Alex Tabarrok on the Elements of Economic Growth and the Decline of Dynamism

David Beckworth: Our guest today is Alex Tabarrok. Alex is a professor of economics at George Mason University, and holds the Bartley J. Madden chair in economics at the Mercatus Center. Alex has written widely on long-run economic growth, and joins us today to discuss it. Alex, welcome to the show.

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Alex Tabarrok: It's great to be here.

Beckworth: Great to have you on, and I have to recognize your contribution to my career before we get started. I began blogging at the end of about August, 2007, and you, Mark Thoma, a few others, would link to me and got some momentum going. You actually helped me write the first book that I did, or I was an editor of it, but you got that project rolling, so I have some recognition I want to give you for helping my career forward, so it's only fitting that you come on the podcast and we give you a chance to share some of your work.

Tabarrok: Yeah, a star is born. A star is born.

Beckworth: I don't know about that, but it's been fun. It's been a lot of fun. I remember, in fact, pitching you the book idea, back I think at a Southern Economic session, way back when, but a lot has happened. I mean, that's 2007. Here we are, 2019. We're in your office, and it's... You can tell by the layout, it's someone brilliant is working here, so thanks for coming on the show, and thanks for joining us to talk about the long-run economic growth. Tell our listeners how you got into economics, and how you ended up in this journey.

Tabarrok: How I got into economics… Well, I guess I have to admit that it was very typical route for a libertarian, that is it started with Ayn Rand, so I read Atlas Shrugged, and The Fountainhead, and I got very interested in free markets, and things of that nature. Rand recommended Mises, and the Austrian School of Economics, so I was reading all of that kind of material, so that got me interested in sort of PPE, politics, philosophy, economics, and that's what I started out doing at University of Toronto as an undergraduate.

Tabarrok: I did especially well in economics, so that was a sign, and so I just took it from there.

Beckworth: And how did you end up at George Mason University?

Tabarrok: So, George Mason, I'd actually... I was at University of Toronto for a couple years. I went to University of Victoria, and I took some classes from Robert Bish, and Robert Bish had been a student of the Ostrom’s, actually, and we did some public choice. Mancur Olson, and a few works of that nature, and at the time, the place where that kind of work was happening was precisely George Mason University, so I applied to a lot of universities in Canada and the United States, and got into George Mason, and they recruited me. It was the only place that actually called me up on the telephone, right? Reached out personally, so that brought me to George Mason.

Beckworth: And this department has a great reputation for a lot of the work that you're doing, a lot of great interaction, as well. The department's known for blogging. You and your colleague, Tyler Cowen, have a textbook out. Tell us about that textbook, briefly.

Tabarrok: So, that came with blogging in a way. I asked... I said to Tyler, "We should write a textbook," and he said, "Yes, we should, but first, we should start a blog." And I said, "That's an interesting idea. All right." And this was I think like 15 years ago now, and we put the first blog post up without telling anybody, without saying anything, and within a matter of days, people were linking to it, and talking about it-

Beckworth: Really?

Tabarrok: Yeah, and so, "Oh, maybe there's something to this," and we've had something new on marginal revolution every single day for the past 15 years. Mostly, of course, due to my phenomenal co-blogger, Tyler Cowen.

Beckworth: Now, I remember your blog being one of the early ones. Freakonomics, your blog, maybe Brad DeLong, but you were definitely one of the pioneers in economic blogging, and during the heyday, the late 2000s, mid to late 2000s, it was really a big part of the conversation. Still is, and you have your textbook, and I just want to mention, I'll plug your textbook, since you're being so modest. I used to teach, at the university, before I took on the job I have now, and I used your textbook. I really, really enjoyed it, so listeners, give it consideration if you are teaching economics courses.

Beckworth: But today, we want to focus on long-run economic growth issues, and what motivated this, I had a listener write in and ask me what is long-run economic growth, particularly what role does population growth play into it, because I kind of just assume everyone knows what it is, and I run with it, but let's talk. Let's get some basics down about long-run economic growth, and one of the ways you frame it in your textbook, which I found really useful in explaining to students, is this distinction between catch-up growth versus cutting edge growth. Can you explain that?

Tabarrok: Sure, so yeah, in the textbook, we had a little bit of a problem, because we wanted to say what are the institutions necessary for strong economic growth, and the type of institutions that we and other people talk about; honest government, rule of law, some democracy, private property, relatively free markets and so forth. These are the institutions of economic growth, and yet, if you look around the world, and you look, well, where are the places which are growing the fastest? That's like China, right? So, China's growing at 10 percent and on every single one of these institutions, China is much worse than the United States.

Tabarrok: China has improved, of course, in its institutional capacity, but on all of these things, free markets, rule of law, democracy, China is worse than the United States, so how is it that China is growing faster than the United States, and yet has worse institutions? And that's why we wanted to emphasize this difference between cutting edge growth and catching up growth. The United States has been on the cutting edge of growth since well into the early 19th century. The only way the United States grows is through innovation, is by creating new ideas, doing things in a different, in a new way.

