In response to a John Cochrane policy paper on growth policies, I wrote a post chiding Cochrane for selling efficiency policies as long-term growth policies. Cochrane now has a long and rather testy reply to Yours Truly. The basic message of the reply is: "If level effects are really, really big, they tend to look like long-term growth effects."
Yep. That's right.
Cochrane's original paper described the impact of growth policies by drawing an analogy with the period from 1950-2000:
If the US economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000 not $50,000. That’s a huge difference. Nowhere in economic policy are we even talking about events that will double, or halve, the average American’s living standards in the next generation.To get a policy change that had that effect, we'd need:
A) A doubling of the level of detrended steady-state GDP, and
B) Frictions in the economy and/or the policy-making process that smoothed that change over 50 years.
Cochrane, in his new post, asserts that (A) is possible (I'll get to that later). He doesn't mention (B). How much of the growth we enjoyed from 1950 to 2000 a result of policy improvement? Cochrane certainly believes strongly that Reagan's policies caused a lot of the growth in the 80s and 90s, but how about the equally impressive growth from 1950-1980?
When I look at U.S. history I see a pretty smooth growth trend (I'll use a David Andolfatto tweet instead of just grabbing FRED data, because it's funnier!):
See the big growth takeoffs from policy liberalization? Neither do I.
Of course, at any time we could have chosen to become North Korea, at which point the line would have crashed and burned, so in some sense the whole upward trend was due to policy. But I think that it's hard to look at this steady upward march and see anything other than the steady improvement of technology. If you look at other countries, you see that they did just about as well as us (or better) over this time period, and that our growth and theirs was highly correlated. To me, that says that it was technology (and trade), not policy changes, that drove most of the global growth trend.
But OK, OK, if we DID engineer policy changes that doubled our income, would it matter to us if it was abrupt or spread out over decades? No, it would not. So Cochrane is right - a "level effect" that huge really would be party time.
So maybe my Bloomberg piece didn't really manage to express what actually annoyed me about Cochrane's paper. I guess it wasn't just about "growth effects" vs. "level effects". It was about proof versus conjecture.
Cochrane, by citing the growth we enjoyed from 1950-2000, and then telling us that we can enjoy similar growth if we do his preferred policies, seems to imply that this is something we've done before and therefore something we can do again. To me, that doesn't seem to fit the facts, even if you give Reagan as much credit as Cochrane gives him. To me, it seems pretty obvious that liberalizing policy changes produced, in the past, at best small bumps in the trend of steady technological progress.
But OK, OK, John obviously really believes that his preferred policies would engineer a HUGE change - a doubling or tripling - of our potential GDP. I may disagree with that prediction, but I guess I shouldn't dismiss it out of hand. I definitely think that pointing to the growth from 1950-2000 as an example of what we could achieve with deregulation is misleading. But ultimately that springs from the fact that my priors about how the world works are just very different from John's.
Anyway, on to John's other points:
Cochrane Point 1: If China did it, why not us?
Because China started off very far away from the technological frontier. If you liberalize your economy in ways that allow you to start importing and applying foreign technology, you will be able to grow fast. Some of China's growth is simple Solow capital catch-up, but some of it is a sudden and dramatic influx of foreign technology.
The U.S. is at or near the technological frontier, so I assume it would be a lot harder for us to do what China did. I think this again illustrates a difference in the way John and I think about productivity - he seems to instinctively think of policy, I always instinctively think of technology.
Cochrane Point 2: We could triple or octuple our GDP by making it easier to do business!
I was pretty skeptical of this argument. Reverse causation is a much bigger problem than Cochrane seems to think; he dismisses it with some anecdotes, but I don't think it can be dismissed. Another problem is the poor fit of the regression line Cochrane shows - see Kevin Grier for more on this point.
A third problem is that the World Bank's "Ease of Doing Business" indicators are constructed from surveys, which have all kinds of huge methodological issues (which Cochrane himself has pointed out in other contexts). They are not objective measures of the ease of doing business.
