Tyler Cowen: "Is Average Over in an Age of Great Stagnation?"

Okay, welcome to our November session of the Economic Liberty Lecture Series. It's nice to be here with y'all. I'm Jacob Hornberger, president of the Future of Freedom Foundation. I think this is the first time that I've spoken to y'all since probably the very first time this club or this program got established. And Bart Frazier, our program director, took it over after that, and he's been welcoming you ever since. And so Bart's on his way to Florida for a wedding, and so I get the honor of being here with you tonight and coming back after what— God, this program's gone on for 4 or 5 years now, or longer. I think longer. Started before all of you here were here. And I got to tell you that it's just been a big honor to work with this club in this program. We just— this has been a first-class program for the Future of Freedom Foundation. And we're just so pleased with it and we're proud of it and we're really pleased to work with you all over the years. And we've got a first-class series of lectures on our website. They go back several years. And so working with Econ Society here at GMU has been a big honor for us and we're very pleased. And to show you that, you know, what you get if the president of the organization is here welcoming you, every one of you this evening, we will give you a free 1-year subscription to our monthly journal, Future of Freedom. We have a daily publication which we like to think is the best libertarian editorial op-ed page on the internet. That's free for the asking. But our journal, which is edited by Sheldon Richman, who's our vice president, and Sheldon used to be the editor for the Freeman that I know many of you are familiar with, that the Foundation for Economic Education publishes. Well, Sheldon's doing a fantastic job, naturally enough, with Future of Freedom, and if you just drop an email to fff@fff.org and remind us that you were at this meeting tonight, we will give you a 1-year subscription. We also have other programs. Sheldon and I just got back from a week-long lecture tour in conjunction with the Young Americans for Liberty where we went to 5 college campuses in the Southeast by car. We started in Jacksonville, Florida. We went up to Georgia, up to North Carolina, South Carolina, and it was just an absolute blast. I mean, we just had an absolute great time sharing ideas on liberty with the Young Americans for Liberty, as well as non-students who came to the programs. And so it was a fascinating dynamic. Some of the students knew about libertarianism. They had read Mises and Hayek and a lot of the Austrian schools and the free market people, Friedman and so forth, Bastiat. And then other students were brand new to libertarianism, and so it just made an fascinating dynamic. We also have an absolutely great webinar that we started 8 months ago with Sheldon as the host for this webinar, and I would invite you to attend this thing.

It's—

the next one's gonna be in December on a Thursday. I forget the date, but you can check it out on our website. But there are few people that know more about libertarianism and Austrian economics than Sheldon Richman. I mean, Sheldon's background goes back to— he worked at the Institute for Humane Study, Studies, worked at the Cato Institute for many years, worked at FEE for 15 years, and now he's running this fantastic webinar. And so I invite you to check it out and to kind of spread the word if you like it, if you attend and you like it, which I know you will. I mean, it's really a stout program on various aspects of libertarianism and Austrian economics. So again, the next one, if you want to try it out, is is in December. I know that David's gonna introduce our speaker, which we're very, very pleased to have, and we've been trying to get this guy to come and speak to us for quite some time now, and so we're really pleased that Tyler's gonna be speaking tonight and sharing ideas on liberty with you. I do wanna say one thing, that Tyler's played a very big role in our lives at the Future of Freedom Foundation, and not just with his economics, but especially with his online restaurant reviews. And I don't know how many of y'all know this, but I mean, like, he is world-renowned for his restaurant reviews. You know, he got like a big review of his reviews either in the Washington Post or New York Times or something like that. It's like the major media pay attention to what Tyler says about his restaurant reviews. And the reason that we owe him a big debt of gratitude is that we needed a good Mexican restaurant to go to when we go to the Washington Nationals games. Tyler, we go to Taco Bomba now in Falls Church because of you, and it's just absolutely awesome. So thank you. So without any further ado, let me introduce David, president of the club. David? Okay, great.

Great. Good afternoon, or I guess it's evening now, everyone. My spiel won't be quite as long. I've been waiting all semester for this lecture. I'm David Roth. I'm president of the Econ Society here at Mason. The Economic Society is a student organization devoted to the personal, professional, and academic development of all students interested in economics. If you would like to learn more about the society, please come and speak with me or another one of my officers after the event. It is my pleasure to introduce Dr. Tyler Cowen. Dr. Cowen graduated from George Mason University with a Bachelor of Science in Economics and earned his PhD in Economics from Harvard. He is currently professor of economics here at Mason as well as the director of Mercatus Center. He has published several books including The Great Stagnation, An Economist Gets Lunch, and Average Is Over. He also publishes daily at the blog Marginal Revolution. Please join me in welcoming Dr. Tyler Cowen.

Thank you all for coming. I'm going to speak about themes from my last two books, "Great Stagnation" and "Average Is Over," which is this one, came out in September, and also emphasize some of the themes as they relate to liberty. I'm not going to cover all of those books. So what I've been doing over the last few years is trying to figure out the implications of what I call uneven growth.

Tyler Cowen.

