The Future of U.S. Economic Growth

A paper (draft) by John Fernald and Charles I. Jones addresses the future of growth in the US. They argue that the contribution to economic growth of traditional sources - capital, labor, and ideas, might decrease. And there will be a shift towards research done in countries such as India and China, and towards artificial intelligence.

An interesting figure from the article: 

Freeman (2009) points out that in 1978, China produced almost no Ph.D.’s in science and engineering, but by 2010, they were producing 25 percent more than the United States.

Economic growth reduces crime against small and medium sized enterprises in developing countries

Asif Islam in a paper that examines the link between economic growth and crime against firms in developing countries (Feb 2014): 

This paper contributes to the literature by examining the relationship between economic growth and crime against firms, a fairly under-researched area especially with regards to small and medium sized firms. The paper finds a negative relationship between firm losses due to crime and economic growth. We find that an increase in real GDP per capita growth by 1 percent is associated with a 0.30 percent reduction in the losses due to crime as a percentage of total sales experienced by firms. This figure is larger for small and medium firms (0.33 percent) than larger firms (0.21 percent). The suggested mechanism for this effect is that economic growth increases opportunities elsewhere and thus increasing the opportunity cost of crime. Furthermore, economic growth may result in small and medium firms growing faster and increasing performance, thus allowing them to better protect themselves from criminal activity. The results of this study are consistent with the literature that finds similar beneficial effects of economic growth on crime experienced by households.

HT: Jacob A. Jordaan

Festivals and economic growth (Italy)

In this paper we show how the investment in cultural events may encourage the building of social capital and foster the development of local communities. We rely on a case study we conducted on the socio-economic impact of “La Notte della Taranta” Festival, one of the most important European festivals dedicated to traditional music (about 170,000 participants per year), on the sub-region of southern Italy where it is held. Our evidence is based on a large survey, consisting of nearly 10,000 interviews to Festival attendees over a span of five editions (2007–2011). A primary result is that the initial economic investment in the Festival has brought a short-term return in terms of touristic attraction worth more than two times as much. More importantly, our results indicate that a cultural festival, despite being a mass gathering, is able to create strong bonds among its participants and between them and the area where the event takes place. Although these bonds are “instantaneous”, i.e. temporally restricted to the duration of the event, they are positively correlated with the economic impact of the event on the territory.

The abstract from this paper in the Journal of Socioeconomics (December 2013). The paper is by Giuseppe Attanasi, Fortuna Casoria, Samuele Centorrino, & Giulia Urso. And the title is "Cultural investment, local development and instantaneous social capital: A case study of a gathering festival in the South of Italy."

A draft is here. 

Italy's Growth, 1861-2011

The graphs are from this paper by Emanuele Felice & Giovanni Vecchi.

Policy volatility, institutions, and economic growth

 That is from this paper by Antonio Fatás and Ilian Mihov. The abstract

In this paper we present evidence that policy volatility exerts a strong and direct negative impact on growth. Using data for 93 countries, we construct measures of policy volatility based on the standard deviation of the residuals from country-specific regressions of government consumption on output. Undisciplined governments that implement frequent and large changes in government spending unrelated to the state of the business cycle generate lower economic growth. We employ both instrumental variables and panel estimation to address concerns of omitted variables and endogeneity. A one-standard-deviation increase in policy volatility reduces long-term economic growth by about 0.74% in the panel regressions, and by more than one percentage point in the cross-section.

Values and Economic Outcomes

Macroeconomic textbooks discuss economic growth in terms of the Solow Model (factors of production and technology). Some textbooks do a better job and indicate that incentives and institutions affect the productive capacity of a country. The graph below goes one step farther and includes values which along with institutions affect behavior. Although incentives are missing in the graph, the inclusion of values is an step ahead. Behavioral factors (individual or collective) affect economic outcomes. 

The graph is from this paper by Janice Boucher Breuer & John McDermott. A draft is here. 

The authors explain

This paper continues recent work on the search for deep determinants of economic development. We show that two core values - respect for others and responsibility - are almost always highly significant and of sizeable magnitude in explaining productivity, capital, human capital, output per worker, and institutions. We suggest that these core values are fundamental and exogenous, and work on behavior - both directly and indirectly through institutions. Our empirical results are strong and consistently support our contention. . . 

