By Glenn Hubbard
Thursday, April 14, 2022
Growth matters. A lot. A slightly higher rate of
economic growth, sustained over time, can make the difference between a big
increase in living standards and relative stagnation. Whether we can still
generate strong and steady growth is a “$64,000 question” for the economy
— the question. Nobel Prize–winning economist Robert Lucas
famously observed that once economists think of long-term growth, it is hard to
think of anything else. A pro-growth policy agenda is a good idea because
growth is a good idea.
But a deeper question remains: Is public support for
growth guaranteed? Oren Cass of American Compass refers to growth and
economists’ fealty to economic participation for all as “economic piety.” This
critique resonates for a simple reason: Forces that propel growth invariably
leave a wake of economic disruption for people in many places and political
disruption for the nation. A serious discussion of pro-growth policy must
account for that disruption.
A conventional pro-growth policy agenda can be enhanced
by support for openness to markets, ideas, and new ways of doing things, and
for the ability of firms to adapt to change. Such an enhanced agenda would
center on infrastructure broadly defined, development and dissemination of
better management practices, and reduced barriers to competition.
Yet the political process, and even many a conservative,
is openly skeptical of such an agenda. This skepticism is rooted not in
disagreement over the future of scientific advances or of organizational
adaptation — but in a concern that growth’s benefits be shared broadly.
Addressing this skepticism head-on is essential for rebuilding social support
for growth and for countering well-meaning but potentially harmful policies.
***
The system that needs defending is a mature and
successful one. Adam Smith, the great proponent of the “invisible hand” (not
the visible hand of a state-directed economy), saw openness and competition as
worth the candle. His 1776 publication of The Wealth of Nations came
before what we would recognize today as industrial capitalism, though
technological change and globalization were features of economic debates in the
aftermath of Smith’s ideas.
Smith’s radical insight is central to economic policy
today: National prosperity (the “wealth of a nation”) is represented by
consumption of goods and services by its people — i.e., their living standards.
The goal of the economy in Smith’s telling was to make the economic pie as
large as possible. His advocacy of free markets and competition rested on their
ability to boost consumption possibilities.
Two centuries later, Nobel laureates Kenneth Arrow and
Gérard Debreu added the jargon and mathematics of contemporary economics to
formalize Smith’s intuition. While individuals and firms act independently,
competitive markets lead to an efficient allocation of resources and a
maximized economic pie. Friedrich Hayek, another Nobel laureate, hailed the
virtue of a decentralized competitive price system in maximizing economic
activity.
Smith’s radicalism draws from his attack on mercantilism
— the economic orthodoxy of the day — which stressed a zero-sum view of trade
and state intervention to promote and protect certain firms and industries.
(Sound familiar?) His second radical insight was that the “nation” did not mean
the sovereign and the well-connected. In Smith’s view, individuals as consumers
— all people — were kings. Finally, channeling the sympathetic concern espoused
in his earlier classic, The Theory of Moral Sentiments, Smith
championed mass participation in the productive economy as a precondition for
human flourishing.
It is fair to say that Smith lacked a theory of per
capita growth in the economy over time; indeed, he wrote before the massive
increase in living standards attendant upon the Industrial Revolution. After
1800, per capita income in the United Kingdom — and the United States —
witnessed a 30-fold increase. There have also been major improvements in the
quality of goods and services that such a statistic doesn’t quite capture. And,
of course, many of today’s offerings — from smartphones to computers to
air-conditioning — were not available even in 1900, let alone 1800.
That lacuna in Smith’s theory partly reflects technical
difficulties in modeling growth. Higher output can come from growth in inputs
such as labor and capital, but what determines their growth? Today’s economists
highlight population growth and society’s willingness to work, save, and
invest. Still more important is growth in productivity, or the efficiency with
which inputs are used to produce goods and services.
Smith’s pin-factory example — in which output rose with
the specialization of tasks — links how things are done with the level of
productivity. But what factors determine productivity growth over time? Today’s
economic analysis focuses on technology and the process of generating ideas.
Since economic growth is still crucial for people seemingly marginalized by
capitalism, it’s worth asking whether the economic foundations expressed in The
Wealth of Nations are still relevant today. Where does growth come
from now? And do those sources still require openness and competition?
The short answer is that they do, but to see why, we need
to focus on the ideas of two prominent economists after 1800: Edmund Phelps and
Deirdre Nansen McCloskey.