So, a lot of economists, their core model is we have this thing, the US economy. It's gonna grow at something like 2.2% a year. That's almost like a law of nature. Let it rip. There are business cycles, but you get back to 2.2%. And you can more or less plan on that. And over time, I've been getting more and more skeptical about that view. I think it's often more useful to see growth as uneven. Both across time and also across sectors. So, uh, let me first start with growth across time. The main argument in my book, Great Stagnation, is that in the last 40 years or so, the rate of technological progress has fundamentally slowed down in the United States. Economic growth here has become less rapid. There's a statistical version of this argument, and there's an anecdotal version. Let me start with the anecdotal version. Let's take my grandmother, who was born in 1905, and when she was born, only 6% of Americans finished high school— forget about college. There were no antibiotics. Cars were not really in use. In some form they existed. Electricity and flush toilets were not to be taken for granted. You couldn't fly in airplanes. There was, of course, no TV. And radio didn't really come until the 1920s. So it was a very, very different time. By the time my grandmother is 50 years old, we're now in the mid-'50s, all of those things have changed. We even have rudimentary computers. We have the beginnings of nuclear power. But of course there's radio. You're starting to get TV. Lots of people have cars. There's talk of a chicken in every pot. Most homes have running water, electricity, and flush toilets. Penicillin is in widespread use. Uh, it's a completely different America. You have large numbers of people graduating high school, going to college. So her first 50 years, literally everything changed completely, radically, dramatically. Now let's think of my own first 50 years. I'm now 51, so I was born in 1962. Uh, probably none of you here in, in this room remember it back then, But if you turn on a TV show from the '60s or '70s, what's striking to me is actually how familiar it looks. It looks clunky, and things are worse. You don't have cable TV, the cars aren't as good in a lot of ways, they get flat tires more often. But a lot of things look the same. So if you took the me from, you know, 1968, '69, and fast-forwarded that me to the world of today, I would know how almost everything works except for— well, I left my iPhone back there. My iPhone, my iPad, computers, I'd be baffled by those. Airplanes. First time I flew on a plane as a kid, I think I was 10, so that'd be 1972. The plane I flew on then is exactly the same kind of plane we fly today. That's astonishing. No one back then thought that would be the case. If you look at energy, energy back then was cheaper. The last 40 years, in an unprecedented manager— manner, energy has become more expensive. Life is much more regulated. Travel time to get to most places takes longer than it did back then. So my view of the last 40 years is we've had a few sectors with really big improvements. It's no coincidence those are relatively unregulated sectors. So it's computers, software, internet, which are mostly free, governed by the First Amendment. Uh, computers aren't as free as we thought because, you know, people are listening, right? This is maybe a shock. But that element of the government, it doesn't really stop innovation. It's just unpleasant in various ways. So we've had a few sectors computer, internet, software do incredibly well, and a lot of other sectors be stagnant. And the overwhelming reality, when you look at GDP, what are two of the components of GDP which are growing? Most of all, it's healthcare, right? Grows almost every year as a percent of GDP. And also education. What do we know about healthcare and education? Well, a bunch of things. First, they're very bureaucratic. Second, government has a pretty big role in them. Third, there's a lot of third-party payment and guarantees. And fourth, we don't really have good ways of measuring productivity in those sectors. So when we measure productivity in education, when education, say, goes to count into GDP, how do we measure productivity? We assume that if we're spending more money on it, we're getting more value. How's that as an assumption? Imagine what it would be like for a private business to operate with that logic. Well, we need to calculate profit and loss, so if we're spending a lot of money on a product line, it must be doing really well. How would a business do with that logic? Not really well, right? There'd be no feedback. You need profit and loss mechanism. So a lot of things, even a few things the government does, but most of what the private sector does, There's feedback through profit and loss. Someone has to buy the stuff, right? So I think when you look at economic statistics, countries which export a lot are actually richer than GDP numbers will indicate. Because those exports, you know they're passing a real market test. Someone had to buy it. Arms sales are maybe an exception, but most exports are sold in very competitive markets to pretty choosy buyers. When you look at countries that aren't exporting that much, have large service sectors, and spend a lot on healthcare in GDP, what should we conclude about those GDP statistics? In my opinion, we are overvaluing what I would call true American GDP. Because we take healthcare, which is now over 17% of our economy, We take education, which is 7-8%, it's pretty high, and we just value those things at cost, and they're getting bigger over time. Defense spending, it's not as big as a percent of GDP as it was in World War II, but in most of the audies, that got bigger over time. Security spending got bigger over time. A lot of things government does have gotten bigger over time. And we're valuing those things at cost, basically. And that makes me suspicious. So economies where government does a lot, economies with a lot of third-party payment, economies with a lot of stagnant service sectors, uh, with low accountability, it's hard to measure value. In my view, those economies are probably actually much poorer than how we're measuring their prosperity. And that to me is the U.S. economy. Let me give you a very startling fact. If you ask a simple question, how is all this GDP growth fed back into wages? Let's take the wage of the typical median, in the statistical sense, median male earner in the U.S. In 1969, it's a long time ago, right? It's 44 years ago. 1969, the median wage for the typical male earner, adjusting for inflation, was higher than it is today. It's stunning to me, that fact. I remember 1969. No one back then thought that number was gonna go down. Left-wing, right-wing, communist, libertarian, whatever, whatever people were, post-Keynesian, no one thought that number would go down. Now, that number has some tricks in it. You know, the distribution shifts because of immigration, so there's a composition effect. Today we have more free goods and services, like we have Facebook. That's nice. That's free. It doesn't go into GDP. So I don't actually think it's correct to say the median male earner is worse off today. I really don't believe that. Life is better in a bunch of ways. But to think that that inflation-adjusted number could in the numbers go down is an indication to me that something is broken with the American growth machine. When you look at wages for women, wages for women are going up at a pretty decent clip. Women, of course, are working much more starting in the '60s and '70s. Women are getting much better educated. This trend is still going on. You know, it's a great thing. But it shows you how much of American growth is coming from people working more— and less and less is coming from we invent new things. And this to me is bad. You would rather have growth coming from new ideas than from people working harder. Nothing against work, it can be fun, it's often fun. For a lot of people it's a struggle, it's inconvenient. So it's another reason not to just aggregate growth, not to just sum up growth. You want to ask, where is that growth coming from? People working harder Or is it coming from inventing lots of new stuff? And I just see too many areas where we are not inventing that much new stuff, again, putting aside computers, the internet, and the like. So that's just, you know, in a very basic nutshell, that's an overview of some of my arguments in "Great Stagnation." That in this country economic growth has slowed down, wage growth has slowed down, There's a bunch of reasons for that. Some of them, I think, are purely coincidence. Some of them are regulation. Some of them are the growth of healthcare and education. When you look closely at the areas of healthcare and education, it's far from clear we're making a lot of progress. So if you ask yourself a simple question: When did the rate of graduation from high school in America peak? The answer is actually in the late 1960s. And since then, it has gone down. It hasn't gone down very much. And actually, the last few years it's turning up again. It's sort of going back to where it was. But it peaked at around 70, 71%, which isn't that great. This is high school, right? Not college. And then it went down to like mid to high 60s percent. Two-thirds. That's not great. And then it just stayed there for decades. That's another form of great stagnation. What happened to expenditure on American high school education? Or K through 12, for that matter? You graph that, just up, right? Per capita, it simply goes up. We spend more and more each year on schooling. It's hard to tell what return we're getting. I think a whole bunch of schools in this country have gotten better, but a whole bunch have not, and a lot have gotten worse. The fact that we don't even know the rate of return, I would say, is itself discouraging. It's a reason to be skeptical. Because we're like this business that's putting out a product, and we're just judging how good it is on the basis of how much we spend. And that's crazy. If you look at healthcare, you can read on Robin Hanson's blog— probably many of you have done this already— There's plenty of studies. There's a very recent study from Oregon. There's a much older study by the Rand Corporation done in California where you take people, ordinary Americans, against a control group, and you give them free healthcare for some number of years. The Rand study even tracks people for decades. So one group of people gets free healthcare and the other gets life. When you do the comparison, like between individuals who get Medicaid and individuals who do not, it's remarkable how hard it is to find a positive return there. I know those studies only measure some ailments. They're not looking at everything. They're highly imperfect. Is the control group really random? What about people who drop out of the study? I know all these issues. But still, when you try to measure it as best we can, and it's really hard to find a big significant effect, you have to wonder, my goodness, like, how good is healthcare? There's stuff you know they can do. You break your leg, you'd better go to the doctor or the hospital, right? You more or less know they can fix it. If you don't, it's bad. You need penicillin, you take it, it works. There's a bunch of things we know work, and then after that, at the margin— again, it's not clear when you look at the microdata What return we're getting from basically 18%, almost 18% of GDP spent on healthcare. And maybe some of you hear this factoid like, "Oh, these other countries, they have socialized healthcare systems, they spend less than the US, their healthcare outcomes are just as good." You've probably all heard that. I think part of what's going on there is simply a lot of healthcare is not at the point where it really works. So, uh, you socialize a sector that doesn't work, You may lower costs, at least, you know, in terms of direct dollar expenditure, you're lowering costs. You may not lower queuing costs, but you're lowering costs. The stuff didn't work anyway. It was like that old joke, like, you want to solve the drugs problem, the heroin problem, cocaine problem, just nationalize the sector, right? I mean, that will do it. You'll get higher price, low quality, and inferior service. So, again, we have these sectors which are not really giving us a high return. Now, let me talk a bit about the more dynamic sectors, which I've called computer, internet, you know, cell phones. You might call that communications. And those have been phenomenal sectors. Just great, great stuff. Huge advances, even in the last 3 or 4 years. Certainly over the last 10 or 15 years. So that's the good news. And a lot of the improvements in living standards we have had, we've had from those sectors. They haven't really come from like a better energy sector, for instance. They've come from information and tech. So I think we have this very skewed economy right now. It's really good for some subset of people. Those people, in one of my books, I call them infovores. My book there is "The Age of the Infovore." So those are people who really love information. I suspect some chunk of you, maybe all of you in this audience, you're infovores. You're here to consume information, right? You want more information of some kind. And no one is paying you to come here. Most people are not really infovores. So if they had free information at the margin, they wouldn't really use it. Like most people don't sit at home reading Wikipedia articles. You ever read a really good Wikipedia article? Yes, they're really fun. Then you're an infivore if you feel that way. You know, oh, click to another, one on each episode or some historical event or some person you wanted to learn about. That's fantastic. So in that area, the space of information, Information about your friends, information about your grandchildren, how people you went to high school with are doing, knowledge of, like, what happened in every Battlestar Galactica episode, reading blogs. Infowars. They're much, much better off. I don't even know how to measure the growth