[Noah Smith] Government holds the promise of faster growth

One of the U.S.’s biggest economic challenges is the slump in productivity. After climbing steadily for many decades, productivity has slowed dramatically since 2011.

Productivity is the key to long-term prosperity. It represents a hard ceiling on the amount of valuable things that a society is able to produce. If productivity flatlines, it means that the pie isn’t growing, and there will be less to divide up among us. So finding the cause of the slowdown is a big, important task.

Some pessimistic economists such as Robert Gordon believe that technological progress itself is simply slowing down -- that we’ve discovered most of the major life-improving inventions out there -- and so there’s not much left to do. Let’s hope that isn’t the case. And in the meantime, we might as well look for policies to address the problem, instead of sitting on our hands waiting for inventors to get lucky.

In past decades, we would probably have turned to libertarian solutions. The obvious answer in the 1980s would have been to cut taxes and regulation, unleashing the forces of the private sector to innovate, build and invest. Some, such as the Hoover Institute’s John Cochrane, still believe that’s the secret. Many Republican politicians would no doubt agree.

But many economists have slowly been warming to the idea that government, far from being “the problem” (as Ronald Reagan put it), might actually be a big part of the solution. This often manifests in calls for increased infrastructure spending, or for fiscal stimulus to blunt the impact of recessions. But recently, some economists have suggested that government can play a vital role in innovation, technological progress and productivity growth.

One of these has been the University of Sussex’s Mariana Mazzucato, who champions the idea that government research is behind most of our major innovations. But recently, she has been joined by some very heavy hitters: Daron Acemoglu of Massachusetts Institute of Technology and James Robinson of the University of Chicago.

Acemoglu and Robinson are known for their theory that good government is critical to economic development. They believe that strong institutions, such as property rights and the rule of law, are the key to allowing countries to unleash their productive potential. But more recently, these economists have come up with an even bolder thesis. Government, they say, might be central to technological progress itself.

They call their new idea “state capacity.” It incorporates the old idea of good institutions, and adds other factors that Acemoglu and Robinson believe are indispensable -- strong education, research spending, infrastructure and lack of discrimination. Essentially, the idea is that governments do a lot of things to encourage inventors, scientists and entrepreneurial innovators, and that these things add up. A strong and effective state, they argue, isn’t the bane of innovation -- it’s a necessary and crucial input.

Testing an idea so big and vague is obviously a difficult undertaking, but as usual, Acemoglu and Robinson find a way to get at the question. In a recent paper with Jacob Moscona, they look at one historically important piece of government infrastructure -- the U.S. postal system in the 19th century.

The post office is an obvious candidate for a government institution that boosts innovation and productivity. It’s something that governments almost always provide long before the private sector -- there was no UPS or FedEx at that time. Delivering mail facilitates communication and the spread of ideas, which are crucial to innovation.

Looking at counties, Acemoglu et al. compare the presence of a post office with the number of patents per person granted to inventors in those counties. They find that over the long term, having a post office is correlated with a substantial increase in patenting activity.

This is a very interesting result, but economic history is always subject to some big caveats. The authors try to rule out the possibility that post offices were allocated to regions that the government knew would eventually become more innovative, by looking at patenting trends before post office construction. Their results still hold. But it’s possible that subtler local advantages of geography or population were partly responsible for both post office construction and patenting.

Still, since post office construction was probably random to some degree, the result is striking. The authors conclude:

Taken together -- while we do not establish unambiguously that the post office and greater state capacity caused an increase in patenting -- our results … suggest that the infrastructural capacity of the U.S. state played an important role in sustaining 19th century innovation and technological change. In the current [pessimistic] economic climate … we present a more optimistic historical narrative in which government policy and institutional design have the power to support technological progress.

In other words, maybe what the U.S. needs to do to restore our lost productivity growth is to stop thinking about how government bogs things down and start thinking about how it could solve the problem. Whether that means better infrastructure, education reforms, more research funding, government-sponsored angel investing or other policies, it’s worth giving government a shot at the productivity predicament.

By Noah Smith

Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for a number of finance and business publications. He maintains a personal blog, called Noahpinion. -- Ed.

Bloomberg