I have a new Bloomberg piece where I criticize John Cochrane, and conservatives in general by extension, for selling static efficiency policies as "growth" policies. The title is not the best (and the picture they use of John is also not the best; sorry about that). But the point is one I've really wanted to make for a long time:
Most of the so-called growth policies Cochrane and other conservatives propose don't really target growth at all, just short-term efficiency...Cochrane sells us on the need for growth policies by citing the undeniable benefits of long-term economic growth...But most of the policies Cochrane recommends are most certainly not things that would increase the growth rate for decades on end!...[S]uppose we cut taxes...the deadweight loss goes away...It provides a one-time bump, but nothing more...The same is true of most regulation.You can read the whole thing here.
Now, Cochrane's piece is a very good one, as far as conservative policy manifestos go - it is non-polemical, thoughtful, and well-researched. It includes not just standard Republican planks like tax cuts, but also some things like increased spending on research. I think Cochrane would be a great chief economic advisor for the Rubio administration.
Nor is he trying to be dishonest here. Cochrane is a good guy. The focus on "growth", and the tendency to sell static-efficiency policies with paeans to the benefits of multi-decade compounding, is just a bad habit - a holdover from Reagan days. But nevertheless, I think it's sloppy. Policies to boost static efficiency should be able to stand on their own merits; they don't need to be oversold like this.
Sometimes, I start to think that economic growth is just an endless series of short-term efficiency changes.
ReplyDeleteIt is, but in the long run, the 'envelope' is determined by technology, according to the Solow growth model that Noah Smith is advocating. Btw I think Smith was a bit dishonest not mentioning by name the Solow growth model. He makes this "old" observation seem new. But trolling your audience is fair game on the internet I suppose, so it's all OK.
DeletePithom: Maybe it is. But even if so, that doesn't make Cochrane right to sell short-term efficiency changes as long-term growth policy!
DeleteRay: I mention the Solow model by name all the time, hoss!
@NS - No Siree, CNTRL+F and "Solow" yields no hits... I just got the Blue Screen of Death in Windows 10 while visiting your site...coincidence? Yes.
Delete"The U.S., the U.K., Japan, Germany and France all have per capita growth rates in the same range, despite substantial differences in tax rates and regulatory environments"
ReplyDelete-Yeah, but Germany, France, and Japan have fallen behind the U.S. in RGDP/worker for over a decade now.
Actually, in the 90s they fell behind a bit but made it up in the 2000s. They grew faster than we did in that decade, despite our housing bubble. Their shrinking working-age populations disguised it, but they outperformed us. So for the 90s and 00s combined, they kept pace with us.
DeleteWho. FFrance outperformed us? Clearly not. Germany's growth picked up in 2004, after Hartz reforms.
DeleteUltimately over the last 30-40 years, the picture is very clear.
Sigh, Noah:
Deletehttp://againstjebelallawz.wordpress.com/2015/08/22/the-great-axis-stagnation/
http://research.stlouisfed.org/fred2/graph/?g=1F80
No, they didn't make up for it in the 2000s other than by raising the employment rate.
France made people limit their hours a lot, though. Their productivity per hour is substantially higher than ours...
DeleteFrance is much more productive? Too funny. Exclude the young and the old, limit severely working hours, then yes it's guaranteed that measured productivity will increase. That's irrelevant comparison, though. You need to count the productivity of the excluded and the lost hours. There's research on the proper comparison, and France is not nearly as productive.
DeleteYeah, but that's about levels, not growth. Working hours in France have not been a factor in French growth/decline relative to the United States since 2002.
Deletehttps://research.stlouisfed.org/fred2/graph/?g=2p93
Their productivity per hour is substantially higher than ours...
DeleteI think this addressed by Bill Lewis in The Power of Productivity. He notes that in France some low productivity jobs which exist in the US such as bagging groceries are not found or very rare. Remove these marginal jobs and your productivity numbers go up.
Again, your premise is clearly false here. The growth in continental Europe as opposed to the US and UK is clearly inferior. Yes, in every year, the difference is small, but they clearly cumulate. France is the poster child for a statist model of development, and the results are in. After a strong catch-up through early 70's , it dramatically fell behind the US and let the UK catch up.
ReplyDeleteHigh tax and regulatory burden is a clear impediment to growth, Turns out you cannot copy technology if you freeze your industrial relations.
Nah, you're not right.
DeletePowerful argument.
Delete@Krzys - ("Crazies") - High taxes and meddling bureaucracy did not hurt California, New York City, Japan, South Korea...and the list goes on (Washington DC too, haha). By contrast, Texas has no state income tax, and neither does South Dakota. You wanna live there? Well I do, but it's only to take advantage of state tax loopholes, since I'm offshore and don't pay tax to anybody, since my work is online. LOL. Noah Smith is right, and he left Texas too.