rate in information in a meaningful way. It's such an explosion. There's way more than anyone can take in or process. But people who love information I suspect have been seeing rates of economic growth which are really like what China's been doing, like double-digit every year. And life for us is phenomenal. Like, that's me, I'm an infivore. People I know who are journalists, they're mostly infivores. Some people who work in finance are infivores. Economists are often infivores. So often, sort of the elite opinion-shaping class, we're infivores. That's a mostly unregulated sector because of the First Amendment. And also it's just hard to regulate. Uh, but you have to ask, like, what percentage of the American population is infivores? Maybe it's a matter of degree, but I don't think that it's more than 5%. But nonetheless, you have this very skewed growth for the infivores. Uh, for journalists, for the elites. I think also there's a skewness that life on the coasts for the most part has gotten much better. It's improved at a faster rate than for the nation as a whole. So if we just consider Washington, a place I think all of you know, it was not that long ago, really just 15 years ago, maybe less, that if you drove up and down 14th Street northwest, it was crack whores. You would avoid going on 14th Street above a certain level. There was like the part by the mall which was deserted and became dark. You would ignore it. And then you'd like get to the crack whores. And you wouldn't go there. There was like a barrier. The barrier was like at 16th Street. Like one year finally it moved to 15th. 14th still had the crack whores. Today you go to 14th Street, there's great restaurants, there's tapas, there's Whole Foods. It's like we've traded in the crack whores for Whole Foods. Washington is a much nicer city. Real estate here is worth much more. Just take like the market measure. How good is Washington? Look at price, right? It's way more expensive. It has more traffic. It has way better ethnic food. We can talk about that more if you'd like. It's much safer. New York also. I grew up as a kid, I grew up outside of New York. Even to go on the Upper East Side, you'd be somewhat afraid. I would take the bus in, I would get off at 42nd Street, and I'd have to walk like 6 or 7 blocks to my chess tournaments. I'd go in to play chess. I was like 11, 12 years old. I think fortunately my mother didn't know what those areas were like. And they were just horrible. There'd be drug dealers, people selling crack, guys walking around with knives. It'd really be terrifying, not just for, you know, me as a kid back then, but me now, it'd be, "Oh, I'm not gonna go there." I wouldn't go there anymore if it were like it were then. Now you go to 42nd Street, there's the Sony thing, there are the lights, there are more theaters, there are restaurants. It's ugly and touristy, all the Europeans walking around, right? But it's completely normal, completely safe, totally different city. So the people who shape opinion, the infowars, the urban dwellers, people in New York, people in Washington, San Francisco, those areas of our country, they've grown at very strong rates. They really have. Some of that has been through rent-seeking. Washington, say no more. A lot of New York's growth has been driven by finance. Which, uh, a lot of that is rent-seeking, not all of it. A lot of New York's growth has been driven by tourism. That's like exports. It's just the rest of the world has gotten wealthier. It's good to benefit from that, but again, it's not a new idea we came up with. So growth in the U.S. is more skewed, much more skewed than it used to be. And geographically, the nation is more different in terms of income classes. So it used to be You would have wealthier people, middle class, and poorer people living not so far from each other. And now, residentially, this country is much more segregated. And also income inequality is going up. So this book averages over— this is really a book about skewed growth, and it's a book about how skewed growth is giving rise to inequality and how income inequalities are rising. But it's not just about income inequalities. It's about geographic inequalities. It's about educational inequalities. So today, the returns to doing very, very well are much higher than they used to be. For instance, if you're trying to be a lawyer, the return from coming out of the top few schools, relatively speaking, is much higher than it had been. If you want to be an economist, When I was getting my PhD in the mid-1980s, people spoke of like the top 10. By the time you get to the 1990s, people speak of the top 6. People who like get PhDs from Yale, all of a sudden it's like, Yale, eh, it's not really that good, is it? Now people are starting to talk of the top 2, and that's Harvard and MIT. It's like, oh, He got out of Princeton, like, eh. It's remarkable how there has been that shift of skewness of returns. And again, it's a mix of factors. They're not all well understood. Some of it is just the most successful people are even more successful because of the internet. And then they sort of breed in clusters. Some of it, I think, is rent-seeking. But you see markedly in a lot of areas. So the authors who write the best-selling books, like Harry Potter or Dan Brown's Da Vinci Code, those sell much more in relative terms compared to the rest of the market than they used to. So Harry Potter, Da Vinci Code, they're best sellers pretty much around the whole world, not North Korea, but in most countries. And again, that's very different. So returns at the very top, it seems like they're really going up. For this complex bundle of reasons. So I think now, as my book indicates, we have a society where there's much more of a race for those top returns. So rent-seeking has gone up a lot. Uh, people whose incomes are stagnant, they have to make a lot of different adjustments. So people who have more stagnant incomes, for instance, they're much more likely to move to poorer states. The biggest shift we're seeing is people leaving places like California and New York, which are what I would call fun states, but they're expensive, and they're moving to Texas, they're moving to Oklahoma, they're moving to the Carolinas, not always the Research Triangle, because it's cheaper there. And again, that's the result of this process of higher inequality. I think another thing we're doing in the world with information technology is we are measuring value better. We have a much better sense of each worker's value. So just a simple example, let's say you take journalism. You put out a newspaper in the 1980s or even '90s, you send out a bunch of stories in paper form, right? And what is it that you can measure? All you can really measure is how many people subscribe to the newspaper. You might hear talk like, Oh, I really like this columnist. I hate that columnist. You have an imperfect sense of how much your different producers are bringing in. But that's it. So pay structures are more egalitarian. Now, my view is there are some strong and very natural divisions of human talent in most areas, maybe all areas. So today, how does journalism work? Well, most papers are online, and they measure very precisely, down to the unit, which article is the most viewed, the most emailed, the most tweeted, whatever metrics you want, they're available in real time in a fraction of a second. And if you want to ask who are the most valuable New York Times columnists in terms of, like, viewership, I can tell you who the most valuable was. It was Nate Silver. Do you all know who Nate Silver was? He did the election forecasting. He's written a lot on sports. Earlier this year, Nate Silver left the New York Times. He was bid away by ESPN. They offered him a salary which was well, well into 7 digits. Because you could measure his value, there were times where like a third of the hits to New York Times website were going to Nate Silver. Unbelievable. This, of course, was the peak of the election. I'm not saying— on a day-by-day basis. He's gonna give you that for years, but a third of all the hits. Phenomenal. It was tweeted and emailed around, everything. Who is gonna win, why, whatever. And of course his predictions did pretty well. So what you get is, again, more inequality in the pay structure because you're measuring value. Another thing I think has happened is the global economy is more competitive. So there are a lot of complaints about inequality. So I view myself as an observer of inequality, not as a complainer about it. But overall, there's much more talent in the world. There's a lot more unskilled labor, which is now not living under the slavery of the way things used to be, or not living under the, you know, the pure socialism of India before reforms, not living under Chairman Mao. And these people are out there producing. So if you look at the world as a whole, which is what I think is the morally relevant unit, you see that inequality, income inequality, it's way down and it's been falling for decades. But there's a funny thing about that pattern. In a world where global inequality is falling, you typically get a state of affairs where within each nation measured inequality is rising. So you have people who are by nature kind of crudely nationalistic. They look at their country. You ask them, "Oh, measure what's going on in my country." They say, "Oh, inequality's going up." And if they're egalitarians, they complain about that. But again, world as a whole, inequality is way down. But we get this funny result that the distribution of the decline in inequality is settled across borders rather than within them. And think how that works. Take the most talented people in the US and China and India, wherever they are. They can now sell their labor, their intellectual property, to the whole world in a way that you couldn't in 1968. 1968, you could sell it to Western Europe, Canada, and Japan, like maybe was starting to have some wealth. Now it's billions and billions of people. So at the upper end Earnings are higher, but again, that's going to increase measured inequality. And in the middle, we're seeing more competition, which I think means that wages in the middle in the US, it's one reason why they've been rising more slowly. It's not just a tech slowdown. It's the fact that there's a lot of economic growth in the world. And our institutions, they also have a status quo bias. So think of there as being job destroyers and job creators, right? We know from economic theory there's both job destroyers and job creators. On average, if you are destroying jobs because of innovation or trade, society, the economy, will be better off, and you pick up that slack through job creation. But in a lot of ways, we have an economy where, you know, there's creative destruction, but we've put more of a stranglehold on the creation than we have on the destruction. So you have automation, you have trade, and in a natural way they take away jobs. That's always been true, it's true now. But what we're not so good at doing is creating new jobs because you have various factors stifling job creation. So you have this kind of slow slide where we're engaged in creative destruction, which too— with too much balance on the destructive side of the ledger and not enough balance on the creative side. And that too is encouraging this rise in inequality. You combine that with some rent-seeking, some lock-in effects, crummy productivity for medical services and education, stagnant or sometimes even regressing it— regressing education, and then global markets for the very most talented people, like Steve Jobs or J.K. Rowling, and you get these really big increases in inequality.. And my book, "Averages Over," basically is trying to think those through. Where do they come from, those increases in inequality? What do they mean? Where are they headed? And think of this as kind of the sequel or second installment in the story of the Great Stagnation. The two books sound a little different, but it's the same basic model. The basic model is most sectors are still pretty stagnant, but we have this cluster of sectors— computers, internet tech, which are really dynamic, and just keep on playing that logic out for decade after decade. What does that look like? Great Stagnation is about the last 40 years. Averages Over is about the next 20 years. But it's the same model. But the further out in time you look, the more the dynamic sector is gonna matter, basically. So you get different predictions, different implications from the model. There's also a lot in the book "Averages Over" about job markets, how job markets will evolve. One thing that I think is true is really the growth sector of the future is what you would broadly call marketing, or persuasion, or getting people's attention. So the more you have income concentrated, the higher the value in grabbing the attention of people with high incomes. Some of this is direct advertising, but a lot of it can be very indirect. And very subtle. Different things you can do, impressive feats that get people's attention. So our economy, in my view, is becoming more and more about marketing, and high returns are going to marketers. A lot of marketing is very productive. Some marketing is rent-seeking. But I see tech, oddly enough, as bringing us, not in every way toward an economy of tech, but in a lot of ways toward an economy of marketing. The more productive tech gets, the more it will shrink as a share of GDP, like agriculture. Agriculture was once 80% of GDP. It became really productive. Now it's just a few percent. Tech, the better and better it gets, the smaller a share of GDP it will be. The more people will be stuck in stagnant sectors. You'll have a lot of high earners. And then again, marketing persuasion, grabbing people's attention, will become more and more the critical skill. There's more I could say about many topics, but why don't I just start there? That's, you know, an overview of some of the arguments I've tried to make. And we can open up for questions, but please feel free to ask about anything you want.

