David R. Henderson  

Great Data but Disappointing Economics

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Northwestern University economist Robert J. Gordon's latest book is on U.S. economic growth from 1870 to 2014. With his careful sifting of the data, he shows how far we've come over that time span, and especially between 1870 and 1970. Examining the economy sector by sector, he finds progress in every area: life expectancy, food, housing, transportation, workplace conditions, clothing, entertainment, and health care, to name some of the most important areas analyzed. In almost all cases, his data are impeccable. For those who fondly wish to return to the "good old days," he has important news: the "good old days," compared to now, were really bad.

The book's strengths are its data and Gordon's common-sense interpretation of that data. Unfortunately, he does not do nearly as good a job of using basic economics to explain the causes of economic growth and the ways to offset the lower future growth that he anticipates. At times, he shows an awareness of the harm done by many government regulations: policies on drug regulation, housing, entry into occupations, and airline security, to name four. However, he actually claims positive effects of a now-defunct regulatory agency, the Interstate Commerce Commission, that economists have definitively shown was almost wholly destructive. Also, he never explains why we've had the kind of innovation and capital investment that has driven our standard of living. When he discusses tax policy, he seems unaware that one of his proposals would likely reduce that investment and innovation.


These are the opening two paragraphs of my review [scroll down to near the end] of Robert J. Gordon's The Rise and Fall of U.S. Economic Growth, published in the latest issue of Regulation. For those who liked my review of Robert Reich's book, this book by Gordon is far more important.

Two of the last 3 paragraphs of my review:

And surely Gordon must be aware that taxing capital more heavily, as increased tax rates on capital gains and dividends would do, would reduce the incentive to invest in capital. With a lower growth of capital, there would be lower growth of productivity and, therefore, output. Yet he mentions not a word about this large downside to his proposal. At that point in the book, I got the impression that one of his agenda items was to push for his preferred policies regardless of their effects on growth.

To his credit, he does call for large doses of deregulation. He would reduce the imprisonment rate of Americans, which, he points out, is a large multiple of the rate in Europe. That would save taxpayer money and increase the real incomes of people who would otherwise be in prison. He also calls for drug legalization, pointing out the savings to taxpayers and the gains in tax revenues from taxing drugs, although not mentioning the gains to people who, as a result of legalization, don't end up in prison. Possibly he thought that this gain was obvious. He also calls for rolling back regulations on land use, which he notes, citing Harvard economist Edward Glaeser, transfer wealth from the less affluent to the more affluent and also reduce productivity. Finally, he would get rid of many regulations that restrict occupational choice and thereby "restrict upward mobility for lower-income individuals."


Read the whole thing.


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