Cardiff Garcia of the Economic Innovation Group interviews Paul Krugman. New Bazaar website (October 9, 2024). There are several interesting points from the interview. There are two themes that caught my eye.
The study of “economic geography” focuses on why economic activity tends to be clustered, dispersed, or occur in certain locations. The general theory is that there are “agglomeration economies”. This refers to the idea that clusters of certain kinds of businesses, workers, and suppliers benefit from being closer to clusters of consumers. But on the other hand, clusters of economic activity can lead to congestion, crime, and even disease. So there is a push and pull in the clustering of economic activity over time. Should the improved information and communication technologies of the past few decades have led to a proliferation of economic activity or greater centralization? Krugman points out:
I mean, the idea that there is some form of agglomeration economy is certainly not new. There is a force that brings things together and a force that separates them. And the balance can tip one way or another. In fact, over the last 200 years it has tilted in one direction, then the other, and then back again.
And modern agglomeration forms are different from those that were prevalent in the 19th century. I would say that the models I used 30 years ago had this steampunk feel. They were all very focused on manufacturing and industrial clusters, and we all lavished attention on these great stories, such as the detachable collar and cuff industry in Troy, New York. And it has mostly, but not completely, disappeared from the United States. It even exists to some extent in manufacturing, but these days if you want to find a really old-school industrial cluster, you go to China.
If you actually look at it, there are many different ways to measure it, but basically in the United States, from the 1920s to about 1980, there was a lot of regional convergence, a lot of income convergence, and basically the convergence between regions became more similar. In the 1980s, they began to break down again, and we began to see metropolitan areas with highly educated workforces attracting much more educated people and much more of an information economy, and regions without those prerequisites were stranded. . … [F]To prepare for future meetings, I looked inside New York State and looked at greater Buffalo and greater New York City. Buffalo was not much poorer or less developed than New York City in 1980, but it is much poorer now. …
So we’re back in a world with extremely localized clusters. And while Zoom, a modern communication technology, allows working from home to do some things without being at home, it cannot completely replace it. And in wealthy societies, other things tend to be important. Highly skilled and highly paid workers especially need accommodations. High-tech workers are unlikely to move to the central part of the country, even if they have good Internet access. Where can you find a good restaurant? Where are the live concerts? So in some ways it’s important that we’re wealthy enough that people can make decisions based on that. So I think we are, in some ways, going back to the unequal development we had in the late 19th century.
Although there is agreement (among economists) that increased productivity is essential to raising living standards, the exact path to sustained productivity growth remains elusive. In practice, the standard calculation of productivity is done by measuring what proportion of the total increase in output can be explained by changes in working hours, workers’ skill levels, and capital investments, and then measuring “productivity” as a residual or residual. Increased production that cannot be explained by other factors. Productivity residuals are also called “Solo residuals” because of the classic work in this area by economist Robert Solow. Krugman explains the mystery of increased productivity:
But if you look at the chart of potential GDP growth in the United States over the last 50 years, there have been some pretty big political changes and big changes in tax policy. If you didn’t know that there were administrative changes and tax policy changes, you would never guess. It’s almost a flat line. The reason is that economic growth is largely determined by Solow. [productivity] leftover. And who knows how to make that change?
If someone said, “I have a policy that would increase potential GDP growth by 0.4 percentage points,” I would reply, “Yes, I might believe it. Show me the details.” If someone says we can only raise it by 1 percentage point, I think that’s crazy. No one knows how.
There are so many of my favorite Bob Solow quotes… but he was actually talking about Britain being left behind after World War II, but that applies to a lot of things. He said: Amateur Sociology.” Ultimately, we don’t know much about why economic growth rates differ across countries. We still don’t know why productivity slowed in the early ’70s. We know why the IT sector has been on the rise for some time. [information technology]Mid-90s to mid-2000s. But ultimately, if we talk about innovation, there is a big mystery now. I think there’s been a lot of technological change in the last 16, 17 years. But if you believe our numbers, and maybe I shouldn’t say that, but if you believe our numbers, total factor productivity growth has been really good. It was terrible the whole time.
