A Look in the Mirror

Tyler Cowen and Alex Tabarrok have written a splendid article, "A Skeptical View of the National Science Foundation’s Role in Economic Research" in the summer Journal of Economic Perspectives. Many of their points apply to research support in general.

The article starts with classic Chicago-style microeconomics: What are the opportunity costs -- money may be helpful here, but what else could you do with it? What are the unexpected offsetting forces -- if the government subsidizes more, who subsidizes less? What is the whole picture -- how much public and private subsidy is there to economics research without the NSF? Too many good economists just say "economic research is a public good, the government should subsidize it."

They go on to ask deeper questions, "Are NSF Grants the Best Method of Government Support for Economic Science?" The NSF largely supports mainstream research by established economists at high-prestige universities. Are there better "public goods," undersupported by other means, for it to support?

Federalization of Labor

We are getting a good hint that a centerpiece of economic policy in the Hillary Clinton administration will be an increase in Federal control over labor markets.

The news here is that serious economists are advocating these policies, not just to transfer income from one to another, reduce inequality, help specific groups, or enhance some sense of social justice, at the expense of dynamism and growth, but that more Federal control of the labor market will increase wages, productivity and economic growth for everyone!

Alan Blinder's cogent Aug 2 Wall Street Journal opinion piece gives a good sense of the language and logic,

... Hillary Clinton has presented an extensive list of policies that would raise wages, starting with a higher minimum wage. ...

Mrs. Clinton also advocates widespread profit-sharing as a way to put more money into workers’ pockets. She would promote that goal both by using the presidential bully pulpit and by providing tax incentives for businesses that share profits. Since the scholarly evidence suggests that profit-sharing raises productivity, such tax breaks will partly pay for themselves.

Increased vocational training and apprenticeships for the non-college-bound are also major Clinton policies....The U.S. can increase its productivity and reduce inequality by ensuring that the right people get vocational training and apprenticeships.

And then there is what may be the surest way to raise wages over the long run: providing pre-K education for all American children....

Labor market intervention is getting wrapped up in "stimulus," as reported in an excellent Bloomberg column by Brendan Greeley here,

 "It’s really simple," she said at a rally in June in Ohio. "Higher wages leads to more demand, which leads to more jobs, which leads to higher wages." ...

When Clinton uses the word "demand" on the stump, she’s blowing a dog whistle. (Economists have them, too.) Increase demand, she’s saying, and you get growth.... 

Bob Gordon signs on reluctantly,  

"I think it’s a very marginal way of promoting economic growth," says Robert Gordon, economist at Northwestern University who specializes in the subject. Like Summers, he prefers a massive investment in infrastructure. But he does agree that a shift in business income away from profits and toward salaries would create growth. Workers are more likely to buy things from their paychecks than businesses are to invest out of their profits.

Alan Krueger ["former chairman of the Council of Economic Advisers and an informal adviser to the Clinton campaign," and candidate for vice-president of the American Economic Association] agrees wholeheartedly:

... "I think the time could be right for a more virtuous growth model," he said, "which is driven by stronger wage growth...more consumption, more demand, creating more jobs." 

Novel rationalizations for decades-old policies are always suspect. And the usual passive or verb-less sentences hiding the heavy hand of Federal government always invites skepticism.

But let's take it seriously. How much sense do these analyses make?

Without rehashing the whole minimum-wage fight, it is worth asking, if the Federal Government forces businesses to raise some people's wages, but others become unemployed as a result, whether that really count as raising wages overall?

The words "presidential bully pulipit" has poor overtones in the current age. The bully pulpit means the DOJ, EEOC, IRS, NLRB, EPA and who knows even the fish and wildlife service may come calling if you don't do what the president wants. Schoolyard bully, not Teddy Roosevelt's jolly-good pulpit.

"The scholarly evidence indicates that profit-sharing raises productivity.." That's a new twist on the abominable "studies show" argument by reference to vague authority.  But even "scholarly evidence" has to make some sense.

It does make sense that firms which study the question and choose profit-sharing plans can thereby raise productivity, either by giving their employees better incentives or by attracting different and more productive employees. They would not do it otherwise.

But this classic subject-free sentence is about Federal Regulations to force profit-sharing that "puts money into workers' pockets" on all firms. It does not follow that such a mandate will have the same effect. This is the classic, "rich guys drive BMWs, so if we force BMW to give cars away we'll all get rich."

