How to raise GDP 10%, and reduce inequality too

Chang-Tai Hsieh and Enrico Moretti have a very nice new working paper "Why do Cities Matter?"

..increased wage dispersion lowered aggregate U.S. GDP by 13.5%  Most of the loss was likely caused by increased constraints to housing supply in high productivity cities like New York, San Francisco and San Jose. Lowering regulatory constraints in these cities to the level of the median city would expand their work force and increase U.S. GDP by 9.5%. 

Roughly, the same worker, working the same job, in San Jose or San Francisco, earns double what he or she earns somewhere else in the country.  Here is their plot of wages across cities:

Sure: Chang-Tai Hsieh and Enrico Moretti

The right tail there isn't just missing -- it was absent in 1964. There weren't any cities (MSA's) with 50% higher wages than average in 1964. That's New York, San Francisco and San Jose now.

What does this have to do with growth?

Suppose there are good opportunities, for high productivity employment in an area like Silicon Valley. Businesses start, try to expand, and bid up wages to match the higher productivity. That's all good, but with strong housing restrictions it stops there. New people can't move in to take those high wage jobs. They try to, but they bid up house prices until the higher house price matches the higher wage.

Now suppose there are fewer restrictions on building new houses or more dense houses. Then lots of new workers can move in, the businesses an expand. Eventually, a much larger group of workers gets the higher wages, and the business expands a lot.

So, productivity-enhancing ideas mixed with housing restrictions don't do nearly as much for growth as those ideas with more open housing markets -- especially markets open to newcomers. Housing restrictions also hurt measured inequality, by creating this large wage gap. (Inequality measures typically do not control for local housing costs. Rent controls and "affordable housing" lotteries may seem to help low income people, but only those who have been there for a while, not workers moving in for new and better jobs.)

The paper has a clear model and careful calculation of this effect.  Their bottom line is that US GDP would be overall about 10% higher than it is now -- and not just in some free-market nirvana, just if New York, San Francisco and San Jose were "only" as restrictive as the typical US city.

This fits in to the long simmering issue of how much micro-economic distortions and rent-seeking are hindering long run growth. My view, here for example, holds that micro economic regulation is holding back growth a lot. The contrary view is that regulation is a small-potato annoyance, 1-2%  growth is as good as it gets, go back to slicing up the smaller pie. The trouble is that for all the regulation horror stories, it's hard to put together solid numbers.

Here is one. 10%. Just from zoning laws and other building restrictions.

Universal Basic Income

Universal Basic Income is in the news. Charles Murray wrote a thoughtful piece in the Wall Street Journal Saturday Review. The Swiss overwhelmingly rejected a referendum -- but on a proposal quite different from Murray's.

Murray proposes that "every American citizen age 21 and older would get" $10,000 per year "deposited electronically into a bank account in monthly installments." along with essentially a $3,000 per year health insurance voucher.

The most important part of Murray's proposal: UBI completely replaces

 Social Security, Medicare, Medicaid, food stamps, Supplemental Security Income, housing subsidies, welfare for single women and every other kind of welfare and social-services program, as well as agricultural subsidies and corporate welfare. 

There is a lot to commend this idea. First, it would reduce the dramatic waste in the current system:

Under my UBI plan, the entire bureaucratic apparatus of government social workers would disappear

Moreover, the bulk of government spending now does not go to people who are really poor. SSI and medicare go to old people, many of whom are quite well off. Housing subsidies such as the mortgage interest deduction go to people with big mortgages and big tax rates -- nor poor people. Murray doesn't really emphasize this point, but his proposal is far more progressive than the current transfer system.

Second, it would reduce the very high disincentives of the current system, which traps people.

 Under the current system, taking a job makes you ineligible for many welfare benefits or makes them subject to extremely high marginal tax rates. Under my version of the UBI, taking a job is pure profit with no downside until you reach $30,000—at which point you’re bringing home way too much ($40,000 net) to be deterred from work by the imposition of a surtax.

If I read Murray correctly, he takes away $3,500 of the benefit between $30,000 and $60,000, which is an 11.6% surtax. That applies on top of the Federal 25% marginal rate, 16% payroll tax, state income and payroll taxes and so forth. So not zero, but it is a lot less disincentive than many current programs.

