What Policy Can Do for Growth and What Politics Won't

Yglesias' valiant attempt to show how Obama's big schemes are all connected by the thread of economic growth works mainly as an illuminating exercise in free association. The thread that in fact holds them together is that there are major constituencies within the Democratic Party that want them. Most of the time, that's how politics works and Matt often displays a fine appreciation of that fact when it comes to Republican policy initiatives. Anyway, I'd like to comment on this bit of Matt's post:

[P]erhaps the most important things policy can do to impact the capacity for sustainable growth—i.e., growth that’s not based on asset price bubbles—is to increase the availability of high-quality human capital and the availability and quality of public sector physical capital. Which is to say education and infrastructure.

I agree that human capital and physical infrastructure are crucial to growth. I'm even happy to agree that government investment in education has more than paid for itself over the years in added growth. But I also think the evidence points to the idea that returns to public investment in the status quo system of education have diminished to basically nothing. No Democrat is going to do anything to run afoul of their party's most powerful client in order to promote the deep structural changes needed in primary education to actually improve the quantity and quality of American human capital. So instead we get free money for college, which is Obama's way of saying “thank you” to the loyal, powerful bloc of Democrats who make their living pouring valuable human capital into nineteen-year-olds by making them pretend to have read Plato and Beloved
As for energy infrastructure, we really could use a “smart grid” that allowed for real-time pricing of energy based on demand. (See Lynne Kiesling on the “transactive” potential of the smart grid.) Markets are known to be the best mechanism available for efficiently allocating resources, and putting in place an infrastructure for pricing energy would be good for growth and the environment. Just before the bit quoted above, Matt allows that:

There are a lot of factors behind growth including, of course, old fashioned human ingenuity at coming up with new products to offer and new ways to offer old products.

But Matt evidently thinks policy can't do much about this. One thing policy can do is to make markets possible, so that there are rewards to ingenuity. That can mean making an illegal market legal, or making a legal market worth investing in by lowering the burden of regulation. Another thing it can do is to restructure intellectual property law to encourage rather than discourage invention. Another thing it can do is not crowd out private investment in innovation, which is the opposite of what Obama plans to do in education, energy, and health care. When I talked to Nobel Prize-winner Edmund Phelps, an expert in failed European attempts to spur growth by subsidizing technological advance and no right-winger, he seemed pretty worried that a lot of new infrastructure spending (much of which will be flat-out unecessary and unproductive) and targeted government spending on “green” technology would in fact adversely affect incentives to innovate. I don't think he's wrong to be worried. Matt thinks entrepreneurship is an empty business buzzword, but it is in fact the foundation of economic growth. 
I will rejoice the day either Republicans or Democrats find that their interests align with the general good and plump for a serious set of pro-growth initiatives. Until then, I'll expect the usual constituency service.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center