To belabor the obvious, that some firms choose it because they see it will work does not mean that the Federal Government forcing it on all firms will work.  That profit sharing which increases workers' incentives can work does not mean that reducing profits and paying lump sums to workers will work. That profit sharing accompanied by greater selection of productive workers works does not mean that forced profit sharing will work for everyone -- someone employs the less productive, I hope.

If it's about incentives, then there should be a widespread Federal initiative to promote piece-work, commissions rather than salaries, independent contractors rather than employees... Hmm, we're headed the other way.

As economists, we are supposed to start with a problem. What is the market failure that stops companies form putting in productivity enhancing profit sharing programs? Or are they just too dumb and need the benevolent hand of the "bully pulpit" to educate them?

"Increased vocational training and apprenticeships for the non-college-bound," are more Orwellian subject-less sentences. Who is going to do this increasing and how? What is the market failure? Do we need to have triple digit numbers of Federal Job-training programs?

"Providing pre-k education" is another subject-free sentence. I presume he does not mean reducing regulations and union requirements so more pre-k schools can start up! That might actually be effective. But perhaps it is technically correct: a large Federal subsidy for pre-k education, funneled through the public school systems and teacher's unions will raise someone's wages. The "scholarly evidence" is not that it will be the kids.

The idea that forcing companies to pay out greater wages is the key to "stimulus," and that demand-side "stimulus" is the key to long-run growth is...er... even more novel economics.

In classic Keynesian stimulus, there is something about the government borrowing money and spending it, or giving it to consumers to spend, that causes people to forget that the borrowed money must be paid back someday. Not here -- this is directly the claim that taking from Peter and giving to Paul is the key to prosperity. And not just temporary stimulus, but long run growth.

One of many fallacies at work here is the notion that companies face a choice between "paper" investment and "real" investment; that by piling up cash reserves they are somehow diverting resources that could be "real demand" into "paper investments." But every paper asset is a paper liability, so this possible truth about an individual company makes no sense for an economy as a whole.

And let's follow the logic.  If this works for stimulus and growth, force companies to give away cash to consumers. Consumers are, well, people who like to consume. Force them to give cash away to thieves. They consume quickly.  If this is a bad idea.. well then maybe the whole "stimulus" thin is a bit of bunk as well.

Gordon at least has the decency to belittle the idea. And on "a shift in business income [another subjectless sentence -- this shift is forced by the Federal Government!] away from profits and toward salaries would create growth"  because "Workers are more likely to buy things from their paychecks than businesses are to invest out of their profits," one can hope that a statement which violates basic accounting is a misquotation.

 Krueger has less defense: "a more virtuous growth model,...which is driven by stronger wage growth...more consumption, more demand, creating more jobs" is a direct quote. It may be "virtuous" to feel this way, but the classic criticism of Democratic economic policy is doing things that make you feel good but don't work.

Well maybe, maybe not. Economics is a work in progress. But it is certainly brand-new, made-up-on-the spot economics, designed to buttress policies decided on for other reasons.

A last grumpy comment. The WSJ titled Blinder's oped, "Only one candidate can make wages grow again."  Actually I agree with the sentence   Like most media they forgot there are more than two candidates!

Macro-Finance

A new essay "Macro-Finance," based on a talk I gave at the University of Melbourne this Spring. I survey many current frameworks including habits, long run risks, idiosyncratic risks, heterogenous preferences, rare disasters, probability mistakes, and debt or institutional finance. I show how all these approaches produce quite similar results and mechanisms: the market's ability to bear risk varies over time, with business cycles. I speculate with some simple models that time-varying risk premiums can produce a theory of risk-averse recessions, produced by varying risk aversion and precautionary saving, rather than Keynesian flow constraints or new-Keynesian intertemporal substitution.

Update 11/30/2020. The link now works and points to the published article 

How to step on a rake

How to step on a rake is a little note on how to solve Chris Sims' stepping on a rake paper.

This is mostly of interest if you want to know how to solve continuous time new-Keneysian (sticky price) models. Chris' model is very interesting, combining fiscal theory, an interest rate rule, habits, long term debt, and it produces a temporary decline in inflation after a rise in nominal interest rates.  