Tabarrok: China, on the other hand, precisely because it was so incredibly poor in the 1970s, we're talking at the time of Mao's death, people in China were living on $400 to $500 per year. Absolute, abject level of poverty. Well, because they're so poor, they actually have such a long way to catch up, and they can start adopting all of the ideas which were pioneered in the West, and to do that, basically all they need to do is save a lot, and to accumulate capital, and just build all of the stuff which we already have in the West. So, they can catch up, and that's catching up growth, and I think most of what is going on in China is catching up growth.

Tabarrok: This does have the implication, the prediction that as China gets richer, it will slow down, so I think we're starting to see that.

Beckworth: Yeah, and you gave another example in your book of South Korea, right? South Korea was dirt poor, 1950s, 1960s. Now it's considered a wealthy nation, and its growth is more in line with the rest of the advanced economies. Is that right?

Tabarrok: Yeah, that's exactly right.

Beckworth: Okay.

Tabarrok: You can have these growth rates of six, seven, or eight, even eight or nine percent for a decade or two, but as you catch up to the rest of the world, you then have to say, "Well, we got to do some research and development of our own. We can't rely on it being developed elsewhere anymore."

Beckworth: Okay, so some of the ingredients to growth that you outlined can be thought in terms of a model called a Solow growth model, but let's put that to the side. Let's just work through some of these key ingredients, so population growth, or the labor supply growth, capital growth, and then what you call total factor productivity, institutions, technologies, those three maybe broad groupings. I want to first think about population growth, and again, this is what motivated this whole podcast, this episode. I got an email from a listener I mentioned earlier. I'm going to read part of it to you and have you respond, and the reason he wrote this is because I've had guests on the show, we've talked about the declining fertility rate in the U.S., and why that's a problem, or kind of the anti-immigration rhetoric, and why that's a problem, too, for long-run economic growth. It's real long-term concerns, and I'm just assuming everyone agreed with me, but this is what he said.

Beckworth: "In this episode, and what seems like a really high proportion of economics podcasts, your own and others, it is mentioned in passing about how important population growth is for economic growth. Obviously that's true in the total GDP sense, but I'd love if you fleshed out with a guess what the mechanics of that are. Usually the context of the comment in passing is about demographic issues, or declining birth rates, and how that is necessarily a headwind. Why is that so? Why does everybody treat it as given that a bigger population creates more positive externalities than negative ones?" So, any thoughts?

Tabarrok: Sure, sure. So, let me try and answer that first of all on the very biggest scale of all. You know, there are two kinds of ways of thinking about people, two models of people. One is that people are stomachs, and the other is that people are brains, right? If you have the model of people as stomachs, then more stomachs is bad. More stomachs takes from other people, and eats, and eats, and eats, and that's not good. On the other hand, if you think that people are brains, more people means more ideas, means more for everybody else, and that could be good.

Tabarrok: So, which of these models, of brains or stomachs, is more correct, and on which time scale? Well, pretty interestingly, if you look on the longest time scale, it's pretty clear that people are brains, and why do I say that? I say that because both GDP per capita, and actually the growth rate in GDP per capita, have increased along with world population. In fact, if you want to ask, "Well, when has the world economy grown the fastest?" It's actually right now. It's actually today. The world economy is growing faster now than it ever has before, at a time when world population is higher today than it ever has been before, and in fact, you can... In a famous paper by Michael Kremer, he sketches this out from one million B.C. to the present time, and what you see is that GDP per capita overall is actually increasing in population.

Tabarrok: Now, that's at the kind of the biggest scale, and it doesn't have to be that way at all times in all places, and part of it is that in order to take advantage of people as brains, they need to be integrated into the division of labor, into specialization, the division of labor, markets, and so forth. So, when we had, in the 1950s, and up until the 1960s and 70s in China, you have half a billion people in China who are doing nothing but subsistence farming. Well, they're not contributing in any way to the world economy, and in order to take advantage of people as brains, you've got to bring people into the market economy, so that they specialize, you have greater division of labor, and you use those brains.

Tabarrok: So, you've got 500 million people, but it's really as if you had just one brain, because all those 500 million people, they're doing more or less the same thing, subsistence farming. They all have more or less the same type and quality of knowledge. It's only when you create a market economy, and you have specialization, and the division of labor, that you get different knowledge in different heads. So, one person becomes a doctor, another person becomes an engineer, another person becomes a lawyer, so with different knowledge in different heads, that's when you get economic growth.

Beckworth: I think this individual might be coming from the framework where you hear a lot of people talking about climate change, having more children might drain resources from the Earth, make the environment worse off, but what you're saying is that if you have more children, more people, and they're integrated into a market, and they're labor specializing, they may discover what could fix climate change. The more people you have, the greater opportunity you're going to have an Einstein, you're going to have someone brilliant who can solve the problem, and if you don't have the people, you might miss out on that opportunity.

