Martin Baily Interviews Robert Solow

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Solow says,

The French automobile industry, much to my surprise, turned out to be more capital intensive than the American automobile industry. So it was not that either. The MGI studies instead traced these differences in productivity to organizational differences, to the way tasks were allocated within a firm or a division—essentially, to failures in managerial decisions.

I would note that if this is the case, then it is possible that high executive pay reflects a productivity differential. Of course, if French auto executives are paid as much as American executives, that would spoil my argument.

Solow has a different take:

An interesting conclusion to me was that international trade serves a purpose beyond exploiting comparative advantage. It exposes high-level managers in various countries to a little fright. And fright turns out to be an important motivation.

Pointer from Timothy Taylor. The whole interview is interesting.

Other Growth Suggestions

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1. Philip K. Howard has several complaints about the legal environment in the United States.

My favorite failure is civil service — designed to be “the merit system,” it instead makes it illegal to judge anyone based on merit.

He writes,

Law should be radically simplified into goals and governing principles, like the Constitution, and leave to accountable humans the responsibility to achieve those goals fairly and sensibly.

I received a lot of pushback on my last post on principles-based regulation. But I still think that it is a promising idea, and evidently so does Howard.

2. Jonathan Rauch argues that apprenticeships are a neglected way to improve human capital. Of course, affluent kids already have a very broad apprenticeship program. Except to maintain class distinctions, their program is called internships.

3. Peter Van Doren writes,

The literature is not very supportive of claims that simple changes in policy would improve productivity and real incomes. For every common argument about a simple policy change that would increase the productivity of land, labor, capital, and everything else that matters I have found compelling contrary or at least complicating evidence.

TANSTAAFL.

Posts on this topic by other writers are coming.

Tyler Cowen, Neocon

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He writes,

Without the current and past American security umbrella, for instance, I believe much of Asia would be a far less free place than it is today, starting but not ending with Taiwan and South Korea.

I give Tyler credit for raising this issue in a forum least likely to be sympathetic to it. This is Brink Lindsey’s growth forum hosted by Cato, where Brink is inviting contributions from the liberaltarian crowd.

I have to say that when looking at places like Russia, Hungary, or the Middle East, my appreciation for the civilization vs. barbarism axis tends to increase. On my list of books to sample (not necessarily read the whole thing) is Bret Stephens’ latest, where he argues that the U.S. should act as the world’s policeman. I wonder whether he explains how the U.S. could do that without also becoming the world’s social worker.

UPDATE: Here is how Stephens starts out:

Where do you fall on the spectrum between internationalists and neoisolationists? Ask yourself the following questions:

Does the United States have a vital interest in the outcome of the civil war in Syria, or in Israel’s relationship with the Palestinians, or in Saudi Arabia’s contest with Iran?

Should Americans take sides between China and Japan over which of them exercises sovereignty over the uninhabited Senkaku Islands? Similarly, should we care whether Ukraine or Russia controls Crimea?

Is America more secure or less secure for deploying military forces in hot spots such as the Persian Gulf and the South China Sea?

My views on these issues are mixed. On the Middle East, I see the Syrian civil war as barbarism vs. barbarism. Similarly, the contest between Saudi Arabia and Iran. On Israel and the Palestinians, I understand that many people explain the Palestianians’ barbaric behavior as being caused by oppression, but I see it more the other way around. They could end oppression by being less barbaric. And I believe that the U.S. ought to support civilization in that contest.

On the second issue, my memories of the Vietnam era are salient enough to make me wary of pushing conflict on the basis of domino theory. Uninhabited islands strike me as dominoes that can be allowed to fall. Note that Stephens in effect equates Crimea to uninhabited islands, which suggests that it, too, is a domino that should be allowed to fall. I do not think that caving in there means that next thing you know Putin will be at the gates of Paris.

I think we are more secure for deploying military forces in the Persian Gulf and the South China Sea. If you press me, I will tell you that I believe that the U.S. navy and air support are the true world government, and without world government we would have major war.

If you think that pacifism and non-interventionism are ways of preventing major war, you have company. But my concern is that those policies only work if there is someone else doing the work of the world’s policeman. Being Swiss seems fine now, but if the U.S. had not intervened in World War II, it might not have been so peachy. And ultimately not so peachy for the U.S., either.

UPDATE: I wrote the foregoing before yesterday’s massacre in Jerusalem. If I have my geography right, the attack took place far inside the 1967 borders. It is an area where young observant American Jews go to study. The sight of Palestinians celebrating cold-blooded murder is something that I cannot put out of my mind. Even the Germans did not celebrate when they murdered Jews.

Dean Baker on Drug Research

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He writes,

It is not difficult to envision alternative mechanisms to pay for the research currently being incentivized with patent monopolies. Several economists have proposed a patent buyout system, where the government would buy out patents and place them in the public domain. A simpler method, however, would be to have direct public funding. The government already spends more than $30 billion a year to finance biomedical research through the National Institutes of Health (NIH). It would probably be necessary to increase this amount by $50-$60 billion a year in order to replace the funding currently supported through patent monopolies.

