Saturday, July 18, 2015

The other Smith on Growth

In a recent Bloomberg piece, "Growth Fantasy of Tax Cuts and Small Government" Noah Smith took on my recent blog posts on 4% growth. In the first, I outlined the historical evidence that yes, the US has grown at 4% quite often. In the second, I outlined the standard smorgasbord of free-market policies which I suggested would increase our growth, at lest by inducing a substantial level shift.

Noah's main point is that in my blog posts I did not make any substantive quantitative claims that moving our country from the Republic of Paperwork to Adamsmithia would return the US to the kind of growth we saw in the 60s, late 80s and 90s. True enough.

My surprise in reading Noah is that he provided no alternative numbers and no alternative policies.  Well, if you don't think Free Market Nirvana will have 4% growth, at least for a decade as we remove all the level inefficiencies, how much do you think it will produce, and how solid is that evidence? He rambled a bit about the predictive value of some state scoring efforts, but that's all quite beside the central point -- how much growth could the best imaginable economic policy, at a national level, produce?

More deeply, Noah suggests no alternative policies. He does not claim that more government wage controls,  unions, stricter labor laws (Uber drivers must be employees) heavier and more politicized regulation, cartelizing more industries beyond health and finance, raising taxes to confiscatory levels, larger welfare state, boondoggle public works and so on -- the alternative path in the current policy debate -- will get us back to 4% growth.

So, one must only conclude that Noah -- and others voicing the same it's-not-possible complaint -- believes 4% growth is not possible. 2% or less is the new normal. Sustained growth, of the sort that made us all healthier and wealthier, if not wiser, than our grandparents, is a thing of the past. So all we can do now is fight to carve up a shrinking pie, retreat from an increasingly chaotic world, and pretend that carving up the pie will not shrink it further.

I am surprised at this pessimism, both economic and political. If the absolute best economic policies anyone can imagine -- and, again, Noah offered no alternatives -- cannot return us to 4% growth and sustain that growth, why bother being economists? They do not call us the "dismal science" because we think the current world is close to the best of all possible ones, and all there is to do is haggle over technical amendments to rule 134.532 subparagraph a and hope to squeeze out 0.001% more growth. Usually, the role of economists is to see the great possibilities that every day experience does not reveal. ("Dismal" only refers to the fact that good economics respects budget constraints.)

Similarly, the next US presidential election looks to be an argument over growth vs. redistribution. I doubt that many Americans are so willing to abandon hope so soon.  Even Hilary Clinton's latest speech took the view that reducing inequality would raise growth -- a novel argument (relative to 250 years since Adam Smith) that invites similar theoretical and quantitative evaluation, but at least one that does not give up on growth.

Noah's tired pot-shot has been going on a long time. 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. One would think the tired argument would have less force by now, or that the pessimists would have found a better one.


  1. You don't think maybe the Fed bringing interest rates down 13 points had a little more to do with the economic boom rather than Rayguns smiling face?

    1. Perhaps, but do you really think it's a coincidence that boom started just as the large reduction in marginal tax rates went into effect?

    2. Yeah, I pretty much do.

    3. In that case, Rich R., where is the boom that six+ years of zero rates should have brought? And Reagan had to sit back and take 1.5 years of extremely tight monetary policy. Obama's entire term has benefited from monetary stimulus that almost any Fed official presiding during the Reagan years would have thought super generous.

    4. It's not even a coincidence given that the boom started 3 years before the tax rates were lowered.

    5. Anonymous, wiki 'Great Financial Crash'.


    6. Rich, what are you talking about? The rate cuts were phased in over the course of '82 and '83. You're saying the boom started in 1979?

      And regarding interest rates, I tend to agree with Anonymous #2. The Fed Funds rate did decline in those years, but so did the inflation rate. If I'm not mistaken, real rates were still positive throughout that entire period and were not particularly low by any historical standard. They were certainly higher than most of the Bush and Obama years.

    7. re: "where is the boom that six+ years of zero rates should have brought?"
      Undergrads make this error often, you can't confuse levels with rates of change

      And the rate cuts of 81 pale in comparison to the 86 tax reforms which accelerated the destruction of the middle class. But the economic boost of 83/84 were primarily about the rate of change in interest rates plus the massive expansion of federal spending. There was a tremendous build up of aggregate demand because of Fed policies that were designed to lower wages.

