Tuesday, May 3, 2016

WSJ Growth Oped

I did an oped on growth in the Wall Street Journal, titled "Ending America’s Slow-Growth Tailspin." I'll post the full thing here in 30 days.

Blog readers will recognize a distilled version of my longer essay on growth (blog post herehtml here,   pdf here), and the graph from Smith v. Jones blog post. I think out loud. The growth essay is much more detailed on diagnosis and especially on policy.

There are three basic ideas (two too many for a good oped).

1) Growth is everything. Increasing growth will do way more for every problem you can name than anything else on the economic agenda. Even if workers in 1910 could have taken all of Rockefeller's wealth, they would have been disastrously poor compared to today.

2) Can policies actually improve growth? The tut-tutters mocked Jeb Bush's 4% aspiration. I outline the "we've run out of ideas" school of thought, most recently in Bob Gordon's thoughtful book; the "everything is right but the zero bound" secular-staglation school, and the view that the growth giant is being held back by a liliputian army of politicized regulators.

As evidence,  I improved on the graph from an earlier post of the World Bank's ease of doing business score vs. GDP per capita,

(if you can't see the graph, click here)

This graph adds a few things relative to the one in WSJ. I added some outliers. Libya and Venzuela seem like countries with good reasons to have temporarily more GDP than their institutions can long support, Rwanda and Georgia the opposite. So the correlation is even better than it looks. Given how crude the world bank measure is, it's surprising it works so well. It's mostly about the difficulties of starting small businesses. I added Greece too to gives some sense of variation within the Euro-US world.

The point: Bad policies can do dramatic harm. Ipso facto, good policies must be able to do a lot of good. The US is not perfect!

A famous economist challenged my view that regulation is causing a lot of problems, noting that all of the big business types he talks to don't complain that much. But I think that's a horrendous selection bias. If you talk to the people still in business, you are talking to the ones that have figured out the political and regulatory game. Go talk to the ones whose businesses are closed, or not even started.

Another point, regulation has been getting worse for decades. Why the slump now? I think that a lot of the government onslaught's effect has been to make the economy less resilient. For example, social security disability is not a problem as long as you have a job. When you lose a job, and go on disability, now the huge disincentive to work, study, move, kicks in.  Recovering from a recession needs new jobs, new businesses, new innovations.

3) A very brief outline of policies to get growth going again. I think the key is to move past the standard rhetoric that defines our current partisan bickering. It's not how much we spend, really, it's how we spend it. Free market economics is not "trickle-down" economics, it's about incentives, simplicity, rule of law, and so forth.


  1. "Go talk to the ones whose businesses are closed, or not even started." Wouldn't I then be talking to the people who tend to blame the political/regulatory game for all problems? Selection bias in the other direction?

    1. First, I think the author is pointing out the need to include those businesses who have failed as well as those trying to open a business/enter the market. Their inclusion does not predicate the exclusion of big business. I believe the larger point is, that onerous regulations actually stiffle competition. Start ups and small businesses do not have the resources necessary to navigate the regulatory landscape. This environment actually shields larger or more established businesses from competition, stifling larger economic growth and hurting the consumer.

    2. Not only what John Reynozo says, but would not we want to know the relative size of both (as claimed) self-selected groups?

  2. Ease of doing business or corruption perceptions (http://worldbank.tumblr.com/post/34237253037/transparency-vs-ease-of-doing-business) are very crucial for the Growth and Innovation. I know lots of people in Ukraine who did not start or stopped their businesses because of those restrictions. Sadly, some people who had/have awesome bright ideas and all the potential to put them into action did/do not even consider starting a business in Ukraine, knowing how difficult (and possibly dangerous) it is. Many of those who did get on the top with their businesses do all they can to stay there and do not allow others to enter. I am afraid that it got even more difficult lately. I would certainly join the third camp and support the sometimes painful but in the long-term rewarding actions -- both wrt to the US, or any other nation, or just a single person. Now, I really have to start exercising more.

    1. I know some wealthy business people who went to Ukraine twenty years ago because they wanted to built a factory. They had the money, the skills and the operational experience. They had an old family connection with the Ukraine. They would have created hundreds of jobs.

      They concluded that Ukraine was so corrupt it would be impossible to do business there.

      The best Ukrainians should move to Europe or North America (hint: Canada has a large, and successful, Ukrainian population).

