Category Archives: Growth Causes and Consequences

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.

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.

What I’m Reading

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The Making of the Modern World: Encounters, by Alan MacFarlane. He has an almost infinite list of books on Amazon, many of them with “Modern World” in the title. This is a Kindle edition, very garbled, but with much interesting material. An attempt to summarize:

1. “Modernity” is different and important. One way to think of it is that in modern societies, there is separation and balance among power, economic activity, religion, and kinship.

2. In pre-modern societies, whether tribal or imperial, these forces are fused, into the tribe or the state, respectively.

3. The 18th century was when thinkers such as Adam Smith began to notice a cultural break with the past. 19th-century legal historian Henry Maine called this the transition from a society of status in which social relationships are determined at birth to a society of contract, in which social relationships are more egalitarian and formal.

4. Maine notwithstanding, modernity reflects a balance of status and contract. We are not so atomistic that we live in a world of arms-length contracts. We belong to various types of associations (MacFarlane notes that many more team sports were invented in England than in other countries) which are bound by more than self-interest, but we do not belong to one single encompassing tribe or theocratic state.

5. The smaller, more fluid units of civil society are key to keeping modern states from reverting to tribalism or all-powerful states. This idea goes back to Tocqueville, of course. Nowadays, I would note that Yuval Levin is one of its leading champions, and he often cites Burke.

6. Modernity is not necessarily robust. Modern societies have managed to make production more rewarding than predation, and consequently they are wealthier and more powerful than pre-modern states. But humans remain attracted by encompassing ideologies, such as Communism or radical Islam. In fact, MacFarlane cites several scholars who wrote over 100 years ago that Islam did not adapt to modernity as did Christianity, and Islam still calls for a pre-modern unity of all spheres.

7. The Industrial Revolution combines modernity with the scientific/technological revolution. Neither alone is sufficient.

I highlighted numerous passages in the book. A few are given below the fold. Continue reading →

My Review of Peter Thiel

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I write,

the business environment of biotechnology, which Thiel and I agree is a very promising field for future economic growth, may be different from that of software. In software, companies like Microsoft and Facebook grew to dominance in large part because consumers find an advantage in using the same software as other consumers — this is the network effect. This in turn creates an opportunity for venture capitalists to back the rapid expansion of a firm that is unprofitable for a few years and then wildly profitable a few years later, once the network effect has been captured. It is not necessarily the case that biotechnology will exhibit network effects in which profits are created by rapidly expanding on an early lead.

I should note that Edmund Phelps, in Mass Flourishing, argues that progress is driven not by big individual breakthroughs but instead by cumulative entrepreneurial progress.

UPDATE: Peter Lawler also writes about Thiel. A sample:

What, today, would be “the largest endeavor over which you can have definite mastery”? This would be the startup. For the libertarian Thiel, the startup has replaced the country as the object of the highest human ambition. And that’s the foundation of the future that comes from being ruled by the intelligent designers who are Silicon Valley founders.

DeLong-term Productivity Trend

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Brad writes,

My problem is that I believe in the slow diffusion of technology, the importance of incremental improvements, the usefulness of the incentives provided by the fact that it is easy to make a lot of money by figuring out a cheaper way to produce and supply things that people are willing to pay a lot of money for, and the law of large numbers. These make me think that–modulus the business cycle and measurement error–total factor productivity should be smooth in the level and smooth in the growth rate as well: whatever processes were going on last year that led to invention, innovation, deployment, and thus higher productivity in a potential-output sense ought to be almost as strong or only a little stronger this year.

The entire post is interesting. I think that the view that there are no sudden economic regime changes is difficult to shake. Probably my best argument against a post-2003 productivity slowdown is that we are seeing the continued expansion of education and health care, two sectors where there is essentially no reasonable way to measure productivity to begin with. Also, quality-adjustment in the goods sector is getting harder to measure, because goods tend to overlap with services (is Amazon Kindle really mostly a good, as opposed to a service)>

Pointer from Tyler Cowen.

The Book on SecStag

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Timothy Taylor writes,

Coen Teulings and Richard Baldwin, who have edited a useful e-book of 13 short essays with a variety of perspectives on Secular Stagnation: Facts, Causes and Cures. In the overview, they write: “Secular stagnation, we have learned, is an economist’s Rorschach Test. It means different things to different people.”

Read his whole post.

The interesting secular trends include low real interest rates, low productivity growth, and declining labor force participation among prime-age workers.

From a conventional AS-AD perspective, low real interest rates are a demand-side phenomenon. The other two are supply-side phenomena. I wish the secstag folks would get together and sort this out.

I think that the most important secular trends are:

1. The New Commanding Heights. That is, the shift in the economy toward a lower share of goods consumption and a higher share of consumption of education and health care services. The New Commanding Heights are sectors in which productivity is difficult to measure and government interference is rampant.

2. The Great Factor-price Equalization. That is, the ability of workers with a given level of skills in China and India to compete with workers of equivalent skills in the U.S. This benefits the median worker in China and India as well as high-skilled workers in all countries, but it threatens the median worker in the U.S.

3. Vickies and Thetes. Or what Charles Murray calls Belmont and Fishtwon. In the U.S., there is extreme cultural sorting going on. People with high intelligence and conscientiousness are moving in one direction, and people who are low in those traits are moving in the other direction.

I think that (1) explains the low productivity growth. It could be partly a measurement problem and partly a problem of government putting sand in the gears.

I think that (2) and (3) explain the labor force participation problem.