    8. "And the rate cuts of 81 pale in comparison to the 86 tax reforms which accelerated the destruction of the middle class."

      The top marginal rate was cut by 20 percentage points in 1982. That's a major reduction any way you look at it. The '86 reform did cut the top income tax rate by 22 points, but it also expanded the base of taxable income and raised the capital gains rate back to 28% after the previous cut lowered it to 20%.

      And saying the '86 tax reform caused the destruction of the middle class seems rather odd considering middle and lower income households have seen significant reductions in their tax rates since then. I'm not sure what you're referring to here.

      "But the economic boost of 83/84 were primarily about the rate of change in interest rates plus the massive expansion of federal spending."

      Real federal outlays increased by a total of 11.5% in fiscal years 83, 84, and 85. If you subtract net interest payments, primary spending increased by less than 10% in real terms in those three years. I wouldn't really call that a "massive expansion of federal spending."

    9. What he's referring to is just standard leftist "the middle class has been destroyed" nonsense that is never true, it's just a little sillier here than usual.

    10. Cons are cheering on the destruction of the middle class. Productivity and wages are no longer linked and the billionaires that fund the GOP love it.

  2. "They do not call us the "dismal science" because we think the current world is close to the best of all possible ones."

    It is strange to see his argument after the massive success and consumer surplus from Uber.

  3. I was appalled to read Noah Smith's column: no facts, no theories, just vague doubts that anything would work. But considering the context—Bloomberg—I guess it should not have been surprising. Bloomberg commentators are very reliably leftists who adore government meddling in the economy. I subscribe to Bloomberg, but I can't stand the commentaries.

  4. The early 1980s recovery was inherently supply-related. AD soared in the 1970s as well. During the Reagan-Volcker recovery, U.S. inflation stayed low, unlike in the 1970s, while NGDP soared, like in the 1970s.

  5. To be fair, your criticism of his piece is similar to his of yours. I share the same concerns about your 4% growth piece: i.e. all your suggestions may indeed be good, but that doesn't mean they will lead to 4% growth.

    Also, is it so strange to say that 4% growth may indeed be impossible, in the foreseeable future? Or at the very least to suggest that policy changes, whether yours or some other ones, may only have trivial impact on growth?

    You attribute, or at least it seems you attribute, high growth in the 80s with Reagan's "growth oriented policies", but is it not possible that that isn't true? Or there's no causal relationship there? Technology, globalization, etc. may be even bigger drivers rather than "policy"?

    And of course, there's policies and then there's policies. Reagan's monetary policies were, perhaps, responsible for much of the growth. But I'm not sure they could be characterized as Adam Smith-ian or otherwise, Left or Right.

    I personally don't think that a return to 4% growth is possible, in the short term, through policy action alone. Monetary policy may play a bigger role, but that's mostly outside of the scope of politics. I don't think we can return to 4% growth because how fast we grow is determined by many things that policy has little if any impact on. And less than 4% growth isn't necessarily a "shrinking pie". It's still pretty darn good, given the level we're at.

  6. "I am surprised at this pessimism, both economic and political. If the absolute best economic policies anyone can imagine -- and, again, Noah offered no alternatives -- cannot return us to 4% growth and sustain that growth, why bother being economists?"
    There's just much more diminishing returns in terms of the sort of policy improvements you can imagine in the US. That's why the real focus outside the narrow world of business cycle fluctuations and how will Fed interest rate moves affect some bond traders on wall street has moved to making developing economies escape any poverty or middle income traps. Ed Prescott himself moved on in that sense,
    The most exciting question in economics today is if China can grow to have gdp/capita relative to the US in 20 years like Poland or maybe like Spain? Or can India catch up to China in terms of gdp/capita? As for the US, is it really a better economy if the median income per capita is probably lower than in Canada or Germany, and with lower income/capita for the bottom 50% compared to those countries? Probably not with any welfare function using concave utility functions for individuals or households. So maybe it's more interesting to look into increasing redistribution in the US, with research focusing on how to minimise the resulting distortions (e.g looking at the effects of higher marginal tax rates under different assumptions on the key factors behind wealth distribution - e.g Bewley-Aiygari model with different labour income processes and discount rate variation versus model with entrepreneurship).

    1. "As for the US, is it really a better economy if the median income per capita is probably lower than in Canada or Germany, and with lower income/capita for the bottom 50% compared to those countries? "

      Yes, it really is.

