Back in 2004, Robert Lucas famously remarked: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”
Ten years later, Paul Krugman replied:
It’s fairly common for conservative economists to try and shout down any discussion of income distribution by claiming that distribution is a trivial matter compared with the huge gains from economic growth. For example, Robert Lucas:
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.The usual answer to this is to point out that we don’t actually know much about how to produce rapid economic growth — conservatives may think they know (low taxes and all that), but there is no evidence to back up their certainty. And on the other hand, we know how to make a big difference to income distribution, especially how to reduce extreme poverty. So why not work on what we know, as at least part of our economic strategy?
Krugman‘s apparent embrace of this growth agnosticism is doubly puzzling. After a lifetime of study, a brilliant Nobel laureate still lacks anything useful to say about fostering growth? How is that even possible?
The puzzle amplifies, though, when you recall that Krugman has endorsed several specific policies with large, clear-cut growth effects. Most notably:
1. Krugman strongly advocates housing deregulation. The whole point of this literature is that housing regulation hasn’t merely made housing expensive; it has retarded economic growth by discouraging Americans from relocating to high-productivity regions of the country. You could say, “This is only a level effect, not a growth effect,” but that’s a semantic quibble. Regulation is now so strict that you could noticeably raise measured growth for decades with moderate deregulation.
2. Krugman has strongly advocated labor deregulation, at least in Europe and the Third World. Again, the whole point of this literature is that labor regulation hasn’t merely made labor expensive; it has retarded economic growth by (a) keeping unemployment rates permanently high in many European countries, and (b) suppressing formal employment in many Third World countries. While you can protest, “Moving French unemployment from 10% to 5% is a one-time gain, not a growth effect,” that’s semantics. After labor deregulation, excess unemployment would still take many years to disappear; hence, measured growth would be markedly higher for years to come.
Furthermore…
3. While Krugman seems to oppose serious deregulation of immigration (for brow-furrowing reasons), he never questions the textbook logic showing that such deregulation would lead to massive increases in Gross World Product. Indeed, the case for immigration deregulation is isomorphic to Krugman’s case for housing and labor deregulation: The status quo forces business to waste big golden opportunities. The only difference is that estimates of the economic gains of immigration deregulation are much bigger.
What’s really going on? Frankly, I think that Krugman’s growth agnosticism is just an act. Intellectually, he knows very well that governments could readily boost growth if they wanted to. Emotionally, however, Krugman finds such reforms uninspiring. Taking from the rich and giving to the poor is fun; freeing the rich and poor to cooperate for mutual benefit, not so much. Krugman thus reminds me of my friend and debate partner David Balan, of whom I’ve said:
Since my opponent is a serious thinker, I know that he actually agrees with much of what I’ve just told you. So where does he go wrong? Emphasis. Yes, David favors allowing a lot more immigration and a lot more construction. He grants that these policies will enrich society in general, and the poor in particular. But none of this excites him. Why not? I’m no mind-reader, but my best guess is that David idolizes Big Government, and resents free markets. So when he thinks about a grave social problem like poverty, he doesn’t want government to get out of the way and let the free market work its magic. He wants government to heroically solve it with redistribution. Even when he knows that government viciously victimizes the poor, he wants to hastily concede the point, then talk about redistribution at length.
On reflection, then, Lucas’ words are even deeper than they seem. Focusing on questions of distribution doesn’t merely seduce and poison economic policy. Focusing on questions of distribution seduces and poisons the minds of fine economists, too.
READER COMMENTS
Thomas Redding
Aug 13 2020 at 11:25am
I find your dismissal of level vs growth effects is puzzling.
The reason redistributive effects are “trivial” next to growth effects is because, after centuries, the growth effects are so much larger.
Conversely, we have no good reason a priori to think redistributive effects are “trivial” relative to level effects.
DeservingPorcupine
Aug 14 2020 at 12:22am
Growth and level effects can’t be disaggregated cleanly like people envision. They’re intertwined. Much efficiency-enhancing, growth-promoting innovation has occurred because the right intellectual and business talent are close to each other and can work together.
Thomas Redding
Aug 14 2020 at 1:59am
There are two ways growth and level effects can be intertwined.
The first is uninteresting: that it takes years for level effects to fully develop into higher GDP.
The second is much more interesting, but (afaik) much more controversial: that policies which promote higher level output also promote higher growth. You claim this is true, but neither Professor Caplan nor you have provided any evidence demonstrating this.
And really, the only remotely charitable interpretation of Krugman’s claim is that such evidence, should it exist, is weak and ambiguous. In my opinion, it is therefore disingenuous for Professor Caplan to dismiss that distinction as a mere “semantic quibble” – it is, instead, the very heart of the issue.
DeservingPorcupine
Aug 16 2020 at 5:46pm
I’m filing this under common sense. I think a large burden of proof is on the other side to demonstrate the contrary.
