Tyler Cowen and The Great Stagnation


I’ve long been a fan of Tyler Cowen’s blog, Marginal Revolution. It’s interesting, off-beat, and is a great source of lesser publicized news stories and research findings, with plenty of thoughtful commentary thrown in. I had been meaning to read Tyler’s recent book, ‘The Great Stagnation’, for a while now. Then the other day, while sitting in an airport, I caught this Business Week article about Tyler, titled ‘Tyler Cowen, America’s Hottest Economist.’ It’s a fascinating article about what makes him one of the more quirky and unique economists, and made me much more eager to read some of his published work.

‘The Great Stagnation’ is about why our economic growth trend has all but come to a standstill, and why that won’t change without some significant disruptive technological breakthroughs. It turns out that it was released exclusively as an e-book (although as a result of its success, a paperback copy is set to be released this Summer). From the Business Week article:

Cowen thought it was too long for a magazine article and too short for a book, so he suggested that the publisher offer it only as an e-book. The work is priced on Amazon.com (AMZN) at $3.99 for 15,000 words. Cowen gets the sense that Dutton humored him, both on the format and the content.

I have to admit, I’ve been hesitant to make the jump to e-books. I like reading real books. I’m not sure why. Probably just habit, and maybe a little stubbornness. So I don’t have a Kindle or iPad. But this release has been wildly successful, and being short and only $3.99, it seemed like a reasonable e-book to begin with. So I borrowed my Dad’s iPad, and gave it a shot. And it was a great reading experience. I’m thinking it might be time for me to ditch my old hard-copy book habits.

But much more importantly, ‘The Great Stagnation’ is a very thought provoking book. It’s clear, concise, and is built on very simple arguments supported by lots of data presented from many perspectives. At 15,000 words, it’s a small time investment, and I strongly recommend reading it. But here’s a brief synopsis of Tyler’s thesis:

  • On Economic Growth: Our economic growth from the Industrial Revolution through the early 1970s was fueled by a combination of significant technological breakthroughs and what Tyler calls the “low hanging fruit” of economic growth. This “low hanging fruit” includes unsettled frontier land, opportunities to raise education standards so that smart kids have the tools and resources to invent new things, and the dissemination of new types of technology into our daily lives. He argues that the majority of this “low hanging fruit” is gone, and that regardless of what our politicians do, slow economic growth is all but certain until there are new breakthroughs that can fuel new growth. This is why real income growth has been essentially stagnant since the 1970s. He also writes at length about why our GDP growth statistics are likely distorted, and why it’s very likely that our overall economy has been growing more slowly than we previously thought.
  • On the Financial Crisis: Tyler’s quick to point out that there’s no use in trying to focus the blame for the recent financial crisis on bad policies, unethical behavior, or belligerent risk tasking. We all thought the economy was growing faster than it was, we all planned as though the long-term trend was going to continue, and then it didn’t. Bad decisions were made, policies could have been better, but as long as the majority of society was acting as through we could expect GDP growth of 3% per year, a bubble was inevitable.
  • On Politics: Tyler quickly dismisses both Democratic and Republican policy makers, arguing that neither side has any solutions for economic recovery that should be taken seriously. Tax cuts with not stimulate growth. Marginal government spending will not stimulate growth. New breakthrough technologies will stimulate growth, and the best thing our politicians can do is facilitate the creation of an environment where this can happen more easily. And the best thing everyone else can do is to help make science a more prestigious career.
  • On the Internet: The internet is the one new technology that has changed the way we live our lives and conduct business since the 1970s. But it’s fundamentally different from prior innovations in that it hasn’t generated a significant amount of new revenue sources to fuel meaningful economic growth. Sure quite a bit of business is now done online, but this was much more a shift of business than a generation of new business. There are certainly exceptions, and there are economic winners and losers as a result of the internet, but the fact of the matter is that inventions such as the car created new industries that employed millions of people and put significant new resources to work. The same can’t be said for the internet. This doesn’t make the internet less important, but its benefits, such as access to information and inexpensive entertainment, are just realized in a different way. A way that isn’t well captured by our standard economic indicators.

On that last point, the book doesn’t once mention utility*, and I think it could have been useful to frame some of the positive benefits of the internet and related technologies in that context. Maybe real income growth isn’t as important if we have real utility growth. I realize I’m on shaky ground here, in that utility is nearly impossible to measure, and as a result it could never serve as a meaningful and objective economic metric. But that doesn’t make it unimportant.

All in all, the book was full of fresh ideas and new perspectives. Again, it’s worth a read.

Kelly Evans of the Wall Street Journal writes, “in terms of framing the dialogue Tyler Cowen may very well turn out to be this decade’s Thomas Friedman.” I would have to agree.

*Since it’s an e-book, I was able to double check by searching. The book does contain the phrase “low hanging fruit” fifty five times. Trying to coin a new phrase that sticks by repeating it over and over again in your own published work is very Tom Friedmanesque.

Tax Advice From Greg Mankiw

Or not. Yesterday Professor Mankiw posted this on his blog:

Tax Fact of The Day

“The U.S. effective corporate tax rate on new investment was 34.6 percent in 2010, which was the highest rate in the OECD and the fifth-highest rate among 83 countries. The average OECD rate was 18.6 percent, and the average rate for 83 countries was 17.7 percent.”

Okay. He chose not to add any commentary, but he’s obviously implying that he believes the rate is too high based solely upon the fact that other countries have lower rates. I suppose that’s a reasonable starting point for a discussion. But his data is extremely misleading. Because the correct way to measure the tax burden on U.S. corporations is to look at what they actually pay, after accounting for all additional provisions in the tax law (i.e., loopholes). The effective tax rate.

So let’s take a look at that. From the New York Times:

So now the tax rate only seems to be unreasonable for a few select industries. What about corporate taxes paid as a percentage of GDP (i.e., the corporate tax burden relative to the size of the economy)? This is probably the best way to compare our effective tax policy with the policies of other OECD countries. Luckily, Ezra Klein had a great post answering this exact question late last year:

Consider this graph, which shows corporate tax rates against the OECD average. As you can see, we’re on the high side:


That’s the evidence for the conservative view. Our rate is about one standard deviation higher than the OECD average. But here’s the thing:

This confirms Mankiw’s data that the U.S. has higher tax rates. Ezra continues:

If you actually look at the amount of money our corporate tax raises, we’re about one standard deviation beneath the OECD average:


The reason is simple enough: Our corporate tax code is complicated. A lot of businesses, like S-corporations and partnerships, don’t pay corporate taxes. Others use loopholes and exemptions and deductions to push their actual rate way down. We could have a simpler code with lower rates that would raise more money.

So U.S. corporations actually pay 1 standard deviation below the OECD average, while U.S. tax rates are 1 standard deviation above the average. There seem to be two take aways from this. First, it’s obvious that we probably need either better tax laws, better tax collectors, or both. And second, maybe we should consider raising the rates (or lowering rates and eliminating loopholes, resulting in a higher effective rate).

Regardless, the conclusion is the opposite from what Professor Mankiw’s “Tax Fact of the Day” would have you imply. If anything, U.S. corporations don’t pay nearly as much as other OECD countries, and the advantage seems to be unfairly skewed by industry. As Ezra says: “We could have a simpler code with lower rates that would raise more money.” And then everyone wins.