Blueprint for America

"Blueprint for America" is a collection of essays, organized, edited and inspired by George P. Shultz. You can get an overview and chapter by chapter pdfs here. The hardcover will be available from Amazon or Hoover Press October 1.

Some of the inspiration for this project came from the remarkable 1980 memo (here) to President-elect Ronald Reagan from his Coordinating Committee on Economic Policy.

Like that memo, this is a book about governance, not politics.  It's not partisan -- copies are being sent to both campaigns. It's not about choosing or spinning policies to attract voters or win elections.

The book is about long-term policies and policy frameworks -- how policy is made, return to rule of law, is as important as what the policy is --  that can fix America's problems. It focuses on what we think are the important issues as well as policies to address those issues -- it does not address every passion of the latest two-week news cycle.

The book comprises the answers we would give to an incoming Administration of any party, or incoming Congress, if they asked us for a policy package that is best for the long-term welfare of the country.

The chapters, to whet your appetite:

Immigration sentiment

Above, a lovely graph from The Conversation. A common story says that opposition to immigration comes from people in high-immigrant communities, who suffer externalities from the presence of many immigrants. It is not true.

NYT on zoning

Conor Dougherty in The New York Times has a good article on zoning laws,

a growing body of economic literature suggests that anti-growth sentiment... is a major factor in creating a stagnant and less equal American economy.

...Unlike past decades, when people of different socioeconomic backgrounds tended to move to similar areas, today, less-skilled workers often go where jobs are scarcer but housing is cheap, instead of heading to places with the most promising job opportunities  according to research by Daniel Shoag, a professor of public policy at Harvard, and Peter Ganong, also of Harvard.

One reason they’re not migrating to places with better job prospects is that rich cities like San Francisco and Seattle have gotten so expensive that working-class people cannot afford to move there. Even if they could, there would not be much point, since whatever they gained in pay would be swallowed up by rent. 

Stop and rejoice. This is, after all, the New York Times, not the Cato Review. One might expect high housing prices to get blamed on developers, greed, or something, and the solution to be government-constructed housing, "affordable" housing mandates, rent controls, low-income housing subsidies (which protect incumbent low-income people, not those who want to move in to get better jobs) and even more restrictions.

No. The Times, the Obama Administration, California Governor Gerry Brown, have figured out that zoning laws are to blame, and they're making social stratification and inequality worse.

Brexit or Fixit

Many commenters compare Brexit to the American revolution. I think the constitutional convention is a better analogy for the moment and challenge ahead. A first attempt at union resulted in an unworkable Federal structure. Europe needs a constitutional convention to fix its union.

The EU's first attempt was basically aristocratic/technocratic. Brussels tells the peasants what to do. The EU  needs a hardy dose of accountability, representation, checks and balances -- all the beautiful structures of the US Constitution. What little thought the EU put in to these matters is clearly wanting.

America did not wait for a state to leave. But, though even the Pope admits the EU structure wasn't working, the EU needed this wake up call. Bring the UK to the convention, and bring them back. Fixit. (#Fixit?)

Transport innovation

What is it?

I saw this in the parking lot of the hotel where I'm staying. Inspection: yes, it's the chassis of an early 1970s VW, with motor and transmission in place. The motor appears functional. It's connected to the gas cans. Yet, this is a trailer. Why? (Hint: it's parked next to a new Toyota CRV electric car.)

Rajan on cash transfers and corruption

Raghu Rajan, who just announced he is stepping down as Governor of the Central Bank of India, gave a very interesting speech, that bears among other things on the question of social programs vs. cash transfers.

A big problem with government provided assistance in India is that the provision is corrupt:

Our [India's] provision of public goods is unfortunately biased against access by the poor. In a number of states, ration shops do not supply what is due, even if one has a ration card – and too many amongst the poor do not have a ration card or a BPL card; Teachers do not show up at schools to teach; The police do not register crimes, or encroachments, especially if committed by the rich and powerful; Public hospitals are not adequately staffed and ostensibly free medicines are not available at the dispensary; …I can go on, but you know the all-too-familiar picture.

Raghu has a thoughtful observation on what keeps this system going:

Syverson on the productivity slowdown

Chad Syverson has an interesting new paper on the sources of the productivity slowdown.