    2. "Probably not with any welfare function using concave utility functions for individuals or households"

      Comparing utility functions to get the social optimum, seriously? Ever heard of a new concept called efficiency? Pareto optimality rings any bells?

  7. Nope. He is not saying 4% is impossible, just there is no evidence that your policy proposals will lead to that kind of growth. If you want to continue advocating for your same preferences, you should note that existing evidence shows it probably won't work, then articulate an alternative reason for supporting them. I suspect we will see 4% again some day, but it will be due to some breakthrough in science or an innovation in using current science, not as the result of some government policy.


    1. Seconded. Cochrane is taking something which is obviously (a) a talking point produced ex ano by a politician, and (b) something which we've seen happen in two years out of the past thirty, and demanding that others use this as the baseline (null hypothesis).


    2. I think Cochrane's point was that liberalization of the political economy has coincided with greater and sustained longer term growth. I don't think he said these policies were a cure all for economic malaise nor would they shoot us into 4 percent tomorrow or even within a year or two.

  8. "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."

    actually bush sr. coined the phrase "voodoo economics", not the "standard liberal commentators";
    and actually the numbers did not add up and the (federal) debt did explode -- if folks care about
    "truthiness" ...

    looking for periods of high(est) economic growth and full employment in us history? how
    about those occasions when federal taxes were raise sharply and the federal gov. hired
    most able bodied men and women and put them to work directly or via gov. contracts?
    supply-side-trickle-down enthusiasts like to point at the reganomics of the '80s and ignore
    the growth in gov. debt, the steady reduction in interest rates (as others have noted here),
    and also ignore the steady reduction in energy prices (take a look at oil prices in the 80s)!
    supply-side-trickle-down enthusiasts also like to point at the '20s tax cuts of 1924 - 1928
    and the boom of that decade, but ignore what happened in the years that followed those cuts;
    and hard to forget our most recent debacle -- the recent years following the bush jr. tax cuts
    frankly i'm not impressed with supply-side-trickle-down. but no one ever cares to talk about
    the flip-side-of-the-coin theory: demand-side-trickle-up. in the immortal words of will rogers,
    that too many folks seem to have forgotten, from an article by Will Rogers in the St.
    Petersburg Times Nov 26, 1932:

    "The money was all appropriated for the top in the hopes that it would
    trickle down to the needy. Mr. Hoover didn’t know that money trickled up.
    Give it to the people at the bottom and the people at the top will have it
    before night, anyhow. But it will at least have passed through the poor
    fellow’s hands."

  9. I think Noah Smith is trying to make a different point. Many of the policies you oppose are understood to give up some economic growth in return for some other social good. For example, making Uber drivers employees benefits Uber drivers. Therefore we want to know how much these policies reduce economic growth. Noah Smith quotes econometric studies which (according to him) show they have no measurable drag on growth.

    You feel that our present level of regulation reduces our growth rate a lot. But econometric studies show it does not. Bottom line: keep the policies.

    -- Jonathan Goodman (don't know how to change "lgm" to my actual name)

    1. econometric studies show a lot of things. I think its a stretch to have so much confidence in a particular study to justify prohibiting two adults from engaging in a voluntary exchange. What economic studies tend to show is that when people are allowed to engage in free exchange total wealth increases.

    2. "... other social good. For example, making Uber drivers employees benefits Uber drivers."

      Good grief. A central take away from Smith's rebuttal is *the lack of evidence* that the proposals will achieve the growth goal, and here comes the assertion that the employee status just IS a "social good". Not so if employed status means fewer Uber drivers are engaged, not so if they are paid less for their time, no so if their hours are limited. Employer based health insurance? Yeah, not so much if you don't get employed.

    3. "For example, making Uber drivers employees benefits Uber drivers."

      Where is the evidence to support that statement? Are Uber drivers clamoring for employee status? If so I haven't heard of it. What Uber demonstrates is the value to society and the individuals involved that can be unlocked by removing restrictions on people's ability to conduct transactions. Is freedom to do so somehow bad?

  10. The ending line of the article was something I thought worth debating: If certain cause major social disruptions but lead to only slight upticks in economic growth, are they worth doing?

    To that end - its a reasonable argument, but as I've argued with other progressives, most of government policies are not really aimed at helping the poor, but helping the very rich. Its something of blindspot for most progressives - but Noah the economist should know better.