Tabarrok: Yeah, that's absolutely right. The great thing about ideas is that one idea applies to everybody. Ideas are a public good, so we have one great idea, and that can change how six, seven billion people in the entire world live. So, really focusing on the creation of new ideas is absolutely key. Moreover, a lot of these problems are created by too little wealth. Climate problems, environmental problems, there's Maslow's hierarchy, right, is that first of all, just people want safety and security. Only when they have reached a certain level of wealth are they willing to invest more in saving the panda bear, and saving the polar bear, and so forth.

Tabarrok: So, it's only when you really have a wealthy society that you're able to convince people that some of these higher level goods are actually worth paying for, so we are not going to be able to solve climate change, for example, by telling the Chinese that no, you can not have a U.S. standard of living. That is not going to fly in China. It wouldn't fly here, if people were told that here, and it's not going to fly in China, it's not going to fly in India. So, the only way that we're going to be able to convince the Chinese and the Indians to invest more in protecting the environment is if they're able to come up to a level of a standard of living where those goods become demanded. Where people actually want those goods.

Tabarrok: So, really, we need to make sure that the entire world is wealthy enough to be able to afford these higher level goods.

Beckworth: Yeah, you had a great TED Talk where you made this point. How should we look at China? And you think of a billion Chinese who want to find a cure for cancer, and they're willing to pay for it. The market has expanded dramatically, and all the researchers are now going to be employed to find a cure for cancer, or some other problem facing humanity. It's really a great opportunity. It's a very positive image of the future, and that's a kind of way to look at the problem. The glass is half full, not half empty, right?

Tabarrok: Yeah, absolutely. The perspective which we're getting today is that we're in competition with China, but actually, when it comes to ideas, we're in cooperation with China, because the more scientists and engineers that there are in China, then the better that is for us, actually. As you pointed out, if a Chinese researcher comes up with a cure for cancer, great! That's fantastic! I mean, ideally I would come up with a cure for cancer, but the second best is my neighbor comes up with a cure for cancer, right?

Beckworth: Right.

Tabarrok: So, increasing the size of the Chinese market, with wealthier Chinese consumers, wealthier Indian consumers, that is going to increase the demand to do research and development, and that is going to have tremendous impacts not only in health, but in any field of endeavor which relies on these big, fixed costs. So, any time you have an idea-centered industry, which is a lot of industries today. All of high tech is idea centered. More R&D means more ideas. That comes from having bigger, richer markets.

Beckworth: Okay, and that kind of touches on the element of total factor productivity, which is another key ingredient. We've touched on population. Another one is capital. Tell us briefly what capital is, and what are your thoughts about that, how it contributes to economic growth?

Tabarrok: So, capital is really the tools that we use to produce goods and services. It used to be that farmers, they went out into the field with picks and hoes, and putting the seeds in one by one, and today an American farmer uses a huge amount of capital, hundreds of thousands of dollars per farmer in capital. Not just combine harvesters and things of that nature, but farmers are now using computers, they're using GPS to precisely identify in each field where they need more fertilizer, where they need more water, where the need less fertilizer, where they need less water and so forth.

Tabarrok: Yeah, so this actually, by the way, also shows that with greater technology, and greater wealth, we actually economize more on these inputs, because you learn more precisely where the inputs are needed.

Beckworth: Yeah, and so we can have population growth, we can grow capital, but ultimately, I think your point is that you need the idea growth, at least in the U.S., if you're on the frontier, that cutting edge. So, you can imagine a situation where a farmer starts out with no tools, he gets some tools, he's more productive, but at some point, even if he has multiple combines, he can't use them all, right? There's some point you can have too much capital. Ultimately, what you need is total factor productivity. The idea generation.

Beckworth: I want to be clear, under total factor productivity, how well we use these resources, there's both the technology, the innovation, but there's also this idea you mentioned earlier. Institutions, right? Do both of those affect how productive we are?

Tabarrok: Yeah, absolutely. For example, the Soviet Union developed a lot of ideas. They had a highly trained scientific workforce, but they could not apply those ideas to producing consumer goods and services. They did not have the institutions, the entrepreneurs, the markets which were necessary to combine ideas with incentives in a way in which produces goods which people actually want. So, in a market economy, you have ideas, but you join them together with incentives, in order to produce a system which produces something which consumers actually want.

Beckworth: Okay, so we're looking at the key ingredients of long-run economic growth. This is what ultimately improves our standard of living, makes us better off, and we've covered the highlights here of it, and I want to bring up one great, kind of natural experiment that highlights these factors and how important they are, and it's in your textbook, and that's the difference between North Korea and South Korea. Explain to our listeners, why is this such a great experiment in illustrating these factors?