Background to wake you up: Long-term US growth is slowing down. This is a (the!) big important issue in economics (one previous post).  And productivity -- how much each person can produce per hour -- is the only source of long-term growth. We are not vastly better off than our grandparents because we negotiated better wages for hacking at coal with pickaxes.

Why is productivity slowing down? Perhaps we've run out of ideas (Gordon). Perhaps a savings glut and the  zero bound drive secular stagnation lack of demand (Summers). Perhaps the out of control regulatory leviathan is killing growth with a thousand cuts (Cochrane).

Or maybe productivity  isn't declining at all, we're just measuring new products badly (Varian; Silicon Valley). Google maps is free! If so, we are living with undiagnosed but healthy deflation, and real GDP growth is actually doing well.

Chad:

First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies ... Second, estimates... of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown...Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs [internet] would have to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.

An interesting read throughout. 

[Except for that last sentence, a near parody of academic caution!]  

Financial Choice

If you're interested in policy rather than politics, the package of legislative proposals coming out of Congress are a lot more interesting than the Presidential race at the moment. Speaker Paul Ryan is rolling out "A Better Way" package and Rep. Jeb Hensarling has just announced a "financial CHOICE act" to fundamentally reform Dodd-Frank. (Most quotes are from Jeb Hensarling's speech at the Economic Club of New York. See also  NYT coverage.)

These efforts will, I think, become much more important later on. The presidential race will decide whether this agenda can survive the instant veto that it faces now.  (This is a non-partisan comment. Hilary Clinton could likely assure a landslide by announcing she will work with Paul Ryan to craft and pass it.)

In any case, it defines a clear program that may be the focus of economic policy under a presidency of either party. And I think that's healthy as well.  We are still living in the shadows of Franklin Roosevelt's 100 days, and an increasingly imperial presidency. But the current need is not for a flurry of new legislation and executive orders to address a crisis. We need a steady clean-up of the legal and regulatory mess of the last few decades. For that project, it may be better for policy leadership to come from Congress, and by careful and patient drafting of actual legislation.

The legislation is still being drafted, which is why it would be lovely if more of the media and blogosphere were paying attention rather than to the latest antics of the presidential candidates. The congressional staff writing these things are paying attention and the proposals can be refined!

Today, a look at the Financial CHOICE act.

More capital, and the carrot of less regulation

...there is a growing consensus surrounding the idea of a tradeoff between heightened capital levels and a substantially lower regulatory burden....[We] will relieve financial institutions from regulations that create more burden than benefit in exchange for meeting higher, yet simple, capital requirements...Think of it as a market-based, equity financed Dodd-Frank off- ramp... the option remains with the bank.

Lottery Winners Don't Get Healthier

Alex Tabarrok at Marginal Revolution had a great post last week, Lottery Winners Don't get Healthier (also enjoy the url.)

Wealthier people are healthier and live longer. Why? One popular explanation is summarized in the documentary Unnatural Causes: Is Inequality Making us Sick?

The lives of a CEO, a lab supervisor, a janitor, and an unemployed mother illustrate how class shapes opportunities for good health. Those on the top have the most access to power, resources and opportunity – and thus the best health. Those on the bottom are faced with more stressors – unpaid bills, jobs that don’t pay enough, unsafe living conditions, exposure to environmental hazards, lack of control over work and schedule, worries over children – and the fewest resources available to help them cope. 

The net effect is a health-wealth gradient, in which every descending rung of the socioeconomic ladder corresponds to worse health.

If this were true, then increasing the wealth of a poor person would increase their health. That does not appear to be the case. In important new research David Cesarini, Erik Lindqvist, Robert Ostling and Bjorn Wallace look at the health of lottery winners in Sweden (75% of winnings within the range of approximately $20,000 to $800,000) and, importantly, on their children. Most effects on adults are reliably close to zero and in no case can wealth explain a large share of the wealth-health gradient:

In adults, we find no evidence that wealth impacts mortality or health care utilization.... Our estimates allow us to rule out effects on 10-year mortality one sixth as large as the crosssectional wealth-mortality gradient.

The authors also look at the health effects on the children of lottery winners. There is more uncertainty in the health estimates on children but most estimates cluster around zero and developmental effects on things like IQ can be rejected (“In all eight subsamples, we can rule out wealth effects on GPA smaller than 0.01 standard deviations”).

