Tag Archives: growth

Reasons to be cheerful – even if American

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A few days ago I reviewed Josef Joffe’s new book, [amazon_link id=”0871404494″ target=”_blank” ]The Myth of America’s Decline[/amazon_link]. It’s partly a history of declinism in the US and partly an argument about the near future based on a compare and contrast between the US and (mainly) China. The new insight I took from it was about the way the threat of decline is used as a promise of political redemption in election campaigns.

In a mildly random way, I followed it up with Charles Kenny’s [amazon_link id=”0465064736″ target=”_blank” ]The Upside of Down: Why the Rise of the Rest is Good for the West[/amazon_link]. I thoroughly enjoyed his previous book, [amazon_link id=”0465020151″ target=”_blank” ]Getting Better[/amazon_link], a cheerful survey of the many ways and many places things (life expectancy, incomes, access to technologies, women’s emancipation….) have improved in many countries in recent decades. There is a similar chapter in the new book, and it made for equally uplifting reading.

[amazon_image id=”0465064736″ link=”true” target=”_blank” size=”medium” ]Upside of Down[/amazon_image]

One of the most telling sections looks at the Democratic Republic of Congo. As Kenny reminds us, it was the setting for Conrad’s [amazon_link id=”1853262404″ target=”_blank” ]Heart of Darkness[/amazon_link], having suffered the depredations of Belgian colonial rule (now there’s a real example of decline from imperial might!). DRC suffered through Mobutu’s rule and a decade-long civil war that killed millions of people. Rape was rife, HIV infection ran amok. This is not a good news story. Even in DRC, though, infant and maternal mortality rates of declined, as has the prevalence of HIV. Two-thirds of children have been vaccinated against diptheria, pertussis and tetanus, and about 40% with symptoms of malaria or pneumonia get medication. School enrollment has risen to match the 1980s level in Kuwait or Honduras. All this on public spending on health and education of $9 per person per year.

The rest of the book moves from the evidence of progress around the world to consider its implications, especially for “us” in the old west. Kenny wants to persuade others that the march of progress is a positive sum game, not least because of the self-fulfilling nature of global economic relations – the belief that flows of goods, capital and people are mutually beneficial is part of what makes them so. I for one agree that we need to think about the global economy in this dynamic, interlinked, increasing returns, non-linear manner, where the choice is broadly speaking between joint contraction and joint expansion over time. So it wasn’t hard for the book to persuade me that western economies will benefit from growth in emerging markets or BRICs, or of the “Folly of Fortress Thinking”, to cite one chapter title. No doubt other readers will be nore inclined to stick with the global race metaphor, where your country is a winner or loser.

I had the most doubts about the chapter on the environmental impact of global growth. The conclusion is upbeat: “With bold but plausible and affordable action, the planet can enjoy continued global growth, convergence in living standards, and two billion more people, all while preserving the global commons.” The chapter ticks off one by one potential environmental limits, and some are less worrying than others. The depletion of minerals for instance, or the scope for agricultural productivity gains and cutting meat consumption. But, thinking back to Mark Lynas’s [amazon_link id=”0007375220″ target=”_blank” ]The God Species[/amazon_link], I think Kenny skates over the question of water too quickly, and is just a bit too cheerful about climate change risks. Of all the environmental questions economics needs to address, the interaction between energy and growth is surely the key one. One aspect of this chapter I did enjoy, though, was the mischievous characterisation of environmentalists: “Once you’ve convinced yourself that the world is on an inevitable course to disaster if … India builds another car factory, then the only logical thing to do … is to sit back, put your TOMS-shod feet up on the couch, and drink microbrewed herbal tea until civilisation collapses.” Fun – but maybe too dismissive of some genuine concern.

Will either this book or Joffe’s persuade Americans and other westerners not to be pessimistic? Doubtful. The emotional power of the narrative, and perhaps its political usefulness as Joffe argues, will sustain the declinists. I’m sure people will read [amazon_link id=”0465064736″ target=”_blank” ]The Upside of Down[/amazon_link] but often to argue with it – the narrative of Anglo-Saxon cheerfulness when the dynamism in the world has moved to Asia has an uphill struggle.