Tabarrok: Yeah, we don't get many grand social experiments on such a large scale, but the division of Korea into North and South, because of the war, because of the Korean War, is really a fantastic natural experiment. So, North Korea chose communism under this weird worship of their leaders, and South Korea chose more or less... I'm going to call it capitalism, but obviously we never have pure capitalism or anything like that, but they chose something much closer to having private property, having a market economy, having a much larger role for incentives, and at the time when North and South Korea were divided by the war, the North was if anything, a little bit richer. Both parts of the country were incredibly poor, at really minimum subsistence levels.

Tabarrok: They'd been bombed, they were poor to begin with. Very, very, very poor. And then you watch over the next 30 years, and what you see is a huge takeoff in South Korea. South Korea starts growing, particularly after democracy comes in in South Korea, and you start to see growth rates seven, eight, nine percent per year, and over... when you're growing at seven percent, that means that your economy is doubling every 10 years. Your GDP per capita is doubling every 10 years, so South Korea had several of those doublings, and by the 1990s, they're basically on the level of a European economy, and today, South Korea is... Yeah, it's a fabulously rich place, with all of the modern amenities and then some. When you go to South Korea, there's actually lots of advantages you don't find in Europe.

Tabarrok: Meanwhile, of course, North Korea, despite having some incredible technological advances, like North Korea has got nuclear weapons. I mean, bravo to them. I mean, it's an incredible achievement for a country to develop that kind of expertise, and to be able to do that. It shows you how rich North Korea could be, if only they adopted markets. I mean, North Korea... It's just brilliant. I mean, wow. And yet, despite being able to produce nuclear weapons, their country is also periodically starving, so that shows you that knowledge alone is not enough. You need to combine knowledge with all of these market institutions, in order to produce a thriving, prosperous economy and people.

Beckworth: Yes, and just to flesh out this idea as to why this is such a great natural experiment, you had one nation split in two, so you can't attribute the success of the South to a different type of people, different culture, different language, it was really... It's one group of people, and one gets the treatment, and one doesn't get the treatment, so it's literally... It's not because they speak different languages, they live differently, they act differently. It's the same group getting two different treatments.

Tabarrok: Yeah, exactly right. It's the same people, same culture, starting out about the same level of standard of living, and again, it's not the only one. You can see this repeated, so you look at East Germany and West Germany, and again, same kind of people, culture, and so forth, and yet West Germany does far, far better than East Germany.

Beckworth: Okay, and all those elements, population, labor growth, total factor productivity, which embeds the ideas, the institutions, all those play a role. Now, let's come back to the United States. We're talking about long-run economic growth here, and the U.S. is a very wealthy country, and it has had rapid gains, as well. Different parts of its history. But, if you look at productivity growth, particularly total factor productivity, which is kind of the broadest measure of productivity, it actually begins to slow down in the 70s, relative to where it was, so coming out of World War II up through the 70s, there's this one trend of growth, and then it actually slows down in the 70s. There's a brief pickup in the late 90s, early 2000s, but for the most part, if you were to draw a line along the trend of the 1940s, 1970s path, compared to where we are today, there's a big, gaping hole.

Beckworth: And so there's been a slowdown, and there's been a lot of talk about this, and you have a number of different articles and pieces that touch on, I think, different elements of the slowdown, at least can maybe help us understand it better. I want to work our way through it, and one of the stories that could explain some of the slowdown in economic growth, maybe some of the slowdown in productivity, is regulation. Growing regulation. And you have a paper that's titled, “Is Regulation to Blame For the Decline in American Entrepreneurship?”, which in turn could affect the growth, and it's published in Economic Policy, so tell us what you found in this article.

Tabarrok: Yeah, I think the story that regulation might account for this slowing in economic productivity growth, it's a very plausible story, and in fact, it goes back to one of the books which influenced me most, which was Mancur Olson's Rise and Decline of Nations, and the argument that Mancur Olson makes in that book is that over time, societies develop these special interest groups, and the special interest groups, they sort of slow society down, they create quotas, and they create... they put up tariffs. They require more legalistic thinking. They make it harder to enter markets. All of the kinds of barriers to wealth that you can see.

Tabarrok: And over time, these special interest groups, they accumulate. There's a popular version of Mancur Olson's book called Demosclerosis, and the idea being is that it's like Arteriosclerosis in the veins, the buildup of the cholesterol kind of slows things down. So, that's what we set out to really test, or look for, in this paper, and we use a new data set on regulation, which was developed by Mercatus, the RegData data set, and we ask does regulation explain the decline in dynamism? Entry and exit of firms? Shifting about of labor in the economy and so forth?

Tabarrok: And pretty surprisingly to us, the answer turned out to be no, and it was surprising, and in a way shocking, and disturbing for the following reason. The reason why the answer is no is that we see a decline in dynamism pretty much everywhere. We see it in highly-regulated industries, we see it in lightly-regulated industries. We see it in industries subject to foreign competition. We see it in industries less subject to foreign competition. You see it in northern states, you see it in southern states. It's not like Texas, which may on some measures be doing a little bit better than, say New York. Overall, in terms of dynamism, this is a cross-U.S. phenomena, and it is very, very widespread, and that's the reason why regulation doesn't really show up, when you look cross- sectionally.