We also examined whether institutions embed core values. We considered four institutions: social infrastructure (as measured by Hall and Jones, 1999), the index of economic freedom, property rights, and civil liberties. In all cases, both core values respect for others and responsibility were positively and strongly correlated with better institutions and explained 34% or more of the variation in institutions. P. 21. 

Probably the next challenge of development economics is to study values deeper, how they change, and what makes them change. I see Breuer and McDermott's paper as a step in the right direction. 

It might well be that there is feedback from increases in income (y) and values via education and technology, and more indirectly via religion and ideology. Of course very important work has been done on these topics, by Douglass North and many others. Several questions remain however, which is exciting. Next time you see an explanation of economic growth and development ask: "What role do values play in your model?" and "What type of values does your model assume?"    

Growth in regions

We use a newly assembled sample of 1,503 regions from 82 countries to compare the speed of per capita income convergence within and across countries. Regional growth is shaped by similar factors as national growth, such as geography and human capital. Regional convergence is about 2.5% per year, not more than 1% per year faster than convergence between countries. Regional convergence is faster in richer countries, and countries with better capital markets. A calibration of a neoclassical growth model suggests that significant barriers to factor mobility within countries are needed to account for the evidence.

Source.  

Research publications and economic growth (II)

Last night I posted the abstract of "Research publications and economic growth: evidence from cross-country regressions," and one of the authors shared the article with me today. I was curious to see the size of the effect of the research-publications variable. The authors write: 

The coefficient of 0.82 denotes that if a nation doubles its research outputs, the GDP growth rate will increase by 0.82% points per year on overage. P. 984. 

That is a very sizable effect. In fact it is almost twice the effect of secondary education on economic growth in their regressions. It will take a huge amount of resources for a country to double its research output, but if you think about developing countries it might not take a lot because the current amount of research is relatively low, if there is some. 

The study includes 34 countries in most of the specifications, and most of them are developed counties. I wonder what would be the effect of research on growth if more developing countries are included in the sample (data allowing). 

Research publications and economic growth

The effects of the quality of tertiary education on economic growth have been examined across countries. Professors’ research publication is used as a proxy for the quality of education at the university level. Research outputs in basic science and engineering are found to have a positive and significant effect on economic growth. Economics and business research also have immediate growth effects although the effects are a bit smaller. The results are, in general, consistent with the findings in the growth literature. The convergence hypothesis is also supported by the data.

From an abstract of a paper by Jin and Jin (Applied Economics, 2013). The title is "Research publications and economic growth: evidence from cross-country regressions." Alas I did not find it online. 

Income growth and inequality (South America)

We investigate in this paper whether income growth has played any role on in- equality in all nine young South American democracies during the period 1970-2007. The results, based on dynamic panel time-series analysis, robustly suggest that income growth has indeed played a progressive role in reducing inequality during the period. Moreover, the results suggest that this negative relationship is even stronger in the 1990s and early 2000s, a period in which the continent achieved macroeconomic sta- bilisation, political consolidation and much improved economic performance. On the contrary, during the 1980s (the so-called "lost decade"), the negative income growth experienced by the continent at the time has hit the poor the hardest, or alternatively speaking, it has played a regressive role on inequality. All in all, we suggest that con- sistent growth, and all that it encompasses, is an important equaliser which should not be discarded as a serious option by policy makers interested in a more equal income distribution.

From this paper by Manoel Bittencourt (January 2013).

He explains:

The data set we use covers the period 1970-2007 and all nine South American young democracies, namely: Argentina, Bolivia, Brazil, Chile, Ecuador, Guyana, Paraguay, Peru and Uruguay (T=38 and N=9). The Gini coefficients (GINI) of income inequality come from the UNU-WIDER files. Income per capita (GDP) and the economic growth rates (GROW) come from the Penn World Table (PWT) 6.3 files.

HT: Maximo Rossi. 

