Tyler Cowen and the Fallacy of American Laziness

Three complacent populations

Cowen finds three groups of Americans to be unsuitably complacent. They are: educated professionals; middle-status people who are “dug in,” desperate to preserve their modest successes; and the “stuck” poor.[1] But he makes it clear that the book’s title refers to the first group, who are also David Brooks’ bobos or bourgeois bohemians, Richard Florida’s creative class, John Kenneth Galbraith’s New Class. (Writers spend a lot of time making up cute names for what used to be called the upper middle class.)

It’s not clear why a group of people, largely self-made, doing satisfying work and living at one of the highest standards the world has ever known, should not be satisfied and seeking to preserve their position. They would be crazy not to. And this class has always been complacent, more so in the past than today. Just read, from a century ago, Sinclair Lewis’ Babbitt and H. L. Mencken’s mockery of the booboisie.

Yet the predictable and understandable complacency of the professional class is the subject of Cowen’s principal complaint and, in his reckoning, the source of our current malaise. What would Cowen have them do differently?

He doesn’t say, but one can infer from the context: start businesses, move far from home, marry outside one’s class or one’s nationality. If you’re a prospective businesswoman, become a backpacker for a year; if you’re headed for a life of adventure, try working in a bank. Work with your hands. Live for a while with someone much older; they already know what you will someday know.

Cowen himself is a Renaissance man. Perhaps he thinks of his own wildly varied interests as a model for others.

These are good ideas but they will not raise economic growth by more than a miniscule amount. Only policy-level changes in incentives can achieve meaningful growth, and, even then, sustained results are not guaranteed.

The productivity riddle

But maybe we don’t need a radical cure because the problems we face, at least as revealed by a key measure of growth, the productivity data, aren’t all that serious.

Headline U.S. productivity statistics continue to disappoint, with labor productivity per hour, a key measure, rising at 1.1% per year over 2007-2016, compared to 2.3% per year over 1947-2007 as shown in Exhibit 1. Of course, this is just a growth rate; the level of productivity is the highest it’s ever been. But slow growth for a long time is a legitimate concern, and has a large opportunity cost.

Exhibit 1

Productivity growth rates in the United States

Source: https://www.bls.gov/lpc/prodybar.htm

Some distinguished economists, however, including the Berkeley professor and blogger Bradford DeLong and former Council of Economic Advisers Chairman Martin Feldstein, believe that official productivity statistics materially understate growth in the standard of living.

The Macbeth effect

DeLong’s argument begins with the observation that the global economy produces about 20 times as much, per capita, as it did before the Industrial Revolution when a typical worker could afford to consume 2,000 calories of grains per day. But, he notes, “[40,000]…calories a day in basic grains wouldn’t do anyone much good.” The amount of money needed to purchase 20 days’ food supply can, today, instead buy a set of goods that are much more varied and valuable than a big pile of grain. For example:

In 1606, there was only one person who could sit at home and watch a bloody audiovisual drama about witches. His name was James Stuart, the king of England and Scotland. He had William Shakespeare and the King’s Men on retainer. Today, more than four billion people with smartphones, tablets, and televisions enjoy a form of on-demand entertainment that was once reserved for absolute monarchs.

DeLong also notes that the richest man of the early nineteenth century, Nathan Rothschild, died of an infection that, today, would be cured by one dose of antibiotics. Few of these quality-of-life improvements show up in the productivity data, which assume that the dose of antibiotics is worth what you pay for it, about a dollar. In fact, Rothschild would probably have given his entire fortune, estimated in the hundreds of billions in today’s money, to get the medication.

Thus, official productivity statistics greatly understate economic growth over long periods of time. At present, people benefit from easy and cheap access to the world’s libraries through the Internet, as I did while writing this article on the beach. Only a quarter-century ago I would have had to camp out at a serious academic library, pay library tuition, hire research assistants to chase down background material and make photocopies, and limit my research to the publications that my local university could afford to buy.

Thus, the spread between growth-as-measured and true growth persists into the present day.