(My emphasis above)

Alex does not emphasize the most important point, I think, of this study.  The natural inference is, The same things that make you wealthy make you healthy. The correlation between health and wealth across the population reflect two outcomes of the same underlying causes.

How to raise GDP 10%, and reduce inequality too

Chang-Tai Hsieh and Enrico Moretti have a very nice new working paper "Why do Cities Matter?"

..increased wage dispersion lowered aggregate U.S. GDP by 13.5%  Most of the loss was likely caused by increased constraints to housing supply in high productivity cities like New York, San Francisco and San Jose. Lowering regulatory constraints in these cities to the level of the median city would expand their work force and increase U.S. GDP by 9.5%. 

Roughly, the same worker, working the same job, in San Jose or San Francisco, earns double what he or she earns somewhere else in the country.  Here is their plot of wages across cities:

Sure: Chang-Tai Hsieh and Enrico Moretti

The right tail there isn't just missing -- it was absent in 1964. There weren't any cities (MSA's) with 50% higher wages than average in 1964. That's New York, San Francisco and San Jose now.

What does this have to do with growth?

Universal Basic Income

Universal Basic Income is in the news. Charles Murray wrote a thoughtful piece in the Wall Street Journal Saturday Review. The Swiss overwhelmingly rejected a referendum -- but on a proposal quite different from Murray's.

Murray proposes that "every American citizen age 21 and older would get" $10,000 per year "deposited electronically into a bank account in monthly installments." along with essentially a $3,000 per year health insurance voucher.

The most important part of Murray's proposal: UBI completely replaces

 Social Security, Medicare, Medicaid, food stamps, Supplemental Security Income, housing subsidies, welfare for single women and every other kind of welfare and social-services program, as well as agricultural subsidies and corporate welfare. 

There is a lot to commend this idea. First, it would reduce the dramatic waste in the current system:

Under my UBI plan, the entire bureaucratic apparatus of government social workers would disappear

Moreover, the bulk of government spending now does not go to people who are really poor. SSI and medicare go to old people, many of whom are quite well off. Housing subsidies such as the mortgage interest deduction go to people with big mortgages and big tax rates -- nor poor people. Murray doesn't really emphasize this point, but his proposal is far more progressive than the current transfer system.

Second, it would reduce the very high disincentives of the current system, which traps people.

 Under the current system, taking a job makes you ineligible for many welfare benefits or makes them subject to extremely high marginal tax rates. Under my version of the UBI, taking a job is pure profit with no downside until you reach $30,000—at which point you’re bringing home way too much ($40,000 net) to be deterred from work by the imposition of a surtax.

WSJ growth oped -- full version

WSJ Oped. Now that 30 days have passed, I can post the whole thing. Previous post.

Ending America’s Slow-Growth Tailspin

Sclerotic growth is America’s overriding economic problem. From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate—1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%. Last week’s 0.5% GDP report is merely the latest Groundhog Day repetition of dashed hopes.

The differences in these small percentages might seem minor, but over time they have big consequences. By 2008, the average American was more than three times better off than in 1952. Real GDP per person rose from $16,000 to $49,000. And those numbers understate the advances in the quality of goods, health and environment that came with growth. But if U.S. growth between 1950 and 2000 had been the 2% of recent years, instead of 3.5%, income per person in 2000 would have risen to just $23,000, not $50,000. That’s a huge difference.

Looking ahead, solving almost all of America’s problems hinges on re-establishing robust economic growth. Over the next 50 years, if income could be doubled relative to 2% growth, the U.S. would be able to pay for Social Security, Medicare, defense, environmental concerns and the debt. Halve that income gain, and none of those spending challenges can be addressed. Doubling income per capita would help the less well off far more than any imaginable transfer scheme.

Summers on roadblocks to infrastructure

The bureaucrats of Massachusetts have done the nation a wonderful service, by parking an abject lesson in America's infrastructure sclerosis right in front of Larry Summers' office.

Summers and Rachel Lipson have written a remarkable Op-Ed in the Boston Globe, and Larry a deeper follow-on piece on the Washington Post Wonkblog, detailing the 5 year struggle to repair a bridge that took 11 months to build in 1911.

