Economic Growth -- Do Policies Even Matter?
About the only thing every participant in the budget debate -- the President, the Ryan Republicans, the Bowles-Simpson crowd -- agrees on is the need for the economy to return to a sustained period of healthy GDP growth. Conservatives think we can get there by cutting corporate tax rates, reducing the regulatory burden on businesses, and simplifying tax codes. The President -- and liberals generally -- think we can get there by "investing" to "win the future" (whatever that means). But what if they're all wrong? Or, rather, what if the plain truth is that no one really knows how to drive economic growth?
Look at recent history. Since the petering out of the post-war boom era in the late 1960s, there have only been two stretches in which real GDP growth averaged 3.5% or better over a period of 5-6 years (which is what the President's 2012 budget assumes for the period 2011-2016) -- the Reagan boom (1984-1990) and the Clinton boom (1994-2000). Reagan cut taxes; Clinton raised taxes. Reagan increased aggregate expenditures through most of his term of office (the defense build-up), then brought them back down; Clinton reduced aggregate expenditures substantially (the post-Cold War "peace dividend").
By contrast, in the Ford-Carter era, both taxes and expenditures (as a percent of GDP) went up moderately, while in the GW Bush years, taxes came down and aggregate expenditures rose fairly substantially. In both cases the result was anemic real GDP growth over an eight-year period.
Do you see a pattern here? I sure don't. The one thing I see in common between the '80s and the '90s -- and missing in the '70s and '00s -- were massive technology/innovation booms that touched nearly every corner of the economy and the majority of households. In the '80s it was centered on the PC, microcomputing, and corporate networking. This was the era when Microsoft, Intel, Cisco, Sun, Oracle, and many others grew what was effectively a whole new sector of the economy. In the '90s, of course, it was centered on the Internet, with a healthy contribution from the nearly universal adoption of "enterprise software." Both of these booms represented tectonic shifts in the national economy, resulting in the creation of entirely new industries, the hiring of hundreds of thousands or millions of high-skill employees, and significant productivity advances in at least some sectors of the broader economy.
It seems at least plausible that the growth the U.S. experienced in the '80s and '90s was due far more to these private-sector explosions in technology and innovation than to the political and economic policies of Reagan or Clinton (although I think a good case could be made that Reagan, in credibly attacking inflation, and Clinton, in credibly attacking the deficit, helped to create an atmosphere of increased confidence that enabled the private sector to do its stuff).
All of which leads to some interesting questions:
- Is there some large-scale technology or innovation out there on the horizon that could generate this kind of sustained economic growth in the forseeable future?
- What if there isn't? What do the President's budget and Congressman Ryan's budget look like then? Are we doomed?
- If so, is there a compelling argument that "conservative" policies would do more to encourage it, or less to discourage it, than the President's policies? (It is curious to note here that the Reagan and Clinton booms produced almost identical total real GPD growth -- 31% for the period 1984-1990, 30% for the period 1994-2000.)
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Feb '11
Re: Economic Growth -- Do Policies Even Matter?
There are often significant time lags between the time a policy is enacted and the time its full impact on the economy is seen. For example, the Staggers Act deregulated freight railroad rate-setting...the graph here (under the "railroad rates" heading) indicates that the rate decline, which had obvious benefits for the economy as a whole, was still in progress 20 years later.
Some of the most important policies are more under the control of state and local governments than of the federal government: education, in particular--and improvements or deprovements in this area will also have long time lags before they impact the economy.
Edited on Apr 22, 2011 at 6:13amFeb '11
Re: Economic Growth -- Do Policies Even Matter?
Steve Manacek:
.....
Or, rather, what if the plain truth is that no one really knows how to drive economic growth?
Steve, I think this is the central truth that should inform public policy. The fact is, if we knew what policies worked to drive growth (if government policy ever drives growth) then we wouldn't be discussing the economy because we'd already be in our fifth decade of booming growth.
Re: Economic Growth -- Do Policies Even Matter?
Ed Gorz
if we knew what policies worked to drive growth ... we'd already be in our fifth decade of booming growth.
Ed: I'm not so sure about that. With liberals, it's not a matter of economic growth -- they have different priorities and they've found a way to convince themselves (rationalize) that their policies square with growth -- thus redistribution is achieved through Keynesian pump-priming, even though it doesn't work. Their history revisionism and economics text books say it does work, and they keep doing it.
Economists will forever argue over whether supply side economics works, but for the sake of discussion, let's just put that aside. I believe common sense tells us that as a general proposition, free markets tend toward robust economic activity -- supply and demand, the price mechanism, competition, and when you have a freer market, generally speaking, you have a more robust economy and vice versa, subject to the ebbs and flows of business cycles (whatever those are).
Liberals always want to control things thru govt and create a more ideal society -- their prescriptions invariably interfere with markets. Their public sector expansion invariably crowds out (and suppresses) private sector economic activity.
Dec '10
Re: Economic Growth -- Do Policies Even Matter?
It is perfectly reasonable that the US as a whole will see its GDP growth more affected by private sector technological innovations than any one policy; however if we want to see how policy affect GDP we shouldn't be looking at the US as a whole, but rather the individual states.
