The Great Stagnation Myth

How We Have Grown Richer But Feel Poorer

{photo_credit}

Three decades of frozen wages. A “lost decade” for the middle class. The Great Stagnation. That’s what we’re told. But the truth, Brookings economist Scott Winship argues in a new essay for Breakthrough Journal, is that Americans of all classes have grown materially richer every decade since the postwar era. Dorothea Lange/Library of Congress.

February 21, 2013 | Michael Shellenberger & Ted Nordhaus

The last decade was a lost one for the American middle class. It came on the heels of three decades of frozen wages. We have entered the Great Stagnation.

So goes the drumbeat. But when you look around, everyone seems richer. "If our obvious material affluence seems difficult to square with various narratives of economic decline," writes Brookings economist Scott Winship in a major new essay for Breakthrough Journal, "that's because it doesn't."

The truth is that Americans of all classes have grown materially richer every decade since the postwar era, Winship explains. "Even after the Great Recession we live in larger houses and own more cars than previous generations. Our homes are cluttered with all manner of gadgets, electronics, and appliances. Air-conditioning and air travel, once considered luxuries, are now available to virtually all of us." 

The crux of the argument for economic pessimism lies in comparing today's low growth rates to the higher growth rates of the 50s and 60s. This is fallacious, Winship argues. Lower growth rates are a function of the slower metabolism of large economies, not the stagnation of American capitalism. 

Look at the facts. We have still been growing — with gains in absolute wealth that are similar to those of the 1960s — only at slower rates. "To fixate on the diminished rate of growth," Winship writes, "is to jealously compare ourselves not to Americans in the 1960s, who were poorer than we are and whose living standards improved less than ours did, but to Americans living today in some parallel universe, where growth rates did not decline."

Why does any of this matter? Because the discourse of economic decay risks undermining efforts to meet the needs of the poorest among us. It stokes worker anxiety and is "as likely to inspire selfishness as generosity among voters," he writes. "Perhaps most troubling, the focus on growth rates misdirects our attention from the minority who are struggling to the broad majority who are doing well." 

Over the last two years, in a series of tightly argued (and hotly debated) essays and reportsWinship has established himself as a powerfully transgressive young economist. Winship's view is "deeply unattractive to the Right and the Left as it implies that a large set of Americans (the middle class as well as top earners) ought to make greater sacrifices to ameliorate the phenomenon of stickiness at the bottom, i.e., the relative lack of absolute upward mobility from those born into the poorest income quintile," wrote Reihan Salam about "The Affluent Economy." 

Already, Tyler Cowen, the author of The Great Stagnation, has responded, "People one hundred years out would be much worse off, relative to exponential growth, and their ability to fix the environment or elevate poor countries to wealth, also will be much lower. In essence economics would be surrendering the gain it won from the victory over Malthus." 

One can safely predict that neither Cowen nor Winship's words will be the final ones on the matter of what, if anything, is fundamentally wrong with the American economy. Responses are invited and will be published in a Breakthrough Debate. Winship's essay can be bought as part of the Breakthrough Journal's e-book, Wicked Polarization.


Comments

  • When businesses can increase productivity and lower costs by replacing workers with ‘machines’, few will hesitate.

    Scott Winship ‘conveniently’ fails to note that whereas the GDP per person continues to rise, for rapidly growing numbers of workers, this has been at the expense of jobs lost to the efficiencies of automation, computers and IT efficiencies. This permits more ‘product’ with fewer man-hours, a final validation of Malthus’ previously prematurely-predicted consequences of technological unemployment.

    I suggest that you read: “Science in the Spectrum of Belief”:

    http://www.pipeline.com/~lenornst/ScienceInTheSpectrumOfBelief.pdf

    – the foot note on page 5. is particularly pertinent:

    *When languages first developed, human utilization of planetary resources were so nearly negligible that barter, and then, monetary tokens, quickly became convenient substitutes, as ‘economic’ motivators, for rewarding reciprocal cooperative behaviors that were intended to improve perceived quality of life. Two hundred years go, Malthus proposed a model that
    predicted that, since populations can increase exponentially, resulting over-utilization of nonrenewable planetary resources must ultimately limit economic growth. His ‘mistake’, and that of his more recent disciples, was in prematurely predicting when this might happen. Unfortunately, it seems that his prediction is now finally beginning to be realized. As productivity per man-hour relentlessly increases as a result of automation, Information Technology and computers replacing humans as ‘workers’, this problem is exacerbated. There are fewer people who can afford to consume what might be produced. The growing numbers of unemployed reduce demand for non-essentials. As a result, the secondary, economic, token motivators – money, capital-growth and gross domestic product – are losing their convenience. As a part of a ‘cure,’ they now may need to be replaced (as the motivators of economic activity) by the original primary stimulus for
    cooperation – the desire to increase quality of life. (Also, see Postscripts, Section 9, B page 17).”

