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Created 11/1/1997
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What Do We Really Know About Economic Growth?

 

J. Bradford DeLong [1]

delong@econ.berkeley.edu

http://www.j-bradford-delong.net

November 1997


Abstract

Today economists' views on long-run economic growth are more than usually divergent.. A minority of economists hold to a baseline vision laid out in the 1950s which is pessimistic about how policies might affect growth. A substantial group of economists hold to endogenous growth perspectives, and have concluded that good and bad economic policies can have much more significant effects because exeternalitieswedges between the social returns realized by the economy and the private returns realized by investorsare pervasive.

One's conclusions about the ability of economic policies to affect economic growth depend on one's vision of economic growth. Nevertheless there is strong reason to believe that the American economy invests too little. And as one moves away from the baseline framework toward endogenous growth perspectives, the case for tuning American economic policy in the direction of generating a substantial budget surplus and of other policies to boost national investment becomes overwhelming.
Most economists hold neither to the original baseline of the 1950s nor to endogenous growth perspectives, but have taken up a position in the middle. It is interesting to note that while the rhetoric of this middle way sounds like the 1950s baseline, its substance --its conclusions about the effects of policies on economic growth--is closer to the endogenous growth perspective.

There is a sense in which we are all endogenous growth theorists now.


Biography

J. Bradford DeLong is a professor of economics at the University of California at Berkeley, a research associate at the National Bureau of Economic Research, and the co-editor of the Journal of Economic Perspectives. From 1993 to 1995 he was a deputy assistant secretary for economic policy at the U.S. Department of the Treasury.


Introduction

In the 1950s and 1960s measured real GDP per worker in the United States increased at roughly 2.5% per year; since 1970 it has averaged less than 1.0% per year. [2] This productivity slowdown is the major macroeconomic event in the United States over the past generation.

Now measured estimates of real GDP growth probably understate true growth in productivity because they suffer from the standard problems of index numbers. Boskin et al. have concluded that true growth is between half and one percentage point per year greater than measured growth. [3] Thus true real GDP per worker growth over the past generation has been not 1.0% per year but 2.0% per year--still a very large number by long-run historical standards.

But the findings of Boskin et al. do not suggest that the magnitude of the productivity slowdown is any smaller: the American economy is still growng much more slowly than in the past. Because have a social insurance system that makes sense only if growth continues at its pre-1970 pace, promises made about future tax rates and benefit levels cannot be kept. The productivity slowdown makes America a poorer country than it might otherwise have been. And it makes American politics less civil: fights over how to redistribute a pie perceived as growing slowly are much more bitter than fights over how to allocate the dividend from faster economic growth.

Can anything be done to reverse this slowdown? This essay provides a short view of how different policies are likely to affect economic growth. The task is complicated because economists' views on the nature and causes of the wealth of nations are, today, more than usually divergent.

Largely as a result of work Paul Romer, today economists' beliefs about the nature and causes of economic growth diverge more than is usual. [4] A substantial minority of economists today is attached to Paul Romer's vision. Its advocates see externalitieswedges between the social returns realized by the economy and the private returns realized by investors everywhere: the advance of economically-useful knowledge and thus of total factor productivity depends urgently on the progress of other forms of investment, and is intimately tied up with monetary and fiscal policy. Some economists work with the baseline vision of the process of economic growth as developed by Robert Solow. [5] This vision lead to the conclusion that growth does not depend that strongly on economic policy, for most of it is determined by extra-economic factors: the progress of science and technology depends little on monetary or fiscal policy. The center of American economics today finds most attractive an extended version of Solow's framework in which physical investment contributes a greater share of economic growth, and in which other kinds of investment--most importantly in human capital through education and training--are powerful sources of increased productivity. 6

An important argument of this essay is that many advocates of the center position suffer from a degree of cognitive dissonance: they understand their position to be that the reformulation of the Solow framework has turned back Paul Romer's challenge, and yet as far as implications for economic policy are concerned, Mankiw, Romer, and Weil are far closer to perspectives usually identified with Paul Romer than they are to those of Robert Solow.