Both considerations place the proposal not in the "perfect world" category, but "how can we do what we're trying to do now a lot more effectively." So, evaluate it as such.

The biggest problem in the argument is the biggest selling point: We trade a check -- even much more than $10,000 -- for complete elimination of everything else.

A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear.

There are a lot of these "big trades" on the table, and there should be more. A big carbon tax, in return for complete elimination of all the regulatory nudges and crony energy related subsidies. A VAT in return for complete elimination of income, corporate, estate, and other taxes.  Lots of infrastructure money in return for elimination of Davis-Bacon, endless legal challenges EPA reviews, and other regulations, strict cost-benefit analysis rather than subsidized anachronisms, and so on.

In all these much simpler cases, the deal doesn't get off the ground. Will the "right" allow a big enough carbon tax? Will the "left" really get rid of their subsidies? Will the "right" really allow a large enough VAT? Will the "left" really not just pile all the other taxes back on top? Making these deals is hard enough even when both sides admit the deal would be good.

That case is going to be even harder here. The "left" has not even thought about the deal, let alone agreed in principle with only trust issues remaining! The Swiss referendum [sad aside on media: it was really hard to find the actual text!] made no mention at all of a swap -- it was pure basic income on top of other social programs.

Programs will remain tempting, because a flat basic income is not close to the "perfect world" social insurance system, or even common sense. We want to give more help to people who need more help. That lets us be more generous to those who do need help, and contains moral hazard that people who don't really need help should be working and paying taxes to supply help. Social security goes to old people, because old people objectively are less able to work.  Disability goes to disabled people, because it's harder for them to work as well. Unemployment insurance goes to people who just lost jobs, we know they are more likely to have suffered a bad shock. Insurance payments go to people whose houses have burned down.

These social insurance programs are indeed ineffective, bureaucratically bloated, and do a terrible job of picking who really needs help from who doesn't. But UBI takes a pretty extreme view that the project is completely hopeless, and the Government should do no conditioning at all, other than reported income:

Government agencies are the worst of all mechanisms for dealing with human needs. They are necessarily bound by rules applied uniformly to people who have the same problems on paper but who will respond differently to different forms of help.

Well, ok, but the call of the better world will be hard to resist, and the "left" has far from accepted that bureaucracies are "the worst" mechanism for sorting the needy from the less needy.

There will still be unfortunate people,  they will still need help, and our electorate will still demand programs to help them. Disability: Ok, it's grown  out of control, but some people really are disabled. You're only going to give them $10,000 and turn your back? What about the guy who takes his check, blows it all on a weekend of meth and beer, and now is lying in the gutter, his children homeless?

Some people will still behave irresponsibly and be in need before that deposit arrives, but the UBI will radically change the social framework within which they seek help: Everybody will know that everybody else has an income stream. It will be possible to say to the irresponsible what can’t be said now: “We won’t let you starve before you get your next deposit, but it’s time for you to get your act together. Don’t try to tell us you’re helpless, because we know you aren’t.”

He goes on to extol the virtues of private charities. I don't think our electorate is ready to completely forswear all bureaucratic help. And the vine grows back.

Eliminating housing subsidies? Agricultural subsidies? "Corporate welfare?" These are all great ideas on their own. If we could do that, our economy would be in a lot better shape than it is.

A bit of paternalism is pretty ingrained in social policies, and it isn't necessarily a bad thing. I'm happier paying taxes to support food, clothes and school for the kids, and basic housing than I am to subsidize a beer and meth weekend. Murray already gives in, by restricting the first $3,000 to a health insurance voucher. If he's going to get rid of social security, he should restrict the next $1,000 to a forced savings plan. If we're going to get rid of all housing programs (a great idea) the next $2,000 is a rent/mortgage voucher.

Some paternalism is justified as a pre-commitment. We know if they blow the money, we'll enact social programs to help them after the fact.

There is a deeper problem -- and I have a constructive solution.

In fact, Americans use far fewer benefits than they are eligible for. Many programs have 2% take up rates. Lots of people eligible for medicare, Obamacare subsidies, disability food stamps, welfare, home heating subsidies, and so on and so on all the way down to Palo Alto's income-based parking permit system don't take advantage of the benefits. If each American took advantage of every subsidy and social program to which he or she is entitled, the country would be bankrupt in about 10 minutes.

