Saturday, June 11, 2011

How to Grow




6 comments:

TJE said...

http://www.bushcenter.com/economic-growth/4percent-project

PL, discussions of this event seem to square with your post.

Doesn't it seem like only yesterday when the environmental left was disparaging growth as a bad thing?

TJE said...

http://research.stlouisfed.org/publications/review/11/01/1-18Garrett.pdf

Patrick_L said...

there's no question that some environmentalists suffer from a limited understanding of economics and growth that prevents them from understanding how important it is to harness these forces if they hope to succeed. However, I think that strain of environmentalism is falling in influence relative to those environmentalists who promote growth, productivity increases, etc. as a way to slow or reverse climate change.

Shockingly both parties, all political movements, and every group under-the-sun suffer from blindspots and ignorance. Just look at the Tea Party.

On the Bush center event, I would just comment that some of the arguments in the event transcripts were better than others. Largely it's not a problem of identifying the wrong factors, but some conservatives placing inappropriate weights on each of the individual factors. For instance, likely the most important thing our government could do is massively increase investments in basic research, infrastructure, human capital, etc. (massively implying doubling or tripling our spending in these areas, though since we already spend so little on these areas they still wouldn't consume much of our economy). This is what many of the Scandinavian nations have done to maintain robust economies along with some of the most expansive social states imaginable.

Only after this government expansion would it be worthwhile to look at other areas like the size of our elderly entitlement programs and the taxes that finance them, which especially after controlling for our nation's obscene health care costs, are no more generous than the average Anglo-Saxon limited government nation and far less generous than the rest of the developed world. Social insurance programs after all have positive economic effects by reducing economic and aging risks and the steps people take to try to control them that dampen growth in-the-now. There's only so much you'll ever reduce those programs, so there's only so much marginal gain to be expected from those kinds of changes.

TJE said...

http://research.stlouisfed.org/publications/review/11/01/1-18Garrett.pdf

Patrick_L said...

Thanks Professor Eismeier for reposting the link- for some reason I wasn’t able to get the document with the first one you gave. Hence my lack of response. Now that I have a working link, I’m pleased to provide my thoughts here:

First, as the authors note, the validity of the use of the index measure- like any such index measure- for this study is only an assumption at this point. A tenuous one without support at this time. And if the index goes, so goes the entire study. As I’ve pointed out before on this blog in response to ALEC’s competitiveness index (which you, Professor Eismeier, smartly cited at the time with no endorsement), index measures like these are extremely arbitrary and what you’d actually want to study- and regress- are the underlying variables. The authors may- or more accurately, the free market think tank Fraser Institute which puts together the economic freedom index- cite theory to explain their measures of economic freedom, but they don’t cite strong empirical evidence for their measures, they don’t explain why they don’t include other measures of “economic freedom”- in this case size and scope of government policies-, and they don’t provide theory or evidence as to why the factors they included should be equally weighted (the last of which is the most galling point- the notion of equal weights is absolutely ridiculous). I appreciate the complexity of the task these researchers are tackling, and I wouldn’t reject results from a properly done study, and I know there are data limitations which can restrict research studies, etc. but honestly- I consider studies using these indexes as suspect. I don’t want a regression on a summary measure, I want a regression on the actual variables of interest. And I know the researchers try to mitigate the bias this kind of summary measure creates, but I also know that it is insufficient and bias will still exist- potentially playing havoc on their results. (potentially not- bias is after all a tricky beast). Their simultaneity control is also … undesirable, but I understand the problems in getting a better one. That doesn’t mean that concerns over simultaneity in their research results shouldn’t be considered, but that’s a minor critique in my mind compared to my concerns over using an index measure. I cannot stress strongly enough my concerns over this approach.

Second, their strongest results by far are for labor market policies. For their index, the minimum wage, government employment as a share of total employment (I’m pleased to say a much better variable choice than ALEC’s from their index, which I sharply critiqued in the past), and union density. Taxation for instance has no statistically significant effect, even at the low levels of statistical significance they are willing to accept (though to be fair- since I’m not a researcher in the field, I don’t know if the 10% significance level is acceptable practice in this specific field or whether there’s a theoretical or empirical argument for accepting a lower level of significance).

Patrick_L said...

Third, their results find that a movement in their economic freedom index from nearly the lowest state to nearly the highest state would explain 10%... or less- possibly 4% depending on the specification… variation in employment growth across states. That kind of effect- generated by such a massive move in the nature of government- should be weighed against the things you lose from changing government that much.

Fourth, their model is insufficiently specified. At the very least, they should have included a mild weather variable in their study. Since it’s generally an important variable in this field of literature, and is backed up by numerous econometric studies, I’m confused as to why the researchers didn’t include it. I’m also skeptical as to why they didn’t include it. Mild weather is a well-known variable for mitigating the size of these government effects.

Fifth, I would not reject out-of-hand arguments that certain measures of government and taxation would have a negative impact on economic growth (just as others will have a positive impact) across different time frames. This isn’t surprising. After all, economists stress the equity-efficiency tradeoff. However, as I’ve said before, the effects are much smaller than conservatives often believe, and are not necessarily even from the government concerns most conservatives cite. Also, I would point out that the labor policy results don’t shock me- this for instance is an area I think conservatives have a good case on the efficiency point and are decently supported on the empirical front. For instance, on this blog I’ve been quite open to the idea that labor laws could have a statistically significant (but small in size) effect on the margin- which would be enough to effect business-decision making. However, that point doesn’t take into account equity and similar concerns that Americans might have. Also, when Americans think about the “disastrous” effects of government on the economy, I’m not sure that the first thoughts that leap into their minds are labor unions or the minimum wage. Smart conservatives might know that these factors could have detrimental effects on economic growth- I’m not sure most Americans would like to confront that reality. (I haven’t made my policy-mind up completely on these areas yet).