What about low real interest rates? This one has puzzled me for a decade. Is it possible that (1) is the explanation? That is, the New Commanding Heights are not nearly as capital-intensive as the old commanding heights of steel, electric power, and transportation. Also, investment may be deterred because of the way government affects these sectors.

Experts Surveyed on the Future of Work

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From Pew, which says

We call this a canvassing because it is not a representative, randomized survey. Its findings emerge from an “opt in” invitation to experts who have been identified by researching those who are widely quoted as technology builders and analysts and those who have made insightful predictions to our previous queries about the future of the Internet.

Respondents gave their answers to the following prompts:

The economic impact of robotic advances and AI: Self-driving cars, intelligent digital agents that can act for you, and robots are advancing rapidly. Will networked, automated, artificial intelligence (AI) applications and robotic devices have displaced more jobs than they have created by 2025?

Please elaborate on your answer: Describe your expectation about the degree to which robots, digital agents, and AI tools will have disrupted white-collar and blue-collar jobs by 2025 and the social consequences that will emerge from that.

Bonus question: To what degree will AI and robotics be parts of the ordinary landscape of the general population by 2025? Describe which parts of life will change the most as these tools advance and which parts of life will remain relatively unchanged.

Here is how I would have answered (note the PSST slant):

1. In a market economy, trade takes place in order to gain from specialization and comparative advantage.

2. There are always such gains to be had, so in principle everyone can always participate in the market economy. In a frictionless economy, meaning that all adjustment to change takes place immediately and costlessly, everyone would do at least some market work.

3. In practice, the economy is not frictionless. One of the big frictions is that market work is taxed, whereas non-market work is not taxed. Among those who face the highest tax rates for market work are poor households who receive subsidies that disappear rapidly as income rises. This is not to say that the subsidies are bad policy (although in my opinion they are very poorly designed) but simply to report the fact.

4. Another source of friction might be termed discovery-process friction. Sustainable patterns of specialization and comparative advantage are only revealed gradually, through a trial-and-error process of new ventures launched and old ventures shut down.

5. Holding the discovery process and other frictions constant, more rapid technological change may lead to higher rates of unemployment, on average. With more rapid technological change, the economy is likely to spend more time out of adjustment than in a state of near-full employment.

6. Looking ahead, I would not rule out technological changes that help to improve the discovery process and thus reduce economic friction. For example, it might be the case that as more business data is collected and analyzed in real time, entrepreneurs will become more accurate in choosing profitable business opportunities and avoiding unprofitable ones.

7. However, I would not rule out the possibility that government policy will become increasingly dysfunctional and thus increase economic friction.

8. I think that the more fundamental question is to what extent valuable skills and capital in the economy will tend to become highly concentrated among a small elite rather than dispersed. I certainly think that this is one scenario. Thus, even though everyone may participate in the market economy, some of us could be Vickies and some of us could be Thetes.

9. Which brings me to my answer to the bonus question. I would suggest that Neal Stephenson’s The Diamond Age is more insightful than any science fiction that I might write.

Entrepreneurs and Development

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Rafael La Porta and Andrei Shleifer write,

the bottleneck is the supply of educated entrepreneurs–people who can run productive businesses. These entrepreneurs create and expand modern businesses…This is how the informal economy dies out in the process of development…the policy message for how to grow the formal economy and shrink the informal one is to increase…the supply of educated entrepreneurs.

An interesting combination of two themes in the latest issue of The Journal of Economic Perspectives–entrepreneurship and development. But I worry that causality may not be established. That is, the increase in the supply of educated entrepreneurs could be a symptom rather than a cause.

Others on the Aging of U.S. Firms

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Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda write,

the typical young firm (as captured by the median) exhibits little or no growth even conditional on survival…however, among all the young firms, a few do exhibit very high rates of growth which yields a high mean growth rate.

Later,

the annual startup rate declined from an average of 12.0 percent in the late 1980s to an average of 10.6 percent just before the Great Recession, when it plummeted below 8 percent.

Still later,

firms aged five years or less made up about 47 percent of all firms in the late 1980s, but this number declined to 39 percent of all firms before the start of the Great Recession, and has declined further since then.

They point to one factor that I had thought of, which is that large retailers are reducing entrepreneurial activity in the “mom and pop” sector.

They also point to the possibility that startups now must spend more resources assembling a trained work force. That sounds to me like an intriguing notion. It might be the case that older, more experienced firms are better able to take advantage of the Great Factor-Price Equalization. In any event, it is probably hard to find a profitable strategy that involves creating lots of new jobs for unskilled workers in the U.S.

Let me also propose a New Commanding Heights explanation. The economy is shifting inexorably toward a larger share of spending on education and health care. Those are sectors where it is relatively hard to create a successful start-up. Do you compete against the incumbents, which have huge advantages in terms of reputation and government suppport? Or do you try to sell to the incumbents, in which case you have to overcome their bureaucracy?

Sure, there are lots of start-ups in education and health care. But my guess is that if you could come up with a way to measure the amount of effort required to be successful in a start-up, that amount would be higher in education and health care than in sectors, such as manufactured goods, on which the share of spending is declining.

Remember this story?

Health is just so heavily regulated, it’s just a painful business to be in. It’s just not necessarily how I want to spend my time. Even though we do have some health projects, and we’ll be doing that to a certain extent. But I think the regulatory burden in the U.S. is so high that I think it would dissuade a lot of entrepreneurs.

If demand shifts to sectors where entrepreneurship is harder, the rate of entrepreneurship is going to decline.