Productivity

The graph above was taken from Noah Smith’s post at Bloomberg View. I’ve taken the liberty of adding a couple of rough trend lines to the graph. There are a couple of things to note:

1. The increase in productivity from 1980 to 2002 was pretty clearly exponential.
2. The trend from 2002 to 2006 was linear.
3. After 2007 to 2011 the increase was linear at a much greater angle.
4. The present trend is linear with a lower angle than that from 2002 to 2006.

Mr. Smith notes:

In past decades, we would probably have turned to libertarian solutions. The obvious answer in the 1980s would have been to cut taxes and regulation, unleashing the forces of the private sector to innovate, build and invest. Some, such as the Hoover Institute’s John Cochrane, still believe that’s the secret. Many Republican politicians would no doubt agree.

But many economists have slowly been warming to the idea that government, far from being “the problem” (as Ronald Reagan put it), might actually be a big part of the solution. This often manifests in calls for increased infrastructure spending, or for fiscal stimulus to blunt the impact of recessions. But recently, some economists have suggested that government can play a vital role in innovation, technological progress and productivity growth.

One of these has been the University of Sussex’s Mariana Mazzucato, who champions the idea that government research is behind most of our major innovations. But recently, she has been joined by some very heavy hitters: Daron Acemoglu of Massachusetts Institute of Technology and James Robinson of the University of Chicago.

Acemoglu and Robinson are known for their theory that good government is critical to economic development. They believe that strong institutions, such as property rights and the rule of law, are the key to allowing countries to unleash their productive potential. But more recently, these economists have come up with an even bolder thesis. Government, they say, might be central to technological progress itself.

I think the situation is complicated. While government can theoretically be a force driving economic growth, it operates in the realm of politics rather than economics. Healthcare and education spending are consumption not investments. In theory they could be made investments but, frankly, that’s politically impossible. If most of our healthcare spending were devoted to the young rather than the old (as it is now) and educational spending were focused tightly on saleable skills, there might be some argument but as it is? Majors in interest studies, French literature, and art history are rather obviously consumption. While they may have residuals in terms of personal satisfaction, they provide relatively little to the rest of us.

Historically, the federal government has been pretty good at mass engineering projects, e.g. Boulder Dam or the space program, with clear objectives and reasonably well understood science but terrible at other sorts of project, e.g. the “War on Cancer” now entering its 45th year. Rewarding political friends, punishing political enemies, and pursuing projects favored by your political base in recent years have tended to overwhealm projects that might provide actual societal benefits.