Beckworth: Yeah, so that must have been surprising to you, and I've talked to some of our colleagues at Mercatus who build this set, and they were surprised, too, but your point is the story is far bigger than just regulation. Regulation can't explain the fact that it's a pervasive pattern across the entire U.S. economy. Do you want to speak to what you think maybe explains the decline in dynamism?

Tabarrok: I wish I knew for sure. So, this does suggest, the fact that it's so widespread, this means that we got to be looking for something which is equally widespread, and I think there are two sort of plausible answers, and this is very much a cutting edge area of research. There are papers coming out right now, looking at precisely this question, so I don't think we've nailed it down, but there are two kind of strands of research. One says, due to Robert Gordon, and my colleague, Tyler Cowen, is that maybe what's going on is a more fundamental decline in actually the rate of scientific progress. That if you think about, in order to start a new firm, you need a new idea, and maybe that new idea is generated because of a new technological discovery. You invent... The semiconductor is invented, and that creates room to create all kinds of new firms.

Tabarrok: Well, if we have a decline in fundamental technological growth, that can also explain the decline in dynamism. That, of course, raises the question, well why? Why is technology, technological growth declining? So, that's one possible answer.

Tabarrok: The second possible answer, which is now in the literature, and people are debating it, is that it's actually goes back to something we said earlier. It's a decline in the rate of population growth. Particularly a decline in the rate of new workers, so we had post-World War II, the Baby Boomers, a big increase in the workforce, and where are these workers going to go, right? So, when you have this big increase in the labor force, they don't all go to the old firms, because the old firms have increasing cost curves and so forth. So, when you have a big increase in the workforce, you get new firms, and new firms typically will do new things. At least they will try to innovate a little bit more, so you have a bunch of new workers, you get new firms. Those new firms naturally, for evolutionary reasons, try and do new things, and that generates you more productivity growth.

Tabarrok: So, those are sorts of the two answers. One of them is a little bit more depressing than the other.

Beckworth: I'd say they're both pretty depressing, because they're hard to fix. I mean, how do you generate new ideas? It's very hard. We've picked all the low-hanging fruit. We're near the... trying to pick from the top of the tree. And then population growth, it's hard to change demographics, right?

Tabarrok: Well, we can change demographics in the United States by having more immigration.

Beckworth: True.

Tabarrok: So, that would... and despite the furor over immigration, immigration has not actually been enough to increase our labor force growth, or put it back into the levels that we had in the 1960s and the 1970s.

Beckworth: All right, so would immigration be enough, or would we need to have a mix of immigration and more, higher fertility rates? More babies?

Tabarrok: Yeah, so I think both of these things. My colleague, Bryan Caplan, is very big on having more babies. He promotes that. Maybe we'll see that. And then there is, as you said, the kind of this more depressing issue of, "Well, maybe we picked the low-hanging fruit, and it's just becoming more difficult to come up with new ideas." And there is some evidence for that, so for example, I'm sure you're familiar with Moore's Law, right? Which is that every two years, or 18 months, depending upon how you want to frame it, the number of transistors per centimeter or whatever, something like that, doubles, right?

Tabarrok: That's true, so that law has continued to hold, but the number of scientists and engineers we have put into making that happen has increased dramatically, so if you look at the thousands and thousands of engineers in order... that is needed in order to generate Moore's Law, it's going up very, very rapidly. So, it's like we're getting less per engineer than we used to. The same thing is true in pharmaceuticals, so big part of my work has been on the Food and Drug Administration, the FDA, and there's no doubt that the FDA slows down the introduction of new drugs. Requires a lot of safety and efficacy tests and so forth, and I've been a big critic of the FDA for that reason.

Tabarrok: However, it is also true, and I think independent of the FDA, that the cost of creating a new drug has just been going up, and up, and up, and that may be because it's just harder. It's just harder to find... It just takes longer. You got to go to more chemical pathways and so forth. It's just harder to find new drugs.

Beckworth: Well, this goes back to the point you made earlier, that you got to have so many new babies born, so many more people, to find that one Einstein, right? You have a distribution of IQs. You're only going to get a few, so you got to have enough to create that distribution, so-

Tabarrok: Right.

Beckworth: Yeah, so all these things are tied together.

Tabarrok: Yeah. Yeah. One of the things which gives me some hope, by the way. You mentioned population growth, and IQ, and so forth. There actually is a way in which we could massively, massively increase the population of high-IQ people, and that is through artificial intelligence, so if we are able to develop artificial intelligence, I mean, that's a way of almost increasing the supply of high-IQ people at almost an infinite number, right? So, if we're able to... My colleague, Robin Hanson, talks about duplicating a human. Emulations. Create emulations, so if we were able to create one emulation of an Einstein today, well then, tomorrow we can create a million of them, right?

