Solow, so slow

Ok, I'd like to discuss the Solow Growth Model, since I don't know it as well as some of the more econ-proficient, so please correct me if I have my facts wrong. Thanks.

Overall, I liked the book, and I'll agree with most of what Chris said about Easterly's attitude towards "panacea-policies," but this thesis seems to me to be a rehash of Blinder's Murphy's Law of Economic Policy. Easterly carefully shows how any single or double variable explanation for growth is insufficient, but admits that the idea was somewhat legitimate because that variable seems to be necessary, if not sufficient. As such, he reinforces the idea that if you ask 100 economists a question, you'd get 300 answers; economic policy still seems to be too complex and sophisticated to put into simple "T-shirt" slogans or singular policy objectives. However, Easterly gives these individual estimations unnecessarily short shrift. Without an experimental inquiry into determining whether or not one of the many confusing and lurking variables held any causative correlation, we would still be left to assume that either countries and peoples are naturally more productive or that only mimicking exactly the tried and true methods could produce wealth. By establishing rigorously that there are several necessary, if not sufficient factors, this comprises an argument in itself; it shows that a macroeconomic system of management must take a multi-faceted approach looking at as many possible perspectives as possible. To some degree, this explains the success of the "Gang of Four" as well as the success of Western democracies that had imperialistically invested in their economies with the proceeds from natural or extracted resources at one point or another in their histories. Partially due to the faith in the financing gap approach (the Harrod-Domar model), nascent economies like those of sub-Saharan Africa that are ineffectively spending themselves into debt concentrate on too few approaches because the investment planning is too centralized, resulting in narrow, inefficient investment (as Hayek warned against). In countries where there are freer markets for the targets of investment, the capital necessarily flows to the kind of investment with the best return, as suggested by the Solow growth model.

One question I had about some of Easterly's arguments in his discussion on Solow concerned his apparent assumption that the supply of labor is relatively fixed. He says that jobless growth is OK because it necessarily implies a higher per capita income, however, if the population rate (offset for age of employment) is expanding faster than employment growth, but not faster than the rate of GDP growth, couldn't workers be losing income? Is this situation still subject to the Luddite fallacy? Could a country in such a situation see their standard of living fall as their average productivity increased, while population growth outstripped such an increase? I would think the answer is probably not, but it seems to be a situation that has potential to resemble a Malthusian nightmare the likes of which only Ward Elliott could have imagined.

Concerning Easterly's discussion of transitioning economies in the Solow growth model, is it possible that economies do go through profound low-capital to high-capital shifts becaues of external shocks? For example, the Antebellum South certainly saw a large supply shock to labor, almost certainly causing a much higher relative return to capital investment, and so on. It is true that the South is still the poorest region in America (but isn't it the fastest growing?), probably the result of such a large economic shock to investment. Could political changes like emancipation disrupt the continuity of the model? This brings up the question of whether or not growth rates are really indicative of conditions; GDP growth is often slow when laying the foundation for long-run growth, causing policymakers to shun those policies which do not appear to produce immediate positive results (the likes of which can be emblazoned on a T-shirt). If we were to use another indicator aside from growth of output per capita to weigh economic welfare (such as an index that would assess the status of all the necessary conditions to achieving growth), policymakers might respond to the indicators of success tied to that indicator, resulting in a more long-run oriented policy.

As far as indicators go, what about the fact that GDP is used as a primary indicator of income rather than GNP? To simultaneously address another issue, how is GDP skewed because of outsourcing? If a country is impaired in its attempts to efficiently accumulate capital (i.e. the capital which these supposedly flawed growth models suggest is necessary), wouldn't the more efficient solution be to outsource the capital (i.e. rent it from someone else), preventing the necessity for domestic investment? The problems here are transaction costs and irrational, illiberal political fears of foreign ownership of domestic inputs to production (see, the Dubai port deal, foreign energy ownership in Europe, etc.). Again, the theme is simple-minded politics nationalistically interfering with economic efficiency.

One other miscellaneous issue I'd like to bring up (maybe for class discussion) is Easterly's idea that “creating skills where there exists no technology to use them is not going to foster economic growth” (73). This seems to make sense in light of the argument he makes, but why couldn’t an investment in skills make it attractive for companies to bring technologies/business centers to those places with ostensibly lower costs per worker (since there is no demand for those skills yet)? Technology is supposedly easily transportable (as it seems to be in high tech), so why couldn’t fostering the skills to use them be productive by reducing the costs of hiring an employee for foreign businesses? This seems to coincide with the success story of India, though in India's case the training was usually at the hands of the corporation rather than public investment. Perhaps this is because of the corporate preference for vocation-specific training, rather than general secondary-schooling, which Easterly also criticizes as an indicator. Perhaps more vocation-specific educational investment (which may resemble Singapore's frequent economic reorientations) would make this a more reliable engine of growth.

Ok, too much to cogently discuss already, so I'll save the rest for class.