Misconception: Can U.S. Economy Grow Indefinitely?

Economist Tyler Cowen in his book The Great Stagnation, argues that U.S. economic growth largely plateaued in the 1970s. He tells Renee Montagne the resources that fueled the country's progress over the last 300 years are largely gone, and expectations need to be readjusted.

RENEE MONTAGNE, host:

And one of the most talked-about books among economists right now is a slim tome called The Great Stagnation. Its by Tyler Cowen. Hes an economist at George Mason University, and he argues that economic growth in the United States largely plateaued back in the 1970s. The resources - what he calls low-hanging fruit -that fueled our progress for generations are largely gone. And now, says Tyler Cowen, we need to adjust our expectations. We invited the economist into our studio to talk more about his theories.

Lets start with the idea of low-hanging fruit. What do you mean by that?

Mr. TYLER COWEN (Economist; Author, The Great Stagnation): If I think of the life of my grandmother - who was born in 1905 - when she was born, most people lived on farms and didn't go to school. But by the time she reached adulthood, almost everyone had electricity, a flush toilet; automobiles were common. So there were some very large innovations which made people's lives much better off, and simply spreading those to most Americans is what I call the low-hanging fruit.

If I look at my own life, I was born in 1962. Other than the Internet, I have not seen comparable changes.

MONTAGNE: As you write, we think there are a lot of changes going on, but if you really think about it, the refrigerator that someone's mother or grandmother used back in 1950 is pretty close to what we use today. That's what you're talking about when you say you have not seen that many changes.

Mr. COWEN: I cook in a 1950s kitchen, and it's basically fine. We've seen a lot of small changes. Weve seen a lot of innovations that benefit small numbers of people. And now we have the Internet, which I do view as a major breakthrough. But, if you think of us as having had the mature Internet for about 10 years, the last 10 years in macro economic terms have been terrible. So the Internet, for us, has not really paid off yet. It's a lot of fun, but it has not yet generated the job growth in revenue and economic opportunities that I think it will - say, 20 years from now.

MONTAGNE: So circle back and tell us why this then leads to the title of your book, "The Great Stagnation."

Mr. COWEN: The typical American household has seen only minimal income growth since 1973. And in fact, the income of the typical American household has declined slightly over the last 10 years. That's what I mean by stagnation.

MONTAGNE: And that is, by definition, a bad thing?

Mr. COWEN: It doesn't always have to be a bad thing. One thing that is the case, I think we have a lot of better societal norms when it comes to tolerance. Society is, in many ways, more advanced, and we should embrace this. But we're making a lot of our spending plans, our budgeting plans, our expectations from government, on the basis of an earlier era which is no longer with us.

MONTAGNE: Well, give us an example of how thinking that theres going to be greater economic growth is hurting us is hurting us either our government, or is hurting us as individuals.

Mr. COWEN: Well, let's look at the recent debate over state pension systems. There are some policy papers out there right now which claim the systems are essentially sound, and those are based on forecasts that the state governments, on their equity investments, will earn 8 percent a year. In my view, this is overly optimistic, and I think we're behaving a bit like Ireland or Greece in expecting our states will earn 8 percent a year. Theres some chance of that, but I think its much more unlikely than likely.

MONTAGNE: The example of pensions has been on the front pages for a long time now. Is there a somewhat more obscure example you can give, that I think people might not be thinking of?

Mr. COWEN: Well, I think Americans - a lot of Americans are not saving enough money. But let's say you have a money market fund and in your money market fund are Treasury bills, you tend to think of that as your wealth. And the Treasury bills, theyre an asset. But the Treasury bills also mean that someone's taxes will go up in the future to pay off those Treasury bills, and there's a very good chance those taxes will be your taxes. So the more government debt you have in a system, the more you have a fiscal illusion where people think that they have a lot more wealth than they actually do. And the notion of five years from now, well have all this tremendous innovation that will help us pay off our bills - what I'm saying is, our technological plateau probably will not end tomorrow. And it's not just our governments but also, a lot of people acting privately are simply being too optimistic because they think of America as a country that will grow indefinitely, at very high rates. And that's not quite the case.

MONTAGNE: Thank you very much for joining us.

Mr. COWEN: Thank you. It was my pleasure.

MONTAGNE: Tyler Cowen is an economist at George Mason University. His new book is The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. The book is available only as a digital download.

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