Fostering Economic Growth

Robert Solow famously developed the field of growth economics by demonstrating that what he termed technological and related innovation was the dominant causative factor in economic growth. Only 211 years after publication of the iconic Wealth of Nations, Solow in 1987 was awarded the Nobel Prize in Economic Sciences for finally identifying the long-invisible monster in the economics room: a demonstrated theory of economic growth. But there was a catch-22 imbedded in his efforts; he found that economic growth was “exogenous” to the approaches of his still-dominant economic school of neoclassical economics. The elements and variables behind innovation were simply too complex to fit within more simplistic, metrics-driven neoclassical theories. Of course, an economics school without a functioning theory of growth appeared entirely unacceptable to many, and a group of “New Growth Theory” economists, led initially by Paul Romer, worked to make growth theory “endogenous,” to put it into an analytical, neoclassical box. But this has proven to be a very hard problem, and economists have gone off on more manageable projects such as behavioral economics.

Gregory Tassey remains one of the small number of card-carrying economists still pursuing economic growth policy. His succinct article “Make America Great Again” (Issues, Winter 2018)—which is more of a cri de coeur—lays out an analysis of the failure of the past decade of national economic policy, particularly the past year of it, to focus on the underlying necessities for renewal of American economic growth. As he notes, the nation’s economy has been beset with low growth—and behind that is low productivity growth and behind that is low investment in capital plant, equipment, and technology. This low growth is breaking us apart: there is a dramatic increase in income and asset inequality and a declining middle class in a nation founded on the ideas that everybody gets better, the next generation is better off than the last. This economic success has been at the heart of America’s democratic experiment. But now we seem to be systematically striving to leave our working class behind by failing to advance a broad-based, innovation-based growth agenda that might create the societal resources that could put them ahead again.

Tassey finds fault with the political parties, neither of which seems to “get” the basics of the growth economics that he lays out. How did the political parties completely miss growth economics? As John Maynard Keynes famously wrote, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” Our political parties appear to have locked-in long ago on classical economics. The politics of each is organized around one of the two dominant factors that classical economics thought (wrongly) was behind growth: capital supply and labor supply. Republicans have focused on capital supply, with its leaders returning again and again to the popular political well of lowering marginal tax rates. Democrats focus on labor supply: improving education, health, and income in labor markets. Neither of these are bad pursuits; they are still significant. But they miss the monster in the room that Solow and Romer—and Tassey—want us to understand: technological innovation and its role in technology-driven growth.

In 2005 the economist Benjamin Friedman’s noted book, The Moral Consequences of Economic Growth, showed from international studies that periods of higher economic growth tend to be accompanied historically by more tolerance, optimism, and egalitarian perspectives, while periods of declining economic growth are characterized by pessimism, nostalgia, xenophobia, and violence. Today, though the American upper middle class is doing fine, the remainder, as Tassey’s data indicate, has been in decline. Unless growth agendas such as Tassey’s are followed, we’re in for a difficult time; we now are seeing that the social externalities of economic well-being are affecting the American working class.

William B. Bonvillian