Large breakthroughs that increase growth rate are “thresholded” on a lot of things aided by growth. Clearly, Silicon Valley wouldn’t have happened without a critical mass of talented people being able to gather in one place. Also, sufficient capital accumulation to fund such ventures has to occur, and level effects can aid that accumulation. Numerous examples like this.
And just mathematically, they’re sort of indistinguishable over a discrete time period, which is all we ever talk about. How do you distinguish one “level” effect every year for 10 years in a row from a 10-year period of increased growth?
Thomas Redding
Aug 21 2020 at 1:06pm
My understanding is that there is only one thing that drives long-term economic growth: technology. Every other cause of long-term growth only helps in that it promotes better long-term tech growth.
If you want an example policies that I’d agree “common sense” says promotes tech growth, I’d give the R&D tax-credit and public grants to researchers. Both these increase the amount of research (Econ 101, subsides) and it follows “common sense” that more research will lead to greater tech growth.
However, I do not think it is “common sense” that
housing deregulation promotes tech growth
labor deregulation promotes tech growth
reducing top tax rates promotes tech growth
immigration promotes tech growth
I don’t see any clear connection between #1, #2, or #3 and improved tech growth. Evidently, neither does Krugman. I’d be willing to accept #4 promotes tech growth given we’re admitting high-skill immigrants.
But in any case,, the proper thing for Caplan (and you) to do is to provide evidence for these claims. Failing that, at least provide a story for how the above would improve tech growth. Instead, both of you have just used labels like “trivial” and “common sense” to dismiss our concerns.
( To be clear, I actually support 3/4 of these policies. I just don’t see how it’s obvious they would cause sustained tech growth. )
Thomas Hutcheson
Aug 13 2020 at 12:11pm
It seems to me that it is the “conservatives” single minded focus on preventing higher taxes (and ideally reducing them) on high consumption people that stands in the way of neo-liberal growth-promoting reforms — substituting wage subsidies/EITC for minimum wages, financing SS/Medicare with a VAT instead of the wage tax, willingness to compensate perceived “losers” from trade reforms, buying off NYMBY opposition to residential and commercial development, revenue neutral carbon taxes for the plethora of “green energy” subsidies, full employment fiscal surpluses and substituting subsidized individual insurance like ACA for employer-“provided” health insurance.. [Admittedly, this does not seem to explain their opposition to massively greater immigration. ]
Mark Z
Aug 14 2020 at 3:24am
This seems like a somewhat arbitrary framing. Why do taxes need to be raised first for any of those reforms to take place? Why couldn’t one just as easily say, “we won’t raise taxes until such and such reforms are implemented; by refusing to implement the reforms, you’re preventing the optimal policy outcome” (assuming higher taxes are part of of the optimal policy outcome). In fact I think most pro-growth reforms could be pursued at least to some extent in a revenue neutral manner, e.g., why would we need to raise anyone’s taxes to justify housing deregulation?
Maniel
Aug 13 2020 at 1:06pm
I agree with the implications of this post, that emotions and feelings almost always win out over logic in public policy. Even people like Krugman, who have gained favor in some corners of the media, are subject to envy and the paralyzing fear that in the laissez-faire environment of the free market, someone somewhere might get rich. Moreover, the idea that the role of governments might actually be to protect our freedoms, including our economic freedom, seems to occur to only a small minority of our “public servants.”
Thomas Tommasini
Aug 13 2020 at 2:34pm
I don’t know if it’s as much that Krugman finds pro-growth reform uninspiring as it is that he has a vested interest in the validation and implementation of his alternative recommendations.
You could argue that interventionist economists genuinely believe that laissez-faire is ineffective at alleviating poverty, but I think that the more obvious conclusion is that they can’t admit such a conclusion on the grounds that it invalidates their long-held beliefs and empowers their political opponents.
Pierre Lemieux
Aug 13 2020 at 4:55pm
Looking at some direct incentives, he also has a crowd of fans to please, who are very psychologically rewarding and justify the NYT to keep his column.
Jose Pablo
Aug 15 2020 at 12:52pm
Yeah, the “character” ate the economist long time ago …
I can´t stop thinking that “envy” also have a significant role in fueling the whole redistribution discussion:
if you are extremely clever, have read extensively and are able to develop sophisticated general equilibrium models and to have smart conversations around cocktail tables, how can you accept this bunch of dysfunctional “idiots” from Palo Alto, with a dystopian view of the world, having way more money that you have?
You are the “whatever fellow” at the “X institution” (being this “institution”, God obvious choice to spread wisdom on earth) while on the other hand Warren Buffett keep saying: “if you have one economist in your company you have one economist more than you need”. An, yet, Warren Buffett is immensely richer that you are … that is just unacceptable!! … let´s redistribute for the sake of “intellectual justice”!!
