Nicholas Eberstadt has an excellent summary of recent, largely depressing American economic trends, called “Our Miserable 21st Century.” He begins with an opposition that doesn’t get pointed out often enough- that steadily rising American wealth has coincided with disappointing GDP growth:
The thing to note is that this is not directly a consequence of income inequality: an increasing income going to the richest in society would still produce an increasing GDP. It could, of course, be an indirect consequence of income inequality. If richer people spend less of their wealth, the rich getting richer can also cause slowed GDP growth. (This is a central aspect of income inequality that Piketty largely ignores in his book.) But it could also be largely distinct from American inequality. If rich people and sovereign wealth funds from around the world are investing in American assets (whether real estate or corporations), this will drive up the valuation of the portion of those assets that American households and non-profits own.
It could also be that the slowdown in GDP growth is a consequence of rapid technological change, rather than a sign of technological stagnation. GDP is a measure of exchange of goods and services, a flow variable rather than a stock variable. Not only has the explosion of the internet pushed a lot of activity into less monetizable forms, but in our ordinary economic lives technological change can slow rather than speed up the process of decisionmaking and contract and agreement that is the heart of the modern world. The more we base decisions on algorithmic processes that nobody fully understands, the more of a challenge creating consensus around those processes becomes.
This isn’t just a matter of software that nobody understands, though I think people underestimate how much confusion throwing ever more complex analytic tools at simple problems can cause (as Robin Hanson recently said, most things that companies think they want artificial intelligence and machine learning for can probably be better accomplished with decently collected data and ordinary least squares.) My candidate for the biggest driver of the “cost disease” that Scott Alexander wrote recently about (and that I experienced in my own life as the $500,000 school grant for a science lab that didn’t produce a science lab) is the opacity of regulatory frameworks that constrain government action in particular, which are their own kind of incomprehensible algorithms. Why is it taking eight weeks for the state highway authority to resurface a single exit ramp on the highway leading to my job? Only the wise must know, but I bet the wise have also read the state administrative code.
Moreover, more economic processes are consolidated within larger and larger firms, which may increase in value (as can be seen from the ever-rising S&P), but intrinsically introduce sclerosis in the flow of goods and services. Take, for example, the dramatic consolidation of finance and shuttering of community banks since the financial crisis: as this Politico article notes, “more than one in five U.S. banks have disappeared—1,708, or more than one every business day—since Dodd-Frank was enacted” in 2010. To a decent approximation, we responded to big banks torching the economy by helping them destroy all the small banks:
As Arpit Gupta of NYU observes, this not only affects the finance industry itself but has produced a relative increase in small business borrowing costs relative to larger firms, again pushing economic activity within larger, more opaque and hierarchical organizations:
This graph from the Economist, comparing the concentration of industries in 1997 to 2016, makes this point more directly- almost all industries are becoming more concentrated in a few firms:
The consolidation of economic activity into ever-larger firms, directed by increasingly opaque software and regulatory frameworks and responsive to global capital flows rather than individual small investors may not be entirely to blame for the divergence between steadily increasing American wealth and slowed American GDP growth, but it sure seems likely to play a role.