Beckworth: Right.

Tabarrok: So, the nice thing about artificial intelligence is as soon as you've got one, it can be everywhere.

Beckworth: And then I get visions of the Terminator. But no, the positive image is that we would have massive productivity gains if we had all these Einsteins running around solving problems.

Tabarrok: Right.

Beckworth: Okay.

Tabarrok: That's what people call the singularity.

Beckworth: The singularity. Brave New World you're offering here. All right, let's go back to dynamism. You have another piece where you talk about the decline in entrepreneurship, is it real? This is one angle on that dynamism story, and I think you argue that in fact it's not going down, it's just being manifested in different ways?

Tabarrok: That's another possible explanation of why dynamism has declined, is maybe we're not measuring it properly, and there are two hypotheses here. One is that a lot of... This term dynamism, of course, has a positive connotation, but you could also talk about dynamism as churn, which kind of has a less positive connotation, like, "Dynamism is people switching jobs," right?

Beckworth: Right.

Tabarrok: But that's also churn, and that's not necessarily a good thing, so... and churn is down, so it's another way of saying dynamism is down. People think that the millennials are... now have more jobs than ever. It's not true. The data that we have actually show that people are less likely to switch jobs today than in the past. That's declining dynamism, but it could also be declining churn, and maybe that's a good thing. So, what has happened? Well, maybe what has happened is that we have outsourced our churn to China, and to other places in the world.

Tabarrok: Certainly, if you look at how Apple treats its input suppliers, they're brutal, right? They're brutal. Every time there's a new iPhone, Apple puts basically everything up for bid, and says, "Unless you guys can produce this cheaper, higher quality, better, and do it faster, you're out," right? So, a lot of it may have been outsourced to China, so maybe on a world level, dynamism is not down as much as we think. That's one possible story.

Beckworth: Okay. What about patents? You've done work on patents, and intellectual property, and maybe that's causing some problems.

Tabarrok: Yeah, so I kind of blame economists here, actually, because we told this story that property rights are good, and indeed they are, but we convinced so many people of this that we created all of these property rights, and intellectual property, and we made them stronger, so we made copyright, which started out at 14 years. It went to 28 years, then went to 75 years. I think it's now at like 90 years plus the life of the author. We extended the length of copyright far beyond anything which could remotely be argued to be useful or necessary to increase the incentives to produce the intellectual property, and I think that's been a problem.

Tabarrok: We've made patent law much stronger than it used to be in the past, and that's okay if you're talking about patenting a chair, but it becomes a big problem when you talk about patenting an idea, which can itself be used to produce other ideas, and this is where the idea of cumulative innovation comes in. So, if you patent an idea which can be used to produce other ideas, you're raising the cost of building on that idea. You're raising the cost of cumulating on that idea, and I do think that across the United States, we have not just in copyright and patent, but more generally, we've created a more rent-seeking society, by which I mean we've invested a lot of resources in dividing the pie, rather than growing the pie. And the more resources you invest in dividing the pie, the smaller in fact the pie gets.

Beckworth: Yeah, so our listeners will be eager to hear that there's a curve named the Tabarrok Curve that illustrates this point, because there's a tension. You want to have some protection for intellectual property to create the right incentive, but you don't want too much, which leads to rent seeking, and you draw this out, kind of like the Laffer Curve, but named after you, and you argue we're on the wrong side of that curve, is that right?

Tabarrok: Yeah, exactly right, so I drew somewhat tongue in cheek on a napkin, just like Laffer did, I drew this curve showing that yes, some intellectual property protection, that'll increase innovation, but if you have too much property protection, intellectual property protection, that actually decreases innovation, and I argued that we're on the wrong side of the curve, that actually by decreasing intellectual property protection, we could increase innovation.

Beckworth: Okay. What about the decline in government R&D? Any role there? And specifically, as it relates to maybe the role government funding provides, National Science Foundation can give to growth. What do we know?

Tabarrok: Yeah, so the way I put this is we have in the United States what I call a warfare-welfare state. That's what we spend money on. Warfare and welfare. And I would like to see us have a much more of an innovative state, an innovation state. In the 1960s, we spent, the U.S. budget, more than 10 percent of the U.S. budget went into R&D. Primarily NASA, in the big Apollo programs, and that was something which I think all Americans, or a lot of Americans could get behind. Creating something incredibly new and innovative.

Tabarrok: Since that time, the share of the U.S. budget going into R&D, it's now less than four percent. Maybe about three percent, and I think part of what has happened is that warfare and welfare have driven it out. Think about health care. Now, like warfare I think is obvious. I think everyone sort of can see we spend an awful lot on the U.S. military. In terms of welfare, I'm talking about all kinds of things, including Medicaid and Medicare and all programs like that, and regardless of your view I think of such programs, you think about the huge debates we had over Obamacare, which was really all about dividing the pie, right? Really all about who should get more, and who should get less, and yet at the same time, I think we're leaving hundred dollar bills on the ground, bigger than hundred dollar bills.