Robert Solow's Framework

Understanding the Solow Framework

By how much would changed policies boost economic growth? The answer to this question depends on what the underlying determinants of economic growth are--and on which of economists' three visions of economic growth you hold to. Each vision leads to different conclusions about how much changed policies can boost growth.

The baseline vision of economic growth as set out by Robert Solow begins with an aggreagate production function: total GDP (written "Y") is a function of the economy's labor resources L, its capital stock K, and its "technology" or total factor productivity level A:

(2)

Using lowercase letters to denote proportional rates of change, we can use (2) to decompose growth in output per worker into various components:

(3)

The rate of growth of GDP per worker (y/l) is (a) increased by a higher share of GDP devoted to investment (I), (b) decreased by a higher rate at which the physical capital stock depreciates (d), (c) decreased by a faster labor force growth rate (n), and (d) increased by faster growth in technology or total factor productivity ( t ). An increase in the rate of growth of the technology or total factor productivity of the economy translates one-for-one into an increase in output per worker growth.
Equation (3) is an accounting framework. It holds by definition. It becomes a theory of economic growth, and gains empirical content, when judgments are made about the relationship of total factor productivity growth ( t ) to the other determinants of growth, and about the size of the parameter ( a ) that governs the impact of investment and accumulation on GDP.

The strength of the other of these effectsthe amount by which an increase or decrease affects GDP per worker growthdepends on the parameter a , the share of national product that is earned by owners of capital (rather than suppliers of labor), and on the economy's output-to-capital ratio (Y/K).Multiply the capital share a by the output-to-capital ratio to obtain the (gross of depreciation) marginal product of capital: the extra boost to GDP next year produced by a $1 boost to this year's investment.

Using the Solow Framework

For the United States today the aggregate output-to-capital ratio and the capital share are roughly one-third and 0.3. Together these imply a (gross of depreciation) marginal product of capital of roughly ten percent per year.Thus Robert Solow's framework tends to produce pessimistic conclusions about the ability of anything (except for raw improvements in technology generated by extra-economic factors) to significantly boost economic growth. Because the parameter a is relatively small, boosts to investment are not that effective at boosting GDP per worker growth. 7

For example, consider a shift in the government budget deficit that brings it into substantial surplus, a shift in fiscal policy that boosts national savings and investment by an amount equal to some three percent of GDP each year. Let us look at the effects of such a policy after one year, five years, and twenty years: one year to gauge the immediate impact; five years to approximate the decision-making horizon of the American political system; and twenty years to gauge the long-run impact without pushing calculated effects so far in the future that analysis loses all credibility--twenty years is about as far as we can look into the future without passing completely out of policy analysis and into theology.

In the Solow framework such an increase boosts growth in the first year after the policy shift by roughly 0.28%: at current levels, a shift of some $210 billion a year away from public and private consumption has produced a boost to the level of GDP of $21 billion in the first year. But by the tenth year the shift to a more investment- and capital-intensive economy has lowered the returns to capital and increased the investment effort necessary to keep the proportionately higher capital stock from depreciating: the benefit to growth is only 0.17%. And by the twentieth year, the increase in economic growth is only 0.11%. In the very long run diminishing returns set in, and the net result is not a change in the growth rate but a permanent boost to the level of real GDP per worker of:

(4)

where g is the growth rate of total factor productivity, and D I is the boost to investment as a share of national product.
Now such a shift in policy would surely have a very high social benefit-cost ratio: the net marginal product of the extra investments made average 6.2% per year, considerably higher than the cost of capital implied by our current long-run real interest rates of 3% per year or so. But this creation of a large government budget surplus is a major shift in policy: a change in policy direction twice as large in relative terms as either the 1990 or the 1993 deficit-reduction effort. The benefits in faster economic growth are an increase of 0.17% per year in annual growth over the next twenty years--not overwhelmingly large by the standards of TV journalists or politicians.


