Did Border Closure Cause the Productivity Slowdown?
August 28, 2012 Leave a Comment
Post by Nathan Smith (regular blogger for the site, joined April 2012). See:
By “the productivity slowdown,” economists have generally meant the slowdown in GDP per capita growth rates that occurred after 1973 (e.g., see here). Note that the word “slowdown” is a bit misleading: it doesn’t mean that we’re getting poorer, just that we’re not getting richer as fast. Still, it’s an unwelcome change, and calls for an explanation. There was then a productivity acceleration in the 1990s, but not a return to the “halcyon days” of the 1950s and 1960s.That productivity slowdown can’t have been caused by closed borders, because the borders were already closed in the 1950s and 1960s.
However, Alexander Field’s A Great Leap Forward: 1930s Depression and US Economic Growth casts a different light on things. Field’s most surprising finding is that the 1930s actually experienced the highest rates of productivity growth in the 20th century. Manufacturing, whose productivity rose at its highest-ever pace in the 1920s, slowed down a bit in the 1930s, but fast productivity growth spread to other sectors. The fast productivity growth of the 1950s and 1960s was actually a decline relative to the 1930s, and the post-1973 productivity slowdown a further decline.
I am not always convinced by Field’s analysis. He often seems insufficiently suspicious of aggregate numbers that have to be calculated on the basis of market prices which change over time and can’t easily be adjusted for quality changes. Still, Field altered my view of 20th-century economic history, and my tentative best guess would now be to defer to him. Let me now tentatively and speculatively extend his analysis a bit. The post-1973 productivity slowdown that attracted so much attention was something of an accident, in the sense that the oil price spike and macroeconomic conditions created a kind of “joint” in the path of GDP, but the lasting productivity slowdown had to do with long-run trends and not really with anything that happened in 1973 per se. In the “halcyon days” of the 1950s and 1960s, two non-technological factors masked an ongoing slowdown in the pace of technological innovation. First, demographically, the US population was quite young, and it’s characteristic of young people to learn and become more productive at a faster rate than their elders. Second, competent monetary policy and much reduced political uncertainty relative to the 1930s contributed to investment and capital formation, enabling the macroeconomy to exploit much more fully the space of technological possibilities that had already been opened up by the innovative 1920s and 1930s. Productivity growth slowed down in the 1970s because the exploitation of the technological backlog from the Depression and war years, as well as the demographic boost from the youthful post-WWII population, had played themselves out.
By this account, the real impetus for much of the late 20th century’s growth can be traced back to… but let me borrow from Tyler Cowen’s The Great Stagnation here:
The period from 1880 to 1940 brought numerous major technological advances into our lives. The long list of new developments includes electricity, electric lights, powerful motors, automobiles, airplanes, household appliances, the telephone, indoor plumbing, pharmaceuticals, mass production, the typewriter, the tape recorder, the phonograph, and radio, to name just a few, with television coming at the end of that period. The railroad and fast international ships were not completely new, but they expanded rapidly during this period, tying together the world economy. Within a somewhat longer time frame, agriculture saw the introduction of the harvester, the reaper, and the mowing machine, and the development of highly effective fertilizers. A lot of these gains resulted from playing out the idea of advanced machines combined with powerful fossil fuels, a mix that was fundamentally new to human history and which we have since exploited to a remarkable degree.
Today, in contrast, apart from the seemingly magical internet, life in broad material terms isn’t so different from what it was in 1953. We still drive cars, use refrigerators, and turn on the light switch, even if dimmers are more common these days. The wonders portrayed in The Jetsons, the space-age television cartoon from the 1960s, have not come to pass. You don’t have a jet pack. You won’t live forever or visit a Mars colony. Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago.
By this account, the technological Golden Age roughly coincided with the last great age of open borders. The momentum lasted for a little while after borders were closed, starting with the imposition of World War I passport regimes and culminating in the Immigration Act of 1924, but gradually trailed off. Well, correlation is not causation of course, and in any case this correlation is very rough. Do we have other reasons to believe that immigrants are crucial to innovation? Sure. “Immigrants are crucial to innovation, study says.” Immigrant Inc.: Why Immigrant Entrepreneurs Are Driving the New Economy. (see also the innovation case for open borders page). Sergey Brin. Andrew Carnegie. The striking international diversity of US university faculties, especially in economics, science, engineering, fields most closely related to innovation. Of course, some acknowledge this and give it as a reason to prefer high-skill immigrants. But Andrew Carnegie wasn’t high-skilled when he arrived, and in general, bureaucrats aren’t good at discerning such matters. And high-skill immigrants have low-skill spouses, children, parents. You’ll attract some of them even if you interfere with all their social ties, but you’ll attract more with open borders.
Yet we can’t think of it in terms of competition among nations for top talent, for technology is a global affair. It doesn’t matter very much where something is invented. Inventions go everywhere. That’s the nature of ideas: once discovered, they’re not scarce. And so it’s not quite right to think of American productivity growth slowing down because America lost out on opportunities to recruit talent by closing its borders. The suggestion must be that the innovative talents of the whole world became less advantageously configured when governments dropped a regime of passport controls on them and interfered with their collaboration. Again, this is tentative. I have an idea in my mind of how the theory could be sketched out more fully, but it’s beyond the scope of this post.