Nevertheless, in the near future, while most poor people still live in low-income neighborhoods, shared schools are another way to integrate the population. For this to happen, children will need to be moved. Busing a large number of children to foster school diversity, as it was done in Boston at some point, is however unpopular, in part for the very good reason that young children do not enjoy being bused. The best idea may be to allow children from designated low-income neighborhoods to attend schools outside their neighborhoods. The METCO program in the United States, which organized the busing of minority children to majority schools, was shown to be beneficial to the minority children without any harm to the test scores of majority children. The latter, who would have mostly spent their lives in largely white enclaves, ended up being exposed to a much more diverse population, which as we have seen durably affects worldviews and preferences.89
REARRANGING THE DECK CHAIRS?
The sum total of all our proposals might seem modest in the face of what feels like a tsunami of prejudice. But that would be to miss the main point of this chapter, which is that such preferences are as much part of the symptoms of the malaise as its cause, perhaps more. Prejudice is often a defensive reaction to the many things we feel are going wrong in the world, our economic travails, and a sense that we are no longer respected or valued.
This has four important implications. First, and most obviously, the expression of contempt for those who express racist sentiments, fraternize with racists, or vote for them (“deplorables”) serves only to reinforce those sentiments, founded in the suspicion the world no longer respects us. Second, prejudice is not an absolute preference; even so-called racist voters care about other things. North India in the 1990s and early 2000s saw a period of mostly caste-based polarization. However, by 2005 this had run its course. The lower castes who had aligned themselves with explicitly caste-based parties (as against the less transparently caste-based BJP, Prime Minister Modi’s party) had begun to question whether they were getting enough from their parties. Mayawati, the leader of one of those parties, decided to rebrand herself as the leader of all poor people, including poor upper castes, and won the 2007 Uttar Pradesh state elections on that basis. She went for broad inclusivity, not narrow sectarianism.
More recently, in the United States we are struck by the curious history of the once much hated Affordable Care Act, or Obamacare. As the signal policy initiative of the much despised black Kenyan Muslim Barack Obama, it was something that many Republican governors refused to have anything to do with, and many refused federal subsidies to expand Medicaid, a key mechanism to extend health care coverage under the Affordable Care Act. Yet by the 2018 midterm election initiatives to expand Medicaid were on the ballot in the deep-red states of Utah, Nebraska, and Idaho. They were approved in all three. Kansas and Wisconsin also elected new Democratic governors who vowed to expand Medicaid where their Republican predecessors had not. This is not because people in these places became Democrats; they still voted for Republican congressmen and senators, often with very conservative views. But on this issue many seem to have decided to ignore the warnings of the Republican establishment and go with their own understanding of what was going to be good for them. Economics trumped Trump.
This is related to our third point. The fact that voters put a premium on race or ethnicity or religion, or even the articulation of racist views, does not have to mean they feel very passionately about them. Voters do realize political leaders choose to play the ethnic or race card when convenient. Part of the reason they still vote for those politicians is they are deeply cynical about the political system, having convinced themselves all politicians are more or less alike. Given that, they might as well vote for the guy who looks or sounds like them. In other words, ethnic or bigotted voting is often just an expression of indifference. But that means it is surprisingly easy to make them change their minds by highlighting what is at stake in an election. In 2007, in Uttar Pradesh, an Indian state famous for its caste-based politics, Abhijit and his colleagues managed to make 10 percent of voters move their vote away from their own caste-party using only a combination of songs, a puppet show, and some street theater—all carrying the simple message “Vote on development issues, not on caste.”90
Which leads us to our final and perhaps most important point. The most effective way to combat prejudice may not be to directly engage with people’s views, natural as that might seem. Instead, it may be to convince citizens it is worth their while to engage with other policy issues. That leaders who promise them a great deal and even make grand gestures toward it may not actually deliver much more than those gestures, in part because doing anything more is not easy. In other words, we need to reestablish the credibility of the public conversation about policy, and prove that it is not just a way to use big words to justify doing very little. And of course we need to try to do what it will take to assuage the anger and deprivation so many feel, while acknowledging it will be neither easy nor quick.
This, as we explained in chapter 1, is the journey we started in this book. We started with the issues where the most is known and understood: immigration and trade. Even there, there is a strong tendency for economists to pronounce on these issues with categorical answers (“immigration is good,” “free trade is better”) without accompanying detailed explanations and necessary caveats, which massively undermines credibility. We now turn to issues that are much more contentious, even among economists: the future of growth, the causes of inequality, the challenge of climate change.
We will attempt to do the same exercise of demystification for these topics, while recognizing that what we have to say will occasionally be based on more abstract arguments than the ones we have made so far, and somewhat less well grounded in evidence. These issues are nonetheless so central to our view of the future (and the present) that there is no way to talk about how to do better economic policy without embracing them.
