World Bank Brings in an Economics Upstart
Having lunch with New York University economist Paul Romer is quite an experience. Halfway through each sentence of mine, he starts smiling and nodding. That’s when I know he’s already thought about whatever it is I’m going to say. As soon as I’ve finished the sentence, he begins his polite, friendly and invariably insightful response. See, it’s really hard to think of something Paul Romer hasn’t thought about before.
That combination of depth and breadth will now be put to great use in the service of the World Bank. Romer has announced that he has accepted an offer to succeed the bank’s Chief Economist Kaushik Basu, who retires on July 31.
Romer’s tenure at the Bank will begin at a challenging time for the global economy. The Bank’s mission is to eliminate extreme poverty and encourage global economic growth. But growth has slumped, both in emerging markets and in developed countries. Global trade growth has slowed since the Great Recession. The European Union and China are both looking weak, while the collapse in commodity prices has hurt many natural-resource exporters. Most ominously of all, global productivity is no longer growing.
Total factor productivity -- a measure of how much the economy produces for given amounts of capital and labor input -- is the fundamental engine of economic growth. If it doesn’t grow, we will eventually live in a stagnant, zero-sum world. From 1996 through 2006, world TFP grew at the healthy rate of 1 percent a year. But in the 2010s, it has effectively stopped growing. If it continues much longer, the current productivity slump will be even worse than the doldrums of the early 1970s. Here’s the picture for the U.S.:
In developed countries such as the U.S., Europe and Japan, a productivity slowdown means either that laws and regulations are throttling economic activity, or that technological progress itself is slowing down. That last possibility is the most disturbing, since there’s no easy government solution to a technological slowdown.
So it’s little surprise that the World Bank has picked a chief economist who specializes in the study of growth and technology. Romer’s most famous academic work is the theory of endogenous growth, which he created in the 1980s and 1990s. The basic idea is that in order for tech to progress, society has to spend money, either via government research or corporate research and development. So there’s a natural feedback loop between the economy and technology.
It’s also very likely that left to its own devices, the private sector won’t spend enough on research. This is because ideas -- something that research creates -- are the classic example of a so-called nonrival good. Once someone pays the cost to create an idea -- say, the design of a smartphone or the algorithm that moves a self-driving car -- it costs essentially nothing to spread that idea all over the world. That makes it very hard for companies to capture all the value from their ideas in the form of profits. So the market doesn’t create enough incentive for researchers to push the boundaries of technology. Government often needs to step in, through research funding, the patent system or other methods.
Free-market fundamentalists have strongly resisted this idea. But Romer has been staunch in his defense of the principle. He has clashed fiercely on the subject with economists who think free markets can produce enough progress on their own. This even brought Romer into conflict with his doctoral adviser, the University of Chicago’s Robert Lucas -- a free-market believer and growth economist of no small repute. And Romer can be a formidable debater with no tolerance for what he perceives to be vague arguments. This was on display when he criticized the economics profession for its "mathiness," an effort by many economists to dress up their elaborate models as science.
But Romer’s intellectual depth is matched by a breadth that's uncommon among academic economists. Instead of simply studying technological progress, he has contributed to it -- in 2000 he founded education-technology company Aplia, and sold it to Cengage Learning in 2007. Romer’s app provides students with interactive homework assignments that match the style and difficulty level of their textbooks, and is designed to minimize lapses of attention and focus.
He’s also not afraid to champion unconventional ideas. In recent years, Romer has promoted the concept of “charter cities” -- cities in developing countries run by foreigners to maximize local growth. That’s unlikely to make it into World Bank policy, but it shows Romer’s ability to think outside the box.
So the World Bank has made a great choice for its next chief economist. If there’s anyone who can help the Bank push back against the tide of slowing productivity, it’s Romer.
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