Tag Archives: growth

What is different, and what isn’t

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I’ve been a bit mystified by Excel-gate (see this good, balanced summary by Gavyn Davies). Bravo for Thomas Herndon, the graduate student who uncovered the error in the now-notorious paper by Carmen Reinhardt and Kenneth Rogoff; his job prospects will be rightly enhanced by this episode.

But the glee with which anti-Austerians pounced on this episode to ‘prove’ that austerity doesn’t work seems to involve an assumption that the original Reinhardt-Rogoff paper of 2010 ‘proved’ anything to the contrary in the first place. There are lots of papers about the impact of debt/GDP ratios on growth, and they demonstrate all kinds of different things – see for example this BIS paper by Cecchetti and others, or this IMF paper (pdf) from last year on the Caribbean economies, or this Fed paper published in December (pdf), or this much-cited 2010 paper by Koehler-Geib and others, or for that matter the new paper debunking Reinhardt and Rogoff’s 90% as it too finds the same correlation albeit with different numbers.

Well, you get the idea. Taking these together, we ‘know’ there might be a threshold for sovereign debt, but it varies over time and across countries, it’s a correlation whose causal direction and mechanism is unclear, and there isn’t enough data for any estimates to be robust (because history only runs once). All of which only goes to underline how little is known about the macroeconomy, not to mention how hard any macroeconomists and their camp followers find it to resist claiming certainty where there is none.

No doubt Reinhardt and Rogoff were tempted into over-claiming for their work by the politicisation of the debt threshold issue. But the underlying message of their big 2009 book, This Time is Different, is unscathed: unlike the later paper, it makes it absolutely clear that debt ‘thresholds’ above which increasing borrowing is correlated with lower growth vary widely in different countries and at different times (no magic 90% here); and that the historical record indicates it generally takes a long time for growth to recover after banking crises involving debt overhangs.

Demography as destiny?

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There was an intriguing short letter in the Financial Times this morning, urging that more attention be paid to the problem of a low birth rate and the adverse demography of an ageing society.  The writer evidently believes the welfare system should be encouraging people to have more children, rather than penalising them for large families. He cites a 1947 book, The Population of Britain by Eva Hubback.

Looking her up, Wikpipedia tells me Eva Hubback was a suffragist, head of economics at Newnham and Girton during the First World War, and advocate of birth control and eugenics. However, her book clearly advocates the national benefits of population growth. This is an intriguing combination of beliefs, very much of its time.

It has long seemed to me that economics doesn’t pay enough attention to demography. Obviously, people studying pensions and the fiscal implications do put the ageing trend at centre stage, and relative demographic trends crop up in work on international migration. But demography is surely fundamental for growth as well. One question is whether an older (on average) population will be as productive and innovative as a younger one. And if so, what does this imply for, say, predictions of Chinese economic power?

Another is simply the numbers game. Endogenous growth models imply that the growth rate is increasing in population, at an accelerating rate because of their increasing returns feature. Ideas live in people’s heads, and the combinatorial arithmetic makes more people generate many more ideas. This is something modern economists (although clearly not Eva Hubback) seem to gloss over with mild embarrassment.

The best book I’ve read including demography, although in a broader context than economic growth, was Emmanuel Todd’s 2001 After the Empire. He was looking ahead to the multipolar world. But I’d be interested to hear other recommendations.

Gross Domestic Problem

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Here’s a book title that wears its heart on its cover. Lorenzo Fioramonti’s Gross Domestic Problem: the politics behind the world’s most powerful number gives you the essence of the argument upfront. If I had to sum it up as an elevator pitch, it would be Tim Jackson’s Prosperity Without Growth view (that economic growth is environmentally unaffordable and unnecessary for welfare) meets the left-wing belief that the military-industrial complex is in control of the economy for its own purposes. I don’t agree with either, although my disagreement is sympathetic.

Start with growth and the environmental costs. It is surely obvious to all but a small minority that measuring better the impact of economic activity on the environment is vital. My preference is to monitor the depletion of natural assets of all kinds, a balance sheet approach automatically injecting the longer-term perspective necessary for sustainability – there is much on this in The Economics of Enough. But any kind of environmental dashboard would be welcome. What drives me to distraction is the persistent belief that we should just stop economic growth because it’s not making us happy. This is simply incorrect – this book cites no research on the question later than 1997. Subsequent research has clearly established a strong link between GDP per capita growth and measured ‘happiness’ – see for example this recent paper on happiness and GDP, and the references in it. Besides, just think – no growth means no innovation, no redistribution (it has never happened outside a rapidly growing economy), rising unemployment (unless companies are banned from improving their productivity ever). The misguided belief that growth won’t make people happier is dangerous because it will prevent any practical politics of sustainability.

On the book’s political arguments, it’s obvious post-crisis that conventional, mainstream economics has been wrong to ignore the politics of finance and the lobbying power of the banking industry. Brett Christophers’ new book, Banking Across Borders, is a fascinating historical account of how that power developed – including its use of the mantra of GDP – in the post-war era. By contrast, Gross Domestic Problem offers some assertions: “GDP served the interests of political and economic elites for several decades”  – OK; “European member states came to accept that only if GDP went up could they afford to pay for schools, hospitals and social security” – er, the Stability and Growth Pact to which this refers aimed to cap government deficits, but raising taxes to pay for public services was never ruled out, certainly not by reference to GDP; “Between 1948 and 1989 American economic growth was largely dependent on military spending” – really? I agree the military budget is high but is it really true that every innovation in the post-war period had no impact on growth? Utterly implausible.