The cholesterol effect

This spread is, of course, a global phenomenon: almost everyone benefits from the Internet, from medical advances, from improvements in the food supply. In contrast, Marty Feldstein offers an argument that the U.S. in particular is enjoying a growth rate higher than that captured by official measures. The reason (caution: geeky) has to do with the way that price indices are calculated:

When a new product is developed and sold to the public, its market value enters into nominal GDP [my italics]. These nominal values of GDP are converted to real values using price indices that don't reflect the new product at all. Why? Because the new product is too small in the beginning to be worth changing the weights in the GDP price index. But over time, if the new product eventually represents a large enough amount of spending, the BLS [does include] the changes in its price...in the price index…[2]

The result is that, even if the nominal GDP measure is right, the inflation rate used to convert it to real GDP is too high, so the measure of real GDP is too low. Thus, continues Feldstein, “when new products are introduced, [the real GDP statistics do not] reflect the extra value to consumers created by those products.”

The end result of all this math, taking statins (Feldstein’s example) as a prototypical improvement in technology, is that GDP-as-measured went down due to statins becoming less expensive as they became widely adopted. But GDP-as-measured didn’t rise, or didn’t rise much, due to statins being introduced! Thus, the tremendous benefit of the new drug never showed up in the data.

This effect is much more important for countries on the technological frontier, such as the U.S., where innovations are high-priced at first, than for countries off the frontier where innovations enter the economy once they have become cheap. So the spread between GDP or productivity, as measured, and the true standard of living is wider for the United States than for other countries.[3] This observation is important and is missed by most economists.

This long digression is a way of saying that the problem to which Cowen has devoted his book may be overstated. If the problem of slow growth is sufficiently overstated, we may not need a solution – although some Americans have terrible problems, a topic to which I now turn.

The mysterious dying of middle-aged white males

Meanwhile, in parts of the industrial heartland and in rural areas across the country, we are not doing well.

The economist Anne Case, and her husband Angus Deaton, who won the 2015 Nobel economics prize, recently presented evidence that, in contrast to the sharply falling mortality rates of most segments of the population in the U.S. and elsewhere, middle-aged white males were dying younger. Exhibit 2 summarizes the Case and Deaton finding, which has been widely publicized:[4]

Exhibit 2

Mortality from all causes (deaths per 100,000), age 45-54, for various groups

Source: Case and Deaton [2015].

Exhibit 2 is for both sexes but, disaggregating the data, the big increase in mortality is for white, non-Hispanic men. The chief reasons, according to Case and Deaton, are “suicide, drug and alcohol poisoning (accidental and intent undetermined), and chronic liver diseases and cirrhosis.” Not good, and the picture is certainly worse once you take out the upper-middle and upper classes.[5]

Despite the favorable broad measures of economic health that I cited earlier, we cannot overlook these indicators of social and medical pathology in such a large segment of the population. Although the timing is not precise, it seems highly likely that some of this misery is caused by the newly reduced economic prospects of this group. In the light of Case and Deaton’s work, Cowen is right to be critical of our economic performance.

I now summarize and comment on some of the specific issues raised by Cowen in The Complacent Class.

The new segregation

Ana Swanson of the Washington Post interviewed Cowen and summarized his observations: “The U.S. population has sorted out not only along political lines, but also by education, race, income, social status and even technological ability. Along the way, the country has become more polarized, less dynamic and less fair.”[6]

But, instead of seeking out ethnic enclaves as in the past, the complacent class has achieved this self-sorting by cramming themselves into the best school districts. Elizabeth Warren on the left, and Charles Murray on the right, have both confirmed Cowen’s observation that the high price of real estate in these districts is one reason for the decline – real or apparent – in social mobility. This process leaves the less desirable school districts and less well-polished neighborhoods for the next class down, and so on until all the social positions have been filled, from élite to ghetto.[7]

Here’s an alternative explanation for the apparent reduction in social mobility. Upward mobility depends in part on raw talent. If the lower and working classes have been stripped of their most talented members by the well-meaning effort to give a college education to everyone who is qualified, no wonder those left behind seem a little dull! And no wonder they are having a tough time. Of course, all we’ve done is replace upward mobility through luck and pluck with upward mobility through college-admissions testing. Under this explanation, overall social mobility has not changed.

The democratization of higher education has not, of course, plucked every single talented member out of the lower classes and placed him or her in the professional class. But sometimes it seems that way. I remember having discussions about the stock market, stereo equipment, and astronomical telescopes with my plumber.[8] Those conversations are unlikely today.