The narrow story:

How, we ask, could our society have regressed to the point where a bridge that could be built in less than a year one century ago takes five times as long to repair today?

In order to adhere to strict historical requirements overseen by the Massachusetts Historical Commission, the Massachusetts Department of Transportation had to order special bricks, cast by a company in Maine, to meet special size and appearance specifications from the bridge’s inception in 1912.

...extensive permitting and redesigns haven’t helped. 

And the rest reads like a typical Wall Street Journal oped anecdote of regulatory incompetence, fodder for my next weekly summary.

Larry's Post follow on is deeper:

Investigating the reasons behind the bridge blunders have helped to illuminate an aspect of American sclerosis — a gaggle of regulators and veto players, each with the power to block or to delay, ...

At one level this explains why, despite the overwhelming case for infrastructure investment, there is so much resistance from those who think it will be carried out ineptly. 

Stop for a moment here. This sentence is a watershed moment. Larry is one of our foremost public-intellectual economists. He's been arguing for years for infrastructure spending, first as "shovel-ready" stimulus to fight the recession, lately as the remedy for "secular stagnation." So far, he's been arguing mostly for more money, and not highlighting regulatory roadblocks. The Democratic party (not Larry) line is that infrastructure is the fault of stingy Republicans who won't spend the money.

But here is Larry, listening, and urging his readers to listen. Savor the sentence: "This explains why.. there is so much resistance from those who think it will be carried out ineptly." How often, in American public life these days, do we see a prominent, party-aligned, public intellectual listen hard and understand what's bothering the other side? No, it's not that they are stingy, mean-hearted, evil, or whatever. It's that they don't trust the money to be spent on the right thing, in the right place, in finite time. They have a point.

Bush v. Reagan on Immigration

Scott Summner posted this beautiful exchange between Ronald Reagan and George Bush Sr. on immigration. Direct link (youtube).

Scott titles the post "when the GOP still had some decency," which I think he should more accurately state as "when the two leading GOP presidential candidates still had some decency." There are many people in the party -- in Congress, governors, state legislators, losing Presidential candidates, in Republican think tanks and so forth --with quite sensible ideas on immigration, and with the kind of personal decency Scott notices in the video, and lacking of the presidential candidates today.  There are also many decent and sensible Democrats too.

In this era that the battles within parties are as important as those between them, we have to get out of the habit of tarring whole parties with the behaviors and attitudes of some people in them.

Scott also characterizes the debate as "Bush stakes out a very liberal position on immigration, and then Reagan responds from a position even further to the left.." That's not quite accurate either. While it's accurate that the "left" wants to allow "undocumented immigrants" access to schools and services,  they typically do not want to open labor markets. Both Bush and Reagan explicitly welcomed people to come and work. Letting people come and not letting them work is a recipe for disaster. These are now libertarian positions, not right vs. left.

But I'm quibbling. Thanks Scott for a great video.

Equity financed banking video

Video of my talk at the Minneapolis Fed's "Ending Too Big to Fail" symposium. A link to the video (youtube) in case you don't see the above embedded version. The event webpage, with links to the other talks and the agenda.  Summary: AM: Dodd Frank is a big failure, we need a big fix. PM: We'll get it to work with little fixes here and there. I posted the text of my talk earlier.

Ideas had sex

Adam Smith. Source: WSJ

Why are we so much better off than our ancestors? Why did this process only start where and when it did, in Western Europe, not in Rome or China?

Deirdre McCloskely has an excellent essay in the Saturday Wall Street Journal Review.

Her answer: "Ideas started having sex," a glorious sentence she attributes to Matt Ridley.

"The idea of a railroad was a coupling of high-pressure steam engines with cars running on coal-mining rails. The idea for a lawn mower coupled a miniature gasoline engine with a miniature mechanical reaper. "

And so on. She is exactly right. We tend to focus on the original idea, the basic science. That's necessary, but 99% of growth comes from elaboration, implementation, and the marriage of ideas -- sex in the sense of genes combining and making new things.

What's the bar for these hookups?

The answer, in a word, is “liberty.” Liberated people, it turns out, are ingenious.

Also,

...equality. ...not an equality of outcome... equality before the law and equality of social dignity.

Though, as she points out at length, the social dignity, property rights, and equality of entrepreneurs has always been a dicey matter.