Well, thank you very much for— you can hear this? Is this coming? Is this on? Yes. Well, yeah, so averages over— I'm thinking back to what W. Edwards Deming, great quality control guy, said. Someone asked him what he wanted to do and he said, "I don't want people working harder. I want them working smarter." Is that perhaps a solution to this, is the fact we We have all this high technology, so even somebody who isn't a computer— I mean, that was the whole point of Steve Jobs and Wozniak was that they would— they were computer gurus, but they realized that they could make it so even people who weren't really computer proficient could use the computer. And what made it so valuable was that Joe Schmo, perhaps, who isn't— doesn't have a degree in computer science can use high technology. He can work smarter. So even if he's not at the very top, he has more productivity at his fingertips.

That's right, but I think it also points to what is the margin we're stuck at. So we need people to work smarter, and the more you have computers and smart software— people who work with computers and smart software need to have new skills. So I view our educational system as a bottleneck. There's a good 30 to 40% of this country not getting educations good enough to really do work, even a lot of simple work with computers or software. And those, to a large extent, are the people who are unemployed or who have stagnant wages. So it's as if we, we've had a lot of bad policies, including educational policy. And when your economy is pretty static, you can get away with those mistakes for a longer period of time. And now we're in a more dynamic era again because of computers, software, and the internet. So we're paying more for our mistakes. And the people who can enter the new world earn more, and in some ways they even face less competition. But the people who cannot cross that divide really are being penalized because to work with computers does require skills which in some ways are harder than, say, working in an automobile factory, which is like the classic job of the 1950s or '60s. And there's fewer of those and more computer-connected jobs. So the cognitive requirement's going up, but on the supply side, again, we have this choke point.

