⚡ Why the 21st Century might be the Indian Century (but could still be another American Century)

Also: 5 Quick Questions for … economist Giovanni Peri on the economics of immigration

In This Issue

The Essay: Why the 21st Century might be the Indian Century (but could still be another American Century)

5QQ: 5 Quick Questions for … economist Giovanni Peri on the economics of immigration

Micro Reads: AI art and jobs; the benefits of pandemic prep; zoning reform;

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Quote of the Issue

“New and improving technologies aided by today's fortuitous discoveries [will] further man's potential for solving current perceived problems and for creating an affluent and exciting world. Man is now entering the most creative and expansive period of history. These trends will soon allow mankind to become the master of the Solar System.” - Herman Kahn, 1976

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The Essay

Why the 21st Century might be the Indian Century (but could still be another American Century)

If you’re interested in economic productivity as much as I am — and if you write about it as often as I do — at some point you’ll find yourself quoting this famous bit from Nobel laureate and New York Times columnist Paul Krugman: “Productivity isn't everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Love that. With apologies to the great Bronx Bomber slugger Reggie Jackson, productivity is the straw that stirs the drink. And if Krugman’s pithiness isn’t persuasive enough for you, let me highlight the results of the new NBER working paper “The Future of Global Economic Power” by Seth G. Benzell (MIT), Laurence J. Kotlikoff (Boston University), Maria Kazakova (The Gaidar Institute for Economic Policy), Guillermo LaGarda (Inter-American Development Bank), Kristina Nesterova (Russian Presidential Academy), Victor Yifan Ye (Boston University), and Andrey Zubarev (Russian Presidential Academy).

The researchers ask this Big Question: Which countries and regions will come to dominate the world economy by century’s end? Their answer suggests a radically different-looking league table:

Productivity growth and its interaction with demographic change are the main drivers of future economic power. Fiscal conditions and automation matter are secondary factors. Our baseline simulations, which forecast productivity growth using each region’s long-term record, predict China and India becoming the world’s top two economic hegemons. … If productivity growth continues at each region’s very recent pace, India will account for one third of 2100 world output (purchasing power parity) and China for over one fifth. … For the U.S. the picture is particularly grim. Its share of the world economy falls to just 10.0 percent by Century’s end [from 16 percent in 2017]. The story for Western Europe, including the UK, is even more shocking. In 2017, WEU and UK account for 25.2 percent of world output. But if recent catch-up rates prevail, their 2100 share will be just 6.4 percent!

Let me briefly explain the interaction of population growth (or decline) and productivity growth as outlined in the paper. For example: Chinese productivity is assumed to continue converging with that of the United States such that “well before century’s end,” workers there are as productive as workers here. Yet at the same time, China won’t have quite the same huge edge population. Using UN estimates, America will have 120 million more people than today, China 400 million fewer. (China also will have a greater share of its reduced population that’s age 70 years or older than the US — 26 percent vs. 22 percent — in the year 2100 as compared to 6 percent vs. 10 percent today.)

Without that population decline and also assuming the eventual productivity convergence, China’s economy would be roughly three times larger than the US economy in 2100 rather than two times larger. By the way, the probability of China radically altering its fertility rate is “essentially zero,” the researchers conclude.

Chart from “The Future of Global Economic Power”

Interregnum: Convergence is about diffusion. It’s the process of poor countries catching up with rich ones as they import capital, know-how, institutions, and technology. The classic case is the four Asian Tigers — Singapore, Hong Kong, South Korea, and Taiwan — becoming developed economies. The paper notes that in 1997, Chinese per capita GDP was just 3.5 percent of the US level. But by 2017, the Chinese share was 13.8 percent or nearly four times higher than two decades earlier. India’s living standards also grew compared to the US, with the 2017 ratio twice that of 1997. Policy matters. For example: A recent Goldman Sachs analysis of India’s growth potential suggests the country needs to get more women working (instead “there’s been a decline in the labor force participation rate over the last 15 years, led by a sharp fall in female labor participation,” GS notes), save more, attract more foreign investment, and continue to formalize the economy through digitization (already happening in consumer finance).

Or to use the example of India. By 2100, India will be an economic powerhouse, with a third of world economic output. That’s double the current share of the US and China, the current co-leaders. With that steady productivity catch-up, India’s massive population edge — almost 50 percent larger than China and almost four times the US — becomes decisive. But again, this assumes steady productivity catch-up. And the sooner the better, of course. Were today’s Chinese workers already as productive as American workers, according to the paper, China’s GDP would exceed US GDP by a factor of four. Now India in 2100 will still be just 35 percent as productive as the US. Although a huge leap from today’s seven percent level, that’s “still miles away from the US, China, and WEU. And it indicates India’s potential to become an even larger economic force through time.”