Why not? Well filling out the forms is a pain. And, more importantly, most people really do use social programs for a limited time. Call it a stubborn independence ethic or some remaining shame to taking assistance, it's there. For now. I fear that welfare states fall apart when the social stigma of taking the money fades.  

For now, both act to limit moral hazard. If it takes a few hours and trips down to an unpleasant bureaucracy to get help, then only people who really need it are likely to ask. If there is some remaining social stigma to getting help, then only people who really need it are likely to ask -- and likely to get out as fast as possible.

Before I get howls of comments on how heartless this view is, remember the objective -- money is limited, we want to use it to help people who really need it, and if we can do something to keep out people who don't, we can be a lot more generous to those who do. If we impose some cost on people to get help, we get them to reveal who really needs it, and we can help them a lot more.

So, my major suggestion -- please, don't automatically send the check to every American the minute they turn 21! Don't send it to my kids! At least, make people go down to a dull and dirty office, stand in line, fill out a long form, and repeat once a year.

Murray limits the benefit once you get to $30,000 per year, introducing a surtax above that level. I've been mulling over a different way to limit benefits and thereby make them more generous: Limit by time, not by income. You can have an additional (say) $10,000 per year, for 5 years, at any point in your life. Most people using social programs do in fact use them to get out of trouble and back on track. Let's make that the expectation. This is not permanent income support, this is help to get out of trouble.  That lets us be more generous, without blowing the budget, and without inducing as large a marginal tax rate to working.

Murray has a lot of speculation on how society will adapt to $10,000 per year check and NO other social programs.

the entire bureaucratic apparatus of government social workers would disappear, but Americans would still possess their historic sympathy and social concern. And the wealth in private hands would be greater than ever before. It is no pipe dream to imagine the restoration, on an unprecedented scale, of a great American tradition of voluntary efforts to meet human needs. 

Trust private charity, with an ever-larger share of income in plutocratic hands? I don't see Bernie Sanders supporters signing on to the deal on that basis.

The known presence of an income stream would transform a wide range of social and personal interactions. The unemployed guy living with his girlfriend will be told that he has to start paying part of the rent or move out, changing the dynamics of their relationship for the better. The guy who does have a low-income job can think about marriage differently if his new family’s income will be at least $35,000 a year instead of just his own earned $15,000.

Or consider the unemployed young man who fathers a child.

Maybe. Maybe not. We do have some experience with corners of societies that live off government checks. We have more experience with places where lots of people don't work. Welfare neighborhoods in the 70s to mid-90s. Europeans living on the dole. Molenbeek. Saudi Arabia. By and large, places where most people live on government checks or large numbers don't work are not happy places.

One can also speculate in contrary ways. Labor markets are more and more regulated and restricted. Well, if people can all get $10,000 from the government, why fight for lower minimum wages for entry level workers, looser occupational restrictions, and so forth?

Murray also confuses the issue, and substantially weakens the case, I think, by wandering off into a soliloquy on once robots do everything there won't be any more jobs.

We are approaching a labor market in which entire trades and professions will be mere shadows of what they once were... the jobs (now numbering 4 million) that taxi drivers and truck drivers will lose when driverless vehicles take over... Advances in 3-D printing and “contour craft” technology will put at risk the jobs of many of the 14 million people now employed in production and construction...The list goes on, and it also includes millions of white-collar jobs formerly thought to be safe..

... as many as 47% of American jobs are at risk...it will need to be possible, within a few decades, for a life well lived in the U.S. not to involve a job as traditionally defined.  

I think this is wrong. Murray acknowledges

I’m familiar with the retort: People have been worried about technology destroying jobs since the Luddites, and they have always been wrong.

Indeed they have. The invention of the tractor was way worse than the invention of the self-driving car for the jobs of about 70% of Americans and about 99% of everybody else at the turn of the 20th century -- farm labor. Murray writes

 It takes a better imagination than mine to come up with new blue-collar occupations that will replace more than a fraction of the jobs..

It's a good thing that every time in the past we did not rely on policy writers' imaginations to come up with occupations for people. I think the answer is pretty clear: services. When robots make everything for us, then people make money supplying services to each other.