When the wave of growth created by private sector innovation came sweeping across the US which states grew more? Is there correlation between the states that saw the most growth and their policies? The same came be said for the world at large. When the computer and internet wave of growth washed across the earth which countries grew and did those countries have similar policies in place?
I think looking at GDP growth in absolute terms is misleading. Its not about how much the GDP grew this year as oppose to past years. The question is how much did GDP actually grow vs what it could have potentially grown?
A period 0% growth in GPD looks pretty horrible if you compare it to some past time where GPD grew 10%. But 0% GDP grow looks awesome if during that same period everyone else saw their GDP actually shrink.
May '10
Re: Economic Growth -- Do Policies Even Matter?
I am beginning to believe that economic stats are worthless beyond being what they are - a mere snapshot of the moment.
The idea that a couple of thousand folks huddled in Washington DC are able to direct the independent economic decisions, not of just 320 million fellow citizens, but 4 billion other economically active adults worldwide is just ludicrous on its face.
It matters not what worked in the 60's, 80's or the 90's because the world was a different place in each of those eras.
Edited on Apr 22, 2011 at 7:59amFeb '11
Re: Economic Growth -- Do Policies Even Matter?
Steve Manacek,
The technologies you cited were developed to a large degree by Xerox in the late 60s and early 70s. Why weren't they implemented earlier? And why didn't Xerox develop them?
Re: Economic Growth -- Do Policies Even Matter?
Great points, Steve. Here's an abbreviated view from this Silicon Valley entrepreneur.
The 80's tax and regulatory reforms unleashed a reorganization of American business away from conglomerates--large internal markets optimized to avoid crushing marginal tax rates--in favor of efficient enterprises returning cash to shareholders. Some of the free cash went into venture-backed start-up companies, which created all those amazing innovations we enjoyed in the 80s and 90s. These companies then accessed public markets fueled by the new investor class, recycling capital to fund the next generation.
Clinton's tax increases could not overcome the power of the new paradigm. In addition, capitalism had triumphed in the Cold War and, on a relative basis, the US was the most attractive base from which to serve the new global marketplace.
Sarbanes-Oxley, enacted early in the Bush administration, killed the model. It is now crushingly expensive to go public in the United States, so fewer and fewer companies do so. Venture capital is more and more statist in orientation, investing public capital pools (i.e., CalPERS) in economically ruinous projects like the latest cleantech fantasy.
Meanwhile, other countries are competing with reduced corporate tax rates.
Edited on Apr 22, 2011 at 7:54amJul '10
Re: Economic Growth -- Do Policies Even Matter?
I don't agree with the premise. In fact, I find it funny that people think that there's a knob somewhere in Washington, DC that controls the actions of millions of people making millions of decisions every day. Wouldn't every President turn that up to 11?
I also think you're cherry picking your examples. Roaring 20s. Depression in the 30s. After Andrew Jackson (the President who retired the debt) there was the "Panic of 1837," yet per capita income grew. So you have to have a jaundiced eye when listening to historians.
You actually stumble across the right answer:
"although I think a good case could be made that Reagan, in credibly attacking inflation, and Clinton, in credibly attacking the deficit, helped to create an atmosphere of increased confidence that enabled the private sector..."
Transparency and the rule of law allows enterprises to do business. Compliance with federal bureacracy where the rules can change in a moment and rent-seeking is the order of the day inhibits economic growth.
As an aside, Apple is sitting on $65B in cash. Many other companies are doing the same...holding off hyperinflation...because we're already inflating...
Feb '11
Re: Economic Growth -- Do Policies Even Matter?
David, I agree with everything you said. It's just that I think there's a difference between establishing the conditions for a free market and individual liberty on the one hand and "driving growth" on the other. I think that for conservatives, too, it shouldn't be a matter of economic growth because 1) there is no such thing as never ending growth, and 2) we can't drive the economy either - no one can. All we can do is set up a system of ordered liberty where individuals are given the space to thrive. While I agree that this would "tend toward robust economic activity" since I think liberty is the true driver, that's not the same thing as saying it's a policy that we know "works" to drive growth. There are no guarantees to success for individuals or the economy as a whole.
Feb '11
Re: Economic Growth -- Do Policies Even Matter?
Hang On: Steve Manacek,
The failure of Xerox to commercially exploit these technologies illustrates the important point that "R&D" is not a synonym for "innovation." Commercial exploitation of a technology requires not just the technology itself, but an appropriate business model, and companies--especially those with a single fast-growing core busines--often try to fit the new business into a procrustean bed which cripples it...for example, by trying to run it through a sales force that may be excellent for the traditional products but not the new ones. And usually, the new initiative will not have the political strength to take on the functional barons of a centralized organization.
Christensen & Raynor discuss this in their excellent book "The Innovator's Solution."
Sep '10
Re: Economic Growth -- Do Policies Even Matter?
I think Michael Tee and David Limbaugh sum up my perspective pretty well. It's not about government driving growth, it's about getting government out of the way and letting the market decide. The two next trans-formative technologies (although it could be argued that they are too interrelated to be considered separate) are biotechnology and nanotechnology. They will not take off until the business environment is much more entrepreneurial and less bureaucratic.