A few additional observations:

• First, past performance may not be indicative of future results. As the researchers humbly point out, “The one constant in the record of relative economic growth is its inconsistency.” Certainly, US productivity forecasts in 1999 were more buoyant than current ones. Indeed, the team concedes that “some highly credible economists” do predict “a near-term, sustained, and substantial drop in China’s and India’s catchup rates.” (I’ve previously written that China might well be experiencing a sharp productivity slowdown — or perhaps no growth at all — as it reverses its past pro-market reform and insists upon greater state command of the economy.) One study cited “predicts an almost complete end to Chinese, Indian, Russian, Eastern European, and former Soviet Union catch-up labor productivity growth.” If that were the case, the Indian or Chinese Century becomes the American Century. Again.

• Second, let’s assume the demographic and productivity forecasts are correct. As to the former, the US has a unique ability to change that population prediction through immigration. According to immigration scenarios prepared by researchers at George Mason University in a study commissioned by FWD.us, projections show the US population would grow to nearly 500 million people by 2050 if US immigration levels were doubled. (As Matthew Yglesias notes in his book One Billion Americans, that many Americans only would get us the population density of France. It would get us one-half the population density of Germany.) But as other nations grow richer, there is far less incentive for their strivers to move to America. You can open your borders all you want, but people have to want to come. Pro-immigration reform should be top of mind for American policymakers.

  

• Third, the study illustrates the power of productivity growth. If it is critical for higher living standards and sustained global power, then I see little reason why it should not have substantive impact on all policy debates, including education, immigration, science investment, and trade. Rather than assume the productivity gains of other nations will fizzle, we should do all we can to accelerate our own. And by doing that, that wealth and technological progress would also aid other nations.

Faster, please!

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5QQ

💡 5 Quick Questions for … economist Giovanni Peri on the economics of immigration

Giovanni Peri is a professor of economics at the University of California, Davis. His work centers on immigration, including the recent working papers “Are Immigrants more Left leaning than Natives?” with Riccardo Turati and Simone Moriconi and “Comparing the Effects of Policies for the Labor Market Integration of Refugees” with Mette Foged and Linea Hasager. Here are some quick immigration questions I asked the economist:

1/ You have a new working paper about the labor market outcomes of refugees in Denmark, coauthored with Mette Foged and Linea Hasager. What policy lessons should the US learn from this study?

We find the most effective policies for the labor market integration of refugees to be intensive language training in the early years after arrival and placement in cities with strong labor markets (low unemployment). We also found that reducing initial welfare payments for them, when they do not have language skills yet, does not push them to enter and stay in the labor market in the long run. Rather, it reduces their available income, putting them at higher risk of poverty and crime. Additionally, concentrating refugees where other people from the same country leave is not a policy with positive employment and earning effects in the long run.

2/ In a recent working paper looking at 22 European countries, you conclude with Simone Moriconi and Riccardo Turati that second-generation immigrants have a "left-wing bias" comparable to the bias associated with living in urban areas. Would you expect your findings to hold for the US as well?

In the European case we found that the left-wing bias derives from a higher inclination of second-generation migrants to be in favor of more government intervention to promote equality, reduce poverty, as well as more open attitudes towards internationalism and a less nationalistic focus. If these preferences are in part a result of the immigrant experience of their parents, they may also translate to US immigrants, implying more left-leaning preferences for them too. There is some anecdotal evidence that second-generation immigrants are more likely to vote Democrat in the US, but I am not aware of any academic study on it.

3/ You've written with Michel Beine and Morgan Raux that "policies that make it easier for international graduates to transition into local and US employment would allow the US to reap the positive economic benefits of a larger supply of skilled labor." What might those policies look like? Should those policies distinguish STEM degrees from non-STEM degrees?

One policy proposal that I like is to allow students who graduate with a US master’s degree (and maybe with a US Bachelor’s degree) to have access to a visa like the H1-B. This allows three years of work, renewable and then the possibility of obtaining a green card if an employer sponsors the worker. I think we should have a list of universities and (possibly STEM majors) that qualify for this program, to limit it to skills that are particularly requested in the US labor market. I would also support a similar policy to give authorization to work to undocumented children (DREAMers) if they complete college or a Master’s degree in the US.

4/ Immigration skeptics make lots of unfounded claims about the harms of increased immigration, but what are the legitimate trade-off we need to consider?