  11. Noah Smith has has replied with a detailed rebuttal, superior in substance and tenor; fair minded readers are directed to

    1. I agree. Noah wins this debate (if indeed it was one) hands down. Burden of proof definitely lies on he who is making bold predictions of 4 percent growth

    2. Cochrane wins the debate.
      Burden of proof should be on the one who supports regulations, not on the one who wants to leave you alone.
      Also, Smith makes a big deal about the fact that 4% is just a made up number. That's not the point, the point is that the economy can grow at higher rates than it does today, it doesn't matter if its 4.1 or 3.9, geometric or arithmetic, who cares?

    3. Anonymous ^2,

      "When debating any issue, there is an implicit burden of proof on the person asserting a claim."

      Or here:

      "The burden of proof is the obligation of a party in an argument or dispute to provide sufficient evidence to shift the other party's or a third party's belief from their initial position. The burden of proof must be fulfilled by both establishing confirming evidence and negating oppositional evidence."

      Hence, the burden lies with John making the claim that the policies he has proposed will produce the outcome he describes.

      Beware of economists making predictions about the future - see Irving Fisher.

      - Fisher was perhaps the first celebrity economist, but his reputation during his lifetime was irreparably harmed by his public statements, just prior to the Wall Street Crash of 1929, claiming that the stock market had reached "a permanently high plateau".

    4. argumentum ad wikipedium

    5. Philosophically I don't know how one can argue that restricting individual liberty is the default position and that expanding freedom needs to be justified.

    6. William,

      The argument John makes isn't that expanding freedom requires no justification. John argues that expanding freedom will generate a higher positive real economic growth rate.

      John draws a causal link between policy recommendations and economic results, hence the burden of proof lies with John to establish that link.

    7. My comment was directed at Noah Smith's assertion that pro-growth policies, i.e. more economic freedom, must be justified but that the current morass of regulations, taxes, transfers, etc, should be the default.

      As far as a causal link between policy and results, all policies imply such a link and from that perspective all must be vetted and debated, but the burden of proof, IMHO, should always be on those who want to restrict individual liberty. Is it not the case that liberty is an inalienable right?

    8. William,

      "Is it not the case that liberty is an inalienable right?"

      Yes life, liberty, and the pursuit of happiness are inalienable rights. High growth is not one of those rights, instead it must be worked for.

  12. The last six years should be conclusive proof of the huge costs of regulations: Obamacare, Dodd-Frank, weird lawsuits against bank and corporations, constant rhetoric from the White House calling for more income redistribution have all resulted in sclerotic growth and low labor force participation. If that is not proof, then what is it?

    1. You use of the word "proof" is a bit lacking. You cherry pick things you don't like and then correlate them with poor outcomes. What about all the other factors that are likely more relevant from a causal point of view: debt overhang recessions last on average 7 years, fiscal consolidation in the face of a demand slump, etc. What about examples of similar administrations that had high growth, or administrations that cut taxes and had low growth (W Bush), etc.

  13. If the US economy could expand by 20% following the 1976 recession, in just four years, why can not we duplicate that performance?

    It would take an expansionist central bank, as we had then.

    It is possible to consider that there has been a nationwide criminalization of robust new housing construction in almost any neighborhood that people want to live. I assume this suffocation of housing markets retards growth.

    A huge and parasitic defense industry is another brake on growth, from the classic economic perspective.

    There is lots to suggest that the reductions in productivity are merely reactions to weak aggregate demand caused by monetary suffocation. For example, everybody's favorite economy-country, Singapore, has also experienced sharp reductions in productivity since 2008.

    You can't get to a boom and soaring productivity by putting a monetary noose on the economy. It has not worked in any modern nation.

  14. John,

    High real growth always requires work and people prefer leisure to working. None of the "free market" policies you have listed change preferences from leisure to work. In fact, many of them move preferences in the wrong direction.

    "Drug legalization"

    Really? Recreational drugs tend to impair judgement and worsen productivity.

    "No more agricultural subsidies."

    Removing the subsidy will likely result in less agricultural production. So your solution to generating real growth is to produce fewer goods?

    1. Basic economic theory supports both conclusions. Productivity isn't total goods produced, its the value of goods produced.

    2. Baconbacon,

      The value of goods produced is a nominal value including an inflation component. We are talking real growth, not inflation induced growth.