    Leonard Ornstein

    By Leonard Ornstein on 2013 02 21

    Reply to this comment / Quote and reply


  • Winship’s essay makes many useful points. However there seem to be a couple of notable gaps.

    First, Winship does not mention the exponentially growing burden of healthcare costs. In particular, a report from the Kaiser Family Foundation points out that health care costs per capita have grown an average 2.4 percentage points faster than the GDP since 1970. Nor, as is often pointed out, does the cost explosion in the perverse US healthcare system seem to translate into comparable gains in health or life expectancy. Among other things, this suggests that the absolute gains in per capita income Winship notes are not as beneficial as he implies, and that the widespread feeling of backsliding has some basis.

    Related to that, Winship compares historical income gains in ‘current’ dollars to make his case. That means the value of money is adjusted using the Consumer Price Index. But CPI is a crude metric which masks changes in what is consumed and why. (Indeed, the case for switching the basis for inflation indexing of Social Security and/or Medicare benefits to the ‘chained’ CPI reflects that gross income can have different value at different times or in different circumstances.)

    Another notable gap: Winship’s essay does not account for the joint nemesis of unfunded liabilities and the difference between gross and after-tax income.

    Over the span of history Winship addresses, neither individual households nor US society as whole saved enough income to fund the inevitable future retirement and healthcare costs of an aging population. Income is not now growing and did not grow at a high enough rate—nor was saved properly—to accommodate the benefits to which much of the population decided it was ‘entitled.’

    Hence the fiscal dilemma facing the US and many other aging, industrialized nations: Faster growth is wanted to ease the burden of unfunded liabilities and other debts of past prodigality. Yet the higher taxes needed to maintain access to credit—or the alternative, higher cost of credit—suppress the capacity for economic growth.

    As the burdens of these various debts have grown exponentially, it seems evident that exponential growth of income is needed to pay for them. Alternatively, younger generations—already burdened by the soaring costs and debts of unproductive education and diminishing employment prospects—will be taxed more heavily to pay for their elders’ entitlements while rightly expecting lesser benefits for themselves.

    In lieu of a solution, Winship’s calculus simply ignores that conundrum.

    By @LewisJPerelman on 2013 02 22

    Reply to this comment / Quote and reply


  • Re Leonard Ornstein’s comment…

    Winship seems to have a realistic understanding of the challenge posed by the accelerating displacement of human labor by automatons (as described in “Race Against the Machine”.)

    This trend need not, and probably does not, spell the end of economic growth as in Ornstein’s neo-Malthusian formulation. Rather, it may, as Winship seems to anticipate, point to a rent-based economy—wherein the expanding production of an ever more efficient economic machine is distributed via some sort of dole to a population that is effectively paid to consume.

    This is akin to the scenario satyrized in Kurt Vonnegut’s 1952 novel, “Player Piano.” Unfortunately, while such a structure is feasible in macroeconomic theory, in practice it has generally proven to be associated with social morbidity. Winship recognizes that hazard of social decadence. Vonnegut portrayed it in his novel, and economists have observed it in a number of countries afflicted with the “oil curse” or more general “resource curse.”

    In that regard, the white paper Ornstein points to is rightly concerned with quality of living as warranting at least equal consideration with gross measures of income or wealth. As econometrician Nicolas Georgescu-Roegen asserted: You cannot be in the economic world without considering the enjoyment of life.

    By @LewisJPerelman on 2013 02 22

    Reply to this comment / Quote and reply

Submit a comment





About Michael Shellenberger & Ted Nordhaus

Ted Nordhaus and Michael Shellenberger are leading global thinkers on energy, climate, security, human development, and politics. They are founders of the Breakthrough Institute and executive editors of Breakthrough Journal.

Click here to view their recent articles.