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Tyler Cowen: missing the point

January 30, 2011

Influential economist Tyler Cowen hits the nail on the head in today’s New York Times column when he points out that

When it comes to understanding our macroeconomic predicament, we often seem to be missing the point.

Mr. Cowen then proceeds to self-referentially prove it by utterly missing the point.

He begins by noting that median income has not been growing as fast as in the past.

The income numbers for Americans reflect this slowdown in growth. From 1947 to 1973 — a period of just 26 years — inflation-adjusted median income in the United States more than doubled. But in the 31 years from 1973 to 2004, it rose only 22 percent. And, over the last decade, it actually declined.

This, however, misleadingly understates the problem since the 22% growth since 1973 is in median family income and not individual income.  Family income rose because of the emergence of the two income household and not at all from higher pay.  While women’s real wages increased, census data shows that full time wages for men declined an incredible 9.5% during this period.  But regardless of which data we use, Cowen extracts from the first of the links in the above quote and states:

If pre-1973 growth rates had continued, for example, median family income in the United States would now be more than $90,000, as opposed to its current range of around $50,000.

That median wages are almost half what they apparently should be is a damning indictment of our system.  But according to Cowen, the system’s not to blame; the problem is our “reaching of a technological plateau”.  This is so counter to the evidence and conclusion presented in the linked article that it makes one question what game Cowen is playing.  The article, a blog post by Lane Kenworthy, clearly shows that the growth of median family income has drastically fallen short of actual per capita GDP growth since the mid 1970’s and if median income had kept up, would now be nearly twice what it actually is.  Kenworthy’s rather understated conclusion is that

“In the past several decades much of the economy’s growth has gone to those at the top of the income distribution.”

Cowen completely ignores this, however, and somehow decides to blame it all on a “technological plateau”.  But how can we make sense of such an argument?  As far as technological productivity, we’ve made enormous strides in recent decades.  Manufacturing productivity is over twice what it was in 1987 and there can be little doubt of the efficiencies being gained in computer based automation and the internet.  Is it not very probable that Jeremy Rifkin is right and we’re approaching what he calls The End of Work?  But none of this for Cowen; despite the fact we can produce things almost at will and are at the highest point by far in the history of human technological achievement, our problem is a “plateau of technology” that’s causing us to live in an era of “scarcity”.  And,

Instead of facing up to this scarcity, politicians promote tax cuts and income redistribution policies to benefit favored constituencies. Yet these are one-off adjustments and, over time, they cannot undo the slower rate of growth in average living standards.

(Note as an aside that he criticizes income redistribution as only benefitting “favored constituencies”, as if the bottom 80% of the population, having just 7% of financial wealth, are a mere constituency.)

Cowen demonstrates a fundamental misunderstanding of money by talking in terms of “affording” government spending, living within our means, and the need for fiscal balance.

It’s unclear whether Americans have the temperament to make a smooth transition to a more stagnant economy. After all, we’ve long thought of our country as the land of unlimited opportunity. In practice, this optimism has meant that we continue to increase government spending, whether or not we can afford it.

the political problem will be in learning to live within our means.

Because neither major party seems to support a plausible path to fiscal balance, or to acknowledge how little control politicians actually have over future income growth, we unscientifically keep living in an age of denial.

Cowen couldn’t be more wrong.  Our means are determined by our technology and are not at all limited by the restrictions of a particular monetary system.  The human race has never had such technological prowess and has more than enough technological knowledge and capacity for everyone to live well.  The problem is not technology but the mal-distribution of wealth coupled with a monetary system that consistently fails to match the level of our purchasing power with our technological capabilities.  It’s not a technological problem, it’s purely political.  And Cowen is at his most political when he declares in his final missed point:

“… the solution to the stagnation of median income will not be a political one.”

  1. Tom Hickey permalink

    Exactly. Randy Wray elaborates in his critique of SOTU (emphasis added). Affordability is not the problem. The availability of real resources is the only constraint on a monetarily sovereign government that is the monopoly provider of its currency of issue. Since such a government funds itself directly with issuance, it requires neither taxes for funding, nor borrowing for financing unless voluntary political restraints are imposed on normal operations to limit them artifically:

    Unlike the private sector’s deficit, a government sector deficit is sustainable in the sense that it cannot lead to insolvency; sovereign government cannot run out of finance. That does not mean growing budget deficits are a good idea — they can boost demand beyond the full employment level, fueling inflation. They might affect the exchange rate; and they might affect the interest rate (although the impact is the reverse of what is usually believed, a point I will not explain here). But none of that is related to affordability.

    (Caveat: state and local governments are not sovereign; they do have unsustainable financial positions and hence are cutting spending and raising taxes and fees. That in turn is creating huge head winds that will kill this supposed recovery. A topic for another day.)

    On this the Chinese are right: whatever is technically feasible is financially affordable. And that is exactly how they are adding thousands of miles of highspeed rails: government funding — either directly or through back-door assumption of debts. They understand that finance is a tool to achieve the public purpose — whether that is high speed rails or new universities — and if they’ve got the real resources then finance should never act as a barrier.

  2. Tom Hickey permalink

    Ooops. I neglected to provide the reference.

    The Good, The Bad, and The Ugly in the President’s State of the Union Address by L. Randall Wray in The Huffington Post.

  3. Thanks Tom, I’ll check it out. It would sure be great to see L. Randall Wray get more press.


  4. Tom Hickey permalink

    Jim, think there is further question that Tyler doesn’t consider. GDP and productivity grew significantly from 1973, but that is not reflected in wages. While it is true that employee compensation has remained at about 70% due to benefits increasing even though wages have been stagnant, the fact remains that income and wealth inequality grew. Why is that?