Hi, Dr. Cowen. Uh, great lecture. Um, what do you think about intellectual protection or intellectual property laws' impact on innovation? And, uh, does the high cost of intellectual property patents maybe only attract like safe investments in new IP.

Question about IP in there and a question about patents. I think our patent law is much too restrictive and we have far too much rent-seeking and there are too many people who register patents for defensive reasons and to sue other people. And this has in many ways become a barrier to innovation. So things like one-click shopping in my view should not be patentable. I think some things should be patentable, like very costly pharmaceuticals, where there's a very clear upfront cost, where the supplier needs to be rewarded or they just won't invent the new pharmaceutical. So I'm not against all patents. But I would clear away, you know, large segments of current patent law and just have nothing. A lot of the 19th century, especially in Germany, which was, you know, world innovation leader then, didn't have intellectual property laws. So you can have a lot of innovation without intellectual property laws. I think copyright is too strict also. I think the costs from that policy are much smaller than the costs from bad patent policy. So copyright is too strict. It means you can't make a lot of neat rap songs where you blend a lot of things together. That's a shame. But I don't think those are very high costs. I just think they're small to moderate costs. But patent law is a total mess. It's getting worse. More and more it's an obstacle to innovation. Uh, but I don't see any real prospect of getting rid of it. We're ruled more and more by lawyers. It's a classic case of concentrated benefits, diffuse costs. The U.S. uses its so-called free trade treaties to spread bad IP law around the world. I'm very much against this. Um, so it's definitely headed in the wrong direction. We ought to stop that, at least halt it and all the more reverse it pretty radically. But that's not on the horizon. Thank you.

