Category: Economic Growth

“A Few Really Good Artisanal Cheese Shops Is No Substitute for a Strong School System”

(p. 836) Moretti’s writing on the “creative class” takes issue with policies associated with Richard Florida, who has exerted a considerable influence on local policymakers worldwide. Moretti uses the example of Berlin, which is a cool place full of creative types but still isn’t much of an economic powerhouse, to make the case against Florida’s recommendations.
. . .
A problem exists if city governments start thinking that their main job is to be hip rather than competent. Having a few really good artisanal cheese shops is no substitute for a strong school system. Local leaders would do well to remember that an externality-creating skilled resident is as likely to be a forty-two-year-old mother who works in (p. 837) a lab as a twenty-five-year-old looking for a good time. The forty-two-year-old’s tastes in local amenities are likely to be quite different from those of the twenty-five-year-old. If Moretti’s caution against creative class policies achieves that end, then it will have done something quite positive.

For the full review, see:
Glaeser, Edward. “A Review of Enrico Moretti’s the New Geography of Jobs.” Journal of Economic Literature 51, no. 3 (Sept. 2013): 825-37.
(Note: ellipsis added.)

The book under review is:
Moretti, Enrico. The New Geography of Jobs. New York: Houghton Mifflin Harcourt Publishing Co., 2012.

McCloskey’s “Great Fact” of “the Ice-Hockey Stick”

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Source of image: http://www.bombayharbor.com/productImage/Ice_Hockey_Stick/Ice_Hockey_Stick.jpg

(p. 2) Economic history has looked like an ice-hockey stick lying on the ground. It had a long, long horizontal handle at $3 a day extending through the two-hundred-thousand-year history of Homo sapiens to 1800, with little bumps upward on the handle in ancient Rome and the early medieval Arab world and high medieval Europe, with regressions to $3 afterward–then a wholly unexpected blade, leaping up in the last two out of the two thousand centuries, to $30 a day and in many places well beyond.
. . .
(p. 48) The heart of the matter is sixteen. Real income per head nowadays exceeds that around 1700 or 1800 in, say, Britain and in other countries that have experienced modern economic growth by such a large factor as sixteen, at least. You, oh average participant in the British economy, go through at least sixteen times more food and clothing and housing and education in a day than an ancestor of yours did two or three centuries ago. Not sixteen percent more, but sixteen multiplied by the old standard of living. You in the American or the South Korean economy, compared to the wretchedness of former Smiths in 1653 or Kims in 1953, have done even better. And if such novelties as jet travel and vitamin pills and instant messaging are accounted at their proper value, the factor of material improvement climbs even higher than sixteen–to eighteen, or thirty, or far beyond. No previous episode of enrichment for the average person approaches it, not the China of the Song Dynasty or the Egypt of the New Kingdom, not the glory of Greece or the grandeur of Rome.
No competent economist, regardless of her politics, denies the Great Fact.

Source:
McCloskey, Deirdre N. Bourgeois Dignity: Why Economics Can’t Explain the Modern World. Chicago: University of Chicago Press, 2010.
(Note: ellipsis added.)

Countries that Protect Jobs Stifle Economic Growth

(p. 240) In an “Interview” conducted by Jessie Romero, John Haltiwanger discusses changing patterns of job creation and destruction: “But now we’re seeing a decline in the entry rate and a pretty stark decline in the share of young businesses. . . . But it’s also important to recognize that the decline in the share of young firms has occurred because the impact of entry is not just at the point of entry, it’s also over the next five or 10 years. A wave of entrants come in, and some of them grow very rapidly, and some of them fail. That dynamic has slowed down. . . . If you look at young small businesses, or just young businesses period, the 90th percentile growth rate is incredibly high. Young businesses not only are volatile, but their growth rates also are tremendously skewed. It’s rare to have a young business take off, but those that do add lots of jobs and contribute a lot to productivity growth. We have found that startups together with high-growth firms, which are disproportionately young, account for roughly 70 percent of overall job creation in the United States. . . . “I think the evidence is overwhelming that countries have tried to stifle the [job] destruction process and this has caused problems. I’m hardly a fan of job destruction per se, but making it difficult for firms to contract, through restricting shutdowns, bankruptcies, layoffs, etc., can have adverse consequences. The reason is that there’s so much heterogeneity in productivity across businesses. So if you stifle that destruction margin, you’re going to keep lots of low-productivity businesses in existence, and that could lead to a sluggish economy. I just don’t think we have any choice in a modern market economy but to allow for that reallocation to go on. Of course, what you want is an environment where not only is there a lot of job destruction, but also a lot of job creation, so that when workers lose their jobs they either immediately transit to another job or their unemployment duration is low.” Econ Focus, Federal Reserve Bank of Richmond, Second Quarter 2013, pp. 30-34. http://www.richmondfed.org/publications/research/econ_focus/2013/q2/pdf/interview.pdf.