Phelps, a Nobel laureate, has done much to connect growth
to Smith’s foundational ideas. He starts with Smith’s emphasis on a great many
individuals (not the state or privileged firms) searching for new and better
ways of doing things. This relentless search produces innovative ideas,
processes, and goods that drive growth — but only if the political economy
allows openness. Smith’s messy, “bottom up” version of the market therefore
puts mass innovation at the heart of economic growth. Phelps’s argument
reflects how Smithian societies committed to openness are best able to prosper
and promote growth.
This argument has two important applications. The first
is to debunk the sometimes fashionable view of secular productivity decline —
that we have run short of new things to discover and exploit. The second is to
give an answer to economies struggling with growth in a period of structural
changes from technology and globalization. Slowdowns in innovation are likely
not due to scientific barrenness but to walls against openness and change —
that is, fears of disruption.
Phelps’s concern with economic dynamism draws him to
Smith’s arguments against mercantilist tinkering in the economy. Like Smith, he
worries about the hidden costs of tinkering with competition by blocking change
from the outside and by enabling rent-seeking on the inside. These
“corporatist” policies — fashionable among some conservatives at present —
inevitably embolden vested interests and cronyism, slowing change and growth.
Even seemingly small interventions can subtly diminish innovation, a point to
which I’ll return.
Yet such a critique must acknowledge the political
consequences of disruption. Dynamism is messy. It creates growth in the aggregate,
but with many individual losers as well as individual gainers.
McCloskey, an economic historian, has similarly
identified the continuous, large-scale, voluntary, and unfocused search for
betterment as the source of new ideas that can produce economic growth. She
sees this “innovism” as primarily a cultural force, preferring the term to the
more familiar “capitalism,” and connects innovism to economic liberalism.
Echoing Smith, she emphasizes how an open economy allows individuals — from the
moderately to the spectacularly talented — to “have a go.” This economic
liberalism allows competition to enshrine liberty and mass flourishing.
In McCloskey’s telling, growth depends on a liberal
tolerance and openness to change, which encourage many people to be alert to
opportunity. Sustaining that tolerance as structural shifts bring economic
misfortune to many individuals, however, requires more than devotion to Smith.
***
Therein lies the current economic-policy rub.
Economists’ theories of growth bring to mind a coin: Sunny descriptions of
growth and dynamism are “heads,” and hand-wringing over disruption is “tails.”
As I observed earlier, growth is messy. It can push some individuals, firms,
and even industries off well-worn and comfortable paths.
But Smith offers more in defense of growth than paeans to
laissez-faire. Though he is sometimes caricatured as being anti-government in
all cases, Smith was principally opposed to mercantilist privileges for
specific businesses and industries and to the governmentalization of social
affairs. He wanted government to provide what economists today call “public
goods,” such as national defense, the criminal-justice system, and enforcement
of property rights and contracts — the institutional underpinnings of commerce
and trade. He also favored support for infrastructure to keep commerce flowing
freely.
But Smith went further: To prepare workers and enrich
their lives, he called for government to provide universal education, and he
drew a connection between education and liberty as well as work in a free
society. But boosting participation in today’s economy — participation that
provides support for growth — will require a bit more.
Not surprisingly, political reaction to economic
disruption brings about — pardon the econ-speak — a “demand” for and “supply”
of policy actions. Job losses, firm failures, and diminished industry fortunes
bring about a demand for help, for adaptation. The political process responds
with a supply of ideas in one of two forms: walls or bridges. Walls
are protections against disruption or change. Bridges, ways to get somewhere or
back, prepare individuals for the changed economy and help those whose economic
participation has been disrupted reenter the workforce.
Proposals for walls are familiar. They can be physical,
of course, but they needn’t be. Conservative populists advocate limits on trade
and technology, in order to advance industrial policy. Some progressives
advocate universal basic income. All these policies would diminish the
prospects for economic advances.
The most prominent sort of wall today is what I call
“modern corporatism.” It assumes that Smith was wrong: The “wealth of a nation”
lies not in consumption or living standards (and so ultimately in growth) but
in jobs, good jobs, even particular good jobs, with good
manufacturing jobs the very paradigm. The sort of tinkering with the market
that drew Smith’s ire may actually be a necessary way of recentering economic
policy on jobs, so the theory goes. Opportunities for work, and for the dignity
it can bring, are surely important.
