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Tyler Cowen has made a bit of a splash with his argument that, here in the United States, we’re probably in the midst of an economic “reset.”

What does Cowen mean? Essentially, his argument is that economic growth may continue at relatively low levels for the foreseeable future (in contrast to the higher rates of growth following on other postwar recessions), that low and stagnant wages will likely continue (his examples are lower salaries of adjunct faculty, two-tier wage systems in manufacturing, and lower wages for college graduates), and there’s probably not much government policy can do to avoid this “grimmer future.”

In this, Cowen is basically echoing the concerns expressed by others, in the form of the “new normal” (associated with, among others, PIMCO boss Mohamed El-Erian) and “secular stagnation” (which Larry Summers [pdf], among others, has been arguing).

My view, for what it’s worth, is Cowen is both right and wrong. He’s right in the sense that we have witnessed, and will likely continue to experience, a relatively slow recovery from the crash of 2007-08. That’s why I continue to refer to our current situation as a Second Great Depression. And, as we have seen, what recovery there has been during the past six years has mostly benefited those at the very top. The rest of the population has already been forced to “reset” their expectations in terms of stagnant wages and salaries.

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But Cowen is also wrong, in the sense that he’s only focused on the last few years. His view is that recent rates of economic growth have been relatively low (by postwar standards), and that trend may continue into the future (thereby requiring those at the bottom to revise their expectations downward). What he misses is the fact that a fundamental “reset” of the U.S. economy has been taking place for much longer, since at least the mid-1970s. Since then, we’ve seen the profit share growing and the labor share declining—a long-term trend that has only been exacerbated since the crash of 2008-08.

Or, if you want a different sort of evidence, consider taking a look at George Packer’s magnificent book, The Unwinding: An Inner History of the New America. Using fascinating profiles of several Americans (and a dos Passos-like sprinkling of alarming headlines, news bites, song lyrics, and slogans), Packer offers an epic retelling of American history from 1978 to 2012—of a shrinking middle-class and an economy that has lost its ability to offer any significant hope for recovery for the majority of the population.

It’s that unwinding—which we’ve been living through for almost four decades now but which Cowen and others miss—that is going to require a fundamental “reset” of our economic system.

Comments
  1. cardiffkook says:

    You are missing the forest for the trees. The forty years you are bemoaning are the greatest forty years in the history of mankind. Worldwide levels of extreme poverty have dropped further and at an increasingly fast rate. I assume I don’t need to supply links to an economist on the great worldwide enrichment, increasing life spans and billion person escape from severe poverty.

    Of course, as hundreds of millions of laborers have entered the global market this has affected supply vs demand, effectively holding down wage increases in more developed nations. As expected, profit levels are increasing, signaling market effects for entrepreneurs to capitalize on the emerging opportunities.

    To be honest, I am surprised an economist could point to the greatest generational gains in prosperity in 10,000 years and somehow spin this into the need for an economic reset? Seriously?

  2. […] just Worstall: that’s pretty much the usual response from conservatives these days (from a recent commentator on this blog through Bruce D. Meyer and James X. Sullivan to Deirdre McCloskey) when the issue of […]

  3. cardiffkook says:

    So your argument is that a fact is wrong if argued by someone you (incorrectly) label as a conservative, or if conservatives typically argue it?

    Let me be real specific. The last forty years have indisputably been better for poverty elimination than any other era in history. Globally inequality is GOING DOWN, as workers previously screwed over by the softer slavery of socialism are now freed to enter the market. As any economist would know, when a billion or so workers enter a market who were previously forcefully and unfairly excluded this will have the tendency to suppress wages until entrepreneurs can create more opportunities ( in pursuit of higher profits). Reality matches theory. Wow!

    Do you need links on the reduction in global inequality (NOT OECD — which specifically excludes the billion people benefitting) and poverty reduction? Or would those be inconvenient facts?

  4. […] of course, in non-fiction—from journalistic exposés (the best of which is George Packer’s The Unwinding: An Inner History of the New America) to data-heavy best-sellers (I’m thinking, in particular, of Capital in the Twenty First […]

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