Source:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 28, no. 1 (Winter 2014): 235-42.
(Note: italics, ellipses, and bracketed word, in original.)

Raghuram Rajan: “Never in the Field of Economic Policy Has So Much Been Spent, with So Little Evidence, by So Few”

(p. 213) Raghuram Rajan delivered the Andrew Crockett Memorial Lecture at the Bank of International Settlements, titled “A Step in the Dark: Unconventional Monetary Policy after the Crisis.” “Two competing narratives of the sources of the crisis, and attendant remedies, are emerging. The first, and the better known diagnosis, is that demand has collapsed because of the high debt build up prior to the crisis. . . . But there is another narrative. And that is that the fundamental growth capacity in industrial countries has been shifting down for decades now, masked for a while by debt-fueled demand. More such demand, or asking for reckless spending from emerging markets, will not put us back on a sustainable path to growth. Instead, industrial democracies need to improve the environment for growth. The first narrative is the standard Keynesian one, modified for a debt crisis. It is the one (p. 214) most government officials and central bankers, as well as Wall Street economists, subscribe to, and needs little elaboration. The second narrative, in my view, offers a deeper and more persuasive view of the blight that afflicts our times.” Rajan argues that central banks took the right actions during the financial crisis, but that the wisdom of the ultra-low interest rate policies in the aftermath of the crisis are not yet clear. “Churchill could well have said on the subject of unconventional monetary policy, ‘Never in the field of economic policy has so much been spent, with so little evidence, by so few’. Unconventional monetary policy has truly been a step in the dark.” June 23, 2013, at http://www.bis.org/events/agm2013/sp130623.htm.

Source:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 27, no. 4 (Fall 2013): 211-18.
(Note: ellipsis in original.)

Natural Resources Increase through Innovation

SolarPanelsDunhuangChina2014-05-31.jpg “A worker inspects solar panels in Dunhuang, China. We have an estimated supply of one million years of tellurium, a rare element used in some panels.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. C1) How many times have you heard that we humans are “using up” the world’s resources, “running out” of oil, “reaching the limits” of the atmosphere’s capacity to cope with pollution or “approaching the carrying capacity” of the land’s ability to support a greater population? The assumption behind all such statements is that there is a fixed amount of stuff–metals, oil, clean air, land–and that we risk exhausting it through our consumption.
. . .
But here’s a peculiar feature of human history: We burst through such limits again and again. After all, as a Saudi oil minister once said, the Stone Age didn’t end for lack of stone.
. . .
Economists call the same phenomenon innovation. What frustrates them about ecologists is the latter’s tendency to think in terms of static limits. Ecologists can’t seem to see that when whale oil starts to run out, petroleum is discovered, or that when farm yields flatten, fertilizer comes along, or that when glass fiber is invented, demand for copper falls.
. . .
(p. C2) . . ., Mr. Ausubel, together with his colleagues Iddo Wernick and Paul Waggoner, came to the startling conclusion that, even with generous assumptions about population growth and growing affluence leading to greater demand for meat and other luxuries, and with ungenerous assumptions about future global yield improvements, we will need less farmland in 2050 than we needed in 2000. (So long, that is, as we don’t grow more biofuels on land that could be growing food.)
. . .
The economist and metals dealer Tim Worstall gives the example of tellurium, a key ingredient of some kinds of solar panels. Tellurium is one of the rarest elements in the Earth’s crust–one atom per billion. Will it soon run out? Mr. Worstall estimates that there are 120 million tons of it, or a million years’ supply altogether.
. . .
Part of the problem is that the word “consumption” means different things to the two tribes. Ecologists use it to mean “the act of using up a resource”; economists mean “the purchase of goods and services by the public” (both definitions taken from the Oxford dictionary).
But in what sense is water, tellurium or phosphorus “used up” when products made with them are bought by the public? They still exist in the objects themselves or in the environment. Water returns to the environment through sewage and can be reused. Phosphorus gets recycled through compost. Tellurium is in solar panels, which can be recycled. As the economist Thomas Sowell wrote in his 1980 book “Knowledge and Decisions,” “Although we speak loosely of ‘production,’ man neither creates nor destroys matter, but only transforms it.”
. . .
If I could have one wish for the Earth’s environment, it would be to bring together the two tribes–to convene a grand powwow of ecologists and economists. I would pose them this simple question and not let them leave the room until they had answered it: How can innovation improve the environment?

