The Sunday, June 19 issue of the New York Times included a column by Harvard’s Greg Mankiw. Titled “One Economic Sickness, Five Diagnoses,” the article is, as always, well-written and persuasive. But, sadly, only three of the five diagnoses stand up to scruting.
First, Prof. Mankiw cites his colleague, Prof. Larry Summers who proposes “secular stagnation” as a causal factor. However, that is not so much a diagnosis as a description of the problem. Describing a problem, while useful, is not a diagnosis.
Second, he notes Prof. Robert Gordon (whom I admire a great deal). Sadly, Prof. Gordon has opted for the economist’s standard reason for any economic event being either better or worse than expected: technology. Economists, even those who have spent careers studying the subject, simply do not understand technological change. That is especially true of the type of change we have seen over the past 20 years. Increasing productivity among those who use and process information is exceedingly difficult to measure. Yet most economists are pretty sure that’s part of the reason for, among other things, the increase in income inequality. Are we to believe that technological change simultaneously boosts the productivity of knowledge workers while causing slower economic growth? I am skeptical.
Prof. Mankiw, however, has omitted one factor which many economists (including me) believe is quite important. The tsunami of new regulations that the executive branch has produced over the last seven years has killed small business startups and stifled entrepreneurship. Those two sectors are the engines of future growth. Even Apple, Microsoft, and Google were small businesses at one point.
Prof. Casey Mulligan has calculated the implied marginal tax rates from, among other things, the Affordable Care Act and other new laws. Immediately after the ACA was passed I wrote two articles in my blog predicting that hiring would slow and economic growth would suffer. Prof. Mulligan, me, and a number of other economists have analyzed this as best we can. Estimating the cost of new regulations is always difficult. But the work is progressing and continues to favor the hypothesis that the current malaise can be laid at the front door of the White House.