DeleteWell, South Korea has a much smaller govt. than the US and Japan's is of similar size.
DeleteYes, centers of globalized industries can survive a predatory govt., but it's of no instructive value for anything.
As to Texas, I might prefer CT, but vast numbers of people choose Texas over any other state, seeing how it has attracted the highest level of inmigration over the recent years.
GDP is at best a loose approximation to welfare. It does not count many things, over-counts others, and undercounts others. For example, people value security of employment, but insecurity will boost GDP (more churn, more market activity). Private healthcare boosts GDP more than public, although the latter delivers much better results. One does not have to spend long in France and the US to realise that standards of living in the two are pretty equal overall, with more rich in the US, and many more poor, much better public provision in France, better private gadgets in the US. Claiming either has "won" by the GDP metric is simply silly.
ReplyDeleteWhich labor market's better, today's or that of the 1970s? And your claim about healthcare is just false.
DeleteNice post Noah, but I think you're a little too hard on John. I agree that he's one of the good guys, and I think we should give him both his one-time efficiency gains and also the things that might improve the trend growth rate.
ReplyDelete$0.02
-Ken
Kenneth Duda
Menlo Park, CA
"Cochrane is a good guy." Demonstrably false.
DeleteWell Cochrane's a good guy perhaps if you're Charles Montgomery "Monty" Burns, aka Kenneth Duda, with a plan to rule the world by fostering cheap money on the people. What does Duda own that makes him so hell-bent to fund crazy schemes like Sumner's NGDPLT, to potentially debase the money supply? Probably real estate.
DeleteRay, is there an economist who you like?
DeleteAlso, what word or phrase you describe your overall economic philosophy? (Based on your comments at Sumner's, I think I can safely cross "Market Monetarist" off the list).
@John S. - there's a professional economist I like, but I rather not put his name here since we've corresponded using my real name (I'm a manager business type with a background in science, not an economist). Using this nym I like Tyler Cowen and I trade emails with him from time to time. Also from the internet I like this guy: http://informationtransfereconomics.blogspot.com/
DeleteMy philosophy is that the economy is non-linear, bounded by an envelope that appears linear at times, long term. Like the stock market, that short term cannot be predicted but long term historically (for the last 100 yrs or so) averages roughly 7% a year or less (Siegal's rule of thumb). Therefore, Sumner's b.s. actually has value, in its placebo effect. Google the experiments where productivity went up based on turning the lights on, brighter, and off, dimmer, at a factory. Both times productivity went up, which cannot be based on physics but just psychology. I've talked to old timers who experienced the Great Depression and they say Roosevelt's 'fireside chats' were a big help in turning the Great Depression around. So, yeah, economists are the modern witch doctors and they play a useful role in society, sad but true.
So if you were made economic policy czar of the US for the next 25 years, what three major changes would you make?
Deletehttp://alicesophie.hatenablog.com/entry/2015/10/31/155610
ReplyDeleteMaking an impact in this digital age requires a lot of creativity and hard work. Although it may seem easy just posting an advertisement online, it takes a lot to get the message to the right people. There is a greater deal of competition thanks to the widespread use and access to digital media.
http://quantumvisionsystemreview.com/buysell-arrow-scalper-review/
If you've got content, make the most of it. If you're like most online marketers you're producing a great deal of audio and video content. And you've likely wondered if you're getting maximum mileage from that content. The fact is, if you aren't providing transcripts of your video and audio content you are missing out on some key opportunities.
http://binarymetabot.com/buysell-arrow-scalper-review/
S P A M
DeleteI think your regulations claim needs a bit more explanation. It is fairly easy to imagine how lower regulatory burdens would raise long term growth rates: people previously employed in navigating bureaucracies/other busywork may find themselves doing productive work. Because now we have more heads thinking about doing more and better stuff, the growth rate should go up.
ReplyDeleteAnd also, there is another angle that may be claimed in favor of static efficiency gains: even if they only provide a one time boost and leave growth rates unaltered, you still get growth rates on top of that higher level. Or in other words, france is now worse off relative to the US because 30% of 2015 GDP is a lot more than 30% of 1980 GDP. I'm less convinced about this one though.
@Felipe - Read about the "Solow Growth Model" on Wikipedia. What Noah Smith is taking about is not controversial at all. The only thing you might quibble with is that the "long run" Noah Smith is talking about stretches into the decades, but historical facts show, as Smith says, that indeed countries more or less catch up with one another rather quickly, due to the diffusion of technology that drives the Solow Growth Model.
DeleteThe catch up in Solow Growth Model has nothing to do with diffusion of technology. It has everything to do with diminishing returns to capital.
DeleteBut the diminishing returns to capital are due to the diffusion of technology, they are flip sides of the same coin. Think about it...what is the rate of return to a monopolist of an important invention, as opposed to one that becomes open source?