For the full commentary, see:
MATT RIDLEY. “The Scarcity Fallacy; Ecologists worry that the world’s resources come in fixed amounts that will run out, but we have broken through such limits again and again.” The Wall Street Journal (Sat., April 26, 2014): C1-C2.
(Note: ellipses added.)
(Note: the online version of the commentary has the date April 25, 2014, and has the title “The World’s Resources Aren’t Running Out; Ecologists worry that the world’s resources come in fixed amounts that will run out, but we have broken through such limits again and again.”)

G.D.P. Is a Useful, But Biased Downward, Measure of Growth

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Source of book image: online version of the NYT review quoted and cited below.

(p. 6) Dr. Coyle concludes that while imperfect, the G.D.P. is good enough as a measure of how fast the economy is growing and better than any alternative. It is closely correlated with things that do contribute to happiness. (Nobody is happy in a recession.)

“We should not be in a rush to ditch G.D.P.,” Dr. Coyle writes. “Yet it is a measure of the economy best suited to an earlier era.”
For one thing, it fails to count the value of the staggering growth in consumer choice. Where once we had three television networks, we now have 1,000 channels; greater choice equals greater freedom, she declares. It does poorly in measuring the Internet economy, in which so many benefits — like Google searches — are offered free. It badly lags behind the headlong pace of innovation and creativity. It struggles with the true value of a host of products or services that didn’t exist before. To the degree that it misses those new benefits to consumers, it understates the pace of economic growth.

For the full review, see:
FRED ANDREWS. “Off the Shelf; An Economic Gauge, Imperfect but Vital.” The New York Times, SundayBusiness Section (Sun., APRIL 6, 2014): 6.
(Note: ellipsis added.)
(Note: the online version of the review has the date APRIL 5, 2014.)

The book under review is:
Coyle, Diane. GDP: A Brief but Affectionate History. Princeton, New Jersey: Princeton University Press, 2014.

Gilder’s Information Theory of Capitalism Will Boost Morale of Innovative Entrepreneurs

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Source of book image: online version of the WSJ review quoted and cited below.

(p. A13) Individuals like Ford and Jobs are key figures in the economic paradigm that George Gilder lays out in “Knowledge and Power.” He calls for an “information theory of capitalism” in which the economy is driven by a dynamic marketplace, with information widely (and freely) distributed. The most important feature of such an economy, Mr. Gilder writes, is the overthrow of “equilibrium,” and the most important actors are inventors and entrepreneurs whose breakthrough ideas are responsible for “everything useful or interesting” in commercial life.
. . .
Aspiring owners shouldn’t look to “Knowledge and Power” for practical advice on starting a company, but Mr. Gilder’s case for the central role of entrepreneurship might boost their morale. Certainly his argument could not be more timely. Census Bureau data show that startups were responsible for nearly all new job creation from 1996 to 2009. Yet entrepreneurship itself (as measured by new business formation) has been stagnant for about two decades. Thus the important question for America’s future may well be, as Mr. Gilder says, “how we treat our entrepreneurs.” He persuasively shows that creating a more supportive climate for entrepreneurs–by clearing away burdensome regulations and freeing information from its current imprisonment–will result in a more prosperous and vigorous society, creating not only more jobs but more Jobs.