In all of this the role of preferences is crucial. It is obviously impossible to talk about growth and inequality and the environment without thinking of needs and wants, and therefore preferences. We have seen that wants may not be needs—people seem to value bottles of wine based on their own social security number rather than the pleasure of drinking—and needs may not be wants—is a television a need or a want? These will of course be central concerns in the coming chapters, implicit and sometimes explicit in the arguments we make and the view of the world we project.
CHAPTER 5
THE END OF GROWTH?
GROWTH ENDED ON October 16, 1973, or thereabouts, and is never to return, according to a wonderfully opinionated book by Robert Gordon.1
On that day, the member countries of OPEC announced an embargo on oil. By the time the embargo was lifted in March 1974, the price of oil had quadrupled. The world economy at this time had become increasingly reliant on oil and was generally facing raw material shortages that were pushing up prices. What followed in the rich countries of the West was a lackluster decade of “stagflation” (economic stagnation accompanied by inflation). Slow growth was supposed to go away but has been with us ever since.
This happened in a world where most citizens of these rich countries had grown up expecting endless and ever-expanding prosperity, where political leaders had grown accustomed to measuring their success in terms of a single yardstick: the rate of growth of the country’s gross domestic product, or GDP. And to a large extent this is still the world we live in, and in some sense we are still talking about that pivotal moment in the 1970s. What went wrong? Was there a policy mistake? Can we coax growth to return and stay? What magic button do we need to press? Is China immune to this slowdown?
Economists have been busy answering these questions. Countless books and papers have been written about them. Many Nobel Prizes have been awarded. After all that, what is it that can be said with confidence about how to make rich economies grow faster? Or does the fact so much has been written signal that we really have no idea
? And should we even be concerned?
THE GLORIOUS THIRTY
For the thirty-odd years that separated the end of the Second World War from the OPEC crisis, economic growth in Western Europe, the United States, and Canada was faster than it had ever been in history.
Between 1870 and 1929, GDP per person in the United States grew at a then unheard of rate of 1.76 percent per year. In the four years after 1929, GDP per person went down by a catastrophic 20 percent—it is not called the Great Depression for nothing—but it recovered fast enough. The average yearly growth rate from 1929 until 1950 was actually slightly higher than in the previous period. But between 1950 and 1973, the yearly growth rate went up to 2.5 percent.2 There is more difference than there might appear to be between 1.76 percent and 2.5 percent. It would take forty years for GDP per head to double with a growth rate of 1.76 percent, but only twenty-eight years at 2.5 percent.
Europe had a more checkered history before 1945, partly because of its wars, but after 1945 things really exploded. When Esther was born, late in 1972, France had about four times the GDP per capita than when her mother, Violaine, was born in 1942.3 This was typical of the Western European experience. GDP per capita in Europe increased by 3.8 percent every year between 1950 and 1973.4 It’s not for nothing that the French call the thirty years after the war les Trente Glorieuses (“the Glorious Thirty”).
Economic growth was driven by a rapid expansion in the productivity of labor, or the output produced per hour worked. In the United States worker productivity grew at 2.82 percent per year, which meant it would double every twenty-five years.5 This rise in labor productivity was large enough to more than offset a decline in hours worked per head that was going on at the same time. During the second half of the century, the workweek went down by twenty hours in the US and in Europe. And the postwar baby boom lowered the share of working-age adults in the population since the baby boomers were then, well… babies.
What made workers more productive? In part, they were becoming more educated. The average person born in the 1880s studied only up to seventh grade, whereas the average person born in the 1980s had on average two years of college education.6 And they had more and better machines to work with. This was the age in which electricity and the internal combustion engine came to assume their central role.
Making somewhat heroic assumptions, it is possible to guesstimate the contribution of these two factors. Robert Gordon reckons that rising education explains about 14 percent of the increase in labor productivity over the period, and the capital investment that gave workers more and better machines to work with explains a further 19 percent of the increase.
The rest of the observed productivity improvement cannot be explained by changes in things economists can measure. To make ourselves feel better, economists have given it its own name: total factor productivity, or TFP. (The famous growth economist Robert Solow defined TFP to be “a measure of our ignorance.”) Growth in total factor productivity is what is left after we have accounted for everything we can measure. It captures the fact that workers with the same education level working with the same machines and inputs (what economists refer to as capital) produce more output today for each hour they work than they did last year. This makes sense. We constantly look for ways to use our existing resources more effectively. This reflects in part technological progress: computer chips become cheaper and faster, so one secretary can now do in a few hours the work a small team used to do; new alloys are invented; new varieties of wheat that grow faster and require less water are introduced. But total factor productivity also increases when we discover new ways to reduce waste or shrink the time either raw materials or workers are forced to stay idle. Innovations in production methods like chain production or lean manufacturing do that, as does, say, the creation of a good rental market for tractors.
