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The Daily Reckoning

The real cause of economic stagnation

In today's changing economy, it's no longer true that you get out what you put in

(Page 2 of 2)

And guess what else? When it comes to surgery, who do you think comes out ahead — people on Medicaid…or people with no health insurance? The people with no health insurance, of course.

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These facts and figures come from a delightfully moronic book called The Great Stagnation, by Tyler Cowen.

He points out that the results from educational spending are similar. In 1971, the US spent a little more than $5,000 per student per year. Now, it spends more than $12,000. So guess how much reading scores have increased? Have they more than doubled too? Nope. They haven’t budged.

This is especially interesting because of something known as the “Flynn Effect.” Flynn noticed that kids were getting smarter every year. So, if IQs are going up, you’d naturally expect test scores to go up to. But they’re not. Which suggests that the quality of educational inputs is going down…so that the results end up in the same place.

In other words, the great Truth of the Modern Age — that further inputs produced further outputs — is no longer true.

What’s the connection between education and government debt? Why are we trying to compare stock market gains with gains in health care?

Here’s where The Great Stagnation falls apart. Its author completely misses the point. He thinks the “low hanging fruit” has already been picked. In a way, he’s right. The big gains in output — in education, health care, heavy industry, farming, banking, debt and many other areas — have already been made. Now, it’s hard to make any successful investment in any area…

…if you invest in more health care…it will probably be a waste of money.

…if you spend more on education (not individually, but collectively), that too will probably be money down a rathole…

…if you increase the level of credit (as the government is trying to do)…you might as well save your money.

…no point in investing in the stock market either. The glory days are over…

…and stay away from the bond market. The debtors won’t be able to pay…

Yes, we’ve entered an era of ‘Great Stagnation.’ And yes, it looks as though the low hanging fruit has been picked.

Tyler Cowen thinks this is a problem that we can fix. He thinks we just have to put our thinking caps on.

The silly goose. He doesn’t realize that the era of low-hanging fruit changed the way we look at things too. It made our arms shorter and our brains smaller. We are all dumb optimists now. That’s what 300 years of finding low-hanging fruit does to a people. We think that every downturn — even a Great Stagnation — can be reversed by, among other things, raising “the social status of scientists.”

No kidding. That’s what he recommends. As if the social status of people was determined by an act of intellectual will.

What a disappointment. We began reading The Great Stagnation thinking its author was a closet Dear Reader. Instead, he turns out to be a disciple of Thomas Friedman.

More on the real causes of the Great Stagnation…tomorrow…


Bill Bonner

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