But I don't have to be right either.  The deeper problem with this line of argument, common on the left, is how utterly hopeless it is, and how it contradicts Murray's case.

Hopeless: Really? Your vision for the future is that 47% of working-age Americans will be living on a $10,000 per year check from the government, doing nothing? $10,000 is not a lot of money, barely sustaining a life on the margins in pockets of poor rural america. It buys a used trailer and a six pack of beer in a place with little hope.

We can do better than that! And we can. We're talking about a several decade shift in the labor force here. If services are the answer, we need to fix schools and other barriers that keep people from getting the skills needed to earn money in the service economy. We need to fix labor markets to make it easier to hire people in flexible ways and help them to develop skills on the job.

Contradictory: Murray's numbers work out (I think, I haven't checked, but it seems plausible) in today's America. But if half our labor force, and all our retired or non-working people, are living off a government check, the cost would explode past what the country could possibly support with any level of taxation.

So set this apart, recognize that adapting to automation will require getting people skills not sending them checks. And that is going to mean keeping the price system alive. It has to be crystal clear that computer programming pays more than goof off majors.

Bottom line, most of the Murray's social changes and adaptation to robot workforce is, I think, a mistake and a distraction.

A Big Deal -- along with the others -- remains attractive: Substantial cash grants and vouchers in place of many current programs -- could offer substantially more help to people who need it, with far fewer distortions.  In place of middle class subsidies -- housing, college, etc. -- and corporate subsidies even better.  But let's not pretend it will cure social ills, or save us from confronting labor market distortions.

WSJ growth oped -- full version

WSJ Oped. Now that 30 days have passed, I can post the whole thing. Previous post.

Ending America’s Slow-Growth Tailspin

Sclerotic growth is America’s overriding economic problem. From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate—1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%. Last week’s 0.5% GDP report is merely the latest Groundhog Day repetition of dashed hopes.

The differences in these small percentages might seem minor, but over time they have big consequences. By 2008, the average American was more than three times better off than in 1952. Real GDP per person rose from $16,000 to $49,000. And those numbers understate the advances in the quality of goods, health and environment that came with growth. But if U.S. growth between 1950 and 2000 had been the 2% of recent years, instead of 3.5%, income per person in 2000 would have risen to just $23,000, not $50,000. That’s a huge difference.

Looking ahead, solving almost all of America’s problems hinges on re-establishing robust economic growth. Over the next 50 years, if income could be doubled relative to 2% growth, the U.S. would be able to pay for Social Security, Medicare, defense, environmental concerns and the debt. Halve that income gain, and none of those spending challenges can be addressed. Doubling income per capita would help the less well off far more than any imaginable transfer scheme.


Why is growth slowing down? One camp says that we’ve run out of ideas. We were supposed to have flying cars and all we got was Twitter. Get used to it, the thinking goes, and start fighting over the shrinking pie.

Another camp holds that the culprit is “secular stagnation,” a “savings glut” demanding sharply negative interest rates that the Federal Reserve cannot deliver. That outlook attracts clever new economic theories and promotes vast new stimulus spending of the sort that Japan has fruitlessly followed.

The third camp (mine) holds that the U.S. economy is simply overrun by an out-of-control and increasingly politicized regulatory state. If it takes years to get the permits to start projects and mountains of paper to hire people, if every step risks a new criminal investigation, people don’t invest, hire or innovate. The U.S. needs simple, common-sense, Adam Smith policies.

America is middle-aged and overweight. The first camp says, well, that’s nature, stop complaining. The second camp looks for the latest miracle diet—try the 10-day detox cleanse! The third camp says get back to the tried, true and sometimes painful: eat right and exercise.

The first two camps are doubtful. How much more growth is really possible from better policies? To get an idea, see the nearby chart plotting 2014 income per capita for 189 countries against the World Bank’s “Distance to Frontier” ease-of-doing-business measure for the same year. The measure combines individual indicators, including starting a business, dealing with construction permits, protecting minority investors, paying taxes and trading across borders. Unlike the more popular ease-of-doing business rankings, this is a measure of how good or bad things are with 100 being the best observed so far, or “Frontier,” score.