What this means is that A) the hypothetical "frontier" that the World Bank and Cochrane construct may not exist, and B) attempts to reach that frontier might actually hurt rather than help growth/efficiency. Alternatively, engineering improvements in the rankings might help a lot for poor countries but not help much for rich countries.
If we look at real-world examples, only one single country - Singapore - has both A) substantially higher GDP than the U.S., and B) better performance on the World Bank rankings. Singapore's GDP is about 60% higher than ours in PPP terms, so if we could reach that level it would indeed be great. They are #1 in the World Bank's rankings. The U.S. is #7. Countries #2-#6 are actually all a bit poorer than the U.S.
But maybe we can emulate Singapore.
Cochrane Point 3: Permanent growth effects might not actually exist.
Yep, true. Cochrane points to a Chad Jones paper showing this, which I actually already knew. It's a good paper. In fact, if you just use a simple Solow-type exogenous growth model you get a similar conclusion - there's nothing you can do to boost growth in the very long run.
Whether or not this is true, it is orthogonal to my point. I was talking about the overselling of efficiency-based policies by appealing to the history of long-term growth. I did not intend to claim that there are other clearly identifiable policies we could take to boost the growth trend for 50 years.
Cochrane Point 4: I should not have used the word "conservative".
I think this word was appropriate. First of all, it's one that the public intuitively understands. Second of all, it accurately communicates Cochrane's apparent love for Republican politicians, especially Reagan. In an earlier post (also a rebuttal to Yours Truly), Cochrane wrote:
In 1980 Ronald Reagan announced some pretty radical growth-oriented policies, at least by the standards of the time. (Not much new since Adam Smith, of course.) The standard liberal commentators made the standard objections: voodoo economics, numbers don't add up, it will take generations of unemployment to lower inflation, the debt will explode, and so forth. (Plus, the Soviet Union will be there forever, we might as well get along.) Reagan offered optimism; won, malaise ended, we won the cold war, and there was an economic boom.I would note that:
A) John uses the word "liberal" to describe people who disagree with his desired policies, and most people use "conservative" to mean the opposite of "liberal".
B) Reagan's policies included more tax cuts, while the big deregulations came under Carter. Deregulation is the centerpiece of Cochrane's current growth proposals, so it's interesting that he credits Reagan 100% and Carter 0%. If the World Bank's Ease of Doing Business rankings had been around at the time, I think Carter's reforms would have resulted in a lot more improvement than Reagan's, but Cochrane gives Reagan all the credit. That sort of feels like a politically "conservative" view of things.
So I don't think that any harm was done by the use of "conservative".
Think you lost something at the end of the second to last sentence of the second to last paragraph.ReplyDelete
Its odd that you keep engaging the Niall Ferugson of economics as much as you do. Why not just acknowledge that he couldnt cut it as a physicists, married into his tenure track position (which is a point for him Noah, if you had married the daughter of a prominent economist you too would have tenure at a higher perch, o well), that he produces highly partisan blog posts and that his broader policy pronunciations -- outside of the safety of his actual anodyne coursework -- is as partisan and hackky as the original, much better looking Ferguson. At least Niall is mildly original in that he brings homophobia and racism into his posts, Cochrane's entire blog can be summarized as 'Be more like my parents' memory of Reagan!'ReplyDelete
+1. Add to this his party-conditional views of monetary policy, in particular his neo-Fisherianism. On 12/10/2015, the Fed must raise policy rates to increase the rate of inflation. On 12/10/2016, policy rates must either be raised or held constant, even if all other macroeconomic conditions are the same, depending on who wins in November of 2016. (Add to that, his health insurance policy ideas, which would have driven most folks into the individual market without any reforms to it. Good luck, Joe Blow, in exercising your bargaining power against Aetna.)Delete
I believe that John's political ideology clouds his judgment whenever politically sensitive topics come up. But that's a reason to engage, not to disengage. He's such a smart, open-minded, and reasonable guy when it comes to anything that isn't a hot-button political issue.Delete
And if you think he wouldn't have gotten tenure at Booth without marrying the right person, you're just crazy!!