 

 

 

Life satisfaction, GDP and sense

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Normally, I’m a sunny-natured optimist but every so often I get grumpy. A recent post on Vox made me grumpy – it’s about life satisfaction and GDP. At first I thought I’d ignore it. But this morning I was dipping into A Century in Books, the little volume from 2005 celebrating the centenary of Princeton University Press, and it fell open at the page on Clive Granger’s 1964 book, Spectral Analysis of Economic Time Series. My PhD used a lot of time series econometrics – Mark Watson, now at Princeton, was one of my supervisors. I did my PhD so long ago that it’s now Once Upon A Time, and it is simply depressing that a generation after time series econometrics matured so many economists fail to think about the statistical properties of different kinds of time series data –  like GDP and reported life satisfaction.

(Actually – this is a rant for another time – it’s depressing that so many economists aren’t interested in data and statistics at all, but just expect to be able to download data files and run them through packages that churn out impressive-looking test statistics, without ever pausing to think about how the statistics are constructed or what the regressions might really mean. See Deirdre McCloskey eg [amazon_link id=”1843761742″ target=”_blank” ]Measurement and Meaning in Economics[/amazon_link].)

One of the first things you learn about in time series econometrics is the importance of understanding whether your data have the property of stationarity or not. (It’s on page 3 of my antique textbook, Granger and Newbold’s [amazon_link id=”0199587159″ target=”_blank” ]Forecasting Economic Time Series [/amazon_link] and no doubt equally early in [amazon_link id=”0521634806″ target=”_blank” ]Hendry and Clements[/amazon_link].) In other words, does the series drift over time far away from where it started? If so, it is non-stationary. GDP is like this; it is an analytic construct with no theoretical upper limit. Life satisfaction, however, is a stationary time series – in the World Values Survey it is measured on a scale of 1 to 10 – so it can never go above 10 over time.

So you don’t need to do any fancy econometrics at all to know that the correlation between GDP and life satisfaction over time is zero. You just need to plot the two separately on a chart over time. One is an almost flat line, one goes up a lot.

Or just engage the brain a bit. Over the course of many decades, average height in most developed countries has increased, thanks to better nutrition, healthier mothers, public health measures etc, all the fruit of economic prosperity. There is certainly a link between GDP and height – but you would not expect average height to have increased in proportion with GDP or we’d all be many metres tall; our average height in the UK would have roughly trebled since 1955. Life satisfaction is similarly an organic kind of characteristic and there is no reason at all to expect it to increase proportionately with GDP. That does no mean economic prosperity has no bearing on happiness.

Think of it another way. There has been next to no growth – indeed, falling GDP in some cases – since 2008. Has this really not diminished life satisfaction?

The Vox column gives the appearance of addressing some recent work challenging the idea of no links between GDP and life satisfaction – this by Stevenson and Wolfers is the best known but there are several papers – but it misrepresents them. The Vox authors write: “This last interpretation [ie the no-link interpretation] has been questioned by Deaton (2008) and Stevenson and Wolfers (2008), who claim that there is a positive relation between GDP and life satisfaction in developed countries.” In fact, this is exactly what they do not claim; they agree there is none. However, they find strong evidence for a positive relation between life satisfaction and GDP growth. GDP growth is a stationary time series (ranging between say -10 and +10 percentage points), so this positive correlation can be meaningful.

The psychology of adaptation might well help explain why the level of GDP has no relation to life satisfaction, which could be reflected in the statistical properties. There are equally strong psychological reasons for expecting the change in GDP to be positively associated with life satisfaction.

As Hobbes put it in [amazon_link id=”0199537283″ target=”_blank” ]Leviathan[/amazon_link]: “There is no such Finis Ultimus, no summum bonum as is spoken of in the books of the old Moral Philosophers. Nor can a Man any more live, whose desires are at an end, than he whose senses and Imaginations are at a stand. Felicity is a continual progress of the desire from one object to another.”

GDP is often thought of as just more of the same stuff, and of course how could having one more car or handbag or house make you happier once you already have a certain number? But this is to misunderstand fundamentally what GDP growth indicates (see my forthcoming [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link]) – which is in fact variety and innovation, new services and goods, from new medicines to graphene, or the internet, that speak to the fundamental human curiosity identified by the Enlightenment philosophers.