In general, the higher a country’s score, the higher its per capita income. The Central African Republic scores a dismal 33, and has an annual per capita income of just $328. Compare that to India (50.3, $1,455), China (61, $7,000) and the U.S. (82, $53,000).

The U.S. scores well, but there is plenty of room for improvement. A score of 100 unites the best already-observed performance in each category. So a score of 100—labeled Frontier—is certainly possible. And, following the fitted line in the chart, Frontier generates $163,000 of income per capita, 209% better than the U.S., or 6% additional annual growth for 20 years. If America could improve on the best seen in other countries by 10%, a 110 score would generate $400,000 income per capita, a 650% improvement, or 15% additional growth for 20 years.

If you think these numbers are absurd, consider China. Between 2000 and 2014, China averaged 15% growth and a 700% improvement in income per capita. This growth did not follow from some grand stimulus or central plan; Mao tried that in the 1960s, producing famine, not steel. China just turned an awful business climate into a moderately bad one.

It is amazing that governments can do so much damage. Yet the evidence of the graph is strong. The nearly controlled experimental comparison of North Korea versus South Korea, or East Germany versus West Germany, is stronger. But if bad institutions can do such enormous harm, it follows inescapably that better institutions can do enormous good.

A growth agenda doesn’t fit neatly into current policy debates. This is fortunate, as new ideas are easier to swallow than defeats.

Parties argue over tax rates, but what’s really needed is deep tax reform, cleaning out the insane complexity and cronyism.

Parties argue over how much to raise or cut spending for social programs, but what’s needed is a thorough overhaul of the programs’ pernicious incentives. For example, Social Security disability needs to remove its disincentives to work, move or change careers.

Parties argue about education spending, but America needs the better schools that come from increased choice and competition.

Most of all, the country needs a dramatic legal and regulatory simplification, restoring the rule of law. Middle-aged America is living in a hoarder’s house of a legal system. State and local impediments such as occupational licensing and zoning are also part of the problem.

Growth-oriented policies will be resisted. Growth comes from productivity, which comes from new technologies and new companies. These displace the profits of old companies, and the healthy pay and settled lives of their managers and workers. Economic regulation is largely designed to protect profits, jobs and wages tied to old ways of doing things. Everyone likes growth, but only in someone else’s backyard.

There is hope. Washington lawmakers need to bring about a grand bargain, moving the debate from “they’re getting their special deal, I want mine,” to “I’m losing my special deal, so they’d better lose theirs too.” While the current presidential front-runners are not championing economic growth, House Speaker Paul Ryan (R., Wis.) and other House members are. And if economic-policy leadership moves from a chaotic presidency to a well-run Congress, that may be healthy for America’s political system as well as for the economy.

Update: response to some criticis

Summers on roadblocks to infrastructure

The bureaucrats of Massachusetts have done the nation a wonderful service, by parking an abject lesson in America's infrastructure sclerosis right in front of Larry Summers' office.

Summers and Rachel Lipson have written a remarkable Op-Ed in the Boston Globe, and Larry a deeper follow-on piece on the Washington Post Wonkblog, detailing the 5 year struggle to repair a bridge that took 11 months to build in 1911.

The narrow story:

How, we ask, could our society have regressed to the point where a bridge that could be built in less than a year one century ago takes five times as long to repair today?

In order to adhere to strict historical requirements overseen by the Massachusetts Historical Commission, the Massachusetts Department of Transportation had to order special bricks, cast by a company in Maine, to meet special size and appearance specifications from the bridge’s inception in 1912.

...extensive permitting and redesigns haven’t helped. 

And the rest reads like a typical Wall Street Journal oped anecdote of regulatory incompetence, fodder for my next weekly summary.

Larry's Post follow on is deeper:

Investigating the reasons behind the bridge blunders have helped to illuminate an aspect of American sclerosis — a gaggle of regulators and veto players, each with the power to block or to delay, ...

At one level this explains why, despite the overwhelming case for infrastructure investment, there is so much resistance from those who think it will be carried out ineptly. 

Stop for a moment here. This sentence is a watershed moment. Larry is one of our foremost public-intellectual economists. He's been arguing for years for infrastructure spending, first as "shovel-ready" stimulus to fight the recession, lately as the remedy for "secular stagnation." So far, he's been arguing mostly for more money, and not highlighting regulatory roadblocks. The Democratic party (not Larry) line is that infrastructure is the fault of stingy Republicans who won't spend the money.