Tabarrok: If we could create a cure for cancer, that would actually be worth much more to everyone than having national health care for everybody at current levels of ability. So, I would like to see much more being spent at, say the National Institutes of Health, or supporting research budgets more generally. I think actually that is something more Americans could agree upon, and would actually have bigger payoffs overall.

Beckworth: Okay. Now, you have a new book out that's related to this, and it's called Why Are The Prices So Damn High, and it's related to Baumol cost disease, but tell us about that book and how maybe that sheds light on this conversation.

Tabarrok: Right, so if you Google some of this stuff, you'll see a famous graph, and the graph shows a whole bunch of products and goods which have declined in price since the 1950s tremendously, like cars are far cheaper in terms of quality, when you measure including quality today. Computers have obviously come down in price. Clothing and shoes have declined in price dramatically. So, we see all these gains, and yet at the other, the upper half of the graph, we see massive increases in the price of education, massive increases in the price of health care, and with other services, typically services, and the question is why. Lots of people, again, have pointed to regulation, government involvement and so forth, and we wanted to take a look at that, and purely accidentally, I wasn't intending this again, but I reject most of those explanations.

Tabarrok: So, we looked at universities. People say, "Oh, well, university is so much more expensive because of bloat, because look how great we treat the students," and we do. It is lovely here at George Mason. We have two Olympic size swimming pools.

Beckworth: Nice.

Tabarrok: It's very nice. But I could not... The data did not support the idea that those things were the cause of higher prices.

Beckworth: And that's true for health care, as well?

Tabarrok: Well, I tweeted, "Every theory about why health care is screwed up is correct," because health care is screwed up in every single possible way, so I think what is going on, the explanation which my colleague, Eric Helland, and I give for these price increases is the Baumol effect, and the Baumol effect is the following: It's that when you have sectors which don't increase in productivity, but which do use a resource which other industries which are increasing in productivity use, those industries must rise in price, and kind of the classic example, which maybe is not actually the best example, but the classic kind of example is the story of the string quartet in 1826.

Tabarrok: String quartet in 1826, it takes four people 40 minutes to produce this piece of music. You now come to 2018, it still takes four people 40 minutes to produce this bit of music, so there's no increase in productivity over those 100, 150, 200 years. On the other hand, the opportunity cost of those four musicians, say high-skilled people, has gone way up. Those four musicians, were they not musicians, could produce goods and services worth much, much more today than in 1826, and as a result, the price of listening to a live performance of a string quartet has gone way up. And we think roughly the same kind of dynamics are occurring in education and health care, and other labor-intensive services which use high-skilled labor.

Tabarrok: So, if you're using high-skilled labor, and again, you think about education, as you and I know, David, we're not doing all that much different than Socrates did, right? Probably less effective than Socrates, but Socrates was drawing in the sand, and we draw on the blackboard, or maybe we use PowerPoint now, okay, but really, we've got 30 people, and they're sitting around us, and it's not all that different than what Socrates did, so our productivity really has not gone up, not in 200 years, but in more than 2,000 years in education.

Beckworth: Wow. And so the argument is that people who are highly skilled have a high opportunity cost, because the other parts of the economy, the goods produced in the manufacturing part of the economy, it has become very productive. The returns to labor there are much, much higher, and in order to keep us in higher ed, or in health care, we have to be compensated. Now, this argument doesn't apply to low-skilled labor, right? In the service sector, because they don't have the opportunity to substitute as easily into these other jobs that pay more. Is that right?

Tabarrok: Correct, and that's where we differ a little bit from Baumol's original formulation. We are focused on high-skilled labor, where I think that is where the opportunity costs have risen the most.

Beckworth: Let me push back just a little bit on that, because there have been some people who argue that there have been some real quality gains in services provided, particularly in health care, so the Murphy and Topel paper that you mentioned in your book, 2006, they find 3.2 trillion from life-extending services, and if you think also about life-improving services, things like joint replacements, maybe asthma treatments, there may be real quality gains that it's hard to... maybe a measurement issue, right?

Beckworth: So, maybe we do see improvements. It's hard to put a number on them, so how do you respond to that criticism?

Tabarrok: Yeah. I think that's exactly right, and health care is very, very complicated. I would say this, however. Almost everywhere, it's: higher quality is correlated over time with lower prices, not with higher prices.

Beckworth: That's a good point.

Tabarrok: You know, at any given point in time. It's true if we want... We can go to McDonald's, or we can go to Ruth's Chris, right? And we pay more for higher quality. So, in any given point in time, higher quality is associated with higher prices, but over time, what you actually see is the reverse correlation, is that lower prices and higher quality go together, and so even if you think that health care has improved in quality, as in fact I do, there's no particular reason why that higher quality should have resulted in higher prices. In most industries, it doesn't, and in fact, a lot of the improvement in quality comes about because of better knowledge, better ideas.