Free Lunches?

Easier Monetary Policy. What of the view that the Federal Reserve is greatly retarding the growth of the American economy--that easier monetary policy would allow the U.S. economy to grow much, much faster?

In popular discussion this view is often put forward roughly as follows: During the "seven fat years" of the economic expansion of the 1980s, GDP growth in the United States averaged 3.9% per year. Before this boom tight monetary policy by the Federal Reserve had kept the U.S. in recession; this boom ended because tight monetary policy by the Federal Reserve pushed the U.S. into recession. Why not simply eliminate tight monetary policy, and grow at 3.9% per year--roughly 2.9% per worker per year--forever?

The problem with this argument is that much of economic growth during booms is a straightforward consequence of lowering the rate of unemployment. When the rate of unemployment falls, more workers join the labor force because they see that they have a better chance of finding a good job. Holding the unemployment rate constant, a one percentage-point increase in labor force growth over a year increases real GDP by an estimated 0.54 percent. Even when the labor force does not increase, a reduction in the unemployment rate is the creation of new jobs for the economy: holding the labor force constant, a one percentage-point decrease in the unemployment rate over a year increases real GDP by an extra 1.67 percent.

With the labor force growing at its current pace of approximately 1.0 percent per year and with underlying productivity growth at its current pace, real GDP growth holding the unemployment rate constant averages some 2.1% per year. About 1.8% per year of economic growth during the 1980s was a result of the reduction in unemployment that takes place during a boom.

During a boom growth is faster than average because unemployment falls. Looser monetary policy does accelerate economic growth by generating such a boom and such a reduction in unemployment. But the magnitude of the productivity boost from reducing unemployment is limited. 4% per year growth would, with the labor force expanding as current demographics allow, lower unemployment by 1.1% per year. Four and a half years at 4% growth would lower the U.S. unemployment rate below zero--and at some point well before then prices would start to rise rapidly in a spiral of renewed inflation. Figuring out how to reduce the rate of unemployment that the economy can attain without generating rapidly-rising inflation is an important task shared by the Federal Reserve and the Department of Labor. But even success in lowering this non-inflation-accelerating rate of unemployment will not lead to 4% per year growth indefinitely. Maintaining an average non-inflationary unemployment rate of 5% rather than 6% is certainly worth doing. But over a twenty year horizon such a shift in the attainable rate of unemployment is an increase in average economic growth of only 0.12% per year: not enough to be visible to politicians or others examining the tracks of economic growth.

Better Fiscal Policy. What of the view that tax reform--relatively small changes in the tax code--could trigger large increases in economic growth through improvements in productive efficiency? The tax law changes in 1981's ERTA , the flagship initiative of the Reagan administration, were designed to have as large a positive supply-side impact as possible: every dollar of notional revenue loss was spent reducing marginal tax rates for someone (in sharp contrast to the 1997 tax law changes, which appear to ahve been designed to have as small an impact on incentives as possible). Lawrence Lindsey has produced the largest estimates of the supply-side benefits from ERTA's tax reductions: he finds that each dollar's worth of tax cut (defined in terms of notional static revenue loss) triggered about fifty cents worth of additional real GDP (once you take account of the shift from unrecorded and untaxed to recorded and taxed economic activity).8

Thus ERTA triggered, according to Lindsey's estimates, an increase in the real GDP growth rate of 0.3% per year over the five years after implementation--an increase in average real GDP growth over a twenty-year horizon of less than 0.1% per year.

Lindsey's estimates are the largest credible estimates of supply-side effects that I Have seen. And even there the boost to growth from a tax rate reduction one-third as large as ERTA is on the order of 0.1 percentage point per year. One again not enough to be visible to politicians or others examining the tracks of economic growth.