  3. I agree with every word in this op-ed. As an additional illustration of what is wrong (of the many things) in the US, turn to Page A3 of that same print edition of the Wall Street Journal (5/3/16), where Cochrane's column appears: the title of the article is "More Cities Lawyer Up", and the gist of it is given by this paragraph: "The 'affirmative litigation' model [...] has been growing in popularity among municipal legal departments in recent years, amid slow economic recovery and uneven regulatory enforcement at the state and federal level. And because plaintiffs' firms bear the litigation load, cities enjoy only the upside of potential victories and monetary rewards."
    There it is. This is heaven for mass tort lawyers, who work the regulatory state to death against private enterprise. Read that article.

    But... alas, my comment regarding Cochrane's article is always the same when he writes similar columns or blog entries: Cochrane writes in normative terms, "what should" happen - which is great, and I agree totally. The problem is that in our current political environment, *nothing*, I repeat, *nothing* will be done. Politicians (of all stripes and colors, Reps, Dems, all of them) and bureaucrats get their money anyway, either from lobbyists or cronies, or via taxation from taxpayers. Politicians and bureaucrats *just do not care*, they simply don't. Yes, yes, a few do; Cochrane mentions Paul Ryan - but those are only a small handful out of the 535 in Congress + the President. Just see the FDA decision against a possible drug to treat Duchenne muscular dystrophy (WSJ, 4/28/16).
    Yes, we should talk in normative terms - it is always good to remind ourselves of what optimality looks like; but lose all hope of converting it into reality. There are just too many cronies, too many lobbyists, too many political friends, too many donors, too many buddies to be pleased, in order to bring sensible reform into this system. I know Cochrane is an eternal optimist, which is fantastic. I, on the other hand, am much less so. And even less so, when contemplating what the two major political parties are offering as candidates to become President of the United States.

  4. This seems like a great post, well argued. So this is an AND, not a BUT. I had the good fortune to host Douglas Holtz Eakin to an event at my old shop. He laid out an agenda that seemed very likely to raise the US growth potential. I was quite smitten. But then a colleague reminded me. Those are all great ideas, but the thing is that the Republican party is not the vehicle to deliver them. I realize and admire, Dr. Cochrane, that you free yourself of partisan constraints. Hence AND, not BUT. Still, I think this is a thing. There is really no vehicle for the disinterested pro-market, correct-obvious-market-failure take.

    Aside: I liked your admission in that audio that you did not know enough math to be a physics theorist. And yet within economics you are relatively mathematically inclined. Neither good nor bad. Just fun. You should do a piece on what physicists or mathematicians think of the current state of method within economics. Maybe you already have.

    1. Well, it "seemed" that way at the time. Oops. I guess I was wrong.

      I switch sides, to the guys who say you can't impose an arbitrary functional form out of sample, especially in social science. Sucks being wrong. Best not to stretch out the pain. Just write another op-ed taking it back.

      Think of the applause you would get from the liberals! You would be our Joe Lieberman. I stick by the personal aside. That was very cool.

  5. John (or others), do you have any commentary on the extent to which GDP can be relied upon as an indicator of growth? Thinking specifically in terms of the economist's most recent special briefing, "The trouble with GDP".*

    Of course, GDP is still quite useful, even if imperfect, and many of the reforms suggested would be beneficial regardless.


  6. I agree with the general thesis of the article but it seems disingenuous (and "a horrendous selection bias" wink wink) to point out the "The nearly controlled experimental comparison of North Korea versus South Korea, or East Germany versus West Germany" as it relates to the US today. I'd guess it is similar to the Laffer Curve debate - nearly anyone who is objective acknowledges & accepts the theory behind the Laffer Curver. However, debate is to be had as it relates to one's location on the curve, or even the slope & shape of the curve. Using a comparison of E vs W Germany as evidence of the impact of gooberment inefficiency & counter-productiveness in today's USandA is akin to the comparison of JFK's tax cuts with theoretical tax cuts today. The marginal thinking seems to be lacking. There just doesn't seem to be much in the article to support the claim that gooberment is the primary grain of sand in the gears of growth or even an explanation of why this is such a problem now.

  7. Similar to other posters, I agree with the op-ed (to others on the board, use the google backdoor if you want to read it) but I wonder how we can make concepts more inclusive and less easily dismissed as "same old, same old", "trickle down" or "Reaganomics". It might help to lead with median rather than mean (or even bottom quintile) income now v the 50s to fend off the "all the gains are at the top" myth. I wonder if ranking a list of 100 "weeds in the garden" based on political viability would be a worthy exercise.


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