Monday, October 26, 2015

A good approach to growth-oriented policies

John Cochrane (Senior Fellow at Stanford's Hoover Institution) is one of my favorite economists. Not surprisingly, I agree with most of his positions, but more importantly, I like the way he explains why some policies are better than others. He recently wrote an essay on why economic growth is so important and what we could do to foster stronger growth. He recognizes up front that government cannot target growth, but it can pursue policies that create fertile ground for growth. The essay is long, however, with over 10,000 words. Here are some excerpts totaling just over 1,300 words that I think summarize his important points. I hope they pique your interest, and that you go on to read the whole thing.

Sclerotic growth is the overriding economic issue of our time. Looking forward, solving almost all our problems hinges on reestablishing robust economic growth. Over long periods of time, economic growth comes from one source: productivity, the value of goods and services each worker can produce in a unit of time. In turn, productivity comes from new ways of doing things. Higher productivity typically comes from new companies, which displace old companies — and displace the profits of their owners, and the healthy pay and settled lives of their managers and workers. 
More people working, and working longer hours, can improve income a bit, but soon runs in to an upper limit. Saving, investment and capital formation can improve income a bit, but its benefit is limited as well. Only new ideas, new products, new technologies, new organizations, and new skills produce such huge increases in prosperity. 

The central problem of preexisting conditions was an artifact of regulation. In the ideal form of health insurance, you buy cheap catastrophic insurance when young, but the insurance policy can follow you as you age, change jobs, and move from state to state, and does not radially increase premiums if you get sick. Why don’t we have that ideal insurance? Because previous rounds of regulation outlawed it. 




Benjamin Cole said...
This comment has been removed by the author.
Benjamin Cole said...

I agree with 90% of this.

But can we get rid of the home interest tax deduction, local zoning and single family detached housing districts, the VA, and licensing of the law professions?

As for cutting the marginal tax rates, could not we target the marginal tax rates of the middle class as a priority?

I believe federal agency spending has become parasitic and should be cut in half, across both civilian and military agencies.

Johnny Bee Dawg said...

Damn, that was a great read! Simple and logical. Even inspiring.

However, it's also depressing to read, because there's not a leading politician in Washington, DC who understands a word of it, or would ever make it government policy. So close, yet so far. Water, water everywhere, but not a drop to drink. None of these common sense, economically sound solutions adds any money to campaign coffers from cronies buying votes. Therefore, this essay will be ignored.

Benjamin Cole said...

Johnny Bee Dawg:

Well, perhaps Ron Paul, and to a lesser extent his son, Ryan Paul, are not "leading" politicians, but they get it. Or most of it.

I suspect Don Trump gets it too, since he has been in private industry for so long. And he may be a "leading" politician soon.

Illuninati said...

The article was quite logical until we came to the unlimited immigration bit. Dr John Cochrane has the same problem Marxists have, models are always beautiful in theory but even the best model is nothing but an oversimplified version of reality and they never function the same as the real thing. Ideas which sound great in theory often just don't work.

In Cochrane's theoretical world people are interchangeable just like parts for a car. Things like culture and religion and the politics which result from culture and religion don't exist in theory. In the real world they are very real. Since people are interchangeable in Cochrane's theoretical world when 100,000 head choppers from ISIS decide to move to he United States across the open borders to do jobs no one else is willing to do that is a good thing. He can either put a monetary value on head chopping in which case the World would grow accordingly, or if he considers head chopping a form of consumption rather than production he could argue that moving 100,000 head choppers to the United States means that there are 100,000 less head choppers in the Middle East so everything balances out. Since head choppers can make a better living in the United States than they could in their home countries, they will each be able to afford more wives and each male will be able to produce large families of perhaps 20 children each all of whom will add to the growth of the local economy. What could possibly go wrong?

Benjamin Cole said...

Illuninati: if the Islamic immigrants concentrate by state, we may gain the benefits of polygamy, although we will lose the privilege to consume alcohol.

With the money saved on booze, maybe a second wife is affordable.

Francisco Javier Fernández Viana said...

Oh, Benjamin, I love reading your posts...:)))

Hans said...

Frankly nothing new with the pronouncement of the Professor..

What is rather stunning are the two quotes below.



So all that is needed is social Indexing to fix SS? Did anyone fall off
the davenport?

And most social programs are for the MC? Gee, could I have a list of even
six of them.

There are times that I think that the Professor needs to vacated his ivory tower.

Benjamin Cole said...

Francisco: thanks and I wish I had a name like yours. Your name sounds so classy.

Johnny Bee Dawg said...

Yo Benjamin:

Rand Paul can't get out of single digits in any polls. So as politicians go, I don't consider him "leading." Single digits doesn't get you much power in DC.

And I don't consider Trump a politician yet, nor is he in DC. And Im not convinced he would actually understand or agree with much of the content of the essay, despite his success in the private sector. Trump has made lots of money for himself, but his investors have not.