Actually I think you got this right in your post: it's not that he becomes suddenly rational on some topics, it's just that some topics involve his very different priors and some don't. You look at a smooth trend-line and see technology. He looks at the same line and sees policy. You can argue the point, but there's no conclusive reason to believe either is right. Why should technological change be smoother than policy change? It seems both proceed incrementally, but a priori, I don't see any reason to find a rock-steady 2% improvement in technology year after year to be any more plausible than the same rate of improvement in policy, without even getting into the huge methodological issues involved in measuring real GDP growth over such long time periods.Delete
"Why should technological change be smoother than policy change?"Delete
It shouldn't. But since policy (at least in democracies) is a matter of public record, we can observe policy change over time and see that it is not smooth. Yet long-term growth trends are remarkably smooth, so policy looks like a poor explanation. Technological progress is much harder to rule out as a cause, because it cannot be measured with a comparable degree of precision.
Policy changes tend to be implemented instaneously, or near instantaneously. Most technological change have to be filtered in through the free market, with small initial take-up due to high costs. Look at the smooth curves showing usage of the iPhone, internet usage, number of tractors, global industrial robot population, average CPU speed, and any number of technological improvements.Delete
If it's China and policy, it must be having a communist government, right?ReplyDelete
"See the big growth takeoffs from policy liberalization?"ReplyDelete
-Ignoring the baby boom, are we? There was a big growth takeoff under Reagan when RGDP/labor force is used. Though I'm not sure how important Reagan's policy liberalizations were. Papandreou's policy deliberalizations, meanwhile...
"Cochrane certainly believes strongly that Reagan's policies caused a lot of the growth in the 80s and 90s, but how about the equally impressive growth from 1950-1980?"
-Fossil fuels and last gasp of the industrial economy.
Also, as I pointed out in Cochrane's comments, doing a lot for the EDB rankings doesn't necessarily do anything to your economy. The biggest example of this is Georgia.
"A third problem is that the World Bank's "Ease of Doing Business" indicators are constructed from surveys, which have all kinds of huge methodological issues (which Cochrane himself has pointed out in other contexts). They are not objective measures of the ease of doing business."
-Actually, they're constructed from laws and experiments. The Enterprise Surveys don't quite measure the same indicators, and it's clear the laws are often very much inconsistent with the survey data. Either Scott A or Cowen once linked to a report showing no correlation on numerous indicators between the surveys and the EDB report.
Larry Summers :ReplyDelete
".... the increases in demand achieved through low rates in recent years have come from pulling demand forward in time, leading to lower levels of demand in the future."
That's the essence of conservative policy interventions since 1980 - let workers eat debt , borrow growth from the future - and since we've hit the ZLB , they're floundering. We're no longer on that comforting long-term trend line portrayed in Andolfatto's graph , nor is the global economy , and nobody with any sense thinks there's any prospect of returning to that trend line by using repeated doses of debt , as in the 80s and 2000s "booms":
This stuff isn't difficult.
But you are an idiot.Delete
The past includes policy variations which are, by the standards of today's debates, really huge. The top tax rate has varied wildly, for example. So if there is a magical policy that we're missing out on, it's probably something that everyone would consider completely insane.ReplyDelete
" A) substantially higher GDP than the U.S."ReplyDelete
Per capita, right?
Sinagpore is constantly used as an example of how efficient the U.S. could be if it lowered taxes. I think this is silly because Singapore is a very small country where 44% of their workers are foreign. They have a higher gpd per capita but I don't think it's because their populace is more productive. I think the reason their gdp per capita is higher is because they import lots of high productivity workers from all around Asia to produce things.ReplyDelete
If the U.S. government decided Software Engineers in Roswell New Mexico didn't have to pay income taxes the gdp per capita of Roswell would sky rocket but this doesn't teach us anything about successful policy for large.
Some evidence this is taking place in Singapore is that if you look at the price of software engineer salaries in Singapore they are $46,000 as opposed to $72,000 is the U.S.