Alternative Frameworks

The Mankiw-Romer-Weil Framework

Today the modal view of economic growth--the view that most economists who have thought long about the issue would hold--is the view set out by Gregory Mankiw, David Romer, and David Weil. It extends the Solow model by augmenting the production function to allow for humancapital H, acquired through education:

(5)

Output-per-worker growth can then be written as:

(6)

with the extra terms appearing because growth could be produced not just by technological improvements or by investments in physical capital, but also by increases in education: investments in human capital.

It also extends the Solow model by allowing for different values for the parameters that govern the returns on investments in physical and human capital: a is estimated from international data as roughly 0.45 or so (as opposed to 0.3 o so in the basic Solow framework). b, the corresponding coefficient governing benefits from investments in education, is roughly 0.25.

These differences combine to give changes in policy significantly larger effects. The long run impact of a boost to investment on real GDP is:

(7)

A shift in fiscal policy into surplus that would generate a boost to private and public investment of three percentage points worth of GDP would boost first-year economic growth by 0.43% in the Mankiw-Romer-Weil framework (as opposed to 0.28% in the Solow framework. Such a large policy shift would boost growth by 0.27% (as opposed to 0.11%) by the twentieth year, for a total twenty-year increase in GDP per worker of .34% per year--fully twice as large as in the Solow baseline.

Why the difference? First, because the addition to the model of "education capital" slows down the approach of diminishing returns: increases in productivity generate increases in investment in education which produce further increases in productivity. Second, Mankiw, Romer, and Weil's estimates of the parameters of the production function suggest considerably larger returns to investments in physical capital. This makes the initial impact of higher investment on growth larger, and it also slows down the approach of diminishing returns as well.


The Endogenous Growth Framework

The most optimistic vision of the potential impact of policy on growth follows the path laid out by Paul Romer, and is often referred to as "endogenous growth theory." It begins by noting that the engine of growth is-- as Solow demonstrated in the 1950s--the advance of economically-useful knowledge. But no one believes that advances in economically-useful knowledge simply drop from the sky like manna from heaven.

The Logic of Endogenous Growth. The applied science and organizational changes that have greatly multiplied productivity have been very closely tied to economic life. For example, after World War II continental Europe grew rapidly, as it built its capital stock and worker skills back to pre-World War II levels. But continental Europe did much better than simply return to its pre-World War II growth trend: today it has output per capita levels more than forty percent above what you would have expected from simple extrapolations of pre-World War II or pre-World War I long-run economic growth trends. The magnitudes of differences in economic performance across eras for the same country and across countries in the same era cannot but make any observer skeptical of a claim that countries must "learn to live with" their long run growth trends. Instead, there is every reason to think that pro-growth policies can nurtureand anti-growth policies destroylong-term economic growth.

What would a productive set of pro-growth policies would be? How much extra economic growth would they generate? And how about the argument that the market system will take care of it all anywaywon't market forces generate the "right" amount of economic growth, and won't any additional growth come at much too high a price in terms of reduced standards of living for those who make increased investments in the future?

The answer is that the Invisible Hand is very good at directing economic activity when resources are scarce, and property rights are straightforward. But economically-useful knowledge is not scarce in this sense: just because I am making use of a piece of knowledge doesn't mean that you cannot use the same piece as well. The nature of knowledge-as-commodity guarantees that it is a broad and important area of the economy where public involvement is needed, and where reliance on the market alone will not produce good outcomes.

The "Narrow" Version of Endogenous Growth. Endogenous growth theory divides into two strands of thought. One is that the principal benefits to productivity come from investments in research and developmentthat an additional dollar spent by the private sector on research and development boosts GDP by between fifty cents and a dollar. 9 Investments in research and development have enormous social returns to the economy. And private industry tends to significantly underinvest in research and development, because the firms that undertake the research do not reap the lion's share of the social benefits.
For example, consider current computer software human interface technology: the windows-icons-menu-pointer paradigm for presenting organized information to knowledge workers. The work that led to this technological breakthrough was almost all undertaken by the Xerox Corporation, at their Palo Alto Research Center, in the 1970s. Xerox has barely made a cent off of this advance in technology. Apple used to make a good deal of money off of this advance in technology. Microsoft and Intel are now making an enormous amount of money off of this advance in technology.

