Tyler Cowen: Stagnation and Complacency, Part 1

From the 8000 Hours blog: Economist Prof Tyler Cowen says our overwhelming priorities should be maximising economic growth and making civilization more stable. Is he right?

Tyler’s arguments can be broken into three parts:

1. Low GDP growth threatens U.S. innovation and competitiveness.

2. For the past few decades America has been afflicted by stagnation (what he calls ‘the great stagnation’).

3. Americans need to take more risk and become less complacent (what he calls ‘the complacent class’) in order to stave off 1 & 2.

#1 and #2 are similar enough to be lumped into a single response, which i’ll do in an upcoming post.

Regarding complacency, Tyler says:

Tyler Cowen: It depends on the person and what kinds of talents they have. But as I argued in my earlier book, The Complacent Class, there now seem to be so many people who are simply satisficers. They’re not very interested in innovating or even participating in a dynamic economy, and they just try to do well enough.


I’m here making a moral argument that at the margin, many, many people should be less complacent and take more chances. Personally, I will lower aggregate societal risk and do more to innovate, save more, work harder, in some way be more dynamic.


You can think of this and Complacent Class as two sides of a bigger picture. Complacent Class is like the sociology of what we’re doing and this is the moral side.

It’s easy to to tell other people to take risks when your job (being a tenured professor) has no risk. Due to high borrowing costs and high costs for advertising, insurance, and other expenses, starting a business is more expensive and harder than ever, but also combine that with a difficult labor market for most people, which is why there is possibly more risk aversion. From the post Why Socialism for the Rich, Capitalism for the Poor?:

But also, many businesses are struggling. By some estimates, this is this harshest environment ever for small business (except web 2.0 and stuff like that, which is immune). Employees are being squeezed but so too is small business, which is another component of capitalism. Multinationals are thriving because of an abundance of cheap capital (due to low interest rates), allowing them to expand and possibly crowd out smaller businesses. But there other factors for why small business is doing so badly: over the past quarter century, the cost of rent, land, insurance, and advertising has vastly exceeded inflation, but credit has become much more tight to all but the largest and safest of borrowers (the old joke being, to get credit you must first prove you don’t need it). This is part of America’s transition to a deterministic economy (similar to a planned economy) and society.

If you have an advanced degree in STEM or economics, reentering the labor force and taking expensive financial risks is easy, but much harder for those who lack marketable, high-paying skills and cannot get business loans (or at least not at a favorable rate). If I had to choose between investing $500k to start a small business , which has a 90% of failing in 5 years, versus putting it in the S&P 500 and getting 11%/year (based on 60+ years of historical data) , the choice is obvious. And if the economy and market crashes, your business likely will almost certainty fail too, so it’s not like your risk is diversified or uncorrelated with the overall U.S. economy.

As shown by post-2009 huge surge in profits and share prices, recent economic conditions favor capital over labor and entrepreneurship (except for web 2.0 ). In terms of ROI, it’s hard to beat top tech companies such as Amazon, Google, or Facebook, but many try. Some succeed and turn $100k capital into a billion-dollar business, but most lose money. I’m more focused on the median than the mean. Even if risk taking has a higher mean return than the S&P 500, due to the risk of ruin, you can only play once, so the median is more important.