Immigration certainly requires a willingness of US citizens and workers and firms to adjust, and in the short run, not all immigrants adapt and are integrated. Additionally, in some sectors and in the short run they may compete with native workers, generating needs for natives to move, change jobs, and for local communities to adapt. These are the costs. At the same time immigrants bring economic growth, dynamism of firms and of local communities, innovation, and help with the demographic decline and with labor force needs. Those are the benefits, especially relevant in the long run.

5/ Your work with Anna Maria Mayda and Walter Steingress notes that immigrants without a high school diploma increase the Republican share of the vote while immigrants with a high school education decrease the Republican share of the vote. Does this dispel the idea that cynical Republicans oppose immigration increases for the sake of their party's performance?

This reading of the paper implies that Republicans oppose immigration due to some core conviction and do this even as this may hurt electoral success. This is possible. Another way to read the evidence in that paper, however, is that the Republican Party has been running on a platform that was increasingly anti-immigrant as they realized that its base, especially non-college-educated citizens outside large metro areas, were those that have reacted to more immigration by opposing it and moving towards the party that will oppose it. By acknowledging the response of that group, they increased its electoral participation. One point I agree with is that if immigration is halted and low-skilled immigrants stop coming, this issue may eventually lose salience and will not be such a strong mobilization point for the Republican Party. However, as long as the media create the perception of large inflows of low-skilled immigrants, even if their inflow is declining (as it was in the last decade), this may be enough to keep the support.

Bonus: If America is only willing to admit a limited number of immigrants, should we target policy toward admitting high-skill immigrants? STEM immigrants specifically?

A policy admitting a limited number of immigrants should still allow a balance of high-skilled STEM immigrants and less educated immigrants doing jobs that US citizens are less willing to do. Examples are jobs in personal services, health care, hospitality, food, agriculture: still in high demand but filled by fewer young natives who are better educated and have access to better-paid jobs. If one allows economic considerations in deciding the balance of immigrants, we should admit certainly more college-educated STEM, who push technological and economic growth, but also non-college-educated foreigners doing manual and physical intensive jobs and help filling vacancies allowing those sectors to continue growing.

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Micro Reads

▶ This artist is dominating AI-generated art. And he’s not happy about it. - Melissa Heikkilä, MIT Tech Review | Greg Rutkowski is a Polish digital artist who uses classical painting styles to create dreamy fantasy landscapes. He has made illustrations for games such as Sony’s Horizon Forbidden West, Ubisoft’s Anno, Dungeons & Dragons, and Magic: The Gathering. And he’s become a sudden hit in the new world of text-to-image AI generation. His distinctive style is now one of the most commonly used prompts in the new open-source AI art generator Stable Diffusion, which was launched late last month. The tool, along with other popular image-generation AI models, allows anyone to create impressive images based on text prompts. … According to the website Lexica, which tracks over 10 million images and prompts generated by Stable Diffusion, Rutkowski’s name has been used as a prompt around 93,000 times. Some of the world’s most famous artists, such as Michelangelo, Pablo Picasso, and Leonardo da Vinci, brought up around 2,000 prompts each or less. Rutkowski’s name also features as a prompt thousands of times in the Discord of another text-to-image generator, Midjourney. 

▶Arbitrary Lines: How Zoning Broke the American City and How to Fix It - Interview with M. Nolan Gray, Profectus | In the book, I suggest three obvious reforms: First, abolish single-family zoning. This doesn’t mean abolishing single-family homes, but rather, ending an arbitrary prohibition on stuff like townhouses, cottage courts, and fourplexes. Second, scrap minimum parking mandates, which force developers to build costly parking that might not otherwise be necessary. This is especially important in cities, where many residents may not need a car, or may only need one. Finally, lower minimum lot sizes anywhere that wet infrastructure is installed. Better yet, get rid of them altogether in most cities and suburbs. These mandates do nothing but waste land and raise housing costs.

▶ Calculating the Costs and Benefits of Advance Preparations for Future Pandemics - Rachel Glennerster, Christopher M. Snyder & Brandon Joel Tan, NBER | The Covid-19 pandemic is estimated to have caused over 7 million deaths and reduced economic output by over $13 trillion to date. While vaccines were developed and deployed with unprecedented speed, pre-pandemic investments could have accelerated their widespread introduction, saving millions of lives and trillions of dollars. … According to our model, spending $60 billion up front to expand production capacity for vaccines and supply-chain inputs and $5 billion every year thereafter would be sufficient to ensure production capacity to vaccinate 70% of the global population against a new virus within six months, generating an expected net present value (NPV) of over $400 billion.