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Is the Internet Destroying Our Standard of Living?

Is the Internet Economy Destroying Our Standard of LivingThe data is both shocking and irrefutable: For 30 years, from 1947 to 1977, inflation-adjusted median family income in the U.S. roughly doubled. But for the next 30 years, median family income grew by less than 25 percent. That's one fourth the growth rate.

Now, here's the kicker: inflation-adjusted GDP per capita maintained consistent linear growth, roughly doubling in both 30 year periods. The long-term macroeconomic trend is clear: family income growth is stagnating, even while our nation's growth isn't. And over the past ten years, median family income has actually declined.

The data begs two big questions:

  1. What's the cause of our stagnant family income growth?
  2. What, if anything, can we do to reinvigorate it?
In a New York Times column entitled Innovation Is Doing Little for Incomes, noted economist Tyler Cowen does a masterful job of answering both questions and setting the stage for what lies ahead for Americans and their wallets. He also provides some critical advice for leaders in the private sector and a kick in the pants for our politicians in Washington.

The answer to the first question is surprisingly simple. We milked the post-industrial revolution for all it's worth and, ever since, it's been slim pickings. The title of Cowen's latest book tells the whole story: The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.
I know it doesn't seem that way, what with the computer, communications, and consumer electronics revolution and all that. In fact, I've been in the workforce for those 30 "stagnant" years, more or less, and I've got to say, the pace of innovation and corporate growth was anything but stagnant.

But that's really the whole point. The key to our income growth stagnation is in understanding the difference between modern industrial innovation and high-tech innovation.

You see, the widespread use of electricity, automobiles, airplanes, household appliances, antibiotics, these big, broad-based manufacturing advances benefited everyone in a big way and significantly raised our standard of living.

But high-tech innovation is different. It makes us more productive and efficient. It provides unprecedented access to information and each other like never before. It gives us more fun things to do. But there's a catch. Since product performance and features must continuously increase at the same price point, to maintain profit margins, companies have to contain costs. And guess what? Salary is cost.

Moreover, the Internet economy has massively compressed the manufacturing and distribution food chain. To say that buying direct or over the Internet has cut out the middle men and pressured profit margins is a ginormous understatement. What all that means is that, as consumers, we get more for the same price. But for that to be true, it also means that, as workers, we have to do more for the same pay. Get it?

As for the second question, Cowen's conclusions are poignant and sobering, but he does provide some clear and actionable suggestions for each of us in the private sector and, more importantly, for our political leaders and lawmakers in Washington:

It's unclear whether Americans have the temperament to make a smooth transition to a more stagnant economy. After all, we've long thought of our country as the land of unlimited opportunity. In practice, this optimism has meant that we continue to increase government spending, whether or not we can afford it.

In the narrow sense, the solution to the stagnation of median income will not be a political one. And one of the hardest points to grasp about this quandary is that no one in particular is to blame. Scientific progress has never proceeded on an even, predictable basis, ...

Science should be encouraged with subsidies for basic research, as well as private charity, educational reform, a business culture geared toward commercializing inventions, and greater public appreciation for the scientific endeavor. A lighter legal and regulatory hand could ease the path of future innovations.

Until science has a greater impact again on average daily living standards, the political problem will be in learning to live within our means. Because neither major party seems to support a plausible path to fiscal balance, or to acknowledge how little control politicians actually have over future income growth, we unscientifically keep living in an age of denial.

Last Word. Last year I commented on a Wall Street Journal op-ed by Internet and virtual reality pioneer Jaron Lanier called World Wide Mush. Lanier's thought provoking piece led me to ponder, Is the Internet Destroying Our Economy? It's worth checking out.

Now, don't get me wrong. I "grew up" in the high-tech industry and it's largely responsible for my standard of living. But given Cowen's perspective, you've got to wonder just how much YouTube, Twitter, and Facebook help the average American's standard of living. What do you think?

Image courtesy Flickr user bull3t