Stagnation, the Machines and the Policy Recommendations

My co-blogger Erik Brynjolfsson has a new book out with Andrew McAfee entitled The Second Machine Age: Work, Progress and Prosperity in the Time of Brilliant Technologies. I read it this week alongside Tyler Cowen’s Average Is Over: Powering America Beyond the Great Stagnation. Given each had earlier eBooks that were counter-points that is what I was expecting here. Instead, they are remarkably similar. On Twitter when I remarked about this Cowen suggested that they disagree more about the past than about the future.

Let me present a table that might address why I thought the books were similar.

Screen Shot 2014-01-19 at 9.40.16 AM

Each has basically the same story. Productivity has been lagging in recent decades while there appears to be an increasing disparity in the distribution of earnings with the middle hollowing out and median earnings falling (at least in the US). However, there is innovation going on and if you just think a little about technology, there is a good chance that it is both responsible for the current trends but also likely to create even bigger issues for the future including more dislocation but also productivity turning around. This gives us even more reason to do the sort of policies that most economists agree upon.

Despite the similarities in overall view, each book is a delightful read. (Specifically, if you like reading this blog you should read both books). Both have their plethora of favourite examples that would be familiar to those familiar with their previous writing. Brynjolfsson and McAfee spend more time looking at the productivity and task-replacing and complementing technologies in development. Cowen spends alot more time on chess (although there is plenty of that all around) but also on the impact on the microeconomics of labour markets — especially that technologies will help separate the productive from the unproductive more clearly. And each book does its job of getting you to think about the world and the macro-future.

The counterpoint view is actually held by Robert Gordon. He has examined history and basically doesn’t see how innovation can reverse the declines in the US. His is a quantitative argument and, in its own way, is convincing. But then again it really comes down to what theory of growth you believe in. If you believe that growth driven by technological change is exogenously determined, there haven’t been enough innovative bursts to sustain it. If you believe that growth is endogenous, the ebbs and flows are natural. What is more, the tide recedes before the wave comes in — that is basically what most endogenous growth models say. Both books make the case that we are on the early stages of exponential growth and that is more convincing, to me at least. But we cannot know for sure.

Now you would think that means that if you believe that innovation is over, then you are less inclined to recommend the policies by those who believe it is about to explode. But Gordon recommends basically the same things as Brynjolfsson-McAfee and Cowen:

Even if we assume that innovation produces a cornucopia of wonders beyond my expectations, the economy still faces formidable headwinds. The retirement of the baby boomers and the continuing exodus of prime-age males from the labor force, sometimes called the “missing fifth,” are reducing hours worked per member of the population. American educational attainment continues to slide ever-downward in the international league tables, due to cost inflation at our universities, $1trillion in student loans, abysmal test scores and large numbers of high-school dropouts.

And inequality in America will continue to grow, driven by poor educational outcomes at the bottom and the rewards of globalization at the top, as American CEOs reap the benefits of multinational sales to emerging markets. From 1993 to 2008, income growth among the bottom 99% of earners was 0.5 points slower than the economy’s overall growth rate. If future output grows, as I expect, at a rate of just 1% a year, that means the overwhelming majority of Americans will see their incomes grow just 0.5% annually.

The future of American economic growth is dismal, and policy solutions are elusive. Skeptics need to come up with a better rebuttal.

Now just a second, that reads like the second half of both books! Gordon would not appear to disagree with either but he says that we should pay attention to these policies because we can’t rely on innovation and productivity growth occurring not because it is going to occur.

And therein lies my issue with the debate. I am not sure that the policy prescriptions are tied sufficiently to the issue over whether or not we are on the cusp of a new innovation age or not. They are good things to do regardless. But surely the forecast for innovation should matter for something. Surely whether we believe in endogenous or exogenous growth should determine some different policy response.

Now maybe I have missed something. Because in each case the economists involve do tie their policy prescriptions to their growth predictions. But it seems that to win policy debates and actually get policies put in place a tighter link is needed.

2 Replies to “Stagnation, the Machines and the Policy Recommendations”

  1. As was demonstrated in the 1930s and 1940s, all we need is an excuse to pay people more. It worked then. It could work now. High wages would continue to drive technological change, so innovation could continue nicely. We’ve had the theory for years. We’ve had the empirical evidence. We just have a lot of people paying good money to convince people otherwise.

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