The net result? Large benefits to the economy and the society in terms of expanded productivity growth from the work carried on at Xerox's Palo Alto Research Center in the 1970s. But barely a cent returned in revenues to Xerox from this particular drain on its cash flow. Companies that are in business to make money will not long spend a great time and effort on such research projects that do not boost productivity and revenues, even if they boost industry productivity and revenues manyfold.

Thus there is every reason to believe that the private sector tends to underinvest in research and development: that policies that boost research and development spending by a dollar a year promise fifty cent or one dollar increases in annual real GDP.

This is the "narrow" flavor of endogenous growth theory: if we could channel an additional 0.2% of GDP into private-sector investment in research and development, we would generate GDP per capita growth higher by between 0.1 and 0.2% per year. Note that this is as large an increase in GDP as was generated by a $210 billion change in the annual federal budget balance according to the Solow framwork, yet it is accomplished by simply boosting private (and public) research and development by roughly $15 billion a year.

The "Broad" Version of Endogenous Growth. A second strand of "endogenous growth" theory suspects that the relationship between technology improvement and economic activity overall is more indirect. A large share of advances in technology have to come from "learning-by-doing": from attempting to utilize new types and new generations of capital equipment, and figuring out in the process of implementation how the production process needs to be reorganized and how the capital goods need to be redesigned to produce maximum productivity.

Still further increases in productivity have to come with the increases in workers' "human capital" from on-the-job training: the best way to become skilled and productive at handling modern machine technologies is to work at applying them, and improvements in workers' skills and capabilities are social benefits to the economy's productivity that are usually not included in businesses' calculations of their returns on investment. A large number of articles have proposed a wide variety of plausible mechanisms. 10

I see a powerful case that generic investments in machinery and equipment carry social rates of return of thirty percent or so: boost spending on equipment by one dollar, and find that next year's GDP is higher by thirty cents. Others disagree. It is possible that such high boosts from equipment investment are to be found in developing countries (where the acquisition of new machinery and equipment carries with it the acquisition of perhaps a century's worth of technological development and improvement) and that in advanced industrial economies the social returns to equipment investment are merely "normal": the data make it hard to tell. But the benefits are likely to be larger than those found in the "narrow" version of endogenous growth theory.

What is clear is that the bulk of increases in productivity and living standards come and always have come from advances in knowledge and improvements in the application of knowledge, and that it is simplistic to think that these advances in knowledge and improvements in the application of knowledge are generated by processes unconnected with the rest of the economy.

The "endogenous growth" theories carry a clear lesson: boost whatever economic activities are the carriers of advances in the application of knowledge. But what if--as in our case--we do not know which economic activities are the carriers of true advances in the application of knowledge? Then boost all forms of investment. In most of the categories the boost will simply generate higher productivity according to the market's rate of return: the economy will not gain extraordinarily; however, it will not lose either but receive its money's worth. And in some of the categories--those that do turn out to be crucial--the economy will receive the significant free lunch of an increase in the rate of improvement of economically-useful knowledge, and thus of the rate of productivity growth.

Potential Increases in Annual Economic Growth from a 3% Shift in Government Fiscal Balance

Model Horizon:
1-Year
5-Year 20-Year
Solow Baseline 0.28% 0.24% 0.17%
Extended Solow 0.43% 0.40% 0.34%
Narrow Endogenous Growth 0.68% 0.56% 0.46%
Broad Endogenous Growth 0.74% 0.61% 0.53%

The table above puts the estimated gains to economic growth according to all of the various frameworks from a policy of fiscal surplus that succeeded in boosting investment in America by some three percentage points of GDP or so. Such a shift in investment is a large-but-not-completely-unrealistic possible effect of a $210 billion per year swing in the overall fiscal balance, given the failure of domestic private saving to offset the fall in government saving in the 1980s and given the limited ability of capital inflows from abroad to compensate for the shortfall in domestic saving.