Trump uses government power to get his way. He brags about paying politicians so they have to listen to him and come to his weddings. Once you get over the hump and get a lot of money in your pocket, cronyism becomes the easiest route for future success for a guy like him. Especially in the property business. His comments on free trade are disconcerting, too...along with his economic plan to tax the wealthy at greater rates than they are being taxed now. Hillary and Jeb both share that goal.

I love the points made in the essay, but remain highly skeptical that today's leading Washington politicians will ever embrace them. That goes for Paul Ryan, too.

Lawyer in NJ said...

I prefer infrastructure spending. It has a greater multiplier effect.

So let's couple it with corporate tax reform.


Victoria Ross said...

Lots and lots of considerations.

However, on a simplistic level when we tax earned income, we are taxing jobs
and there are only 2 broad based alternatives to the income tax: sales and property.

Benjamin Cole said...

Victoria Ross:

A consumption tax is best, and Cochrane recommends that. If one wanted to be "soft," perhaps food and medical expenditures need not be taxed.

Milton Friedman recommended a progressive consumption tax to finance military outlays. That is an interesting idea, and if implemented, might bring some necessary scrutiny to federal "national security" outlays.

I like the idea of cutting federal agency outlays in half, and going to a national sales tax, Pigou taxes, and heavy gasoline taxes.

No income or capital gains taxes at all!

The problem is, FICA taxes are even worse---imagine one guy hires another guy, and the first penny paid is taxed at a 15.2 % rate. And FICA taxes are a tax only on productive citizens. People who work and hire. Our best citizens!

I hope the GOP can bring itself to promoting tax cuts and lower marginal tax rates---but explicitly on the middle class and employers.

GOP talk about cutting the top marginal income and capital gains tax rates, especially in a time a capital gluts, is not very good posturing. It is horrible politics as well. And yes, Bernie Sanders is worse.

Matthew Grech said...

I loved the Cochrane article. (He's a brilliant man and I was sad to see he left UofC.) But this latest budget deal tells us all we need to know about these Republicans. It also tells us that the sensibility expressed in Cochrane's piece is simply lost on these political nitwits. Actually, I wish they were mere nitwits. They're all far worse.

Scott, did I not predict this a couple of times in the last many months? That is, the Dems and GOP would get together and do what they do best: waste our hard-earned money. And, boy, did they! Eight percent growth?! The GOP is just pathetic. How can they possibly claim to be about smaller government? What a bunch of frauds.

Is this really what we voted for in 2014?

Benjamin, seriously, we need you to run. I absolutely love your economic ideas. Slash FICA, slash "defense", and grow, grow, grow. What do you call it? Big-time boogie, or something? Benjamin, a hobbled nation turns its economically bankrupt eyes to you! Run, Ben, run!

(Btw, if anybody opines that Ryan wasn't in on this deal, I'm going to have an aneurysm.)

Scott Grannis said...

I agree that the Republicans could have done a much better job. But I'm not yet willing to throw in the towel. Let's wait to see if the country votes in a conservative president. And then let's see if the Republicans squander the opportunity to make meaningful changes to fiscal policy. In the meantime, the Republicans have managed to slow down considerably the growth of federal spending. As I've been highlighting for years, the federal deficit has collapsed, mainly because of the slowdown in spending. Don't let the perfect be the enemy of the good.

I love the internet, if only because it allows good ideas to spread at the speed of light. I've always believed that good ideas must win out in the end, especially if they can spread. I would like to believe that the electorate is tired of crony capitalism and Big Government, and ready for a change.

Consider the latest good news: Argentina is on the cusp of voting out the Peronists! This can only be the result of the free flow of ideas and information. Good is going to triumph over evil because the populace had a chance to get educated.

Benjamin Cole said...

Scott Grannis: again? We voted in heavy GOP majorities in 2008. We got a larger government and intractable overseas entanglements. A collapsed financial system.

On my gloomy days, I believe you have a choice between socialists or plutocratic warmonger religious zealots.

Matthew: well, if Donald Trump can win maybe I can win. Or anybody else for that matter.

Johnny Bee Dawg said...


I'm guessing u just made a typo, but we got heavy DEM majorities in 2006 and 2008, not PUB. That DEM Congress cranked spending and deficits to unprecedented levels. The collapsed financial system occurred after DEMs took over, not PUBs. Remember Mark-To-Market changes in Nov 2007?? It was only when the Tea Party formed, and PUBs later took back the House that the spending stopped rising, This occurred despite DEM efforts to keep it going.

Hans said...

Illuninati, interesting post..Head choppers, like some many other immigrants
are more than likely to constitute votes for the Sovshevikes..The results will
be a further socialization of our economy and culture.

Unchecked immigrant will, without a doubt, create unwanted headwinds for a
nation which already showing a serious decline.