Feb '11
Re: Economic Growth -- Do Policies Even Matter?
The levers are fiscal policy, monetary policy, trade policy, and domestic regulations. Reagan had looser fiscal policy (lower taxes and higher deficits), tighter monetary policy, no difference in trad policy, and fewer domestic regulations than his predecessors. The economy was good.
Clinton had tighter fiscal policy (higher taxes, lower deficits), no difference in monetary policy, freer trade policy, and more domestic regulations than his predecessor. The economy was good.
Bush had looser fiscal policy, looser monetary policy, less free trade, and more domestic regulations than his predecessor. The economy ran out of gas and then turned to disaster.
Obama repeated Bush's disastrous economic policies on steroids and we're headed over the cliff.
So to argue that it's technology and not the economic policies does not ring true. Reagan's could have been better. Clinton's could have been better. And both were better than their predecessors.
The technology will come to the marketplace when and where the economic policies allow it.
Feb '11
Re: Economic Growth -- Do Policies Even Matter?
david foster: Hang On: Steve Manacek,
Christensen & Raynor discuss this in their excellent book "The Innovator's Solution." · Apr 22 at 8:07am
You're right, it is an excellent book. And you're right that's why Xerox didn't do it.
George Savage is also absolutely right about why the technologies were brought onto the market when they were. There was a good economic environment for them to come to the fore.
Sep '10
Re: Economic Growth -- Do Policies Even Matter?
George Savage: Great points, Steve. Here's an abbreviated view from this Silicon Valley entrepreneur.
Edited on Apr 22 at 07:54 am
Is its presence in CA having an effect on Silicon Valley?
Re: Economic Growth -- Do Policies Even Matter?
Steve, I think that you underestimate the long-term impact of the Reagan tax cuts -- which were only modestly adjusted upwards under Clinton. When investors lose their shirts, the government does not share their pain. When they make out like bandits, the government takes its cut. The size of that cut -- percentage-wise -- matters enormously to anyone calculating the risks. Right now, we are in flux, and no one investing now has any idea what the size of that cut will be when and if he realizes any gains that he might make. If the Republicans win and win big in 2012 and if they implement something like the Ryan plan, the investing instinct will once again be unleashed. If not, not. We could end up like France -- with structural unemployment at 8-12%.
Re: Economic Growth -- Do Policies Even Matter?
George Savage: Great points, Steve. Here's an abbreviated view from this Silicon Valley entrepreneur.
Clinton's tax increases could not overcome the power of the new paradigm.
Sarbanes-Oxley, enacted early in the Bush administration, killed the model. It is now crushingly expensive to go public in the United States, so fewer and fewer companies do so. Venture capital is more and more statist in orientation, investing public capital pools (i.e., CalPERS) in economically ruinous projects like the latest cleantech fantasy.
Meanwhile, other countries are competing with reduced corporate tax rates. · Apr 22 at 7:50am
Edited on Apr 22 at 07:54 am
George: I think your statement re Clinton is a great way of explaining that. As for Sarbanes-Oxley, I wish you would elaborate more on that from your entreprenuerial perspective and experience. It is a perfect example of disastrous consequences flowing from liberal "good intentions."
But could you be more specific on how Sarbanes actually deters in practice? I've read some about this, but would be interested in your take if you have time.
Dec '10
Re: Economic Growth -- Do Policies Even Matter?
Hang On: Steve Manacek,
The technologies you cited were developed to a large degree by Xerox in the late 60s and early 70s. Why weren't they implemented earlier? And why didn't Xerox develop them? · Apr 22 at 7:46am
Xerox should by all rights be ruling the world right now. The fact that they don't is...is I don't even have the words to describe it. When you read the history of Xerox and its R&D group you just can't believe the story is true. You keep waiting for the punchline, or conspiracy theory, or something to explain how management couldn't see what they had their hands on.
Re: Economic Growth -- Do Policies Even Matter?
Hear hear!
Jan '11
Re: Economic Growth -- Do Policies Even Matter?
It's a human instinct to want to control anything that affects your job performance. If you're going to get fired unless X succeeds, it's only natural to want to control X.
However, it's also the worst possible thing you can do. Growth requires innovation, and "controlled innovation" is an oxymoron.
Jul '10
Re: Economic Growth -- Do Policies Even Matter?
Or, rather, what if the plain truth is that no one really knows how to drive economic growth?
You have to understand the script. The economy hits a bad patch, the politicians devise a "stimulus" funneled to their political supporters (payoff is such an ugly word) and the business cycle proves the stimulus sound. Natural forces of grifting and economics in a time-honored tradition as old as currency.
But what if someone got greedy and structured a "stimulus" so budget bustingly huge and combined it with policies so dictatorial that no business, large or small, felt safe? A "stimulus" so bitingly cynical and ill-conceived that, in an expanding population in the most proven and robust economy in the history of the world, the workforce actually shrinks?
A singular accomplishment of horrific proportion. Obama will be the face of this disaster for all of history.