For the full review, see:
MATTHEW REES. “BOOKSHELF; The Real Market-Maters; Economists as far back as Adam Smith have undervalued entrepreneurs–the restless, inventive, job-creating engines of the economy.” The Wall Street Journal (Tues., March 18, 2014): A13.
(Note: ellipsis added.)
(Note: the online version of the review has the date March 17, 2014, and has the title “BOOKSHELF; Book Review: ‘Knowledge and Power’ by George Gilder
Economists as far back as Adam Smith have undervalued entrepreneurs–the restless, inventive, job-creating engines of the economy.”)

The book under review is:
Gilder, George. Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World. Washington, D.C.: Regnery Publishing, Inc., 2013.

One Way to Appreciate All We Take for Granted

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Source of book image: http://knowledge.dsruptiv.net/en-gb/wp-content/uploads/2013/12/The-Knowledge-Full-Cover_lowres.jpg

(p. 8) Over the past generation or two we’ve gone from being producers and tinkerers to consumers. As a result, I think we feel a sense of disconnect between our modern existence and the underlying processes that support our lives. Who has any real understanding of where their last meal came from or how the objects in their pockets were dug out of the earth and transformed into useful materials? What would we do if, in some science-fiction scenario, a global catastrophe collapsed civilization and we were members of a small society of survivors?

My research has to do with what factors planets need to support life. Recently, I’ve been wondering what factors are needed to support our modern civilization. What key principles of science and technology would be necessary to rebuild our world from scratch?
. . .
. . . there are the many materials society requires: How do you transform base substances like clay and iron into brick or concrete or steel, and then shape that material into a useful tool? To learn a small piece of this, I spent a day in a traditional, 18th-century iron forge, learning the essentials of the craft of the blacksmith. Sweating over an open coke-fired hearth, I managed to beat a lump of steel into a knife. Once shaped, I got it cherry-red hot and then quenched it with a satisfying squeal into a water trough, before reheating the blade slightly to temper it for extra toughness.
. . .
. . . , it needn’t take a catastrophic collapse of civilization to make you appreciate the importance of understanding the basics of how devices around you work. Localized disasters can disrupt normal services, making a reasonable reserve of clean water, canned food and backup technologies like kerosene lamps a prudent precaution. And becoming a little more self-reliant is immensely rewarding in its own right. Thought experiments like these can help us to explore how our modern world actually came to be, and to appreciate all that we take for granted.

For the full commentary, see:
LEWIS DARTNELL. “OPINION; Civilization’s Starter Kit.” The New York Times, SundayReview Section (Sun., MARCH 30, 2014): 8.
(Note: ellipses added.)
(Note: the online version of the commentary has the date MARCH 29, 2014.)

Dartnell’s commentary, quoted above, has been elaborated in his book:
Dartnell, Lewis. The Knowledge: How to Rebuild Our World from Scratch. New York: Penguin Press, 2014.

Better Policies Explain Why Poland Prospers More than Ukraine

RushchyshynYaroslavUkraineEntrepreneur2014-03-30.jpg “Yaroslav Rushchyshyn, a garment manufacturer, wants to end penalties when his company reports a financial loss.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B1) LVIV, Ukraine — Every kind of business in this restless pro-European stronghold near the border with Poland has an idea about how to make Ukraine like its more prosperous neighbor.

For Yaroslav Rushchyshyn, founder of a garment manufacturer, it is abolishing bizarre regulations that have had inspectors threatening fines for his handling of fabric remnants and for reporting financial losses.
For Andrew Pavliv, who runs a technology company, it is modernizing a rigid education system to help nurture entrepreneurs.
For Natalia Smutok, an executive at a company that makes color charts for paint and cosmetics, it meant starting an antibribery campaign, even though she is 36 weeks pregnant.
. . .
(p. B10) Victor Halchynsky, a former journalist who is now a spokesman for the Ukrainian unit of a Polish bank, said the divergence of the two countries was a source of frustration.
“It’s painful because we know it’s only happened because of policy,” he said, adding that while both countries had started the reform process, Poland “finished it.”
Ukraine has been held back by a number of policies. Steep energy subsidies have kept consumption high and left the country dependent on Russian gas, draining state coffers. Mr. Pavliv said the state university system, which he called “pure, pure Soviet,” was too inflexible to set up a training program for project managers, or to allow executives without specific certifications to teach courses. An agriculture industry once a Soviet breadbasket has been hurt by antiquated rules, including restrictions on land sales. Aggressive tax police have been used to shake down businesses.

