The origins of Biden’s most important policy, explained

“At its heart, industrial policy strives to solve a “classic Keynesian political problem,” says economic historian Yakov Feygin, director of the Berggruen Institute’s Future of Capitalism program: The only way to grow the economy is ultimately through productivity-enhancing investment — but there are enormous upfront costs to building new plants or buying new equipment, especially at the technological bleeding edge, while returns are years in the future if they ever come at all.
If only capitalists get to decide when to invest, they may — rightfully — decide that the unpredictability of future demand and credit conditions make it difficult to justify expanding capacity in crucial sectors even in the face of soaring prices. They fear the “bullwhip effect,” where investors may put up cash for new plants or equipment to respond to higher prices, only for those prices to fall before new production can actually come online.”

“The government, for better or worse, has the unique ability to stabilize the investment cycle and goad risk-averse private capital into making desperately needed, but enormously costly, long-term investments.”

“Biden’s economic team is betting on something Hamilton knew: Long-term investment in the real economy is essential, but private investors might not provide it. That’s where government can — and should — step in.”

Republicans Need an Actual Plan To Grow the Economy

“under the current policy, the Social Security trust fund runs dry by 2034 and benefits will be automatically cut by at least 25 percent, leaving little room to shelter the most vulnerable seniors who truly depend on it for most of their retirement income. This inevitable scenario will happen even sooner now that inflation has jacked up benefits. In practice, by doing nothing, Democrats too want to cut benefits.
Yet you didn’t hear the Republicans make that point during the campaign. Nor did they make the case for reforming the program before its impending insolvency. They were completely silent on the need to reduce government debt policies. I understand that these are unpleasant topics of conversation—it is the proverbial “root canal” of policy, as the late Jack Kemp liked to say. But ignoring these realities will not change them.”

The relationship between taxation and U.S. economic growth

“So, what did corporations spend their large tax cut on, if not wages or investment? Analysts at the International Monetary Fund find that 80 percent of the corporate tax cuts were repurposed into stock buybacks and dividends, which overwhelmingly benefited wealthy shareholders.16 And Lenore Palladino of the University of Massachusetts Amherst documents that these corporate buybacks and dividends also widened the racial wealth divide, finding that White stock-owners hold $27 for every $1 in corporate equity and mutual fund value held by a Black or Hispanic stock-owner.17
The main effects of the Tax Cuts and Jobs Act were less government revenue and regressive tax cuts for corporations, wealthy shareholders, and executives who bear nearly all the burden of corporate taxes even as the rate changes had little effect on business investment or workers.””

How to make sense of the positive GDP report

“The US economy shrank in the first half of the year, but in the third quarter, it started growing again — which some economists say is an optimistic sign that the country isn’t in a recession now. But underlying factors show the economy is clearly slowing down, they say.
The country’s GDP grew at a 2.6 percent annual rate in the third quarter, according to Commerce Department data released on Thursday. The growth was mainly driven by trade: American companies exported more goods and services, and imports dropped. Meanwhile, key components of the report — consumer spending and residential investment — reflected weaker economic conditions.

Although the two consecutive quarters of negative GDP earlier in the year met a common but unofficial definition of a recession, many economists said at the time that the labor market was still strong and the country wasn’t yet in an economic downturn. Economists and forecasters have warned about a potential recession in the next year, however, as the Federal Reserve continues to raise interest rates to bring inflation under control.”

“The labor market is still strong now. Employers have been adding hundreds of thousands of jobs to the economy each month and the unemployment rate stands at 3.5 percent, a half-century low. But economists say the data in the GDP report reflects an economy that is already cooling, and more pain is likely ahead.”

Humanity was stagnant for millennia — then something big changed 150 years ago

“It really looks that we had as much technological change and progress between 1870 and today as we had between 6000 BC and 1870 AD. We packed what had previously been nearly eight millennia of changes in the underlying technological hardware of society, which required changes in the running sociological code on top of that hardware. To try to pack what had been eight millennia worth of changes before in 150 years is going to produce an awful lot of history.

Before 1870, most of history is how elites run their force-and-fraud, domination-and-extraction mechanism against a poor peasantry so that they, at least, can have enough, and so that their children are only two inches shorter than we are, rather than five or six as the peasants are. It’s about how the elites elbow each other out of the way as they eat from the trough. And it’s about the use they make of their wealth for purposes good and ill, of civilization and destruction.

But if you’re enough of a Marxist, like me, to say that the real motor of history is the forces of production, their changes, and how society reacts for good or ill to changing forces of production, then yes, [1870 to 2010] has to be as consequential because there’s as much technological change-driven history as there is in entire millennia before.”

