🚀 Faster, Please! Week in Review #30
Culture wars; exponential growth; trickle-down economics?; communications and innovation; permitting and growth
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In This Issue
— How culture wars undermine America's future
In a country where vaccines to halt a deadly pandemic are controversial, I wonder what sort of culture war disputes will arise as CRISPR-based medical treatments become more common. Or maybe just lots of anti-automation arguments as AI and robotics become more commonplace. One explanation for these battles — and it’s not necessarily the only one — that I will keep coming back to: When a society lacks an aspirational and attractive vision of the future, something will fill the void. And right now in America, that void has been filled by a vision that many — certainly many on the right — find unattractive, even if you set aside the more hysterical speculations about everyone having to eat bugs and being forced to live in tiny apartments in mile-high skyscrapers. It’s a scarcity-driven vision where Americans must be compelled to live less well so that others can live better. Certainly when it comes to climate change, many on the right are suspicious of the motives of many environmentalists.
The modern world is the result of economic growth accelerating from nothing to almost nothing to something. To put actual numbers on that acceleration: “It took thousands of years for growth to increase from 0.03 percent to 0.3 percent, but only a few hundred years for it to increase from 0.3 percent to 3 percent,” notes researcher Tom Davidson in a report for Open Philanthropy “Could Advanced AI Drive Explosive Economic Growth?” Davidson continues: “If you naively extrapolate this trend, you predict that growth will increase again from 3 percent to 30 percent within a few decades.” But the argument here isn’t just about extrapolating historical trends to the stratosphere. As the title of the report suggests, advances in AI might provide the mechanism for another upward leap. Perhaps the most obvious way is through machines substituting for human labor. “If capital can replace labor entirely, growth rates could explode, with incomes becoming infinite in finite time,” write economists John Fernald and Charles Jones in a 2014 paper for the San Francisco Fed. But for me, the more intriguing aspect is what Davidson calls the “ideas feedback loop.” It comes from the notion that people generating ideas is the core of innovation-driven growth.
We should want a tax code that raises revenue in an economically efficient and in a way that the American public generally thinks is fair. But make no mistake, tax policy can both help and hinder economic growth. Policymakers need to take that reality into account when thinking about changes to the US tax code. Take corporate taxes. All else equal, reducing them should, over time, increase real investment in the US (because the tax cut lets companies keep more of the profits from those investments, making such investments more lucrative). And more investment should translate eventually into higher worker productivity and higher worker wages. That’s the theory. And it’s a theory backed by evidence. One example: In the July 2022 working paper, “Short-Term Tax Cuts, Long-Term Stimulus” by James Cloyne (University of California, Davis), Joseba Martinez (London Business School), Haroon Mumtaz, (University of Lond), and Paolo Surico (London Business School), the four researchers find “that corporate income tax changes generate persistent effects on R&D expenditure, productivity and output whereas personal income tax changes trigger large but short-lived responses of capital expenditure, productivity and output.” ) Indeed, there’s good reason to mostly abolish the corporate income tax while shifting most of the tax burden to shareholders.
Best of 5QQ
Walker Hanlon is an associate professor in the department of economics at Northwestern University. Earlier this year, we podcast chatted about the role of the engineering profession in the industrial revolution. It's definitely worth checking out! He also released the working paper "A Penny for Your Thoughts," co-authored with Stephan Heblich, Ferdinando Monte, and Martin Schmitz, which investigates how communication costs affect the production of new ideas and inventions.
Do you think cheaper and better communication, in combination with urban housing costs, could break down the agglomeration effects of today’s cities?
This seems unlikely to me, for two reasons. First, I think that there are still certain types of knowledge that are difficult to communicate virtually. Think, for example, of transmitting to a new hire a particular workplace culture. As other types of communication become cheaper, these types of communication become the key bottleneck, and so I think that face-to-face interaction may actually become even more important (as appears to have happened since the introduction of the internet). Second, I think cities offer more than just communication advantages. In particular, many people now seem to be moving to cities to take advantage of the amenities they offer, such as fine dining, nightlife, or cultural events, and those seem difficult to enjoy from a distance.
James Coleman is a nonresident senior fellow at the American Enterprise Institute and Robert G. Storey Distinguished Faculty Fellow and Professor of Law at Southern Methodist University. He also writes the excellent Energy Law Professor blog and is the author of a recent AEI report, “Overcoming Local Roadblocks to Energy Transport and a Cleaner New Energy System,” that’s worth checking out.
What's your assessment of Senator Joe Manchin's now defunct permitting reform bill, good and bad?
The current draft would shuffle authorities without speeding up new energy projects other than the Mountain Valley gas pipeline. It gives the federal government authority over some clean energy infrastructure such as hydrogen pipelines and certain power-lines, but that doesn’t help because it doesn’t significantly speed up the sluggish federal process. On the other hand, if it added strong provisions to limit court and local review of federally-approved projects, it could significantly speed up new energy infrastructure.