      If agricultural subsidies lower the cost of production and thus the cost incurred by the consumer, then they are beneficial to real growth.

      If fewer people use drugs because they are illegal, then that will be beneficial to real growth.

      John's point (I think) is that the cost of subsidies and drug enforcement outweigh the benefits. That is arguing from the unknown.

      I don't know how rampant drug use would become if they were legalized. Maybe some type of Darwinism would take place if legalization was accompanied by an elimination of drug treatment programs.

      I don't know how much agricultural prices would move if subsidies were eliminated. I would suspect that prices would become more volatile.

      And that is also something to consider. Which is more import - low inflation or stable inflation? Obviously from a real growth rate standpoint persistently low inflation is what you strive for.

      But suppose you could only get one of the two - a stable inflation rate of 2% or a volatile inflation rate swinging between 0% and 4% - which is preferable?

    3. Baconbacon,

      Y = A * K^Alpha * L^Beta

      Y has units widgets / year (A measure of the quantity, not value of goods produced in a year)

      L has units man-hours / year

      K has units capital-hours / year

      A (Total factor productivity) has units that can be found in the link.

  15. Who is Noah Smith?

  16. "There is not enough quantitative evidence that reforms work looking at the US in time series".

    "The government must curb carbon dioxide emissions even without conclusive quantitative evidence about human induced global warming".

    Isn't it nice to look at the left?

  17. "As for the more radical steps John Cochrane suggests, such as ending agricultural subsidies, eliminating occupational licensing and rolling back most labor law, we should get the data before we start slashing."

    Pure comedy to cite poor data as the reason to keep policies which were passed with no supporting data for their inception. Is Noah going to cite research on the social impact of occupational licensing? Feel free to doubt estimates or argue that these policies aren't first order (then as Prof Cochrane suggests, what are your alternatives, go) but I really don't get this battle.

  18. I confess that when these columns venture into political economy (as opposed to the more scientific branches of economics) they seem more like debates about religious doctrine. Faith rather than evidence seem to be the inspiration. 4 percent growth in GDP seems to have been achieved under Reagan but it was also achieved under Clinton (at least according to the chart I looked up) and my gosh was it really achieved under Carter?
    I suspect that the rates of growth had a lot more to do with the spread of the computer into the workplace rather than any small change in the amount of taxes that are imposed. Most of us get up, do our jobs and at the end of the day pay our taxes just like the mobster Frank Costello described to the Kefauver Committee back in the day.
    I must be older than Professor Cochrane. I actually remember the first standard liberal commentator who denounced Ronald Reagan's tax proposals as Voodoo Economics: It was his soon to be Vice President George H. W. Bush!

    1. Tom Conroy: You are correct. Bush Sr. coined the term, when describing Reagan's fiscal policies. I guess that was 1979.

    2. I was aware of the source of the voodoo economics phrase. Too subtle and nonpartisan for the blogosphere I guess

    3. It is interesting that people look back at the Carter administration as if it were some sort of growth miracle, as it was not seen as such at the time. Further, Carter was turned out by a wide margin in 1980.

      What actually happened was that increasing inflation during his term artificially stimulated the economy. It started at 6.5% in 1977, rising to 13.5% in 1980. Unfortunately, this type of stimulation cannot go on for long without doing extensive damage to the economy. It took Reagan's fortitude to correct this and set the US on a growth path.

    4. No one was more surprised than I to find that the Carter administration presided over two years of REAL, not nominal, above 4% growth.
      Attributing the end of the Great Inflation to Ronald Reagan rather than the Carter appointed Paul Volcker, to my mind, is an example of faith based rather than fact based political economy. William Greider's classic "Secrets of the Temple" gives some real incite into what the Reagan Treasury Department thought of Volcker at the time. (One of Greider's sources was a young Treasury Dept. official named Larry Kudlow. I wonder what ever happened to him?

    5. Tom,

      The source of the phrase was during the 1979 primaries at Carnegie Mellon University in Pittsburgh, PA.

      Does anyone have a link to the entire speech?

    6. Might as well note here too that Greg Mankiw, for a time G.W. Bush's chief economist, described as "charlatans and cranks" the economic advisers who told Reagan that broad-based income tax cuts would raise tax revenues.

    7. Found the Bush / Reagan debate:

      Bush repeatedly decries Reagan's tax cuts as potentially worsening the inflation problem.

  19. This paper seems to support your view:


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.