“you look worldwide and you take my index of technological progress, and it [grows by] less than half a percent per year from 1770 to 1870. That’s based on exploitation of really cheap coal and also on the productivity benefits of falling transport costs that gather all of the manufacturing in the world into the place [the United Kingdom] where it’s most productive and most efficient, because it’s the place where coal is cheapest.

I was struck by a line I came across from the 1871 version of John Stuart Mill’s Principles of Political Economy: “Hitherto it is questionable if all the mechanical inventions yet made have lightened the day’s toll of any human being.”

Say you have some slowdown in global technological progress after 1870 because the cheapest coal has already been mined and the deeper coal is hard to find, and say that you have some other slowdown because you don’t get the boost from gathering manufacturing in places where it’s productive. We might well have wound up right with a steampunk world after 1870: a world with about the population of today, but the living standards of 1870 on average.

That’s what the pace of progress was, except that we got the industrial research lab, the modern corporation, and then full globalization around 1870. The industrial research lab rationalized and routinized the discovery and development of technologies; the corporation rationalized and routinized the development and deployment of technologies; and globalization diffused them everywhere.”

America has an innovation problem. The H-1B visa backlog is making it worse.

“Since the early 20th century, the US has been a world leader in innovation and technical progress. In recent decades, however, some experts have worried that the country’s performance on these fronts has been slowing, even stalling.

There are many possible explanations for this phenomenon, but one has seemed especially salient in recent years: an immigration system that discourages, and often turns away, the most highly skilled and talented foreign workers.

Historically, immigrants have played a vital role in American innovation. As Jeremy Neufeld, an immigration policy fellow with the Institute for Progress, a new innovation-focused think tank, remarked to me, “It’s always been the case that immigrants have been a secret ingredient in US dynamism.” Robert Krol, a professor of economics with California State University Northridge, describes it this way: “The bottom line is that when you look at the impact of immigrants — whether you think about starting businesses or innovating patents — they have a large, significant impact.”

Multiple analyses of historical immigration patterns show that more migrants to a region correlates with a higher rate of innovation and related economic growth. By contrast, when immigration is more restricted, companies — especially tech companies and those that conduct innovative R&D work — are less successful, and growth in jobs and wages slows. Studies have also shown that immigrants tend to be entrepreneurial: Based on survey data between 2008 and 2012, 25 percent of companies across the US were founded by first-generation immigrants. Other research shows that immigrants are more likely than native-born US citizens to register patents.

As Neufeld points out, the Covid-19 pandemic might have gone much worse if immigration had always been as restrictive as it is now. A number of co-founders and critical researchers with Moderna are immigrants, as is Katalin Karikó, a pioneer of mRNA research — who, if she had tried to immigrate after the 1990 H-1B reforms to the skilled guest worker program, might not have been able to come to the US at all.

Those H-1B guest visas are at the center of the issue today, some experts say. Designed in 1990 to bring in skilled professionals to meet labor market shortages, visas through the H-1B guest workers program are sponsored by employers, who submit petitions to bring in particular foreign professionals appropriately qualified for specific, highly skilled roles. Guest workers generally need at least a bachelor’s degree in a relevant field.

According to the United States Citizenship and Immigration Services (USCIS), there are about 580,000 foreign workers currently on H-1B visas, a small percentage of the US workforce and immigrant population. But they are disproportionately concentrated in STEM, particularly computer-related occupations, often in fields where cutting-edge technologies are being developed.

Unfortunately, the H-1B process is falling increasingly out of date and badly failing to serve its original purpose of turning on the talent tap for top innovative companies. Congress sets an annual cap on how many H-1B visa holders can come in, and that cap is now far below what the labor market demands. The crush of applications once the window opens for a given year on March 1 is so intense that, in every year since 2014, USCIS has resorted to a lottery system instead of a first-come, first-serve process. That means that year in and year out, hundreds of thousands of high-skilled workers from abroad try to come to the US and ultimately fail, so that both the prospective employee and the company hoping to hire them end up losing out on their preferred option.”

About 200 years ago, the world started getting rich. Why?

“You try to explain two broad things about sustained economic growth: why it started when it did (in the mid-18th century) and why it started where it did (England). Let’s start with the when. What took so long? Humans invented agriculture maybe 10,000 years ago. Why did it take 9,800 years or so for that to lead to real economic growth?”

“This is one of the key questions in all of economics. Its answer is central to why some countries grew rich while others have not. The simplest answer is that economic growth occurred only after the rate of technological innovation became highly sustained. Without sustained technological innovation, any one-off economic improvement will not lead to sustained growth. Incomes will rise in the short run, but over time people will have more babies and those babies will eat up all the economic surplus. This is known as the “Malthusian trap,” after Thomas Malthus, a British clergyman of the late 18th century. This Malthusian logic explains the pre-industrial world pretty well.”

