Inequality, Economic Stagnation and Product Innovation

Yglesias has an important post, Inequality and Stagnation:

Tyler Cowen and Peter Thiel argue that median incomes are stagnating because we don’t have enough innovation….let me suggest that perhaps this is backwards. Perhaps we’re not having much innovation because our median incomes aren’t growing fast enough. Consider, for example, the fact that even though “everyone” has a smartphone these days, most Americans actually don’t have a smartphone.

There are a whole bunch of other things like that. Useful fairly recent innovations that aren’t so expensive that only a tiny elite can afford them, but that most people don’t own because they’re pretty expensive. Laptops, tablets, hybrid cars. These are, I think, the kind of things more people who own if they had more money. And the issue here is that it’s not as if Robert Nardelli is going to say “I’m rich, so why not go buy eleven iPads.” If the income distribution were flatter, you’d see higher sales for all these affordable luxuries. And if sales for that kind of product were higher, there’d be more return to dreaming up new categories of product…

A lot of U.S. tax policy over the past twenty years seems to have been driven by the idea that we suffer from some kind of investment drought. It seems much more plausible to argue that we’ve been suffering from a shortfall of worthwhile investment opportunities, at least in part because we’re suffering from a purchasing power shortfall.

Peter Frase made a similar point in an excellent post about how cheap labor can lead to stagnation in innovation.  But for Yglesias’ point, we don’t need to speculate too much.  There’s actually a fantastic example of this happening right now. From the WSJ in September:

For generations, Procter & Gamble Co.’s growth strategy was focused on developing household staples for the vast American middle class. Now, P&G executives say many of its former middle-market shoppers are trading down to lower-priced goods—widening the pools of have and have-not consumers at the expense of the middle.

That’s forced P&G, which estimates it has at least one product in 98% of American households, to fundamentally change the way it develops and sells its goods. For the first time in 38 years, for example, the company launched a new dish soap in the U.S. at a bargain price….The world’s largest maker of consumer products is now betting that the squeeze on middle America will be long lasting.

“It’s required us to think differently about our product portfolio and how to please the high-end and lower-end markets,” says Melanie Healey, group president of P&G’s North America business. “That’s frankly where a lot of the growth is happening.

Instead of developing new, innovative products, P&G, the major trendsetter for a large part of what Americans buy, is going to focus on taking its existing base of products and make shoddier, cheaper versions of them.  Versions better suited to fit an hourglass distribution of income.

This downshifting has been happening with food too.  Looking at reports coming out of Walmart, another bellwether responding to consumer demand, consumers are trading down quality of their goods when it comes to food.  Joe Weisenthal caught this slide from a report:

Imagine how much more expensive per unit those smaller sizes are – it is expensive to be poor and cash constrained.  But buying cheaper food is one of the major drivers of the statistics behind the whole “but consumption inequality isn’t that bad!” responses to increasing income inequality.  No doubt the idea that major consumer product manufacturers are refocusing towards figuring out how to make things cheaper and – since markets were already working to minimize prices – shoddier in some sort of optimal way will be comforting for those who look at consumption inequality. But for those who are looking at mass prosperity as a driver of innovation and increased quality of products, this is a major problem.

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7 Responses to Inequality, Economic Stagnation and Product Innovation

  1. As new digital innovations potentially increase all types of efficiency, profit margins drop. The elite entities that have profited handsomely over the past century charging interest don’t get that that model is now outdated.

    The built up infrastructure and increased digital efficiency equals VERY LOW interest rate charges. Instead, high interest rate charges on credit cards, and still too high interest rate charges on mortgages and student loans are killing the economy.

    In exchange for lower interest rate charges, people should pay down their debts, that is what is need to restabilize the world’s economy. Except no other existing economic theories, they no longer apply in this day and age.

  2. Pingback: FT Alphaville » Further further reading

  3. Invidious says:

    I would love to read your thoughts on how the broad move toward shoddier products by the income constrained relates to CPI and COLA (or Chained CPI) index; and the impact of using these measures to adjust social security and other benefit payments.

  4. PS says:

    do we know for sure that the cheaper version is worst in quality? i cannot tell the difference between GV and brandname flours — can you?

  5. v says:

    Outsourcing at the high end job level (software, engineering, medicine etc.,) (which is nothing but labor arbitrage) will decimate the US. For every one of these jobs outsourced, 5 jobs in the US in the middle and lower level is decimated.

    The supply curve is so drastically shifted and there is absolutely no chance for this to change unless a huge pool of workers in developed economies completely abandon these professions (which they can’t do easily since they require very long education time). Also for people who have taken microeconomics, both China and India are VERY LARGE countries and there are exceptions in microeconomics text to these cases which involve VERY LARGE countries. When a country is small (say vietnam, Malaysia, Singapore etc.,) and outsourcing happens there, not much gets affected.

    The sad part is that CEO’s, consulting firms and investment banks get paid multimillion dollars to do this easy stuff and go around claiming that
    a. they have invented next best thing to sliced bread and have optimized something (consultants)
    b. they are doing god’s work (investment bankers)
    c. they have created shareholder value (CEOs)

    Truly pathetic. The only value added by the above bozos is that they have found someone who can do the job for lesser pay.

  6. aelilea says:

    For key innovations, there is a gap between the early adopters (with sufficient disposable income) and a mass product. This gap is becoming wider and possibly unbridgeable.

    It’s not just innovation in consumption goods that is affected. It’s also any kind of private investment good which does not gain a market with the necessary scale to become feasible and then grow. I am thinking for example of energy-saving home improvements (from insulation to photovoltaics to…).

  7. Call it the Paradox of going “down market”

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