Why the economy is stagnant

The U.S. economy is stagnant because American corporations are hoarding cash instead of using it to put people to work to create useful products and services.   I am not sure why that is.  “Corporate greed” is not an answer.  Why wouldn’t greedy capitalists put their capital to work and become even more wealthy?

Double click to enlarge.

An economist named Tyler Cowen gave one possible answer in a book entitled The Great Stagnation.  I haven’t read it, but I have read Cowen’s Marginal Revolution web log.  He claims that during the past few decades, for some reason, investment in new technology has not produced the payoff that it did in earlier eras.  If he is right, then corporations have fewer investment opportunities than in earlier eras.

Another  possible answer is that the growing concentration of wealth in the upper 1 percent of income earners, and the stagnation of wages, has undermined the mass consumer market that drove American investment in the past.  Americans offset wage stagnation in the past by going into debt, but this bubble has burst.  If this explains economic stagnation, then it is possible to do something about it.  If Cowen is right, then we’re stuck.

Click on Tyler Cowen | The Great Stagnation for more about Cowen’s ideas.

Click on Widening Income Inequality Bad for Economic Growth for results of a recent International Monetary Fund report.

Click on An obituary for the age of mass affluence for a post of mine about the decline of the mass American consumer market.

Hat tip to Kevin Drum for the chart, which he got from Ezra Klein.

The mystery of the Great Stagnation

We’re not as innovative as we think we are, according to Tyler Cowen, a respected right-of-center on the faculty of George Mason University.  American innovation and American income growth are both slowing down, he said in a talk to a TED conference.

The great age of American innovation was the first half of the 20th century, not the second half, Cowen said.  During the early 20th century, electricity, the telephone, the automobile, broadcasting and aviation revolutionized American life.  Nuclear power, the space program, xerography, the personal computer, the Internet, the cell phone – these changed American life much less.

I think what he said is correct.  I could, without much discomfort, go back to living as I did in 1961.  I don’t think many Americans who were 74 in 1961 would have willingly gone back to living as they did in 1911.

Cowen said 20th century American innovation was based largely on inventions and discoveries of the late 19th century – the electrical generator and the internal combustion engine.   Most of what came after is based on a realization of the possibilities in these two things.  The main exception that comes to mind is antibiotics, also an innovation of the early 20th century.

But Cowen does not really address the question of why this is so, and nor does he connect it with the slowing of income growth.