The challenge of doing what’s obvious

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Naturally I was very interested when the LSE’s Growth Commission report on the UK economy was published back in September. I’ve just looked through the book of the report, [amazon_link id=”1909890022″ target=”_blank” ]Investing for Prosperity: A Manifesto for Growth[/amazon_link], edited by Tim Besley and John Van Reenen. It’s a very impressive publication, summing up concisely a vast amount of evidence on the long-term weaknesses of the UK economy.

[amazon_image id=”1909890022″ link=”true” target=”_blank” size=”medium” ]Investing for Prosperity: A Manifesto for Growth[/amazon_image]

As the preface underlines, the report is not about the demand side issues and short-term growth, but rather about the supply side and the UK’s long term potential. The problems are hardly unknown. The individual chapters cover three main areas: infrastructure, skills, and private investment and innovation. The policy recommendations correspond to these, including a shopping list of proposals to improve primary and secondary schooling; an independent infrastructure infrastructure – a strategy board, a planning commission to deliver the strategy and a bank to finance it; and measures to support investment in innovation by the private sector centred on increasing competition in the banking sector.The chapters give a very useful summary of the state of the evidence in each of these areas, very handy for students – there are terrific lists of references too.

The recommendations are all deeply sensible. However, I think the book serves to underline two problems with the task the Growth Commission set itself. One is that any policy measures to address an area of concern are either rather motherhood and apple pie – ‘improve standards of primary education’ – or extremely detailed, because once you get down to thinking about actual measures to implement, they have to be. The report is surely right on the big picture, but patchier on the detail – inevitably in a 300 page book. The infrastructure sections are the strongest, the education ones the least persuasive – but maybe that’s because I’ve been closely involved in primary education as a governor helping turn around a school.

The other problem is that the book does not, for me, meet the challenge it describes in the preface: ‘If your ideas are so good, why haven’t they already been done?’ It is excellent on the economic analysts but doesn’t really tackle the difficulties of political implementation of “structural reforms”.

Take transport infrastructure. We surely know the London area needs more airport capacity; but a political decision on location is needed. However, early on the current government kicked this can down the road beyond the next election to wait for a later government. Yet any decision taken now would be much better than further delay – so argues Bridget Rosewell persuasively in her book [amazon_link id=”1907994149″ target=”_blank” ]Reinventing London[/amazon_link], and she writes as a firm supporter of a new airport to the east of London.

[amazon_image id=”1907994149″ link=”true” target=”_blank” size=”medium” ]Reinventing London (Perspectives)[/amazon_image]

Or take HS2. [amazon_link id=”1909890022″ target=”_blank” ]Investing for Prosperity[/amazon_link] does not have a view on this, perhaps because economists are divided on this issue as they are not on airport capacity. It’s not at all clear how an Infrastructure Strategy Board would navigate the politics of this project, although it’s plain as daylight that the amount of investment in infrastructure in general has been too low over a long period.

Still, it’s not the job of economists to deliver the politics, but rather to point out the uncomfortable realities. I ended the report feeling rather optimistic because, as it argues, the UK has a lot of assets that will support a stronger potential growth rate and future prosperity. The Commission argues for measuring progress in terms of median income rather than GDP per capita, to take account of the distribution of the gains, which seems entirely sensible. The economy’s problems may be long-standing but the counterpart of that is that we know what to concentrate our reform energies on.

A hawk’s eye perspective on growth

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The UK economy seems to be continuing its slow recovery – today brought figures showing a modest rise in investment in Q3 after the previous quarter’s decline, although consumer spending is a bigger contributor to GDP growth, and the housing market seems – as ever – to be one of the main engines of growth. However, the Bank of England cast doubt on the quality of the investment figures, which have been volatile, and it would be good to see it expanding more consistently.

The uncertainties about the outlook make this a good time for us to have published in the Perspectives series Andrew Sentance’s Rediscovering Growth: After the Crisis.*

[amazon_image id=”1907994157″ link=”true” target=”_blank” size=”medium” ]Rediscovering Growth: After the Crisis (Perspectives)[/amazon_image]

Andrew has blogged about the book himself – here at The Hawk Talks and here on some of the implications of the ‘new normal’ of slow growth for airports at (pdf) PWC. So I won’t try to sum up his views myself. Here’s what he says are not the reasons for a lacklustre outlook – read the book to discover his explanation!