For the full story, see:
DANNY HAKIM. “A Blueprint for Ukraine.” The New York Times (Fri., MARCH 14, 2014): B1 & B10.
(Note: ellipsis added.)
(Note: the online version of the story has the date MARCH 13, 2014.)

PavlivAndrewTechEntrepreneur2014-03-30.jpg “Andrew Pavliv, who runs a technology company, wants to help turn Lviv into a little Ukrainian Silicon Valley.” Source of caption and photo: online version of the NYT article quoted and cited above.

In Traditional Societies People Try to Kill Strangers

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Jared Diamond. Source of photo: online version of the NYT article quoted and cited below.

(p. 12) Your latest book, “The World Until Yesterday,” is about traditional societies and your research in New Guinea. Why is the acronym Weird central to the book? In Weird — Western, Educated, Industrialized, Rich and Democratic — societies we take these things for granted that just didn’t exist anywhere in the world until a few thousand years ago. We encounter strangers, and it’s normal, and we don’t freak out and try to kill them. We eat food that somebody else grew for us. We have a government with police and lawyers to settle disputes.

. . .
. . . , the book has been criticized for saying traditional societies are very violent. Some people take a view of traditional society as being peaceful and gentle. But the proportional rate of violent death is much higher in traditional societies than in state-level societies, where governments assert a monopoly on force. During World War II, until Aug. 14, 1945, American soldiers who killed Japanese got medals. On Aug. 16, American soldiers who killed Japanese were guilty of murder. A state can end war, but a traditional society cannot.
People have called the book racist, saying it suggests third-world poverty is caused by environmental factors instead of imperialism and conquests. It’s clearly nonsense. It’s not as if people in certain parts of the world were rich until Europeans came along and they suddenly became poor. Before that, there were big differences in technology, military power and the development of centralized government around the world. That’s a fact.

For the full interview, see:
AMY CHOZICK, interviewer. “Talk; ‘New Guinean Kids Are Not Brats’; Jared Diamond on What We Can Learn from Traditional Societies.” The New York Times Magazine (Sun., JAN. 12, 2014): A12.
(Note: bold in original; ellipses added.)
(Note: the online version of the interview has the date JAN. 10, 2014, and has the title “Jared Diamond: ‘New Guinean Kids Are Not Brats’.”)

The book under discussion above is:
Diamond, Jared. The World until Yesterday: What Can We Learn from Traditional Societies? New York: Viking Penguin, 2012.

Angus Maddison Saw that Life Improved During the “Capitalist Epoch”

HockeyStickGraph2014-03-02.jpgSource of graph: online version of the WSJ article quoted and cited below.

(p. A13) Angus Maddison, the late and eminent economist for the OECD, produced a famous chart in 1995, depicted nearby. For the longest time–basically from after the Garden of Eden until the 19th century–economic benefit for the average person in the West or Japan was flat as toast. The Mona Lisa aside, there was a reason someone back then said life was nasty, brutish and short. Then suddenly, new wealth spread broadly.

Maddison describes 1820 till 1950 as the “capitalist epoch.” He means that admiringly. The tools of capitalism unlocked the knowledge created until then. What came to be called “economic growth” gave more people jobs that lifted them and their families from the muck of joblessness and poverty. Maddison also noted that much of the world did not participate in the capitalist epoch. No wonder they revolt now.
This history is worth restating because the importance of strong economic growth, and the unavoidable necessity of a U.S. that leads that growth, may be disappearing down the memory hole of public policy, on the left and even among some on the right. Both share the grim view that the U.S. economy is flatlining, and the grim fight is over how to divide what’s left.

For the full commentary, see:
Henninger, DANIEL. “WONDER LAND; The Growth Revolutions Erupt; Ukrainians want what we’ve got: The benefits of real economic growth.” The Wall Street Journal (Thurs., Feb. 27, 2014): A13.
(Note: the online version of the commentary has the date Feb. 26, 2014.)

One of Maddison’s last important books was:
Maddison, Angus. Contours of the World Economy, 1-2030 AD: Essays in Macro-Economic History. Oxford and New York: Oxford University Press, 2007.