But here is Larry, listening, and urging his readers to listen. Savor the sentence: "This explains why.. there is so much resistance from those who think it will be carried out ineptly." How often, in American public life these days, do we see a prominent, party-aligned, public intellectual listen hard and understand what's bothering the other side? No, it's not that they are stingy, mean-hearted, evil, or whatever. It's that they don't trust the money to be spent on the right thing, in the right place, in finite time. They have a point.

(I had a conversation with Larry a while ago, that went something like this: Larry: We need more infrastructure, and borrowing money is really cheap right now! John: Yeah, but they'll just blow the money on a high-speed rail line from Tonopah to Winnemucca, and even that will be held up for 10 years of EPA reviews and lawsuits. Larry: Oh, John, there you go again exaggerating how bad regulations are... Maybe I can flatter myself that I nudged him a little here.)

The right response is to advocate for reforms in procurement policies, regulatory policies and government procedures to make the investment process more efficient and effective.

This is a watershed. Here is the kind of reach out for middle ground that could unlock our political and economic sclerosis.  Larry is likely to be in government again sooner or later, and I hope he will push hard for this -- and with more effect than the last hundred or so anti-red-tape and regulatory reform commissions.

Larry's change of heart, or at least change of emphasis, seems deeper:

I'm a progressive, but it seems plausible to wonder if  government can build a nation abroad, fight social decay, run schools, mandate the design of cars, run health insurance exchanges, or set proper sexual harassment policies on college campuses, if it can't even fix a 232-foot bridge competently. Waiting in traffic over the Anderson Bridge, I've empathized with the two-thirds of Americans who distrust government.

It's not about who cares. It's about competence. We can work together to fix this. Wow. Thank you, Massachusetts Historical Commission.

More than questions of personality or even those of high policy, the question of how to escape this trap should be a central issue in this election year

That is not likely to happen in our Presidential race, but it surely should be a focus of Congressional elections, and the realignments happening now in Congress to try to escape paralysis.

In that context, I heard recently of one lovely small proposal to help "escape this trap." If you're fixing a bridge that is already there, you are exempt:

Amendment 4065 Mr. SULLIVAN [Senator Dan Sullivan, Alaska] (for himself and Mr. King [Angus King, Maine] submitted an amendment ....to the bill H.R. 2577... as follows:

Any bridge eligible for assistance under title 23, United States Code, that is structurally deficient and requires construction, reconstruction, or maintenance--

(1) may be reconstructed in the same location with the same capacity and dimensions as in existence on the date of enactment of this Act; and

(2) if the environmental impacts of the construction, reconstruction, or maintenance are not substantially greater than the environmental impacts of the original structure, as determined by the applicable State environmental authority, shall be considered to be compliant with the environmental reviews, approvals, licensing, and permit requirements under--

(A) the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.);

(B) sections 402 and 404 of the Federal Water Pollution Control Act (33 U.S.C. 1342, 1344);

(C) division A of subtitle III of title 54, United States Code;

(D) the Migratory Bird Treaty Act (16 U.S.C. 703 et seq.);

(E) the Wild and Scenic Rivers Act (16 U.S.C. 1271 et seq.);

(F) the Fish and Wildlife Coordination Act (16 U.S.C. 661 et seq.);

(G) the Endangered Species Act of 1973 (16 U.S.C. 1531 et seq.), except when the reconstruction occurs in designated critical habitat for threatened and endangered species;

(H) Executive Order 11990 (42 U.S.C. 4321 note; relating to the protection of wetland); and

(I) any Federal law (including regulations) requiring no net loss of wetland.

I kept the long list as a reminder of just how many laws and regulations are in the way of fixing a bridge. Alas, the Senators forgot about the National Historic Preservation Act of 1966, which seems to be mainly behind Larry's traffic jam.

I gather this amendment provoked a  specific veto threat. Well, maybe next time.

Bush v. Reagan on Immigration

Scott Summner posted this beautiful exchange between Ronald Reagan and George Bush Sr. on immigration. Direct link (youtube).

