The Stagnation?

Perhaps there is someone who would both read this blog and not know of the book:

The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better by T. Cowen

However, I will only point out two reasons it is thought notable. 1) because it is a e-book only release which is relatively short. For an academic book this is great because it eliminates the filler most academics seem compelled to include in their books. 2) It has been widely talked about by people both pro and anti-market.

Cowen seems startled somewhat by its reception among self-titled libertarians. Afterall, he claims that there is a stagnation. If fans of small government thought that they have a case against big government at all, surely the growth in government over the past 50 years would have caused stagnation?

This strikes me as noteworthy, especially since Cowen, when I was in school at GMU, was a fan of staying that government is a luxury good. When income rises you want more of it (generally speaking).

This is particularly interesting considering a hot debate in the regulation literature. A 2001 working paper by Edward L. Glaeser and Andrei Shleifer, The rise of the regulatory state, is a good example of the basic hypothesis. The modern regulatory state rose because of legal failure, that is, legal decisions failed to reach an efficient, stable, or lasting consensus for future activity among the group they were intended to regulate. Basically, this is a critique of constitutional political economy from the Chicago-Virginia (Coase-Buchanan) perspective.

Diana and I are very interested in developing this line of inquiry. If it is true that legal precedent does a poor job of establishing a clear and permanent legal consensus, then regulation has to be at least considered. In a working paper, which we have presented at conferences in the past, we argue that the regulation of medicine, specifically blood donation, was controlled by a regulatory action motivated by pure public choice concerns. We argue that the outcome was worse than what had already been established in legal opinion but not yet taken place. We think that regulation is just as suspect if not worse than the process of the courts.

Since I believe that Shliefer's work (this paper with Glaeser and others of his) points to the best arguments against the idea of a constitutionally limited government with democracy; I also am willing to view Cowen's argument as a cleverly updated version of Schumpeter's thesis about the demise of capitalism in Capitalism, Socialism, and Democracy. Cowen makes a bold assertion and dares us to prove him wrong. If there is no stagnation (as I assumed in my knee jerk reaction ) despite increases in the scope of government over the last 50 years, then we have no reason to lament this change in government. I know that we could have higher growth -- but at some level I am willing to appreciate that the unseen benefits of growth will always fail to win minds compared to the visible poverty that persists even with the intervention.

Cowen shows us that stagnation is normal in a process of growth. Russ Robert's this week mentioned Kuznets Curves which predict that income inequality increases during periods of growth but converges later. These theories show us that there is some regularity in the world driven by a more complex process. We shouldn't expect high growth all the time, sometimes we prioritize fairness over growth.

I tend to be on the side of the heroic vision of capitalism which I believe is best illustrated by Hernado De Soto's claim in his book, The Mystery of Capital, that allowing people access to capital is the economic equivalent to nuclear fission. But, I am willing to look out the window and see people being prevented from having access to this by the banality of "frictions" in the developing world. [This is putting it nicely, but these frictions should occupy another blog post in the future] At the end of the day, we have to come to terms with the fact that people want intervention in order to grow at moderate rates in order to signal social justice. Growth that occurs too quickly might be on net positive for the society, but there is something psychological about high growth rates that cause moralizing among voters (or the mob in general). I have called this repugnance in other places. I will talk more about this in the future, but for now, I think it is sufficient to link this stagnation idea to the moderation of growth rates implied by Schumpeter and Kuznets in rapidly growing (or recently rapidly growing) economies. Linking this to the regulation theory of Shliefer means that we have a causal process for the growth in regulation partially identified.

Now off to think more about Mises's work, Interventionism.