Robert Barro on inflation and economic growth

From the abstract of the paper published in the Annals of Economics and Finance (2013): 

Data for around 100 countries from 1960 to 1990 are used to assess the effects of inflation on economic performance. If a number of country char- acteristics are held constant, then regression results indicate that the impact effects from an increase in average inflation by 10 percentage points per year are a reduction of the growth rate of real per capita GDP by 0.2-0.3 percentage points per year and a decrease in the ratio of investment to GDP by 0.4-0.6 percentage points. Since the statistical procedures use plausible instruments for inflation, there is some reason to believe that these relations reflect causal influences from inflation to growth and investment. However, statistically sig- nificant results emerge only when high-inflation experiences are included in the sample. Although the adverse influence of inflation on growth looks small, the long-term effects on standards of living are substantial. For example, a shift in monetary policy that raises the long-term average inflation rate by 10 percentage points per year is estimated to lower the level of real GDP after 30 years by 4-7%, more than enough to justify a strong interest in price stability.

Zimbabwe on my mind . . .  

Linking Ethics and Economic Growth

An economy characterised by a great deal of helping behaviours, civilised manners, and the like is also likely to be an economy with little friction, controversy, and destructive disagreement – one that promotes flexibility and adaptability, leading to higher total factor productivity.

Read more here. 

Temperature Shocks and Economic Growth

This paper examines the historical relationship between temperature fluctuations and economic growth. We find substantial effects of temperature shocks, but only in poor countries. In poor countries, a 1◦C rise in temperature in a given year reduces economic growth by 1.3 percentage points on average. The estimates suggest that climate change may affect the rate of economic growth, rather than just the level of output. Moreover, estimates using medium-run shifts from 1970 to 2000 rather than annual variation produce similar though noisier estimates, suggesting that adaptation may not undo these effects in the medium term.  

By focusing on fluctuations in temperature, we seek to inform old debates over temperature’s role in economic development and new debates over future impacts of climate change. Our findings of large effects of temperature shocks on poor countries provide counterevidence to claims that temperature does not influence national production. While higher temperatures reduce agricultural output in poor countries, we also find that they lead to reductions in industrial output and political stability. These results underscore the breadth of mechanisms underlying the climate-economy relationship and emphasize channels not usually considered in the aggregate climate literature.

Source: A working paper by Dell, Jones, and Olken (August 2012). The full title is "Temperature Shocks and Economic Growth: Evidence from the Last Half Century" (Forthcoming, American Economic Journal: Macroeconomics).

Model:

The article has a good discussion on the channels through which temperature affects growth. 

I am on slippery terrain here. The R squares are not relatively high (most of them less than 0.20). One of the key issues in the model is how well the dummy for being a poor country captures many other variables that affect economic growth. Think about countries that are poor but have high rates of economic growth. The other concern is the intermediate channels through which temperature affects growth, historical institutions, for example (the authors talk about that). 

The paper is thought provoking (like everything Melissa Dell has written) and the main idea that high temperature affects current productivity is very plausible. In fact some countries such as Haiti might be in a circle of high temperature, low productivity, and low growth (of course, Haiti is complex). 

Democracy X education => Economic Growth

While the incidence of education on the determination of personal income has been well documented by scholars, the same is not true when it comes to the effects of education on economic growth, where different data sets and models have yielded contradictory results. This paper shows that a democratic environment is favourable to the impact of education on economic growth, even if democracy itself may not have a direct effect. This can be at least part of the explanation for why education alone, when observed in a cross section of countries, has shown mixed effects on growth.

This looks like a very important piece of the puzzle, from a new paper by Armellini (Kyklos, July 2012). Alas I did not find the full paper online, and wonder how the authors define "democracy."  

The correlation of human capital and economic growth

See the case of Brazil:

That is from the paper by Nicola Gennaioli, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer: "Human Capital and Regional Development."
The abstract 

We investigate the determinants of regional development using a newly constructed database of 1569 sub-national regions from 110 countries covering 74 percent of the world’s surface and 97 percent of its GDP. We combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions. To organize the discussion, we present a new model of regional development that introduces into a standard migration framework elements of both the Lucas (1978) model of the allocation of talent between entrepreneurship and work, and the Lucas (1988) model of human capital externalities. The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and possibly human capital externalities help understand the data.

