Monday 31 January 2011

Re: Economic growth is not a race to the moon

Dear Clive,

Thanks for this article in today's FT.

The fact is, the secret of America's success in the post-war period was lack of competition more than productivity and other things you mention.

With Japan and Germany (including most of Western Europe) out of the way and Russia closed, America had the whole pie to itself. Hence the un-hindered growth and great life-style for the next 6 decades.

Now, most of the Europe is definitely back on track. But with the China and partly India joining the race, no matter how much productivity America tries to improve, it is not going to help.

The only solution for America is to adapt with lower expectations.

Regards,

Pradeep Kabra




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Economic growth is not a race to the moon
By Clive Crook
Published: January 30 2011 21:30 | Last updated: January 30 2011 21:30
My first take on Barack Obama’s State of the Union address was to find it disappointing. The US president missed the perfect opportunity, I thought, to prepare the US for the fiscal squeeze that must come. Having read the speech more carefully, I feel I was unfair. I was too kind.

Not that I retract everything. The lack of fiscal specifics was the biggest failing. (Next month we shall see whether Mr Obama puts it right in his budget.) And this was partly balanced by some stirring stuff about unity and optimism and American exceptionalism and so forth. But I was too indulgent of the president’s main theme: jobs, innovation and competitiveness.

How could anyone object to that? In 1994, back when he cared more about demystifying economics than scourging conservatives, Paul Krugman wrote a wonderful essay on competitiveness for Foreign Affairs. He was rebutting – too mild a word – the then-prevailing Clintonian orthodoxy, as advanced by Robert Reich and others, which held that competitiveness was the key to prosperity. This myth has never gone out of fashion with business leaders. Mr Obama, in his turn, has now taken it up.

Mr Krugman’s point is not hard to grasp. The ultimate source of higher living standards is growth in productivity, and growth in US productivity has little to do with whether Japan, or China, or any other country is growing quickly or slowly. Admittedly, his own thinking has since evolved. Last week he wrote a column on competitiveness that did not even mention productivity. Never mind, he got it right the first time.

The metaphor of growth as a race with winners and losers – all that stuff in the speech about Sputnik moments, falling behind, winning the 21st century – is nonsense. Over the long haul, if US productivity rises, so will US living standards. Why should growth in China or India hold back US productivity? No reason at all.

Once conditioned to think “productivity” whenever a politician says “competitiveness”, you look at economic policy differently. Winning begins to seem overrated. What exactly do we win, you wonder? Being number one in worldwide production of solar panels would be nice, but how would that raise economy-wide productivity? The key to improving living standards lies not in winning the race to develop showcase technologies, but in accumulating capital, diffusing knowledge and accommodating the disruption that this entails.

Granted, this is a bit of a simplification. Skills tend to cluster. The literature on research and development suggests that social returns are higher than private returns, so the case for subsidising it is strong. The link between productivity and wages has weakened in the US in recent years, partly because health costs have driven a wedge between the two. All such caveats aside, productivity is still the key, and you do not raise it by putting men on the moon (even if you get pens that can write upside-down as a spin-off). Productivity is about doing boring things well.

Educate your workers. Build roads and bridges (high-speed trains, optional). Don’t punish savers. Don’t overregulate. Let good businesses flourish and bad ones fail. “Higher productivity” is another way of saying “lower costs” – so let companies strive to lower them. Welcome cheap imports: they raise real incomes.

What use is that, you might say, if the jobs all go? The jobs don’t all go. Unemployment is high in the US today because demand collapsed, not because the US is “uncompetitive”. Eventually, demand will revive and employment will recover.

Even in good times, foreign competition forces workers to find new jobs. If you are going to object to that, complain about labour-saving innovation as well. A successful economy is not one that avoids displacing workers, but one that speeds them back into good jobs.

Assisting this transition is a proper role for economic policy. In the end, though, the pay these jobs command will depend on physical and human capital – that is, on productivity.

Aside from the muddle over competitiveness, the president also seems confused about innovation and jobs. They rarely go together, at least in the first instance. The desire to cut costs, including labour costs, is why most innovation happens.

The president envisages a surge of investment and employment in clean energy. You can justify this on environmental and national security grounds; you can justify it as stimulus spending, too, which might boost aggregate employment. But clean energy is a disruptive technology: go to West Virginia and ask a miner. At full employment – or as part of a revenue-neutral package, which the president seems to have in mind – it would destroy as many jobs as it created.

The US is a remarkably rich country because it has a remarkably productive economy. Mainly, I credit its daunting work ethic, its appetite for economic dislocation and its post-1945 surge of investment in education.

The work ethic is unimpaired. By European standards, economic dislocation is still tolerated. But the US education system, despite the country’s pre-eminent universities, is failing. I don’t doubt that this is the biggest threat to future US living standards. The president mentioned it in his speech. That part, I loved.

clive.crook@gmail.com