“The question is why it took so long for the rate of technological innovation to grow as it did. This is one of the central questions we attempt to answer in this book. And there is not one “silver bullet” answer. For one, sustained innovation requires institutions that limit confiscation by the government (and protect other property rights more generally). But most societies in world history were weak on this dimension.
Sustained innovation also requires cultural values that support innovation and encourage understanding of how the world works. Societies in which work is looked down upon are unlikely to experience sustained innovation.

Ultimately (and this matters for the acceleration in growth we observe from the late 19th to the 20th centuries), it also helps if families limit the number of children they have. This does not necessarily contribute to innovation, but it does mean that innovation will more quickly translate into growth.

Most societies in world history had none of these features, let alone all of them. It took a while for all of these preconditions to coalesce in one nation. But once it did, economic growth took off.”

“[In our view], the decisive break responsible for industrialization rests on developments that seem to be only indirectly connected to the story of colonial exploitation. But future work might change my opinion on this subject.”

“On the one hand, the sugar economy boomed in the 17th and 18th centuries, and cotton was the major input into the textile factories at the center of Britain’s industrialization. These crops were produced with slave and coerced labor.

On the other hand, the evidence is fairly weak of a connection between the products of exploited labor and the innovations that were central to the onset of modern economic growth. This is not to deny a connection between the two, and reasonable people disagree over the relevant counterfactuals. Had there been no slave labor in the New World, would the Lancashire factories have been able to get enough cheap cotton to make innovation worthwhile? Would innovation have been possible with more expensive cotton of different quality from other parts of the world?

Our book leads to the conclusion that there is no silver bullet explanation for why the world became rich. Colonization likely played some role, and it likely played a much greater role in keeping large parts of the formerly colonized world poor. But there are many key features of the onset of growth that cannot really be accounted for by colonization. Most importantly, explaining how the world became rich requires an explanation for why the rate of technological change rose so rapidly. Colonization may have played an indirect role in this process, but there are many other causes we highlight that were much more direct and relevant.”

Have we been thinking about economic growth all wrong?

“The implication of Philippon’s paper is as simple as it is disturbing: We should expect economic growth to slow down in the long run, and the big leaps forward of the last couple centuries may be an aberration.

This conclusion is far from certain, and it goes against decades of assumptions on how to model economic growth. But Philippon brings a lot of data to bear on his thesis, which makes some intuitive sense, and even the possibility of it being true should alarm us.”

“What Philippon does is attempt to assess whether TFP actually does, in practice, grow exponentially. He first looks at two datasets covering TFP in the US and finds, instead, linear growth since World War II: TFP does not increase by a set percentage each year, but a set amount (0.0245 points, if you’re curious) each year. It doesn’t compound; it just gradually, steadily grows. You’re getting $2 a year, not 2 percent of an ever-increasing pile.

Extending the data back to 1890, he finds linear growth, but with a break: slower growth from 1890 to 1933, and faster after 1933, but steady and non-exponential in each period. He then extends the analysis to 23 relatively wealthy countries, from Japan to Germany to Spain. A linear model fits better here, too.”

“The US and other rich countries have experienced a well-documented decline in productivity growth, especially TFP growth, since 2004 or so. Philippon’s findings could help explain why that is. The slowdown is only there if you assume TFP should be growing exponentially. If you assume mere linear growth, it’s not that things have gotten worse in recent decades. It’s just that they were never that good.

That’s an alarming conclusion, mostly because from the standpoint of human history, the past few centuries have been very good. Before the 17th to 18th century or so, human economies grew extremely slowly. Agriculture showed little productivity growth, meaning there was a fixed population that farming societies could support. Living standards varied mostly based on how many people were around; when the population suddenly shrank (as in the Black Death in Europe) people grew richer on a per capita basis, and when the population swelled the opposite occurred. This is known as the “Malthusian trap.”

“Until about 1800, the vast bulk of people on this planet were poor,” Joel Mokyr, an economic historian at Northwestern, once noted. “And when I say poor, I mean they were on the brink of physical starvation for most of their lives.”

That pattern started to break down in the 17th through 19th centuries, a process sometimes shorthanded as the “Industrial Revolution,” but including a wide variety of cultural, scientific, technological, and economic changes. Long story short: productivity sustainably grew for the first time in human history. And it grew, by historical standards, quite rapidly, such that a far lower share of people alive in 2022 are on the brink of starvation than were in 1800, even though the population needing food has never been greater.”