Measuring Economic Growth from Outer Space

GDP growth is often measured poorly for countries and rarely measured at all for cities or subnational regions. We propose a readily available proxy: satellite data on lights at night. We develop a statistical framework that uses lights growth to augment existing income growth measures, under the assumption that measurement error in using observed light as an indicator of income is uncorrelated with measurement error in national income accounts. For countries with good national income accounts data, information on growth of lights is of marginal value in estimating the true growth rate of income, while for countries with the worst national income accounts, the optimal estimate of true income growth is a composite with roughly equal weights. Among poor-data countries, our new estimate of average annual growth differs by as much as 3 percentage points from official data. Lights data also allow for measurement of income growth in sub- and supranational regions. As an application, we examine growth in Sub Saharan African regions over the last 17 years. We find that real incomes in non-coastal areas have grown faster by 1/3 of an annual percentage point than coastal areas; non-malarial areas have grown faster than malarial ones by 1/3 to 2/3 annual percent points; and primate city regions have grown no faster than hinterland areas. Such applications point toward a research program in which “empirical growth” need no longer be synonymous with “national income accounts.”

That is from the paper "Measuring Economic Growth from Outer Space" by Henderson Adam Storeygard David N. Weil (AER, April 2012).

A graph from the paper:

Fascinating! 

Science fiction, innovation, and economic growth

David Brooks writes that there is innovation stagnation in The US:

Recently, a number of writers have grappled with this innovation slowdown. Michael Mandel wrote a BusinessWeek piece in 2009. Tyler Cowen wrote an influential book called “The Great Stagnation” in 2010. The science-Fiction writer Neal Stephenson has just published a piece called “Innovation Starvation” in World Policy Journal and Peter Thiel, who helped create PayPal and finance Facebook, had an essay called “The End of the Future” in National Review.

These writers concede that there has been incredible innovation in information technology. Robotics also seems to be humming along nicely, judging by how few workers are needed by manufacturing plants now. But the pace of change is slowing down in many other sectors.

As Thiel points out, we travel at the same speeds as we did a half-century ago, whether on the ground or in the air. We rely on the same basic energy sources. Warren Buffett made a $44 billion investment in 2009. It was in a railroad that carries coal.

The Green Revolution improved grain yields by 126 percent from 1950 to 1980, but yields have risen only by 47 percent in the decades since. The big pharmaceutical companies have very few blockbuster drugs in the pipeline. They are slashing their research departments. Keep reading . . . 

The reference to Niel Stephenson called my attention. Science fiction writers join the debate [may be they can bring some good perspective, like or not some economics find strong connections between economic and science fiction, economists can find inspiration  in SF as well]: 

Niel Stephenson, profoundly, writes:

Where’s my donut-shaped space station? Where’s my ticket to Mars? Until recently, though, I have kept my feelings to myself. Space exploration has always had its detractors. To complain about its demise is to expose oneself to attack from those who have no sympathy that an affluent, middle-aged white American has not lived to see his boyhood fantasies fulfilled.   

My parents and grandparents witnessed the creation of the airplane, the automobile, nuclear energy, and the computer to name only a few. Scientists and engineers who came of age during the first half of the 20th century could look forward to building things that would solve age-old problems, transform the landscape, build the economy, and provide jobs for the burgeoning middle class that was the basis for our stable democracy. 

The Deepwater Horizon oil spill of 2010 crystallized my feeling that we have lost our ability to get important things done.  

So, how science fiction can help the economy, Stephenson claims:

1. The Inspiration Theory. SF inspires people to choose science and engineering as careers. This much is undoubtedly true, and somewhat obvious.

2. The Hieroglyph Theory. Good SF supplies a plausible, fully thought-out picture of an alternate reality in which some sort of compelling innovation has taken place.

[Snow Crash, a Niel Stephenson book isn't that optimistic, and he admits it].

May be Stephenson is right and we need to find optimistic SF writers to get inspired, at al least go back to the classics.