP has increased about 25% more than per employee GDP.

Virtually all of the comparisons you make are heavily biases by you using data that ignores the growth in the two income family.

Doc Merlin October 13, 2011 at 1:03 am

I partially agree with Tyler. I think larger and larger rents have been successfully captured by governments over the last 40 years.

dietwald October 13, 2011 at 8:05 am

“Other than the computer industry…”

Sounds like Life of Brian. “Other than …, what have the Romans ever done for US?”

Of course, if you define all the stuff that’s better out of your definition of what’s better, or simply dismiss it as “other than…”, nothing has changed.

Tyler seems to be blissfully unaware of the tremendous technological gains made POSSIBLE by computers in the last 20 years alone.

Now imagine how rich we could be if it weren’t for the rapid growth of the Leviathan.

(Curiously, the computer industry is probably the least regulated industry in the world. Coincidence?)

John Dewey October 13, 2011 at 9:32 am

dietwald: “Tyler seems to be blissfully unaware of the tremendous technological gains made POSSIBLE by computers in the last 20 years alone. “

It seems that way. Or it could be that he chooses to ignore those gains because acknowledging them would not support the sales and fame of his book.

Mark V Anderson October 14, 2011 at 10:36 pm

I don’t understand how anyone who lived several decades ago can say that American society isn’t a lot richer than it was in the ’50′s, ’60′s, and ’70′s. I am 55, so I mostly grew up in the ’60′s. In my younger years, we could only afford one car, so my father to ride share so my mother would have the car to go shopping. This was a common practice in my middle class neighborhood. Nowadays the middle class only ride-share to be politically correct; everyone can afford at least a cheap car. Nowadays I hear about average people regularly traveling to Mexico and overseas, 30-40 years ago only the rich could do that. Everyone has so much stuff in their houses than before, because electronics, furniture, and other stuff is so much cheaper. People tend not to buy stuff now because they run out of room or there pile of garbage has gotten too high. That’s the sign of an affluent society. When I was a kid, making a long distance call was reserved only for special occasions. A lot of mothers had a sewing machine to repair clothes. Few bother to do that anymore, the cost of clothing makes that dumb. Of course that doesn’t include the tremendous computing power and communication power we all have in our houses now from the computer, which didn’t exist at all even 20 years ago. My father died of a heart attack at 50; he would have lived much longer under today’s medical system.

Anyone who thinks only the rich have more money now just isn’t paying attention. It may be that non-supervisory blue collar workers aren’t doing much better than 40 years ago, but that is breaking out a small segment of society. Blue collar workers made far more than they were worth in the ’50′s through the ’70′s because of unions and because of the tremendous lead America had in manufacturing after WWII. the wage market is more rational now, so the unskilled blue collar worker makes much less in reltive terms than other occupations. That’s why I tell my kids that they need to get some education after high school. High wages for low skills are very scarce these days.

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