There are many misunderstandings about the reasons for disappointing growth. It is not due to a deflationary global economy, as in the 1930s. Emerging market economies have not had difficulty finding growth opportunities – and their performance has been strong both before and since the crisis. Inflation has been a bigger problem than deflation for many economies around the world since the financial crisis – including the UK. Nor is weak growth the product of restrictive economic policies – fiscal austerity or a lack of monetary stimulus. Across most western economies, government spending restraint and tax increases have not been severe, and monetary policy remains extremely loose.

*Amazon has sold out currently and the e-book will be out around the end of this week – meanwhile, order direct with free UK P&P from the LPP website, http://londonpublishingpartnership.co.uk/rediscovering-growth-after-the-crisis/

Cities triumphant and not so triumphant

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One of the highlights for me of the European Economic Association/Econometric Society meetings (#eeaesem2013) that have just finished in Gothenburg was Ed Glaeser’s Marshall Lecture. All kinds of fascinating ideas were slotted into the one-hour lecture, whose theme was the interaction between the three pillars of urban economies: human interactions, engineering (the roads, buildings, cables etc), and public policy. The talk moved from the developed world to the developing world context, starting with a survey of the various kinds of evidence that population density drives productivity in cities but asking what ‘engineering’ and especially what public policy and institutional framework is necessary to enable the higher productivity and growth.

The evidence on growth happening in cities is strong, albeit with some inevitable questions about causality. For example, there is an earning premium for population density in US cities, and there has been faster house price growth in more densely populated cities. Prof Glaeser pointed out that older cities had formed because of a production advantage such as a good harbour but it is consumption advantages that matter now, as well as (in the US but not other countries) a nice climate. The people factor, the retention and increase in human capital, accounts for the contrast between the revival of Boston and New York since the 1970s and the continuing decline of Detroit and Cleveland. As an example of the importance of productivity arising from  face-to-face contact, he cited the way Mayor Bloomberg took the walls out of City Hall, so it looked like a trading floor: “Knowledge is more important than space.”

The human capital factor is even more important in helping explain which developing world cities are growing faster, along with the existence of an entrepreneurial industrial structure. We always think about the slums, but, as Prof Glaeser pointed out, poor people move to cities – it is not the cities that make them poor. Indeed, real incomes, taking account of the costs and disamenities of urban life, broadly equalize across urban and rural areas; in the 1970s people used to get ‘danger money’ to live in New York to compensate for the crime and grime. The mega-cities in Asia and Latin America and Africa are reaching much larger populations at given income levels than was historically the norm because agricultural productivity is higher than in the past and transportation costs lower. So it is much cheaper to get food into a large population than would previously have been the case. Hence today’s new cities are larger and fewer than the smaller and more widely dispersed cities in Europe.

Many people regard the growth of huge developing country cities, with sprawling slums and extreme poverty as an undesirable phenomenon – but the fact that the countries’ growth must be driven by cities makes this question of whether they are a good thing or not a rather meaningless question. The meaningful question is how can they be best run? For this, city governments need money, technology and governance to tackle what Prof Glaeser called the “demons of density”. He argued that it is too hard to determine the ‘optimal’ size of a city because there are many trade-offs. The final part of the lecture was a high-speed exposition of some models of some of these trade-offs, focusing on some of the institutional and political problems such as how law enforcement needs to change with city size and density – the costs of disorder increasing with city size, but the challenge of bringing order increasing too. Providing clean water is another vital challenge. So too is creating the framework for efficient land use – and the combination of business district skyscrapers and huge low-rise slums indicates that most developing world cities fail on this set of policies.

Many of us in the audience found the models sped past too quickly, and I’ll look forward to reading about them. Much of the contextual background can be found in Prof Glaeser’s terrific book, [amazon_link id=”0330458078″ target=”_blank” ]Triumph of the City[/amazon_link]. The bottom line of the lecture is that it is important to understand better the policy challenges and trade-offs in city politics, because all the vital national economic institutions are shaped in cities – the middle classes form there, revolutions start there, and, as Professor Glaeser noted, “There’s no such thing as an arch-libertarian in a city.” Economists need to understand better the nexus of urban policy and institutions, what it is that shapes the human interactions, the source of productivity and growth (or not).

[amazon_image id=”0330458078″ link=”true” target=”_blank” size=”medium” ]Triumph of the City[/amazon_image]