Implications

One important implication is that, for all the difference in presentation, philosophy, and rhetoric between the "endogenous growth" perspective on the one hand and the Solow model baseline and its revisions on the other, the perspectives are not radically distinct. At least, they are not radically distinct as far as their predictions for output over twenty-year time spans are concerned. Policies to boost savings and investment have effects that fall over a considerable range, but are not totally dissimilar.

A second implication is that the central position held by economists today, a position that in its rhetoric is close to the original framework of Robert Solow, is in reality--in its estimates of the effects of economic policy over a twenty year horizon--close to the framework of Paul Romer. As neither Milton Friedman nor Richard Nixon said, we are all endogenous growth theorists now--but this substantive victory of the endogenous growth perspective has passed without much explicit notice.

What view you take of the likely effectiveness of budget and tax policies, or of subsidy and regulatory policies, at boosting growth depends on which vision of economic growth you adoptthe standard Solow baseline; the extensions that attribute a larger role to investment (especially to investment in human capital through education); the "narrow" version of endogenous growth theory that places great stress on the high benefits from investments in research and development; or the "broad" version of endogenous growth theory that places stress on the overall productivity benefits from broad categories of investment.

Perhaps the best way to think about the interaction of broad visions of economic growth and economic policy is that broader visions of growth raise the stakes at risk with respect to policies that move the budget into either substantial deficit or large surplus. Deficits that boost interest rates and crowd out investment are much worse when the investments being crowded out are investments in research and development that not only boost the productivity of the company undertaking them, but also boost the productivity of other firms as well).

Any shift from the Solow baseline in a direction of more optimistic visions of economic growth would tend to lead one to strongly support tax law changes to boost investment. As Alan Auerbach frequently points out, a belief in large positive externalities from capital investment strengthens the case for only certain particular kinds of tax law changes to promote investment. To the extent that the case for tax incentives rests on external benefits, they are external benefits from investment, not from saving. 11

Unfortunately, it is not at clear what the best policies to promote investment are. A desire to mitigate revenue loss leads marginal incentives: marginal research and development tax credits; marginal investment tax credits; and so forth. But our experience with designing "marginal" incentives is not a good one. At some stage the complexity of the tax code leads managers to in the most part throw up their hands: run their business as they see fit, and after the fact bring in consultants to figure out which tax benefits they might be able to claim--in which cse all of the energy gone into crafting tax incentives to boost investment has been worse than wasted.


Conclusion

Today economists' views on the nature and causes of long-run economic growth are more than usually divergent. A minority of economists hold to a baseline vision laid out in the 1950s which is pessimistic about how policies might affect growth. A substantial group of economists hold to endogenous growth perspectives, and have concluded that good and bad economic policies can have much more significant effects because exeternalitieswedges between the social returns realized by the economy and the private returns realized by investors are pervasive.

One's conclusions about the ability of economic policies to affect economic growth depend on one's vision of economic growth. Nevertheless there is strong reason to believe that the American economy invests too little. And as one moves away from the baseline framework toward endogenous growth perspectives, the case for tuning American economic policy in the direction of generating a substantial budget surplus and of other policies to boost national investment becomes overwhelming.

Most economists hold neither to the original baseline of the 1950s nor to endogenous growth perspectives, but have taken up a position in the middle. It is interesting to note that while the rhetoric of this middle way sounds like the 1950s baseline, its substance --its conclusions about the effects of policies on economic growth--is closer to the endogenous growth perspective.

Thus there is a sense in which we are all endogenous growth theorists now.

A view that investment has a larger role in boosting growth than the baseline Solow framework suggests leads in a lot of directions other than toward policies to balance the budget and to decrease taxes on new investment, especially investments in research and development, and in private investments that carry new generations of technology.