Um, so part of your, I guess, thesis is different industries are—

have a lot of growth while some are stagnant.

How much of the stagnant industries are stagnant because of—

I guess government regulation, and then to what extent would getting rid of that regulation change your thesis?

Well, I think a lot. You know, I'm not sure we know how much. But if you take healthcare and education to be the two most stagnant sectors, about— was it 55% of all healthcare dollars spent in this country are directly spent by government. And it's extremely highly regulated, and there are barriers to entry. You look at education, even at the higher level, college, 78% of our students go to state colleges or universities of some kind. And K-12, I don't know the percentage, but it's, you know, a very strong preponderance of that is state-run and not really competitive. So exactly how much would it help to undo those things I don't know. I don't think every stagnant sector is due to regulation, but a lot of the big ones are. If you take something like transportation, for instance, I think some of that is just we're stuck with the high cost of energy. So a reason why airplanes are not better now than they were in 1970 for most people flying is really that the price of energy has gone up. And we will in time solve that problem. I'm not sure how much regulation is the culprit. There are other things, like take sofas. I don't think that's regulation at all. So if you ever sit on a sofa, like from the 1920s, it's really uncomfortable. It's hard, there's not enough room on it, the legs maybe are wobbly. Maybe that's because it's old, but those are not great sofas. Only people who collect antiques want them. But if I think about my sofa of 20 years ago, My sofa of 20 years ago was really as good as my sofa of today. It's as comfortable. So my sofa is really comfortable. But at the margin, what can they do to make it more comfy? It's tough. It's tough at certain margins, at certain plateaus, to get the next breakthrough. And this is just the unevenness of progress through time. Now, I'm convinced at some point not next year, not 10 years from now, but maybe within 50 years, there'll be a new sofa and you'll sit down on it and it will measure, you know, your biological fields and judge how healthy you are and maybe send you an email telling you you need a checkup at the doctor's. And whoa, that'll be a better sofa. That will happen. But until that happens, just to make the cushion softer You're at some local maximum. Also with cars, we're going to have another breakthrough with driverless cars, which will be a big breakthrough. That will come. We already have some, they work. But, you know, the last 10 years, cars haven't gotten that much better. Oh, the sound system might be better, you can get satellite radio, side airbags, there's a few things. But to get to cars from horse and buggy was a huge deal. And then those gains kind of trickle away for a while. You're at a new frontier, uneven growth, it's pretty stagnant, and then you get another burst and another breakthrough. And we'll get that, like I said, driverless cars. We have them. We need the legal and regulatory infrastructure to allow them to operate, and they need to be somewhat cheaper. But again, as I said, they work. So I think part of what's happened, we've just had bad luck with a lot of sectors hitting plateaus at the same time, and then that combined with a lot of bad regulation, and we've had this more general slowdown. But in computers, you've had Moore's Law, which has been great. And no other part of the economy has had something like Moore's Law. Nothing close. Yes.

Professor, I want to ask the question about China. So as we know, the GDP growth of China used to be more than 10%, but recently is just 7% each year, last year. So do you think it's due to the stagnation, as you mentioned, or it's because, as the government said, they slow it down deliberately to adjust the economic structure. So which one do you think? And what's your, what do you think the future of Chinese economy?

That's a very good question. Let me first say, none of what I've been saying applies to China. China's a very different story. So it's the US, Western Europe, Canada, Japan, uh, a few other places, but not at all China. China has been doing what we call catch-up growth. Not inventing so many new things, just taking what's there, catching up, moving people to cities, exporting more, putting technology in place, building infrastructure, and it's gone great. So you say China's been growing at, you know, 10% a year or more. In my view, those numbers are probably underestimating how much China grew. Remember my point about exports. Countries which export, we're probably underestimating how vital they are, because they're specializing in sectors where there's a real market test. And during those growth years, you'll note China didn't spend that much on healthcare. That led to some human tragedies, but overall was probably a wise decision. Like, "Let's get the growth in there. Don't worry too much about healthcare. Let's grow." So I would say it was probably more than 10%, but I really worry where the number is coming now. So a lot of Chinese growth has been led by investment, right? And a lot of that investment, it's not all centrally planned in the old classic Soviet sense, but it's led by government. And this worries me, because governments are not good at everything. So in the early years, governments put in roads, build bridges, airports, and you know the Chinese economy needs that stuff. So there's a lot of what I call low-hanging fruit, and those investments work out pretty well. China keeps on growing. But the more infrastructure you build, the harder it is to find good projects at the margin, and the more you need to worry when the government is driving your growth the way state-owned enterprises have been controlling a lot of resources in China. So right now you're telling me China is in a range, you know, near 7%, but I think that's an overestimate. I think real Chinese growth now is much lower. The growth they have is driven a lot by, like, state spending on fiscal policy, the state gunning up the economy artificially, artificially cheap credit not necessarily being allocated where it ought to go. And I think that 7% number— I don't mean that the statistic is a lie, it's probably pretty close, but what I mean is the goods and services being produced behind that 7% are not real 7% growth. It's a lot of bad investment, a lot of homes that aren't being used, a lot of infrastructure which at the margin is not as valuable as it was 5, 10 years ago. So I think Chinese economy is in a lot of trouble. And I think it's due for a crack-up. I don't know exactly when that will come, but I think they are a classic example of a kind— what we call the Austrian theory of the business cycle. They're investing too much, they're investing in the wrong ways, and at the margin, those investments are being led away from what market price signals would be indicating. And there's just way too much, basically, infrastructure and too many government projects and not enough market consumption. So, I think China's due for a kind of crack-up. But, that said, I'm not a pessimist about China in the longer term. I think they'll have a very tough 10 years, and they'll get over it, and then they'll grow again. But people who are expecting China to keep growing at 10% or even 7%— in my view, we will not see anything close to that. And there will be a fairly dire situation, probably not tomorrow, but at some point in the foreseeable future. So, I don't mean to worry you too much, but that's my answer. But I think you look at the assets of China, like, pretty good educational system, really smart people, like this great pragmatism, very strong business sense, just sort of a feeling now is their time. All those are great and they're not going away. So again, I'm not a pessimist about China longer term, but in my view, like right now is China's 2007, like your Great Recession is right around the corner. You'll get over it.