Anonymous
Aug 13 2020 at 6:32pm
Too much mind reading! Let’s stick to the facts: housing deregulation would meaningfully increase growth, growth over the long run drives human well being, Paul Krugman agrees in principle, and yet does not emphasize growth. Why not? He explicitly states why not, so there’s no need to say “Krugman’s growth agnosticism is just an act.” We can read what he wrote and take him at face value: “conservatives may think they know (low taxes and all that), but there is no evidence to back up their certainty.” You’re often really good at setting aside disagreements to focus on areas of agreement so why not instead focus here on increasing agreement and emphasis on your agreement with something like: “Paul Krugman is skeptical that low taxes a la Paul Ryan meaningfully increase growth, but agrees that housing deregulation could increase growth. How can we get him and people like him to place greater emphasis on housing deregulation as a way to achieve economic growth?” I’ll tell you what, I sincerely doubt Dale Carnagie would say that the answer is accusing him of being a phony by writing: “Frankly, I think that Krugman’s growth agnosticism is just an act.” The real question is how to ignite a passion for growth in someone who earnestly reads Krugman.
Alexander Turok
Aug 16 2020 at 6:43pm
Carnegie’s advice is about personal advancement, it’s far from clear it’s the best strategy to advances one’s political ideology. Of course, for many, these goals tend to get clouded in their minds, as they are trying to maintain their invitations to the cocktail parties. I’ve noticed a trend in Right-wing spaces where “moderates” want to tone-police only so far as the people being attacked are on the Left. Not that I’m trying to do a “my fellow libertarians.”
https://www.youtube.com/watch?v=D-6ofb3b0yY
Dennis Howard
Aug 13 2020 at 6:44pm
Gee whiz. Rapid economic growth in the short term is generated via expansionary fiscal and monetary policy, particularly targeted at those with a high propensity to consume or invest.
Long term economic growth is generated by improving productivity, most usefully facilitated by better education and health. Both of these are then efficiently achieved via policies of distribution.
Tax cuts for the wealthy are neither. This ain’t rocket science; it’s first year economics.
Nick Ronalds
Aug 13 2020 at 7:19pm
I’m tempted to say my views are isomorphic to yours.
John Donnelly
Aug 13 2020 at 9:19pm
Your initial premise is that Krugman should offer something on how to foster growth? How is that possible?
Elijah
Aug 14 2020 at 10:01am
The distinction between a growth effect and a level effect appears to be, at least arguably, important. Would someone be willing to explain to me?
Levels & Growth
Aug 14 2020 at 12:58pm
Level shift means a one time change, a long term change in growth compounds over time. A level shift could mean a big change in poverty, for example a poor country quickly catching up to richer neighbor, but it’s one and done. After the level shift, there’s no change in the long term growth rate. In contrast, a change in the long term growth rate compounds year over year over year until a small difference in growth rates yields a massive difference in material prosperity. For example, in any one year the difference between 3% and 2% growth may seem quite small, but over the course of 100 years it’ll lead to a 2.5x difference in growth. The difference between 4% and 2% per year over that same period is almost 7x! Because it compounds, anything that changes the growth rate can yield massive differences in material prosperity over the long term. If you’re interested more in this argument for focusing almost exclusively on growth, you should check out Tyler Cowen’s book Stubborn Attachments.
Elijah
Aug 15 2020 at 8:43pm
Thank you! I see that a change in the rate of growth is different from a one time addition to the level of GDP. Changing the growth rate clearly matters a lot.
Still I think I agree with Bryan’s overall point, as it seems to me that a large one-time addition has substantial lasting benefits over the long run. Whatever the growth rate, GDP that has been level-shifted X% will remain X% bigger 100 years from now than it would have been without the level shift (all else equal). As mentioned above, it is likely that level-shifting reforms will spur an increase in the growth rate as well.
AMT
Aug 17 2020 at 2:53am
Isn’t long run growth exclusively about technological progress? Based on what I recall from intermediate macro, basically everything else can be classified as a level effect, because it cannot continue indefinitely. Except for Krugman’s limitation of the discussion to the question of “rapid” economic growth, shouldn’t he know that? But really, that limitation shouldn’t even matter. The answer, no matter how rapidly your goal, is to increase innovation so we can produce more efficiently. Obviously, if you aren’t talking purely about long run growth, it would be disingenuous of him to exclude short or medium term “level” effects that temporarily increase “growth,” as you mention. And it seems very likely he is not considering only long run growth, because he explicitly discusses growth in low and middle income countries, where all catching up to rich nations is by definition a level effect.
So, in Krugman’s defense, I think in this post he is focusing mostly on less developed nations, rather than America.
In my opinion his views are defensible for policy considerations in least developed countries, where redistribution helping out the poorest can lead to very large relative increases in human capital formation, which can accelerate productivity growth faster than a more laissez faire approach. I believe Poor Economics by Banerjee and Duflo supports this notion, though it is complicated.
Daniel Kian Mc Kiernan
Aug 17 2020 at 4:00am
You write “governments could readily boost growth”, but your prior discussion seems to be about ways for government no longer to retard growth as much as it now does, which is a different matter.
I think that, in fact, there are ways for government to boost growth; but, beyond the standard classical-liberal prescriptions of protecting private property, those ways involve pushing growth above an optimum.
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