I understand that Singapore is a tax haven and that when, for example, Microsoft sells software in Japan, the profit gets booked in Singapore.Delete
I'm sorry to say, your last paragraph is deeply annoying. Sure, if the only two policy positions are liberal and conservative, then Cochrane is conservative. But why should every possible ideology fit somewhere on that one dimensional line from left to right, I have no idea.ReplyDelete
If Cochrane's views are (much) closer to libertarian than conservative, and he identifies as a libertarian, AND he explicitly asks you not to describe him as a conservative, is it really so hard to comply? And isn't it misleading for people who don't know him and associate (say) pro-war policies with him because you described him as conservative?
Analogy: Mahesh is a Hindu. He has a blog where he writes about Hindu things. He also writes about how he disagrees with Christianity. You repeatedly describe him as an atheist. He asks you please not to call him an atheist because look at his blog, he is a Hindu. Your response: "Well atheist is a word the public understands. You write about how you disagree with Christians, and most people think atheists disagree with Christians, so there you go."
Agreed. It would be much more accurate to describe Cochrane as a libertarian than as a conservative. Clarity is good.Delete
The thing is that Cochrane might think "libertarian" is a badge of honor where I think it is a mark of shame.
"But I think that it's hard to look at this steady upward march and see anything other than the steady improvement of technology."ReplyDelete
I think that there is another contributing factor. Suppose that at 1900 we had a large gap between where we were at and where the technological frontier was. The suppose that the frontier moves slowly higher. In the meantime, as a result of accumulating savings we are able to close the gap between what is and what is possible. Now we get temporary rapid growth as we fill a backlog of opportunities - we would see real rates of return fall over long periods of time under this hypothesis.
Just saying that technological advance is not the only possible explanation.
Singapore GDP/capita was about $57k in '14, somewhat higher than the US but much lower than most major US metropolitan areas. http://www.bea.gov/newsreleases/regional/gdp_metro/gdp_metro_newsrelease.htmReplyDelete
I don't know Sing's PPP GDP, and generally I think PPP is useless and misleading and as a firm rule not at all understood by those who most often use it. But since Sing is actually more expensive than NYC I can't imagine how anyone could calculate PPP GDP per capita 60% higher than the US when GDP/capita is so close. There are many wacky flukes to PPP but I've never encountered one that outrageously wacky.
Instead of relying on Andolfatto's tweet, you should have gone to FRED.ReplyDelete
There is a huge change in the GDP/Cap slope at 1980. And in fact the slope has been in continuous decline in the post 1980 period.
Maybe the tweet graph obscures this because of the long time scale. But isn't that a bit dishonest? If I understand correctly, there is no reliable data prior to about 1930. Is this wrong?
Now here, I'm pretty sure that's nominal gdp (per capita) and the slow down after 1980's is just the lower inflation we've had once Volcker got done smacking it around.Delete
OK - Here is real GDP/Cap on a log scale.Delete
It's not as dramatic, but you can see the slope declining over time.
To me the slope looks the same (I guess you could test that). The differences are that 1) it's smoother overall with less fluctuations post-1980 (the Great Moderation) and 2) there's two "downward bumps" (1990 recession and the Great Recession) where the line shifts down and then resumes at the same trend.Delete
The second one is interesting because it means that the economy never makes up the ground lost during those recessions.
The peabrain thinks Cochrane's policy change preference is for distributional changes to the system. The "growth" policy preference is for increases income to the top of the income pyramid and less for the bottom.ReplyDelete
Noah, you've used a graph of nominal GDP per capita to prove technological advance. If you want to measure technological improvement, you need to use:ReplyDelete
1) Real GDP per capita
2) A measure of value other than the dollar
The method of measurement you've used is probably valid in small countries that are more specialized, but in the US, which still has a very dominant position in the world economy, this doesn't seem valid to me.
The value of the dollar in the US is effected by technology. GDP is denominated in dollars. There is not widely accepted way of measuring the effect of technology on quality of life. The dollar is not a valid measurement stick, nor is any other currency.
David, those are chained dollars, so it's real GDPDelete
I'm glad to see you revert to the mean after your last post.ReplyDelete