18 Jan 2010

My Objection to GMU Treatment of Growth Rates, Sans Sports Analogy

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In a recent post I may have been too clever by half, or even by three-fourths. I thought I had discovered a glaring contradiction in the arguments of some GMU bloggers in their disputes with Keynesians lately. But instead of stating my view plainly, I invented a basketball game between Team GMU and Team JMK (John Maynard Keynes). Let me point out the perceived problem in plain English to make sure my point isn’t lost:

* Some GMU professors have been speculating lately about Samuelson’s famous textbook predictions that the Soviet Union would eventually overtake the US. Brad DeLong tried to defend Samuelson from the accusation that his mistake was due to left-wing bias. DeLong pointed out that using standard mainstream production functions etc., you would expect the poorer Soviet Union to grow at a higher rate than the U.S. (There was other technical stuff too.)

* Bryan Caplan came back and explained that this was very naive, that the institutional structures made a big difference, etc. Here’s Caplan’s summary:

Bottom line: Even on Brad’s charitable interpretation of Samuelson and company, their argument was unreasonably sympathetic to the Soviets. There was never a point in Soviet history when a sensible economist would have seen communism as good for growth in any meaningful sense.

OK so I think Caplan established that a free market economist would have recognized that not only did the US enjoy a higher living standard, but that there was no reason to suppose that that gap would shrink over time.

* Now in an apparently totally different debate, the GMU bloggers were getting in fights with the Keynesians over the effects of social democratic welfare states on European economic growth rates. It’s a long story, but for sure the GMU’ers loved this post blasting Paul Krugman and Matt Yglesias. (Caplan linked favorably to it [I don’t have the link right now], and here’s Russ Roberts calling it a “spectacular analysis.”)

But the irony is that that “spectacular analysis” argues that only an idiot would have thought that European welfare states would grow more slowly than the US. (And so Yglesias shouldn’t be high-fiving Krugman over the apparent empirical finding that Europe doesn’t grow more slowly.) According to the writer, the important thing is the level of economic output, not the rate of its growth. Why? Because (he claims) standard economic growth theory shows that poorer countries tend to grow faster than rich countries, other things equal. So the real issue with Europe, he claims, isn’t whether or not it grows faster than the US, but whether it has a higher or lower per capita income, and whether its growth rate is that much higher than the US’s, given how much poorer Europe tends to be.

Now I’m not saying Caplan was wrong about the Soviet Union, and I’m not saying this new guy is wrong about Europe. What I am saying is that these two positions seem contradictory. When the Soviet Union grew more slowly than the US, the GMU’ers said, “Ha! We knew it! Only you commie lovers would have used the Solow model on a capitalist and a socialist country.” Yet when Europe grew as fast or faster than the US, the GMU’ers said, “So what? Using the Solow model we would expect the capitalist and the social democratic welfare states to show these characteristics.”

Last point: You can argue that the US is a welfare state, not different in kind from Europe. Fair enough. But I don’t think any GMU’er made that subtle distinction.

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