What made the few decades before 1970 extraordinary compared to much of history is that total factor productivity increased particularly rapidly. In the United States, TFP growth was four times faster between 1920 and 1970 than between 1890 and 1920.7 In fact, it was this rather than growth in education or capital per worker that gave the later period its special mojo. TFP growth in Europe was even faster than in the United States, especially after the war, partly because Europe adopted innovations already developed in the US.8
Rapid growth was not only to be seen in national income statistics. By any measured outcome, quality of life was radically different by 1970 compared to what it was in 1920. The average person in the West ate better, had more heat in the winter and better cooling in the summer, consumed a larger variety of goods, and lived a longer and healthier life.9 With a shorter workweek and earlier retirement, life was no longer quite so dominated by the drudgery of daily labor. Child labor, omnipresent in the nineteenth century, had more or less disappeared in the West. There, at least, children could now enjoy their childhoods.
THE LESS GLORIOUS FORTY
But in 1973 (or thereabouts) it all stopped. On average, over the next twenty-five years, TFP has grown at only a third of the rate achieved in 1920–1970.10 What started with an economic crisis with a clear start date, and even a set of foreign powers to blame, became the new normal. The persistence of the slowdown was not immediately apparent. Born and bred during the golden age of economic growth, scholars and policy makers initially believed it was a temporary blip, soon to fix itself. By the time it became clear that slow growth was not just an aberration, the latest hope was that a new industrial revolution, spurred by computing power, was right around the corner. Computing power was increasing at a faster and faster speed, and computers were being introduced everywhere, much as electricity and the combustion engine once were. This would surely translate into a new era of productivity growth that would pull the economy with it. And indeed it finally happened. Starting in 1995, we saw a few years of high TFP growth (though still significantly less than in the go-go years). It faded quickly, however. Since 2004, TFP growth and GDP growth both in the United States and in Europe seem to be back to the bad days of 1973–1994.11 In the United States, GDP growth did pick up in mid-2018, but TFP growth remains slow. Over the year, TFP grew only at an average of 0.94 percent,12 compared to the 1.89 percent achieved during the 1920–1970 period.
This new slowdown has provoked a lively debate among economists. It seems difficult to reconcile it with everything we hear around us. Silicon Valley keeps telling us we live in a world of constant innovation and disruption: personal computers, smartphones, machine learning. Innovation seems to be everywhere. But how could there be all this innovation without any sign of economic growth?
The debate has revolved around two questions. First, will sustained fast productivity growth eventually return? Second, is the measurement of GDP, at best a bit of an exercise in guesswork, somehow missing all the joy and happiness the new economy is bringing us?
IS GROWTH OVER?
Two economic historians at Chicago’s Northwestern University are at the center of this discussion.
Robert Gordon takes the view that the era of high growth is unlikely to come back. We have only met Gordon once. He gives the appearance of being quite reserved; his book, however, is anything but. On the other side is Joel Mokyr, whom we know much better, an enormously vivacious man, with twinkling eyes and a kind word for everybody; he writes with infectious energy consistent with his generally positive outlook on the future.
Gordon has gone out on a limb and predicted economic growth will average a meager 0.8 percent per year over the next twenty-five years.13 “Everywhere I look,” he said during a debate with Mokyr, “I see things standing still. I see offices running desktop computers and software much as they did ten or fifteen years ago. I see retail stores where we are checking out with bar code scanners the same way we did before; shelves are still stocked by humans, not by robots; we still have people slicing meat and cheese behind the counter.’’ Today’s inventions, in his view, are simply not as radical as electricity and the
internal combustion engine were. Gordon’s book is particularly daring. He gleefully takes on the set of future innovations futurologists predict and one by one explains why, in his opinion, none of them would be as transformational as the elevator or air conditioning, and why none would take us back to an era of fast growth. Robots cannot fold laundry. Three dimensional (3D) printing won’t affect large-scale manufacturing. Artificial intelligence and machine learning are “nothing new.”14 They have been around at least since 2004 and have done nothing for growth. And so on.
It is clear of course that nothing Gordon says precludes the possibility that something entirely unexpected, perhaps some hitherto unimagined combination of familiar ingredients, will prove to be transformative. It is just his hunch that it won’t.
Mokyr, on the other hand, sees a bright future for economic growth, spurred by nations competing to be the leader in science and technology, and the resulting rapid spread of innovation worldwide. He sees the potential for progress in laser technology, medical science, genetic engineering, and 3D printing. To Gordon’s claim that nothing much changed in fundamental ways in how we produced in the last few decades, he counters: “The tools we have today make anything that we had even in 1950 look like clumsy toys by comparison.”15 But mostly, Mokyr thinks that the way the world economy has changed and globalized produces the right environment for innovations to bloom and change the world, in ways we cannot even begin to envision. He predicts one factor that will accelerate growth: we will be able to slow down the aging of the brain. Which of course would give us more time to have better ideas. Mokyr, engaging and creative as ever at seventy-two, is a good example for his thesis.
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