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How to fix America

By Jonathan J. Ariel - posted Wednesday, 26 October 2011

Many of the business pages of our daily newspapers will have you believe that the current Global Financial Crisis (GFC) befalling the advanced economies is primarily due to a catastrophe centred on the alfresco members of the Eurozone. Others claim that an undervalued Chinese renminbi is the real villain. Media mavens in both the United States and Australia often talk of the need to tinker with tax rates, investment allowances, or tariff barriers, as though they were what have got a chokehold over the Australian economy.

Tyler Cowen, Professor of Economics at George Mason University in Fairfax, Virginia thinks a whole lot differently. He would have us believe that America’s ills and by implication Australia’s ills are rooted in our past. His essay, published earlier this year, first became an e-book and thereafter a hardback titled The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.

Tyler offers his take on the relationship between innovation and national affluence. While the book makes for interesting reading, the non-partisan professor never mentions the Euro fiasco, the Greenback’s role as the world’s reserve currency or China’s full time job as chief lender to a diminishing United States. And that’s a shame.


He posits that the United States - and for that matter one could extend the discussion to Australia – was blessed with an abundance of gifts he calls “low hanging fruit”. These include ample free land, millions of immigrants seeking work (at low wages) and millions of young folk thirsting for education. Oh, and a large side serving of scientific progress and technical innovation.

Cowen’s main argument, that median incomes have stagnated in recent decades as the economy's "low hanging fruit" has become more and more scarce, is well argued. GDP in the advanced economies is in fact rising but the gains are not shared equally throughout society enabling the rich to get richer and ever richer while the poor get more numerous.

There is no discussion as to whether the poor, while remaining “poor”, are actually richer in real terms. He remains on solid ground when he covers the educational achievements of Americans over the decades, or more correctly, the educational non-achievements. He is sadly spot on when he laments that neither more spending on schooling nor getting heavy handed with teachers has improved the lot for America’s youth. So why maintain such policies?

In the United States, teacher unions, under siege for three decades, have yielded time and again to some competitive pressures such as merit-based pay and increaseduse of standardised testing. Sadly all this change in how teachers teach and how their teaching is measured has produced sweet little in the way of improved educational outcomes.Since 1970, student test scores have not risen, but spending adjusted for inflation has. Significantly. The United States spent $5,593 per pupil in 1970-71, and in 2006-07 the same expenditures have more than doubled to $12,463. And America isn’t getting smarter.

In 2003,American 15-year-olds were ranked for reading skills in the middle third ofmember countries in the Organisation for Economic Cooperation andDevelopment (OECD), but just three years later when it came to assessing proficiency in maths, American 15-year-olds found themselves in the bottom quartile of the OECD.

Cowen argues that the middle class has prospered over the last 200 years or so thanks to innovation. This has brought inventions such as the motor vehicle, refrigerators, air conditioners, energy extraction, a staggering number of scientific discoveries in consumer goods and health care, but the rate of innovation in the last three decades has slowed, and that the United States is now parked atop a "technological plateau," which makes further growth challenging.


He also argues that the lives of say our grandparents changed markedly: the innovation of flight, relatively cheap and plentiful transportation options, a plethora of mod cons in the home far exceed – in a meaningful and measurable manner – any progress in the lives of many brought about by the most celebrated of recent innovations: Tim Berners-Lee’s World Wide Web.

Cowen beseeches that we need a new burst of innovation that will propel economic growth. He shocks readers by stating that for all their innovative prowess and life transforming capacities, the three firms of Google, Facebook and Twitter have embarrassingly low headcounts: 20,000, 1,700 and 300 respectively. The sad truth is that the high tech industry is not recruiting many, and those that are recruited have very, very specific skill sets, shared by few. Beyond Google, entire industries like semiconductors, computers, biotechnology and the Web, offer few jobs in total and very few for middle skill people.

Cowen claims that most of today's innovations are already created in industries that are machine not labour intensive, but thinks that the future will be different. Regrettably he offers little in the way of evidence for this faith other than saying that the rise of the middle class in China and India not only will spur innovation in those economies (good for the global economy) but will spur innovation in the United States in goods like pharmaceuticals, for which there will now be a bigger global market.

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About the Author

Jonathan J. Ariel is an economist and financial analyst. He holds a MBA from the Australian Graduate School of Management. He can be contacted at

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