NIMBY and BANANA

A group of successful people who are mostly concerned with preserving their own status does not, of course, take kindly to letting strangers and strivers into their enclave. This attitude reveals itself in NIMBY (not In my back yard), a political posture that begins with a good-hearted effort to preserve neighborhood ambience and the natural environment but ends up creating barriers to entry through astronomical real estate prices.

The Mecca of the new complacent class is San Francisco. Old-timers can remember when a new house, in a desirable part of the city, could be bought for around $15,000, because the dockworkers and fishermen who lived there in the 1950s had very little money. Today the same house sells for upwards of $2 million, the highest rate of appreciation in the country. If San Francisco had been allowed to develop along free-market principles it would look like Manhattan and would be dramatically less expensive. But it would not be “San Francisco.”

NIMBY has been so successful at keeping the riff-raff out, in complacent-class cloisters from San Francisco to Ann Arbor to Boston that it has morphed into what Cowen calls BANANA, “Build Absolutely Nothing Anywhere Near Anything.” This is effectively the program of the environmental and anti-growth movements, which turn out to be powerful forces for stasis.

Of course, we need to protect the environment, but Cowen claims we should also recognize the social and human costs of doing so, and achieve balance.

Matching

In a society where we’ve sorted ourselves out into residential communities by educational level, industry (tech in California, finance in New York), taste for urban, suburban or rural living, and political and sexual preference, we tend to marry those who are much like us and produce children who are even more like us. Instead of seeking mates who belong to the same place of worship, go to the same (economically diverse small-town) school or are pleasing to the eye, we use social networks and software to search for partners who match us very closely in a whole array of deeply personal characteristics and desires. Some of us even use online matching software to look for sex partners.

The results are not impressive: marital happiness is not visibly improving, divorce rates are down only a little and many people choose to forgo marriage altogether.

Similar matching software makes us more closely matched in other ways, for example to our music. There are 1371 music categories on Spotify, including black sludge, solipsynthm, and skweee. These compare with about five (rock-and-pop, jazz, country, folk, classical) in the record stores of my youth. This blizzard of choices has not made music noticeably better – we are just better matched to it, and spend less time listening to music we don’t like. But we also don’t often discover something delightfully new. We are musically complacent, unlikely to listen to genres out of our comfort zone.

Cowen argues that this intense matching creates communities that are anti-civic, pursuing their own parochial interests instead of the national interest. This concern is justified. The hipsters of Portland, the former coal miners of eastern Kentucky and African American strivers in the Atlanta suburbs all have something in common: they’re Americans and human beings. But how often do they think of each other as members of one giant, embracing national community?

Casual Friday every day

Cowen even finds a downside in the uniquely American, and mostly salutary, habit of not dressing up. Of course, once Cowen explains it, it’s obvious:

The less strict the dress code, in fact the harder it is to look good and to fit in, and that disadvantages those who are not from well-educated and successful backgrounds… If everything is casual, what do you do to show your seriousness?

Fashion is but one example of how the American wealthy have been redefining social status through…countersignaling [that is, signaling one’s virtue through displays of modesty]. Bill Gates…can countersignal all he wants, and he is still Bill Gates and obviously so… If you’re twenty-four years old and looking to get ahead, it can be tougher.

It’s a sign of Cowen’s intellectual inventiveness that he can identify the social cost of dressing casually, a practice that on first glance is leveling. That’s what economists do – in any situation they’re trained to ask “what are the costs?” – but only in the afterglow of Gary Becker’s Nobel prize-winning work do economists think to apply this principle broadly to include khakis and blue jeans. (Becker’s gift to economics was to apply it to all sorts of non-economic questions.) Cowen, a Becker acolyte, is ideally suited to making these connections, and all of his books benefit from such unconventional thinking.

Rooted or stuck?

Did you know that Americans have (almost) stopped moving? “The interstate migration rate has fallen 51% below its 1948-1971 average,” Cowen writes. During those peak years, about 20% of households moved each year. Now, it’s less than 10%.