A gentle industrial policy devised by social scientists
who are worried about jobs is not the answer. It results in state tinkering for
special interests, precisely the kind of thing that prompted Smith’s criticism
of mercantilism. Moreover, as University of Chicago economist Luigi Zingales
argues in A Capitalism for the People, it risks a vicious cycle: A
little bit of tinkering becomes a lot of tinkering — and anyone who cannot
justify special privileges is left out, calling into question social support
for growth. Nevertheless, industrial policy has caught the attention of elected
officials on the right, from Donald Trump to Josh Hawley to Marco Rubio. While
national security and the border can be exceptions as concerns, advice from
Milton Friedman to the party of Ronald Reagan this is not.
That said, economists’ invocation of Smith as a proponent
of let-’er-rip laissez-faire is neither faithful to Smith nor particularly
helpful to individuals and communities buffeted by disruption. With today’s
rapid and long-lasting technological change and globalization, “having a go”
requires support for acquiring new skills when they are needed.
That is why we need more bridges. Bridges take us
somewhere and bring us back. The journey to somewhere is about preparation for
new opportunities. The journey back is about reconnecting to the productive
economy when economic forces beyond our control have knocked us away.
Economic bridges have three features. The first is that
they help people overcome a specific challenge on their way to economic
flourishing — they don’t provide that outcome directly. The second is that
wider society builds the bridge, through private organizations, governments, or
public–private partnerships, as globalization and technological change have
introduced significant risks that individuals by themselves cannot avoid. The
third feature is that they avoid restraints on openness to changes in markets
and ideas.
We once did better, much better. During the Civil War,
President Abraham Lincoln worked with Congress to pass the Morrill Act,
directing resources to the development of land-grant colleges around the
country, extending higher education to citizens of modest means, and enabling
workers to develop skills for new industries, particularly in manufacturing. As
World War II drew to a close, President Franklin D. Roosevelt and Congress came
together to enact the G.I. Bill, helping to educate returning troops for a
changing economy.
Supporting economic growth and undergirding broad
participation in the economy require similarly bold ideas. To begin, community
colleges are the logical workhorses of skill development and retraining, and
their presence in regional economies makes them attractive partners for
employers. Yet community colleges have seen their state-level public support
wither. The Biden administration calls for free tuition, which would boost
demand but provide no support for community college to offer a practical
education and an emphasis on completion. Amy Ganz, Austan Goolsbee, Melissa
Kearney, and I proposed an alternative approach based on the land-grant-college
model. We proposed a supply-side program of federal grants to strengthen
community colleges — contingent on improved degree-completion rates and
labor-market outcomes. To further encourage training, the federal government
could offer a tax credit to compensate firms for the risk of losing trained
workers. It could also increase the earned-income tax credit for workers with
or without children.
New ideas are also needed to promote workers’ reentry
into the workforce. Personal reemployment accounts, for example, would support
dislocated workers and offer them a reemployment bonus if they found a new job
within a certain period of time. The “personal” refers to individuals’ choosing
from a range of training and support services. Another idea is to beef up
support for place-based assistance to areas with stubbornly high rates of
long-term nonemployment. Such support could be integrated with an increase in
the earned-income tax credit and the supply-side investment in community
colleges. Building on the decentralized approach in the land-grant colleges and
grants to community colleges, expanded place-based aid would be delivered via
flexible block grants encouraging business and employment.
Broad public support required for growth and dynamism
requires both bridge-building and a political language that frames it. Growth,
opportunity, and participation are good, and we do not need a new economics.
But phrases like “transition cost” and “inevitable economic forces” must give
way to bridges of preparation and reconnection.
***
‘Why did nobody see it coming?” a quizzical Queen of
England questioned a quorum of economists at the London School of Economics
about the global financial crisis as it emerged in late 2008. How could major
disruptive forces build up over time and yet escape the attention of experts
and leaders?
Of the disruptive structural changes accompanying
economic dynamism, one might ask a similar question. Growth matters. But that
growth is one side of a coin whose flip side is disruption is known, certainly
to economists. Why has our political discourse not emphasized this basic point?
Why did we not see fatigue with change coming among the
people who most had to bear its ill effects?
However foolishly, we did not. Some so-called
conservatives today have responded by saying that we should limit change.
Surely a better response is that we should seek ever more growth by allowing
unfettered change, but also facilitate the establishing of ever more
connections in a growing economy. That classical-liberal answer has the better
place in American conservatism — and in American economic life.
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