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ReplyDeleteI like the distinction Noah makes in the column, and agree that it's too often blurred by conservatives, but I'll echo and expand on Felipe: Many (most?) regulation do have both efficiency costs and growth costs. Unnecessary professional licensing like for hair stylists both increases the cost of hair cuts and reduces innovation, e.g., one more barrier to profiting from an automatic haircutting robot.
ReplyDeleteNoah, are you claiming the particular basket of regulations being debated mostly don't feed into growth in this way? Could you give examples?
In defence off Cochrane - growth is growth even if it is a transitional effect lasting only a decade. A decade from now there may be new opportunities that give rise to new transitional growth opportunities.
ReplyDeleteNoah's one policy for long term growth is more research. I agree that we should be doing more research. If I were in charge DARPA would have a bigger budget and a broader mandate. What I would really want to do is create some sort of super Bell Labs.
The problem I have with Cochrane is the use of GDP per capita as the measure of success. We run into the difference between average and median. One could imagine a set of policy changes which increase GDP per capita by 1% after a phase in period, but all of that increase PLUS more goes to the top one percent of income earners and the other 99% see their standard of living fall. Cutting capital taxes and cutting social security to pay for the tax reduction would have that sort of effect. Cochrane would count that as a success but I would count it as an abject failure.
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ReplyDeleteBasically, the policies Cochrane advocates like tax cut, eliminating regulation will lead to level effect, NOT growth effect.
ReplyDelete"If you doubt my argument, consider what the world would look like if tax rates produced permanent differences in growth. Countries with tax rates just 1 percent lower than their neighbors, or regulations slightly less onerous, would eventually be infinitely richer. That's not only implausible, but it also doesn't fit the facts."
ReplyDeleteNoah: "Look, raise taxes to 99.9%! It's just a one-time negative bump, then we'll return to good long-term, sustainable growth." Obviously not.
Technological progress - both the rate of knowledge acquisition and adoption - is a result of policy, even tax policy.
"(and the picture they use of John is also not the best; sorry about that)"
ReplyDeleteLOL!... you weren't kidding there!
If technology drives long terms growth, what drives technological innovation? Research, especially early-stage research, right? Where does most of the funding for such research come from?
ReplyDeleteSeems like a real "growth" policy would start with greater government funding of research.
Trouble with basic research is of course that it is a public good. Every country benefits, not just the innovator (ask Bell Telephone and Xerox about that). If you want YOUR country to benefit relative to others, then you need to ensure that that research is implemented faster in your country - and I would guess that investment in education and infrastructure are the keys.
Delete"Sure they exist, they're just a lot smaller relative to the overall wealth level than in poor countries. A poor country can grow by 10 or even 15 percent if it does the right policies. Could we boost our growth by more than a couple percentage points even if we cleaned up a lot of our inefficiencies? I guess I can't rule it out, but it seems like it would be a LOT harder than in a poor country." -Noah Smith on EconLog
ReplyDeleteNoah,
ReplyDeletethe standard of commentary here is really appalling. Don't know what can be done to improve it, although banning or putting commentary limits on some individuals might be a good idea.
I think what you are doing here is unethical.
ReplyDeleteNow you have my identity in this IP address, you know what I'm saying. Are you helping me or hurting me? Doesn't matter, you're deceptive.
" -- the U.S. is about one-third richer than the large rich nations of Europe and East Asia. Those differences probably do reflect differences in economic efficiency. " [from the Bloomberg article]
ReplyDeleteI'm curious why the US is more efficient given our much greater inequality: slowing the velocity of spending at the top (1%) because of overabundance and lowering the productivity of the bottom due to inferior education and opportunities.
During the "Great Compression" good times ran pretty much on auto-pilot (if you were white). The auto-pilot mechanism: high union density.
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DeleteGot my answer this morning at: http://angrybearblog.com/2015/11/wait-maybe-europeans-are-as-rich-as-americans.html
Delete" Imagine, rather, that the cost-of-production estimation method is underestimating the value of government goods — just as it would (wildly) underestimate private goods if they were measured that way. Now do the math: EU built out governments encompassing about 40% of GDP. The U.S. is about 25%. Think: America’s insanely expensive health care and higher education, much or most of it measured at market prices for GDP purposes, not cost of production as in Europe. Add in our extraordinary spending on financial services — spending which is far lower in Europe, with its more-comprehensive government pension and retirement programs. Feel free to add to the list.
"All those European government services are measured at cost of production, while equivalent U.S. services are measured at (much higher) market cost. Is it any wonder that U.S. GDP looks higher? "
I should add that of course Europeans work shorter hours than Americans. I think that a few years or more back we worked 50% more than Germans thought that may have closed up some now.
DeleteNoah,
ReplyDeleteWould you say economic policy in, say, Venezuela is causing a collapse in the trend rate of growth, or is that just an artifact of shifting to a different level of prosperity, and that the underlying growth rate remains unchanged?