Scott titles the post "when the GOP still had some decency," which I think he should more accurately state as "when the two leading GOP presidential candidates still had some decency." There are many people in the party -- in Congress, governors, state legislators, losing Presidential candidates, in Republican think tanks and so forth --with quite sensible ideas on immigration, and with the kind of personal decency Scott notices in the video, and lacking of the presidential candidates today.  There are also many decent and sensible Democrats too.

In this era that the battles within parties are as important as those between them, we have to get out of the habit of tarring whole parties with the behaviors and attitudes of some people in them.

Scott also characterizes the debate as "Bush stakes out a very liberal position on immigration, and then Reagan responds from a position even further to the left.." That's not quite accurate either. While it's accurate that the "left" wants to allow "undocumented immigrants" access to schools and services,  they typically do not want to open labor markets. Both Bush and Reagan explicitly welcomed people to come and work. Letting people come and not letting them work is a recipe for disaster. These are now libertarian positions, not right vs. left.

But I'm quibbling. Thanks Scott for a great video.

Equity financed banking video

Video of my talk at the Minneapolis Fed's "Ending Too Big to Fail" symposium. A link to the video (youtube) in case you don't see the above embedded version. The event webpage, with links to the other talks and the agenda.  Summary: AM: Dodd Frank is a big failure, we need a big fix. PM: We'll get it to work with little fixes here and there. I posted the text of my talk earlier.

Ideas had sex

Adam Smith. Source: WSJ

Why are we so much better off than our ancestors? Why did this process only start where and when it did, in Western Europe, not in Rome or China?

Deirdre McCloskely has an excellent essay in the Saturday Wall Street Journal Review.

Her answer: "Ideas started having sex," a glorious sentence she attributes to Matt Ridley.

"The idea of a railroad was a coupling of high-pressure steam engines with cars running on coal-mining rails. The idea for a lawn mower coupled a miniature gasoline engine with a miniature mechanical reaper. "

And so on. She is exactly right. We tend to focus on the original idea, the basic science. That's necessary, but 99% of growth comes from elaboration, implementation, and the marriage of ideas -- sex in the sense of genes combining and making new things.

What's the bar for these hookups?

The answer, in a word, is “liberty.” Liberated people, it turns out, are ingenious.

Also,

...equality. ...not an equality of outcome... equality before the law and equality of social dignity.

Though, as she points out at length, the social dignity, property rights, and equality of entrepreneurs has always been a dicey matter.

95% of the enrichment of the poor since 1800 has come not from charity but from a more productive economy.

It will also come from the businessperson who buys low to sell high, the hairdresser who spots an opportunity for a new shop, the oil roughneck who moves to and from North Dakota with alacrity and all the other commoners who agree to the basic bourgeois deal: Let me seize an opportunity for economic betterment, tested in trade, and I’ll make us all rich.

She missteps in only one place:

Economists and historians from left, right and center cannot explain the Great Enrichment. Perhaps their sciences need revision, toward a “humanomics” that takes ideas seriously. Humanomics doesn’t abandon the economics of arbitrage or entry, or the math of elasticities of demand, or the statistics of regression analysis. But it adds the study of words and meaning and their stunning contribution to our enrichment.

I'm sorry, this is just wrong. Deirdre: You are an economist and historian, and you just did it. So have others.

Alas, though an incredibly wide-ranging and deeply read public intellectual, McCloskey here has failed to keep up with her own field.  "Ideas having sex," in the context of liberal institutions, is exactly the mainstream conclusion of this generation of economists. Deidre, put down the literature and history for a while and read Lucas, Romer, Jones, Acemoglu, Barro, and countless others.

Moreover, her plea for "words" misses a central fact of modern economics -- and growth. The Greeks and Romans had plenty of words, arguably better than ours. Marx and Keynes did too. If our generation had only studied words, a reader could well conclude that this is the latest fashion in economics, as ephemeral as the latest fashions in literature.

No, it is exactly the math of elasticities and of budget constraints, and the quantitative comparison of explicit models with the historical record, that gives us some hope that economics is constructive.

More generally, our growth -- the growth of engineers and accountants -- is built on quantification. Science started to be cumulative when Galileo and his generation started doing controlled experiments and measuring things.

I will pass on a lesson I learned long ago, and the hard way: Don't make fun of things you haven't read.