Tyler Cowen, so with many Americans actually having like tools to actually use the internet to increase their human capital worth, many Americans don't do that. Instead, they like sit on their couches and play games instead. Is like, what would be the best way to actually have them becoming productive? Since I just see my friends, majority of my friends on Grand Theft Auto. All the time.

Well, I don't know your friends, of course, but I think actually for a lot of people the best thing to do is to play games, that they sharpen your sense of computers and software. Now, if you only play games and never take it any further, obviously that's a waste. But I think games are actually a pretty good way of teaching people, and we see more and more tasks in our economy becoming gamified. So I would say you'll see people who take like their gaming knowledge and who apply it to things, and they will then later build integrations of software and hardware that mimic games but have more practical uses, and those people will do very well. And then you'll have people who just like play games and watch porn or whatever, and they're going to stagnate. But I'm not opposed to games per se. Like every generation has its thing it does. Where everyone worries that it's a waste of time. Watching TV in the 18th century, it was reading novels. You know, in the '50s and '60s, it was reading comic books. And clearly there's a big wasteful element, but it's also preparing people for the worlds they're gonna live in. So a lot of people learned a lot of smart things from novels in the 18th century, even though a lot of the novels then were bad and a lot of the novel-reading time was in a way a kind of waste. So games are our current equivalent of that. You know, I think a big problem on the internet is people, like, they send email and they have Facebook, and they use Facebook as something a little better than watching TV. And the internet makes them better off, they're not in favours, that's all they do. I mean, that's their right, that's fine. But just in terms of, like, their future income stream, maybe it's not going to be very dynamic. But I see a lot of people stuck at those margins. OK.

So given the fact that you had mentioned that quite a few of the industries within the United States are quite stagnant, and that maybe certain industries such as tech or information seem to have a higher growth rate, as it were, my question for you is, would you have any particular policy recommendation in order to maybe help alleviate that issue? Or I guess maybe even just general recommendations around the economy, or is it just more of a natural thing? I mean, you would imply that it seems more like overregulation seems to be causing the problem.

No, I would do a lot of deregulation or unregulation. Again, I'm not sure exactly how much of the problem to begin with is due to regulation, but I'm sure some of it is. And I would take away a lot of the regulation on healthcare and also education, and I would have a lot more experimentation with choice in education at all levels. And then I just think a lot of the change has to come from families. You just need more families to give a damn about the education of their kids, whether we have school choice or not. If you have bad families, I mean, school choice may be better, but it's only gonna get you so far. So you need some cultural shifts. Like more Asian tiger moms, but doesn't have to be with Asians. I would have some deregulation. U.S. still has a lot of pluses. You know, a pretty good work ethic, a lot of entrepreneurial spirit. I would definitely have much more open immigration. That's the single biggest thing we could do to get more innovation, is I would take in way, way more immigrants. And we're failing to do that. We're being more restrictive in many ways. We're sort of free-riding upon the immigrants of the past. Look at how many startups, including tech startups, come from immigrants, like Google, PayPal, really a lot of them. So way more immigration, less regulation. See how much that eases things up, but go from there. Start with that.

As opposed to what you want to happen with public policy, what do you think the actual impact of this will be? Because the increasing income inequality is going offend the sensibilities of a lot of people. So what do you see in terms of public policy changing in response to the Great Stagnation and income inequality?

I see a lot of gridlock in public policy. So my four-word theory of American politics is: old people never lose. So Medicare and Social Security take up more and more of the budget. As we get older as a society, they'll take up even more. We cannot reform those entitlements now, right? Not really. So the more older voters you have, which we're gonna get no matter what, the harder it will be to reform those. So they'll just swallow up a bigger chunk of the economy, and we may be less innovative and invest less in a lot of different areas. It seems to me tech will still stay dynamic. It has enough of a start, and it's opened up a big enough corridor. There's a lot of things we've kind of made but not implemented yet. Like IBM's Watson, like driverless cars, just better stuff. Amazon covering more retail items. A lot more gains around the corner that aren't gonna stop anytime soon. But you look at policy, it's a nightmare. I don't really see it getting better. And budget's gonna be eaten up by old people, taxes will go up, spending won't really fall. It's hard for me to see any other outcome there. That part of things to me looks very pessimistic. You'd better hope that growth from tech is going to be so marvelous that it's going to pay for our mistakes, right? There's no guarantee of that. We just have to hope it does. I don't really see very beneficial reforms coming. You know, I know very well that the era of Thatcher, the era of Reagan, and they were highly imperfect times, but they brought a lot of real policy gains which made a real difference. But in a sense, those eras went after the low-hanging fruit of deregulation, cutting government, cutting tax rates. Now, when the core of government is about sending money to old people, you know, we can and probably will pare back defense spending a bit, but I don't really know what the next generation of Reagan or Thatcher could look like, unless you think my forward theory is wrong. And I don't. I hope it's wrong, but I don't think it is.

Sorry, second question for you here. What do you think of standardized testing, maybe with a focus on secondary education, as a demonstrable measure of educational outcomes?