This additional funding could probably best be channeled through a mechanism other than NIH, with private companies bidding for major contracts to support research in a variety of areas. By having a relatively limited number of prime contractors, who could then contract out as they please, we would avoid having a situation of the government micromanaging research. The contracts could then be renewed and/or expanded, depending on the company’s track record. The conditions of getting the funding would be both that all patents are placed in the public domain and also that all research findings are made publicly available on the Internet as soon as practical.

I agree that we should think outside of the patent box when it comes to medical research. In fact, in my essay for the growth forum, I also chose to propose an alternative to the patent system.

The Most Anti-Pigouvian Tax

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James Hamilton writes,

Professor Shoven noted that the current structure of Social Security in some cases amounts to a pure tax on those who work for more than 35 years in order to transfer those funds to individuals who retire early. He suggested that one change we should consider would be to recognize the status of “paid-up workers.” The idea is that if you’ve already put in 40 or more years of paying into Social Security, at that point your personal Social Security bill would be declared to be paid in full, and neither you nor your employer would be asked to make any more Social Security contributions for as long as you continue working. This would create more incentive for older citizens to keep on working and for employers to want to hire them.

Does this apply to young workers any less than it applies to workers over 65? Let’s face it, the payroll tax is a tax on market work. In my opinion, there is no reason to discourage market work. Off hand, I would say that the payroll tax is the most anti-Pigouvian tax that we have. That is, it taxes something we want to encourage, when Pigou argued that we should tax things that we want to discourage.

Mission-Driven vs. Philanthropic

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Peter Thiel says,

mission-oriented companies are often defined by a unique mission that maybe others don’t think is important, whereas a lot of the social entrepreneurship efforts gravitate towards things where you have many copycats doing relatively similar things.

From an interview with Ezra Klein. Pointer from Tyler Cowen.

One of the main recommendations of the Colander-Kupers book is to expand what they call the “for-benefit” sector. By that, they mean corporations that seek both profits and social benefits. To be fair, they tout this more as an alternative to government programs than as an alternative to profit-maximizing firms. As you know, I have been given to ranting against non-profits, on more than one occasion.

Technical and Communications Skills

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Catherine Weinberger writes,

while math scores, sports, leadership roles, and college education are all associated with higher earnings over the entire 1979-1999 period, the time trend in the earnings premium was strongest among those individuals who participated in sports or leadership activities during high school and had higher levels of cognitive skills. Supporting evidence based on Census and CPS data matched with the Autor, Levy and Murnane (2003) job-task measures provides an independent observation also suggesting that the labor market increasingly favors workers with strong endowments of both cognitive and social skills. These findings, coupled with evidence of growing employment, suggest increasing complementarity between cognitive and social skills among young workers.

Pointer from Tyler Cowen, who sees the findings in an average-is-over context. Indeed, if cognitive skills and social skills are both somewhat scarce and imperfectly correlated, increasing complementarity would lead to greater inequality.

I would always tell my AP Statistics students that they were learning technical communications skills. I would say that communicators without technical skills end up as baristas. Those with technical skills but poor communication skills will end up as Dilbert, working for a boss who appears to be an idiot.

Uber’s Most Important Customers

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Emily Badger of the WAPO wonkblog reports that Uber is being used heavily in the DC area by politicians and their staffs. Pointer from Mark J. Perry, who comments,

Here’s my economic forecast for the transportation industry: Expect continued and very strong hurricane-strength Schumpeterian gales of creative destruction, with a high likelihood of market disruption for Big Taxi

Or, as Clubber Lang would put it, pain.

Less Hiring and Firing

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Stephen J. Davis and John Haltiwanger write,

we think the information revolution has played a significant role in the trend declines in worker reallocation. Information about criminal records, credit histories, unfavorable media coverage, and even ill-advised web postings has become more abundant and cheaper to access and process. The likely result is a shift to stricter selection on the hiring margin and less use of trial employment arrangements that contribute to hires and separations.

I dunno about that one. If we had really high rates of hiring and firing, you could tell a story about the information revolution accounting for that phenomenon, also.

They also cite other factors, including regulations, that might be slowing down the rate of hiring and firing.

Meanwhile, the more recent figures show improvement.

Cato Growth Forum

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Brink Lindsey writes,

1. Arnold Kling proposes alternatives to the regulatory status quo at the FCC and FDA, respectively: a spectrum arbitration board and prize-grants for medical research.

2. Robert Litan calls for more high-skill immigration and higher pay for teachers in exchange for an end to tenure.

3. Douglas Holtz-Eakin provides an overview of structural reforms needed to reduce government debt levels and restore growth.

4. Lee Drutman argues that tripling the budget for congressional staff can lead to improved policymaking.

The links go to our essays. More essays will be posted every day. This is all part of a run-up to a conference in December.