Why does it feel like the economy is still stuck in neutral?


America is in the midst of a strange sort of economic malaise. On the one hand, some economic numbers, like the unemployment rate, look pretty good. On the other hand, neither incomes nor the economy are growing fast enough.

Some people call this "the new normal." Others call it "the great stagnation," a term coined by economist Tyler Cowen. Cowen's theory is that technological change has slowed, leading to a stagnating economy. In this line of thinking, he is joined by Peter Thiel, one of the top investors in Silicon Valley. But in a recent interview with Vox's Timothy B. Lee, entrepreneur Marc Andreessen lays out an interesting theory for our paradoxical predicament.

This strange feeling of economic stagnation, Andreessen says, is due to the fact that there are actually two kinds of industries: some that are growing very quickly, and others that are holding back growth. Here's how he explains it:

You've got these sectors of the economy where there's rapid productivity growth. Prices are falling fast. Those are the industries where everyone is worried that the jobs are going away — or to China or Japan or Mexico. People say there's too much disruption — too much technological change. The Silicon Valley kids are wreaking havoc on the economy.

Then you have the sectors in which prices are rapidly rising: health care, education, construction, prescription drugs, elder care, and child care. Here there's very little technological innovation. Those are sectors with insufficient productivity growth, innovation, and disruption. You've got monopolies, oligopolies, cartels, government-run markets, price-fixing — all the dysfunctional behaviors that lead to rapid increase in prices.

The government injects more subsidies into those markets, but because those are inelastic markets, the subsidies just cause prices to go up further, which is what is happening with higher education. [Vox]

Because those two things are going on at the same time, "you get this muddle in the middle where it looks like we're puttering along," he says. "But this masks what's actually happening. You have some sectors falling in prices very fast, some are rising very fast."

People's paychecks are being eaten by health care and education because those are the sectors where innovation is slowing down. And this is why some parts of the economy, like Silicon Valley, seem to be doing very well, even as the economy overall seems to be just sort of sputtering along. Therefore, says Andreessen, "the problem is insufficient technological adoption, innovation, and disruption in these high-escalating price sectors of the economy."

This is a problem that economists have long pointed to, and it has a name. It's called Baumol's cost disease. When a part of the economy gets more productive but another part doesn't, the less productive part still has to bid for salaries against the more productive part, which leads to rising prices. Which means that for those services with Baumol's cost disease, people have to pay more for the same quality.

So, what are we to make of this?

Andreessen's lens is probably accurate to some extent. It makes some sense of this weird scenario we find ourselves in where the economy seems to be doing both well and badly at the same time. And it explains it without recourse to dastardly elites stacking the deck against the little guy (whether they're your right-wing populist or left-wing populist version of "the elite").

The problem, though, is that Andreessen seems to view those two sides as equivalent and to assume that, essentially automatically, the more productive side will disrupt the other side and boost the economy's overall productivity. There's good reason to doubt this is the case — after all, the internet revolution has been going for 20 years, and while it has been a boon for consumer surplus, it hasn't really shown up in the productivity numbers. Andreessen lauds artificial intelligence, the latest tech fad, but it's unclear to what extent AI will meet the hype. Sure, tech hasn't provided the economic boon we need yet, but it will, tomorrow, promise, for real this time.

Andreessen is right that the economy is split in two between a productive sector and a less-productive sector that needs to get better. Where he's wrong is when he suggests that if we just sit back and wait, the problem will fix itself. It seems to be much less tractable than that.

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