It's a good question. You know, I'm all for it. Given where we are now. I would say in an ideal world, I'm not really for it. I don't have the kind of temperament that gravitates naturally to thinking standardized testing is a good idea. But the bad schools in the US are so bad that to the extent there are— whether they're beliefs or strictures or mandates or whatever level they come from— to just like teach the test, that's like always a criticism of standardized testing. Oh, teachers teach the test. Like, my goodness. I would love it if teachers could teach what's on the test. It doesn't sound that great, but you have students all over this country who can't even really take the test. So I think at the margins we're at, I'm all for it. I'd love for us to outgrow it. I don't want to, you know, be there forever. I think already at least a third of our educational system doesn't need it, shouldn't have it. But I'd even, if I had to, put it on everywhere to get it, you know, with those lower levels, if that's the choice. So kind of reluctantly I say yes, we need things like that. It's not my preferred reform. My preferred reform is like more experimentation, more choice, discovery process. But if you're just kind of locked into some bigger system and you can't undo that, should you in some ways be tougher with standardized tests? I'll give a reluctant yes. For now at least.

Hello. I was wondering, in the current administration, we have a presidency that can't create a website that works and a kind of a fear about innovation in a way that it's going to take away their jobs and their livelihoods. Do you feel there's a way around possible— a way around the government regulation side in economics? Do you feel we can get around that and create innovation to better the world, or do you feel it's going to have to go to another country to create the innovation without the regulation?

Well, other countries are screwed up too, so don't Don't put too much faith in them. I think there's still a lot of areas, and the number one really is writing software. You sit down to write some software, it really is mostly not regulated. I know at some later issues regulations kick in, but we're very dynamic in that. And since that's a big growth sector, partly it is a growth sector because it's not so regulated, and partly it's happy coincidence that we're getting Moore's Law in our favor. And that's huge. It's going to be even bigger. And I don't see regulation stopping it. It's not as if next year there'll be like a new Bureau of Software Regulation that's going to put all this through like a process akin to drug approval. It's just not practical to regulate software. It's done in such an invisible, decentralized way. I think it will stay relatively not regulated for really a long time. In most areas. So those areas, like, they're great now and they're gonna continue, and we're kind of lucky to have a bunch of them. An area like energy, you know, if we had to build today's energy infrastructure with today's level of regulation, it could never be done. So to think we could move to some better energy infrastructure, which I very much believe, that's going to be very hard to do. Everyone— there's a state, local regulation, there's NIMBY, not in my backyard, not anywhere near my backyard. A lot of promising ideas, I don't know which ones will pay off. It's good to see we've made some progress with fracking, but progress in energy has been slow. In a lot of ways we've had 40 years of going backwards on net in energy. Energy 40 years ago was a lot cheaper than it is now. Take the market price as a signal. So again, you have sectors, you know, getting new drugs approved is a nightmare. Minimum, it takes 10 years. It costs billions. Some get through. I don't see that easing up soon. It should. But you need to ask, well, will people in other countries do these drugs? I don't see it. There aren't that many places that can come up with good new pharmaceuticals. And the ones we have are either regulated themselves by, say, the European Union, or they're counting on selling to the US —and EU markets, which have these regulations no matter where the drug comes from, and rising countries like China, if anything, the signals are they will move towards systems like what US and the EU have. So where you see the stock sectors, I don't know, it doesn't look that good, actually, to my eye. I would just say education is one sector where I actually see a lot of promise. I don't think we've done much deregulation of it in a good way. I don't see that at all. But partly because of online, there's been so much experimentation done impromptu. You know, Alex Tabarrok and I, we have our own online project, which I would encourage you all to visit if you don't already know it. It's called mruniversity.com, and we offer short lectures online on economics. And it's on the internet and it's free. And we didn't really need to get anyone's approval to do this. So I think some parts of education, there's this fantastic new experimentation which might really pay off. It's been done by this end-run process. But I don't see when it comes to like building an energy infrastructure or marketing a new pharmaceutical, it's harder to see what those end-runs look like. Unless you mean like illicit drugs in a meth lab. We do actually have a lot of innovation there, but it's not really a productivity gain.

Thanks for coming. You touched a little bit on the answer to my question, but I wanted to ask, uh, we've kind of reached this point where the teachers that are in our schools are actually educated by the schools themselves. So would the technological advances actually help to kind of fix that problem in education with programs such as your website and other in-school programs? Well, I think they will.

There's a bunch of problems. One is that educational hiring is not always done on merit, right? It is in many districts, but in many it's not. There's also a fair degree of unionization, and there's just a big time lag. So let's say, like, Everything we should do to fix education, we could wave a wand and get it done tonight. Of course, that's impractical, but let's just say. How many years is it before you have, you know, a generation of kids who've gone up through that and have matured, and then they're working in jobs and being more productive? That's 20+ years right there. And that's assuming we did it all tonight. So even if you're very optimistic about education, and I'd say I'm pretty optimistic, The time lag for making it matter is really pretty long, even under the best of scenarios. So it will happen, I think, but don't hold your breath. You'll be an old person when you see that coming to fruition. And even those private experiments, we still really don't know, like, what works, what doesn't. Like, you look at private MOOCs, some have done well, a lot have bombed. How will they be regularized? Will they be for credit? At different levels. We don't know yet. So, I mean, don't think the private sector's figured that out. It really hasn't. We're at very early stages in these areas. Okay, it has been fun. Thank you all. And, you know, if you ever have a question I can help you with, feel free to email me. Thank you, Jacob.

Thank you, Tyler. That was an awesome talk and gosh, awesome discussion. That was great, great questions and audience participation. Two reminders. If you wanna subscribe, get a free subscription, one-year subscription to our publication, Future of Freedom, drop us an email at fff@fff.org. Remind us that you were here at this meeting and we'll give it to you. And second, Sheldon's webinar every month that I think you absolutely love. It's high-level stuff that Sheldon's talking about. Next one will be in December. Just check our website at fff@fff.org. Fff.org.