    Michael Hudson’s analysis shows that this is due to wealth capture through extraction, largely in the form of economic rent. In addition, Bill Black shows that in addition to economic rent, fraud was also a significant factor in extracting unearned gains. The result of overreach and fraud was ponzi finance that resulted in an unprecedented financial crisis. Historically financial crises involve huge losses for the financial sector that are made up by transfer from households. That transfer is still going on. This is generating significant social dissatisfaction in the US.

    Social dissatisfaction eventually becomes unrest if not addressed. Former Goldman Managing Director Nomi Prins writes of the current international situation here. While the piece is chiefly about Egypt, it applies to the current international climate, even extending to the US, where workers are being in effect exploited:

    When a country, among other shortcomings, relinquishes its financial system and its population’s well-being to the pursuit of ‘good deals’, there is going to be substantial fallout. The citizens protesting in the streets of Greece, England, Tunisia, Egypt and anywhere else, may be revolting on a national basis against individual leaderships that have shafted them, but they have a common bond; they are revolting against a world besotted with benefiting the powerful and the deal-makers at the expense of ordinary people.

    BTW, Randy Wray, Bill Black, and Michael Hudson are colleagues in the economics department at the University of Missouri at Kansas City, which, with its associates, is called “The Kansas City School.” What they produce is to be taken as being of one piece, even though they may not agree on every last detail.

  5. “they are revolting against a world besotted with benefiting the powerful and the deal-makers at the expense of ordinary people. ”

    That’s a great quote and especially so considering the source. Prins is right – there’s a bond felt throughout the world, including here in the US, for what’s going on in the mid east. The key will be when successful protesters in at least one of the countries make the leap from blaming a figurehead politician and sees the problem being with global capitalism.

  6. Tom Hickey permalink

    Right, the same with discontent in the US, which is now centered on government. The right still thinks that the road to serfdom runs through socialism, whereas it runs through global capitalism, which has captured the apparatus of the state in so-called liberal democracies that have become plutocratic oligarchies exploiting workers.

    With the traditional media controlled by global capital, the propaganda is thick. Internet reporting reveals false flag and black ops at work in Egypt, for example.

    Egypt: Cue the Dirty Tricks, False Flags To Discredit Pro-Democracy Movement

    Is the Egyptian Government Using Agents Provocateur to Justify a Crack Down On the Protesters?

    The CIA’s Role in Egypt’s Regime Change? Who Is Omar Suleiman?

  7. Calgacus permalink

    I have to agree with Cowen on several points. In some respects his views are standard ones and correct. Historians of technology agree that the period of greatest technological change was in the century from 1850-1950, and we are not likely to see anything like that soon.

    I personally think that the rate of progress in mathematics, science, medicine and technology has been slowing down in the last few decades. But Cowen, like 99% of economists, exchanges cause and effect. Governments, and the US in particular have been attacking their healthy sectors like higher education for decades, enriching useless, parasitic ones like finance and the military and showering rewards on economic rent. This is part of the neoliberal attack on living standards, which we would all agree lowers wealth in the short term. What Cowen describes is just a serious longterm effect of neoliberalism.

    • Tom Hickey permalink

      Calgacus, I agree that the problem is essentially neoliberalism. It has resulted in increased rent-seeking substituting for productive investment and failure to share productivity gains from innovation with workers. This has resulted in increased inequality, which inhibits flow of funds throughout the economy, leading to an unsustainable level of private debt accumulation.

      I disagree with Cowen that the best days of advancement in knowledge and innovation are behind us. I don’t think we have seen anything yet in comparison with what will be coming, provided we coordinate intelligently. Civilization is the return on coordination. This civilization will be replaced by a more advanced one one way or another. In my view, neoliberalism has about run its course and will be upgraded to a more suitable paradigm for a global economy.

  8. I don’t think there’s any doubt the 1850 to 1950 period saw the greatest period of technological change in human history and the rate of change has since slowed down. My disagreement with Cowen is that it’s completely inappropriate to blame the stagnation of median income on the slowdown.

    There comes a point where we just don’t need more technological breakthroughs in order for everyone to live well – I believe we clearly crossed that threshold at some point between 1850 and 1950. It would be tremendous to have more (sustainable) technological advances, but the rate of those advances is not a viable excuse to explain the fact many, probably a majority, are living insecure and demeaning lives in this country and throughout the world. Can we seriously blame this sad reality on the fact we aren’t coming up with better toasters fast enough?

    I think a good analogy can be made with the old arguments supporting the arms race with the USSR. Despite the fact we could blow them to dust 1,000 times over, we still needed to continuously develop more weapons. While we probably can’t provide good living standards for everyone 1,000 times over, I think it’s beyond doubt we can provide for everyone quite easily with existing technology. Since we don’t need more technology to achieve what’s truly important, Cowen should be criticized for concocting a phony and false narrative that does nothing more than justify and support a failed social system.

    I firmly believe the ultimate root of the problem is twofold: 1) full private control of technology which leads inevitably to narrow wealth concentration and its flip side – widespread insecurity; and 2) A monetary system which fails to allow purchasing power to reach the level needed to take advantage of our technology.

    The bottom line, IMO, is that we’ve had tremendous technological change since 1850 but our social structure is still mired in the 19th century world of class and power. I stand my ground: Cowen has completely missed the point.


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