The Free Lunch in Economic Growth

Productivity growth is a strange and mysterious thing.  As far as I can tell, despite mountains of papers on growth theory, we know very little about how to optimize growth.  For instance, while it might seem like taxes should be important in determining growth, no evidence exists for this proposition.  Growth in the relatively low tax U.S.A. is roughly equivalent to high tax countries in Europe.  Similarly, growth in the U.S.A. was actually much higher half a century ago despite much higher marginal tax rates.  If there is an effect it appears to be swamped by the business cycle and other factors.

Some people talk about good institutions as being vital.  This seems obvious to me.  The better question is what is a “good” institution and how do we establish them?  Neither of these seem like tractable problems.  And so it appears to go in growth theory.

There is a joke that all the components of growth we can’t identify get lumped into Total Factor Productivity which is kind of a proxy for technological innovation.  I am fascinated by what is hidden in this variable.  For instance a recent study tried to quantify the effect on productivity of reducing sex and race discrimination.  For example, by letting women and blacks become doctors, we should overall benefit from better doctors unless you believe the best doctors are all white males.  The authors estimated that between a fifth and sixth of productivity growth in recent decades could be attributed to such an effect.  That is like free growth just from the country being less intolerant over the years.

Similarly, it’s recently become clear that cities are engines of productivity and that within cities some are far more productive than others.  If we could eliminate barriers for people moving into these productive cities we would all be better off.  Unfortunately, many of these cities artificially restrict housing supply raising cost of living such that for many it is better to move to low productivity Texas than high productivity San Francisco.  Thus everyone loses, the individual because they have to live in Texas and society because they lose out on the output gap of that individual for choosing to live in Texas.

Combining both of the above, if we had freer migration between countries, then the best human capital could go to the most productive areas in the world.

I guess my point is that TFP is masking all the interesting things.  Most of this is as close as you get to a free lunch in economics and it mostly comes down to allowing “free trade” in humans.  It may sound callous, but why are we so keen on free trade for goods, but so picky about where people want to work?


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