Tabarrok: So, the doctor used to bloodlet people, and then you discover, "Oh, that doesn't actually work," but it doesn't cost more to treat somebody with aspirin, or the drug, than to bloodlet them, right? It's just a better idea, and that actually should have resulted in lower prices, not in higher prices.

Beckworth: That's a great point, and that reply really works well with the health care example, because you're right. We would expect to see at some point lower cost, not just higher cost. In education, on the other hand, where you don't see productivity gains, I think you can make a clear case you don't see the innovation that maybe you do see in health care.

Tabarrok: Yeah, exactly. I think what people say when it comes to education is, "Well, yes, it's true, you and I, David, we're sort of doing the same thing, teaching 30 people, but today we're teaching them the truth. The stuff we are teaching is better." But again, that actually doesn't make sense, because it doesn't cost us more to teach a true theory than to teach a false theory, so there's no particular reason why, even though today we are teaching better things, hopefully, including in the sciences, it shouldn't actually cost more, because those better things are all just better ideas. The teaching is the same.

Beckworth: Related to this is this argument that we're not measuring things properly, so the iPhone has all these apps that replace goods that we had to buy separately. Maps, radios, photo albums, cameras, and there's been some work done by some economists at Chicago Fed and some other places. They've taken that critique, they look at it, and they still say, "It still doesn't explain the decline in productivity." So in other words, they look at all the value, all the consumer surplus you would say we get from these things that the information side has given us.

Beckworth: What are your thoughts on that? Where do you come down on that discussion?

Tabarrok: Yeah, so you see the same thing, and we talked about this a little bit in the dynamism literature, is maybe we're measuring dynamism wrong, or maybe we're measuring productivity or quality wrong. The problem, however, is that people don't feel that way, right? So, the statistics of declining dynamism, declining productivity, declining growth rates, that actually seems to correspond to how people feel, which is namely they're not that happy. The people don't feel that, "Oh, we're living in boom times."

Tabarrok: So, if it were the case it were just a measurement issue, our numbers would be wrong, but people would feel great, right? But it does seem that... Feelings are hard to measure too, I suppose, but it does seem that people think we're in something of an economic malaise, or slow time, so our numbers appear to meet that more than this alternative theory.

Beckworth: Okay, in the time we have left, I want to know from you, what would you see as truly innovative technological change? What kind of developments would you like to see, that would really lead to rapid productivity gains? Like for example, some kind of change in transportation that would... you'd get to some place on planet Earth quickly? Concordes again? What would you like to see that would lead to rapid growth?

Tabarrok: Well, it's interesting that you mentioned Concordes, because one of my co-authors, Eli Dourado, who was a... got his PhD from George Mason, he has gone not into academia, but he is now working at Boom, and Boom is a firm which is trying to bring back supersonic jet travel. We can now do it at... with much less noise, at much lower cost. The Concorde did have some problems, but we could now bring it back, and really the only thing which is technologically this is possible, but we passed a bunch of really I think silly laws, or bad laws, to prevent the Concorde from creating so-called noise pollution, and so we need to change the laws.

Tabarrok: But I think that would kind of be an exciting mark. I mean, people... There is something to be said for an example, which illustrates we're in a new era, and to be able to travel, say from New York to Tokyo in three or four hours, and to get to London in an hour or two, that would be kind of pretty remarkable, because since the creation of jet travel in the 1950s, we have seen no increase in the speed of long-distance travel. That's pretty amazing. That's 60 or 70 years now with no increase. In fact, because of TSA, we've actually had a decrease in the time spent for long-distance travel. So, if we could break through this barrier, literally a sound barrier, but also a regulatory barrier, if we could break through this barrier, I think that would excite people, and that would tell people, "Yeah, maybe we are in a new era, and new things can be done," and I would... So, I want to see Boom really rack up.

Beckworth: Okay, that'd be a watershed development that maybe causes other research and development, and other things to happen, but yeah, I think transportation costs, if we could radically lower transportation costs, that would be one big way to improve productivity, you know? I mean, I'm going to go really way out here, like if we had a transporter. If you could instantly go from one part of the Earth to the other, the cost of getting goods and services, something like that. We don't have transporters, but we do maybe have faster planes, like you've just suggested. So, things that can radically change the cost of delivery I think would be a big step forward.

Tabarrok: I think that is true, and I would say the big ones, which are uncertain, but the big ones which could really transform, as we talked about, like the singularity, artificial intelligence, and if I may be... end on a controversial note, how about genetic engineering, to increase human IQ? That, again, that's... We're in a race with the machines, right? And increasing human IQ, that would be a remarkable advancement, and it seems to be that we are on the cusp of that possibility.

Beckworth: It may happen. Okay, our time is up. Our guest today has been Alex Tabarrok. Alex, thank you so much for coming on the show.

Tabarrok: It's been great.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app, and while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening.

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About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.