Perhaps public infrastructure has components that truly do promise high social returns. Pure research is bound to be underprovided if left to the private sector alone: a true public good. A large chunk of high-technology and telecommunications investment today appears to have a "network" character, in which case there may be space for a substantial public role.

The urgency of a growth agenda is strengthened by the recognition that the United States' social insurance system was designed for the pre-1973 rapid rather than the post-1973 slow pace of growth.Without faster long-term economic growth America's social insurance system as we know it is unlikely to survive the next generation. Thus there is a sense in which the stakes at risk in the task of finding policies to spur American economic growth are larger for the left than for the right half of the political spectrum. All have an interest in faster economic growth: faster growth empowers the American people to better achieve their endswhether their ends are sitting on beaches sunning themselves, raising their children, protecting endangered species, or increasing their level of education.

But in the absence of faster economic growth than has been seen in the past two decades, the future of the social insurance state is easy to read: Medicare and Social Security devour the rest of the Great Society and the New Deal over the course of the next generation. Two generations hence Medicare and Social Security run up against their own budget constraints, and destroy themselves.


References


Auerbach, Alan J., "Investment Policies to Promote Growth," in Policies for Long-Run Economic Growth: A Symposium Sponsored by the Federal Reserve Bank of Kansas City (Kansas City, MO: Federal Reserve Bank of Kansas City, 1993), pp. 157-184.

Auerbach, Alan J., and Kevin Hassett, "Tax Policy and Business Fixed Investment in the United States," Carnegie-Rochester Conference Series on Public Policy 35 (1991), pp. 185-216.

Boskin, Michael, et al., "Report of the Advisory Commission to Study the Consumer Price Index" (Washington, DC: Senate Committee on Finance, 1996).

Bradford, David, Untangling the Income Tax (Cambridge, MA: Harvard University Press).

DeLong, J. Bradford, and Lawrence H. Summers, "Macroeconomic Policy and Long-Run Growth," in Policies for Long-Run Economic Growth: A Symposium Sponsored by the Federal Reserve Bank of Kansas City (Kansas City, MO: Federal Reserve Bank of Kansas City, 1993), pp. 93-128.

DeLong, J. Bradford, and Lawrence Summers, "Equipment Investment and Economic Growth," Quarterly Journal of Economics 106:2 (May 1991), pp. 445-502.

Economic Report of the President (Washington DC: GPO, various years).

Jones, Charles, "Economic Growth and the Relative Price of Capital," Journal of Monetary Economics 34 (December 1994), pp. 359-82.

Jorgenson, Dale, "Productivity and Postwar U.S. Economic Growth," Journal of Economic Perspectives 2 (1988) pp. 23-41.

Lee, Jong-Wha, Trade, Distortions, and Growth (Cambridge, MA: Harvard University Ph.D. Diss., 1992).

Lichtenberg, Frank, "R&D Investment and International Productivity Differences," in Horst Siebert,ed., Economic Growth in the World Economy (Kiel, BRD: Kiel Institute for World Economic Research, 1992), pp. 89-110.

Lindsey, Lawrence, The Growth Experiment (New York: Basic Books, 1990).

Munnell, Alicia, ed., Is There a Shortfall in Public Capital Investment? (Boston, MA: Federal Reserve Bank of Boston, 1990).

Romer, Paul, "Increasing Returns and Long Run Growth," Journal of Political Economy 94:5 (October 1996), pp. 1002-37.

Romer, Paul, "Capital Accumulation in the Theory of Long Run Growth," in R.J. Barro, ed., Modern Business Cycle Theory (Cambridge, MA: Harvard University Press, 1989), pp. 51-127

Romer, Paul, "The Origins of Endogenous Growth," Journal of Economic Perspectives 8:1 (Winter 1994), pp. 3-22.

Solow, Robert, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics (70) 1956, pp. 65-94.

Solow, Robert, "Technical Change and the Aggregate Production Function," Review of Economics and Statistics 39 (1957), pp. 57-99.

