My friend and colleague Joel Mokyr talked recently with Russ Roberts in an EconTalk podcast that I cannot recommend highly enough (and the links on the show notes are great too). The general topic is this back-and-forth that’s been going on over the past year involving Joel, Bob Gordon, Tyler Cowen, and Erik Brynjolfsson, among others, regarding diminishing returns to technological change and whether we’ve reached “the end of innovation”. Joel summarizes his argument in this Vox EU essay.
Joel is an optimist, and does not believe that technological dynamism is running out of steam (to make a 19th-century joke …). He argues that technological change and its ensuing economic growth are punctuated, and one reason for that is that conceptual breakthroughs are essential but unforeseeable. Economic growth also occurs because of the perpetual nature of innovation — the fact that others are innovating (here he uses county-level examples) means that everyone has to innovate as a form of running to stand still. I agree, and I think as long as the human mind, human creativity, and human striving to achieve and accomplish exist, there will be technological dynamism. A separate question is whether the institutional framework in which we interact in society is conducive to technological dynamism and to channeling our creativity and striving into such constructive application.
I personally (IANAE) am inclined not to believe the tech-pessimist. I think that there is a decent argument that technology must reach the top part of its S curve. However, I think there are more pressing reasons for sub-par growth, including:
1. Fiscal incontinence: Enormous deficits with no clear path to bring them under control.
2. Tax increases. Not only did the tax law adopted last New Year increase the top marginal tax rates, but Obamacare imposed new taxes on capital income.
3. Regime uncertainty. Well, the country is being run by an utter incompetent, who is all the more more dangerous because he is in the grip of the Dunning–Kruger effect. His signature accomplishments are Obamacare and Dodd-Frank. Obamacare has gone from regulatory nightmare to complete fiasco. Regulators are years behind on Dodd-Frank, and there is no reason to believe it will work any better than Obamacare. Further, the EPA is still honing its axe with which to shut down industries all over the country.
4. The Fed, which has continued its uncertain foray into expanding its balance sheet like the universe expanded after the Big Bang. The Federal Reserve system is now carrying $50 of assets on each $ of capital, a ratio that would cause it to put a commercial bank into receivership. Further its ultra-low interest rate policy acts as a confiscatory tax on savers. How they can climb down from this situation without a catastrophe is not apparent. http://www.youtube.com/watch?v=hj86YsaoCtw
5. Institutional sclerosis in major chunks of the economy. Health care spending is more than one sixth of the GDP. In no other OECD country does it exceed one eighth. It is not a function of wealth. By most measures Switzerland has a per-capita GDP equal to or greater than the US, but its health care system is only 11.5% of GDP. Bringing the US back into line with the rest of the OECD means either an enormous cut back in health care expenditures or an enormous expansion of growth in other sectors. Neither seems likely. Education, Law, and Government all have symptoms of institutional problems. (1T$ of student loans, 40% of grads in law unemployed, bankruptcy of Detroit).
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