One particular confusion that many commentators on GDP make is muddling up this measure of economic activity with the measurement of economic welfare. Economics has always been clear about the distinction. Simon Kuznets, one of the creators of GDP and the national accounts, advocated a measure of welfare instead but lost the argument – this book presents his work as criticism of the definition of GDP, but the quotes here date from a 1937 book in which he was pitching for a welfare approach instead. The production demands of the war – when the military-industrial complex was indeed powerful – swung it in favour of GDP instead.

I do think these seemingly dry questions of measurement are important, and that measurement choices affect the way people behave. However, Gross Domestic Problem is an unsubtle and confused take on the question of GDP. GDP is one measure of economic growth – there could be others, and economic growth is highly desirable, in my view, subject to the huge challenge of moving towards sustainability. Measuring the economy’s size differs from measuring society’s welfare, but they are linked. It’s high time political economy was revived, but understanding how elites acquire economic power deserves some serious social science research rather than conventional assertions.

 

The idea of progress

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A while ago I started reading Abundance: Why the Future is Better than You Think, by Peter Diamandis and Steven Kotler, only to put it down part way through. It’s very readable but has a rather breathless tone which put me off. It also covers the same kind of territory of techno-optimism as the excellent An Optimist’s Tour of the Future by Mark Stevenson and The Rational Optimist: How Prosperity Evolves by Matt Ridley – even some of the examples overlap. And it has some of the environmental optimist flavour of Mark Lynas’s The God Species: How the Planet Can Survive the Age of Humans. Having said this, I finished Abundance yesterday and did enjoy it.

It is important to point out that for all the well-founded economic and environmental and political gloom in so many countries at present, there has been huge progress over our lifetimes in things that matter to us, from improved longevity and health to smartphones and low-energy lightbulbs. And that there is at present an amazing array of technological discoveries close to commercial potential – all of the innovations covered in these titles in what could be described as the techno-optimism genre.

It’s all the more important as there’s a countervailing techno-pessimism genre, including Brynjolfsson and McAfee’s Race Against the Machine arguing that innovation is making people redundant, a theme picked up by Paul Krugman in his column Rise of the Robots this week, with as a side-branch Robert Gordon asserting that innovation-driven growth is over anyway.

Why is it important to be optimistic? Because expectations about the future shape today’s decisions. Paul Krugman himself demonstrated this in a marvellous but little known 1991 QJE paper on endogenous growth theory, History Versus Expectations (pdf), showing that growth outcomes depend on expectations of a promising future outweighing the disappointments of the past.

History casts a long shadow unless the future shines a bright light. Progress only occurs when people believe in the idea of progress.

Having said that, the techno-optimists can lack important nuance. Abundance is a good example of that shortcoming. The authors allow no room for doubt, and give no space to questions such as how the investment required for the innovations they describe will be financed, how innovators will succeed when incumbents have so many relevant markets sown up, where the complementary infrastructure will come from, and how politics will navigate the sharing of costs and benefits. So I prefer (not surprisingly) my own (2001) formulation of the ‘Paradoxes of Prosperity‘.

I don’t want to sound too down on Abundance just because I happen to have read some other similar books. It has loads of good nuggets of information and soundbites. For example:

“When seen through the lens of technology, few resources are truly scarce; they’s mainly inaccessible.”

“Human beings are designed to be local optimists and global pessimists.” (We are more optimistic about thing we think we can control, think we’re all more intelligent and better drivers than average etc. – although global pessimism is what helps impending disasters become self-averting. Was there a genuine Y2K problem or not?)

I was interested to learn that India has switched from being a major importer to a major exporter of cotton thanks to GM varieties.

I also really liked, for personal reasons, Bill Joy being quoted on the ‘dematerialisation’ being brought about by modern technologies. In 1996 I published The Weightless World (pdf), which used the fact that the economy of 1990 literally had no greater physical mass than the economy of 1980, thanks to minaturisation and the use of new materials and the switch towards services. Bill Joy has updated this by pointing out that one smartphone is now a phone, camera, TV screen, radio, web browser, tape recorder, range of books etc.

So, if you know someone who’s feeling – not surprisingly – pessimistic about the state of the world, you should give them one of the techno-optimism books as a seasonal gift. Cheering up the population one person at a time until we collectively believe in the possibility of progress again is an important civic duty.

Technology, people and place

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Diego Comin, Mikhail Dmitriev, Esteban Rossi-Hansberg have written a fascinating summary of their work on the diffusion of technology, published as a CEPR working paper. The headline is that distance matters, and that the diffusion process follows the same kind of pattern seen in the transmission of epidemics.

The authors note that their data (covering a large number of technologies) strongly confirms the  pattern of east-to-west diffusion of technology described by Jared Diamond in his fantastic book Guns, Germs and Steel. The argument there was that geographical latitude explained the success of certain important agricultural innovations. So how could it also matter for the spread of, say, ATMs, cellphones or TVs? “Distance is a significantly more important impediment across parallels than across meridians.” The VoxEU authors suggest this is because technologies are spread – like diseases – by people, and the patterns of social contact for reasons of history and geography are more prevalent east-to-west than north-to-south.

There is a forward-looking aspect to this, of course. Trends in the movement of people do change over time, and have changed with globalisation. More significant, anybody thinking about long-term growth needs to think about the adoption of ideas. Most new ideas will come from outside the borders of one country, attached to people from elsewhere. One cannot think about innovation (among other things) without thinking about immigration – as Ian Goldin, Geoffrey Cameron and Meera Balarajan argued in their book Exceptional People: How Migration Shaped Our World and Will Define Our Future.