Robert Solow, "Perspectives on Growth Theory," Journal of Economics Perspectives 8:1 (Winter 1994), pp. 45-54.





Notes

1 I would like to thank Tim Cogley, Barry Eichengreen, Chad Jones, Alicia Munnell, David Romer, Lawrence Summers, Robert Waldmann, and David Wilcox for helpful discussions on this paper and on closely related issues.. I would also like to thank Berkeley's Institute for Business and Economic Research, the Alfred P. Sloan Foundation, and the National Science Foundation for research support.

2 See Dale Jorgenson "Productivity and Postwar U.S. Economic Growth," Journal of Economic Perspectives 2 (1988), pp. 23-41.

3 See Michael Boskin et al., "Report of the Advisory Commission to Study the Consumer Price Index" (Washington, DC: Senate Committee on Finance, 1996).

4 See, among others, Paul Romer, "Increasing Returns and Long Run Growth," Journal of Political Economy 94:5 (October 1996), pp. 1002-37; Paul Romer, "Capital Accumulation in the Theory of Long Run Growth," pp. 51-127 in in R.J. Barro, ed., Modern Business Cycle Theory (Cambridge, MA: Harvard University Press, 1989); and Paul Romer, "The Origins of Endogenous Growth," Journal of Economic Perspectives 8:1 (Winter 1994), pp. 3-22.

5 See Robert Solow, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics (70) 1956, pp. 65-94; Robert Solow, "Technical Change and the Aggregate Production Function," Review of Economics and Statistics 39 (1957), pp. 57-99; and Robert Solow, "Perspectives on Growth Theory," Journal of Economic Perspectives 8:1 (Winter 1994), pp. 45-54.

6 . This line of argument is best exemplified by Gregory Mankiw, David Romer, and David Weil's (1992) "Contribution to the Empirics of Economic Growth," N. Gregory Mankiw, David Romer, and David Weil, "A Contribution to the Empirics of Economic Growth," Quarterly Journal of Economics 107:2 (May 1992), pp. 407-438.

7 See Edward Denison, Why Growth Rates Differ (Washington, DC: Brookings Institution, 1967).

8 Lawrence Lindsey, The Growth Experiment (New York: Basic Books, 1990).

9 Frank Lichtenberg, "R&D Investment and International Productivity Differences," pp. 89-110 in Horst Siebert,ed., Economic Growth in the World Economy (Kiel, BRD: Kiel Institute for World Economic Research, 1992).

10 The list of possible references is overwhelming. See, for example, J. Bradford DeLong and Lawrence H. Summers, "Macroeconomic Policy and Long-Run Growth," in Policies for Long-Run Economic Growth: A Symposium Sponsored by the Federal Reserve Bank of Kansas City (Kansas City, MO: Federal Reserve Bank of Kansas City, 1993), pp. 93-128; J. Bradford DeLong and Lawrence Summers, "Equipment Investment and Economic Growth," Quarterly Journal of Economics 106:2 (May 1991), pp. 445-502; Charles Jones "Economic Growth and the Relative Price of Capital," Journal of Monetary Economics 34 (December 1994), pp. 359-82: Jong-Wha Lee Trade, Distortions, and Growth (Cambridge, MA: Harvard University Ph.D. Diss., 1992); Frank Lichtenberg, "R&D Investment and International Productivity Differences," in Horst Siebert,ed., Economic Growth in the World Economy (Kiel, BRD: Kiel Institute for World Economic Research, 1992), pp. 89-110; Alicia Munnell, ed., Is There a Shortfall in Public Capital Investment? (Boston, MA: Federal Reserve Bank of Boston, 1990).

11 Alan J. Auerbach, "Investment Policies to Promote Growth," pp. 157-184 in Policies for Long-Run Economic Growth: A Symposium Sponsored by the Federal Reserve Bank of Kansas City (Kansas City, MO: Federal Reserve Bank of Kansas City, 1993).


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