Over the last several months Tyler Cowen’s short e-book The Great Stagnation (also in hardcover) has generated much discussion. Cowen argues that we have entered a period of very low growth that will extend into the foreseeable future because we have already picked all the “low-hanging fruit” of technological innovation.
Is it really true that growth has slowed so dramatically? Are Americans not seeing the increases in their economic well-being that prior generations did? It is true that money wages have grown far more slowly since the 1970s than before, and the same is true of median household incomes. However, there are numerous explanations for those data, including the fact that more of our total compensation comes from nonmonetary benefits and that flat median incomes are consistent with most people doing better if the incomes of new immigrants and labor market entrants are below the median.
Another line of criticism is that these aggregate data do not capture the real gains that households have seen. Rather than focus on major technological innovations, we should look at the ways in which applications of innovations make our lives easier. There have been no major technological changes to automobiles in the last few decades, but each year they get safer, more fuel efficient, and more convenient and comfortable. No, we don’t have flying cars, but the tires are much less likely to blow – and that’s hard to capture in economic statistics.
Or think about the Internet. Critics point out that the traditional economic aggregates on which Cowen relies aren’t good at measuring how much it (along with other technologies) improves our lives. The falling cost of broadband and the ease of engaging in secure economic transactions have been boons to lives.
Economists frequently talk about economic growth in terms of reduced transactions costs. The easier it is for us to find exchange partners, make exchanges, and enforce contracts, the more exchanges will take place and the better off we will be. The Internet’s great economic contribution is in reducing transactions costs, whether in buying goods more easily, finding a romantic partner, or selling your old baseball card collection on eBay.
About a week ago, while grilling chicken breasts, I realized that the heat distribution plate on my four-year-old grill was pretty much shot. If this were 15 years ago or more, I would have had to find the time to call propane stores to see who carried the part for my brand and drive back and forth (assuming a store was nearby) to get it. But today I simply put the brand and model number into Google and in about 30 seconds discover that the part is available from Amazon.com — in a porcelain-covered version at that. A few mouse clicks later the piece is on its way to my house without my ever leaving my desk chair.
The lesson is that what seem like the most obvious measures of economic growth might not tell the full story. The dramatic decline in transaction costs necessary to buy the replacement part is a huge gain in real income. The time I saved, not to mention the money I saved thanks to Amazon’s size compared to a small propane store, makes me richer. I could devote the time to a variety of other things: earning income, enjoying consumption, or anything else I prefer. Even the cost of shipping is likely less than the time and gasoline it might have taken to find and visit the propane store.
It’s also worth noting that I bought the grill, fully assembled, from Walmart at a reasonable price, one far less in labor hours than it would have cost 25 years ago.The story of my grill is something of a modern miracle, the real gains from which are probably only apparent to those of us who can remember how things used to be. As existing technology continues to get tweaked at the margins, we will live better and better lives even if traditional economic data make it seem as though we are stagnating.