What's holding back the U.S. economy?
What ails the economy, various wise men tell us, is that we're not innovating like we used to. Personal computers and the Internet may look like a big deal, but their impact on our lives - and incomes - pales alongside the effect that electric power, the automobile and the airplane had on our 20th-century forebears. Much as onetime California Angels manager Lefty Phillips said of some overhyped rookies, "Our phenoms ain't phenominating."
As The Post's Steve Pearlstein discussed in his Wednesday column, there's a growing body of work - most prominently, that of George Mason University economist Tyler Cowen, who has just published an e-book, "The Great Stagnation" - that argues that the stagnating incomes that most Americans have experienced over the past three decades have been caused by this decline in innovation.
Cowen's is an elegant theory and by no means entirely wrong. It fails to explain, however, why other nations with advanced economies, such as Germany and France, haven't experienced the same economic transformations the United States has - in particular, the upward redistribution of the nation's wealth to the very rich as everyone else's income flat-lined. That didn't happen in the other advanced economies, even though those nations' record of innovation isn't any better (and by many measures is worse) than ours.
But Cowen contends that the innovation gap is the real culprit. Since the early 1970s, he argued in last Sunday's Economic View column in the New York Times, "we are coming up with ideas that benefit relatively small numbers of people" economically. From 1947 to 1973, he wrote, "inflation-adjusted median income in the United States more than doubled." Since then, it has risen just 22 percent (and that small increase is largely the result of more members of the household entering the workforce).
The stagnation of median income, in Cowen's view, is the consequence of the absence of innovations on the scale of Henry Ford's assembly-line cars. "No one in particular is to blame," he wrote. "Until science has a greater impact again on average daily living standards, the political problem will be in learning to live within our means."
But is the absence of world-changing innovation really behind the economic stagnation that all but the wealthiest tenth of Americans have endured for the past 35 years? After all, during that time our gross domestic product expanded and our productivity rose. The difference between America pre- and post-1973 is that in the years preceding, the benefits from economic growth were widely shared, while in the years following, they increasingly went only to the top.
From 1947 through 1973, according to the Economic Policy Institute's State of Working America report, released this week, the incomes of the poorest 20 percent of Americans rose 117 percent, while the middle 20 percent saw a rise of 104 percent and the wealthiest 20 percent a rise of 89 percent. From 1973 through 2000, however, the income of the bottom fifth increased by a scant 9 percent, the middle fifth by 23 percent and the richest fifth by 62 percent. Since 2000, the concentration of income gains at the very top has grown only more pronounced. The share of income going to the wealthiest 1 percent of Americans, which was less than 10 percent in the early '70s, reached 23.5 percent in 2007 - the highest level on record save for 1928. (Note: Both years preceded epic crashes.)
Lagging innovation may explain many things, but it doesn't explain the rise of the rich over everybody else. For that, we need to look at changing power relationships, something that most mainstream economists resolutely ignore. Surely, the shrinking of unions - from 35 percent of the private-sector workforce in the 1950s to less than 7 percent today - has decreased American workers' ability to win good wages. Surely, the offshoring of manufacturing has diminished both the number of good jobs and our ability to exploit our innovations productively. Surely, the deregulation of finance has diverted more and more resources to a relatively small circle of bankers and speculators. And that tiny cadre has chiefly enriched itself at the expense of the rest of the nation.
The great majority of Americans haven't been struggling just because our phenoms haven't been phenominating. They've also lost power to our corporate and financial elites. Until they can win it back, all the innovations in the world won't bring them their rightful share of the wealth they create.