Bye, bye easy money
Don’t fixate on the financial crisis. Our economic problems have been far longer in the making, and would have caught up with us sooner or later anyway.
That is one of the conclusions I take away from two striking essays: “The Great Divergence”, published in Slate last September by the journalist Timothy Noah; and The Great Stagnation, just published as a short e-book by the economics professor and blogger Tyler Cowen.
The two essays describe two disturbing trends that, while logically separable, seem to be related. Noah discusses a sharp increase in income inequality in the US since the early 1970s. After analysing many explanations, he concludes that the chief culprits are a tolerance for super-high salaries and bonuses on Wall Street and in the boardroom, and a failure of the US education system. Blaming China is considered, but largely dismissed.
Cowen begins with the fact that median family income in the US has barely increased, again since the early 1970s. Its growth rate has been about 0.5 per cent a year after inflation. The median family income is the income of the family in the middle of the income distribution. It is a useful measure precisely because it ignores the action at the top: if a Connecticut hedge fund manager made an extra $11bn in a year, this would raise the mean income of the US’s 110 million-ish households by $100 each. It wouldn’t alter the median income by a cent.
In the UK, the situation is not as grim. Median earnings in the UK have increased by more than 1.25 per cent a year since 1968, over and above RPI inflation. That figure is for men working full-time; for women the gain is more than 2.25 per cent a year. At the bottom of the income distribution (the tenth percentile) the gain is slightly under 1 per cent annually for men and 2 per cent annually for women.
If Timothy Noah is right, part of the solution is to improve schools. (It is not clear whether voluntary pay restraint, or more redistributive taxation, would be effective in shifting more money to the median household. Perhaps.)
But if Cowen is right, it is not at all clear what the cure might be. Cowen blames the disappearance of “low-hanging fruit”. The US can no longer reap easy gains simply by sending more bright people to school. Better schools would help, but it used to be as simple as making sure bright 12-year-olds stayed in school for a few extra years.
Another easy gain in days gone by was to enjoy the gradual roll-out of the staggering array of vital innovations developed in the late 19th and early 20th centuries, including electrification, refrigeration, aeroplanes, indoor plumbing, bulk chemical processing, the internal combustion engine, and the telegraph, telephone and television. Everyday life was transformed by these technologies between 1930 and 1970, Great Depression notwithstanding. Since 1970, we have the rise of computers and mobile phones – truly wonderful inventions – but not much else.
In short, if Cowen is right, there will be less growth in future unless a new wave of technology arrives, and our political institutions will have to cope, if they can. The same argument surely applies to western Europe too, and will come as no news to Japan.
And the solution? I am not sure, and neither is Cowen. He hopes to raise the status of scientists and researchers – a good idea, but how? The UK coalition plans to introduce charter schools; we shall have to see whether that delivers results. The government is also reducing subsidies for universities and, indirectly, for public libraries. Both those policies are probably progressive: universities (certainly) and libraries (probably) tend to be middle-class haunts. But if the great stagnation is the problem, making access to knowledge more expensive is surely not much of a solution.
Also published at ft.com.
7 Comments
Nemo says:
Some folks think a better theory is that nations have ridden 19th century nationalist banking systems too long. When the global economy becomes a finite box in certain key respects (e.g. land) some of the interest charged on loans has nowhere to accrue from in terms of profits on real production and turnover. The fallout tends to end up as national debts. So govts print money in various ways and these are typically purchased by those above median or middle incomes. Closed loop. Result: two tiers, divergence, and intermittent crashes, increasing in size.
13th of February, 2011John Rowland says:
The middle class is rich. Look at the average kitchen. It has a device for every stage and kind of food preparation. The garage has two cars whose lives are interminable compared to 1970 predecessors. What must happen now is that wealth must be shepherded. There is little time left, because the school are so wretched the next generation will be at a peril to create new wealt.A wealthy culture can endure much. If anyone contributes mightily to wealth accumulation he/she must be rewarded profusely.
13th of February, 2011Felix says:
‘Both those policies are probably progressive: universities (certainly) and libraries (probably) tend to be middle-class haunts.’
Did you really mean progressive rather the regressive?
13th of February, 2011Surely removing the opportunity for poor children to access libraries is bad, and making choosing university in to an expensive gamble must reduce uptake among the less well off?
Béranger says:
«In short, if Cowen is right, there will be less growth in future unless a new wave of technology arrives…» –> In short why do we need to have a strong GROWTH? Just because you, the economists, don’t have another idea for keeping the workforce employed other than a perpetually increasing GNP?
The developed world already has a decent level of the GNP. What the planet lacks is a proper distribution of the wealth.
The solution is to find WISER policies, not to push on MORE, and MORE GROWTH.
14th of February, 2011Rich says:
Hi. Just trying to understand the numbers here. Don’t Cowen’s numbers mean that the median US household is about 25% richer in real terms than it was in 1970. And in the UK, isn’t the corresponding figure close to 65%. I’ve probably done my sums wrong, but this seems to be far from having “barely increased”.
TIM: I’ve not checked your sums but the numbers sound right. 25% is not much to show for 40 years of growth – it’s what the Chinese get every two years. But that’s a matter of opinion.
14th of February, 2011Phil Bradley says:
Just one point here if I may. I would contest your point that libraries are probably middle class haunts. Libraries are for everyone, and they’re used by everyone. That’s the ideological view. Having said that, there’s plenty of evidence to show that the most heavily used libraries are very often those in the most deprived areas; In 2008 the busiest library in London was Wood Green one of the most deprived areas of the city. As the financial crisis continues to bite harder the middle class will, should they so wish, continue to be in a position to buy books. Those with poorly paid jobs, or no jobs at all will be unable to do so. The library will therefore be even more important to those communities.
14th of February, 2011Julien Couvreur says:
“But if the great stagnation is the problem, making access to knowledge more expensive is surely not much of a solution.”
I am unclear how you reach the conclusion that reducing subsidies and privatizing services will make them more expensive.
15th of February, 2011I see how it may appear so in the short-term and in a narrow sense, but this deserves more careful analysis for the long-term.