A group of Germans with whom Cowen spoke thought he was kidding or exaggerating when he quoted the 20% number. In Germany, buying and moving into a house, often one’s parents’ house or a house nearby, is usually a lifetime decision. But Americans, in search of opportunity, a change of scenery, or better weather – or to escape from bad conditions –moved at the rate described.

The new, more sluggish rate of relocation keeps many people from getting ahead. A quarter-century ago, Michigan residents who had lost their jobs in the auto industry migrated quite aggressively to Texas. Today, they tend to stay behind, adjusting to the lower pay of new jobs or to disability payments. It’s hard for the economy to grow that way, and it’s not healthy to have a resentful and dependent population concentrated in one area. Today, there are many such regions.

People who rarely move can be rooted or stuck. Cowen suggests they are mostly stuck, although they may be comfortable in communities to which they are economically and culturally matched. Staying put, matching and segregation are all related. NIMBYism is also related, because high-growth areas can be numbingly expensive, reducing the incentive to move for better pay.[9]

Sclerotic government

One does not have to be politically partisan to believe that we are poorly governed. Our acrimonious political debates resolve fewer and fewer issues, and the overall quality of government is questionable. How did this happen to a country that produced Washington, Jefferson, Lincoln and Roosevelt?

Cowen provocatively argues that it’s because of entitlement spending, which now consumes 50% of tax revenues, headed toward 80% due to the aging of the population. (The biggest entitlements are Social Security, Medicare, and Medicaid.) Thus political fights, which are mostly about discretionary spending, resolve a smaller and smaller part of the total budget.

A government that is stuck cannot greatly help a population that is stuck. Interest groups trying to preserve their special privileges find themselves playing a zero-sum game with other interest groups in similar positions. It isn’t pretty.

Compare this situation with 1960s California, which supported the largest expansion of public higher education in history while building a magnificent highway system and greatly expanding welfare payments – all without sparking a tax rebellion. How did they do it? Massive economic growth, due to a technological boom, embracing civilian aviation, defense and the space program, all of which lifted incomes and spurred migration from other states.

Through aggressively pro-growth policies and continued immigration at all skill levels, the U.S. can, and I believe will someday, recapture the energy of that unique time. It could be a long wait – an aging society has some disadvantages– but we will not be an aging society forever, and the goal is worth pursuing.

The great reset

How does all this complacency end? Cowen suggests that it is through a “great reset” analogous to the Reformation: pressures silently build until it becomes obvious that we have a problem. Campus unrest, a pause in the decline of crime and political chaos are the early first signs that have already occurred.

In one scenario of Cowen’s future, the chaos does not last forever and, as the term “reset” implies, we eventually reach a new equilibrium in which birth rates begin once again to rise, the U.S. population is refreshed with entrepreneurial immigration from Africa (not as farfetched as it sounds), and the benefits of technology become more obvious and more widespread.

I wish that Cowen had put more effort into his visions of the future, because speculative thinking is his great comparative advantage. The world is full of social critics, but visionaries are rare and he can make a serious claim to being one.

Conclusion

It is almost unpatriotic to give one of Tyler Cowen’s books a middling review. A brilliant thinker, Cowen is at his almost magical best when noting the profound relevance of an apparently trivial fact, finding markets operating in the oddest places, and uncovering connections between seemingly unrelated ideas and events. Read his blog – I do so every day. But this book is not particularly compelling. The Complacent Class is for readers who want to go that extra mile in their search for insight into contemporary social dilemmas. The basics are better covered elsewhere.

Cowen sets forth a one-sided, deeply gloomy and largely unfair view of America’s current troubles. Keynes was right about one thing: animal spirits are crucial to the dynamism of an economy. We could talk ourselves into an economic depression by allowing our animal spirits to flag – by concluding, incorrectly in advance, that few if any undertakings are likely to be fruitful. Let’s not do that.

The United States has plenty of faults, but complacency among the leadership class is not one of the major ones; lack of opportunity for the less able is. Let’s educate our less fortunate and provide practical incentives to work so they can participate and compete in global markets and enjoy the opportunities and pleasures that Cowen’s so-called complacent class has created.

Laurence B. Siegel is the Gary P. Brinson Director of Research at the CFA Institute Research Foundation and an independent consultant. He may be reached at [email protected]. Steve Sexauer provided many helpful comments.

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