Debating the Supply Side of Growth
Last month, Bloomberg View columnists Tyler Cowen and Noah Smith met online to debate the merits of government efforts to boost the economy by stimulating demand. Here they follow up that discussion by debating ways to stimulate the economy by making it more productive and efficient.
Smith: In our last debate, we talked about demand-side policy, but I think we both agree that it’s important to think about the supply-side, or ways to increase the country’s total potential output. I see two main categories of policy here: 1) things the government should do less of, and 2) things the government should do more of.
In the first category, I think the two biggest and most obvious things to address are land-use regulation and occupational licensing. There’s an increasing recognition that policies to prevent dense development are holding cities back from their economic potential. Second, in a time when lots of jobs are vulnerable to automation, occupational licensing is preventing people from entering some of the very jobs that are least likely to be eliminated by robots. These are areas where governments need to get out of the way and let the economy do its thing.
As for what the government can do more of, the most obvious is infrastructure investment. Repairing our existing infrastructure gets the highest returns, of course. But increased investments in new things like self-driving car infrastructure, smart electrical grids and faster broadband seem like they could also pay dividends. Another obvious area is research funding for things like advanced energy storage technology, neurotech and materials science. The third is high-skilled immigration -- we should shift our immigration policy toward a points-based system like Canada’s, to make sure we remain the world’s research and development hub.
Cowen: I agree on land-use regulation and occupational licensing, but you are not pushing hard enough on the broader issue of regulation. The economy is full of pointless or counterproductive regulations that boost business costs, lower employment and slow innovation.
We couldn’t have built today’s energy infrastructure with today’s regulations, so how are we to manage the energy infrastructure of the future? Less NIMBYism for wind power is step one of a thousand we could make. Or take fracking. It has made energy cheaper, created jobs and helped lower carbon emissions. And yet it remains a legally fraught enterprise.
We have moved to a highly politicized economy and society where laws and regulation take up far too much of the time and attention of our most valuable workers and creators.
I agree with most though not all of your proposed infrastructure investments. I would stress the complementary point that we have made cheap and timely infrastructure almost impossible to build. How about repealing the Davis-Bacon wage requirements, which inflate labor expenses on public-works projects, so that infrastructure costs are manageable again? Carbon emissions issues aside, how about limiting the number of layers of environmental review? We live in a world where it can take years to rename a bridge, much less build a new one or repair the old.
Finally, on immigration you might be right about the points system but I’m not yet convinced. I say take in more high-skilled immigrants, but I wouldn’t move to a Canada-like points system. It seems the current American criteria already attract entrepreneurs. Do we really want to focus admission on more degree-holding service-sector professionals who work in industries with low rates of productivity growth? I’m not so sure.
Smith: I do think there are probably a lot of regulations out there that are pointless, or giveaways to lobby groups. The problem is that these are so varied and fragmented that it’s impossible to combine them into a single issue. I think the wisest course is to set up an office to review old regulations and decide if they still make sense -- former Obama administration official Cass Sunstein, now a Bloomberg View columnist, seems to have been doing a good job with this. I think of that as “agile government” -- a constructive alternative to blanket slashing of regulations, many of which may be doing more good than harm.
Regarding infrastructure costs, I doubt that unionized labor is a big part of our problem, since Europe has stronger unions but much cheaper costs. It’s probably due more to our inefficient contracting process. So we should focus on reforming that first.
As for skilled immigrants, both they and Americans can switch between jobs. For example, if we import more foreign doctors, pushing down U.S. doctor salaries, more bright young Americans might choose engineering over the medical profession. So I’m not at all worried about bringing in the “wrong kind” of skilled immigrants.
Cowen: I’ll second your call for procurement reform, but note in our last exchange you suggested infrastructure investment would boost employment significantly. So you have to admit lower and indeed market-determined labor costs would make infrastructure much cheaper, and furthermore help put many more people to work.
Another valuable supply-side reform would be on the tax side. America’s high rate of corporate income taxation seems unworkable, given all the evasions and accounting tricks available to corporations. How about a lower published corporate tax rate, no deferred tax bills and a saner treatment of foreign income earned by American corporations? We live in a crazy world where foreign interest in buying American companies -- namely investing in the U.S. -- is called an “inversion” and is condemned. Something is wrong in this picture and we absolutely can change it -- let’s hope the left wing of the Democratic Party gives a President Hillary Clinton the leeway to do so.
Smith: I agree about the corporate tax. Despite the recent result by Emanuel Saez and Stephanie Stantcheva, I still think it’s likely that capital taxation is less efficient than other taxes. The fact that European and Asian countries have all lowered their rates is telling. And the fact that our actual effective rate of corporate tax (i.e., the amount we actually end up collecting) is about the same as those other countries is a clear sign that rates need to come down -- a lot of money is getting wasted on tax avoidance that could be used to raise wages. I think the political key here is getting people on the left to understand that a corporate tax is partly a tax on workers and consumers, not just on owners.
One more suggestion: The idea of tweaking corporate governance to encourage more investment and less short-termism is intriguing -- long-term stock exchanges, tenure-based voting rights and so on.We know closely held companies invest more. What do you think of these?
Cowen: I’ve yet to see clear evidence that corporate short-termism is a big problem in the American economy. If it were, we should observe markets reacting positively, and systematically, to announcements of long-term investment plans, or announcements of research and development expenditures. Yet the data don’t show that.
It is difficult to distinguish short-termism from the mere fact that business make mistakes or can’t see the future perfectly. If half of the time businesses think too short term, of course there will be many anecdotes about excessive short-term thinking and planning. But that also implies there are lots of companies thinking long term. Furthermore, the market seems quite willing to put a high valuation on tech companies with long-term and highly uncertain revenue prospects, or on Amazon, which hardly ever turns a short-term profit.
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