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06/07/94

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Economic growth conference inaugurates economics center

STANFORD -- For the past decade, about two dozen Stanford University economists have been quietly probing what the United States and the world can do to maintain and improve the standard of living for the next generation. They presented their latest work on long-term economic growth at a day-and-a-half-long conference June 3-4 at the new Donald L. Lucas Conference Center.

Several high-tech industrial leaders and venture capitalists, as well as some visiting economists from Harvard, Berkeley and the Massachusetts Institute of Technology, also participated in the conference, sponsored by Stanford's Center for Economic Policy Research. Topics ranged from the economic costs of litigation and environmental health and safety regulations to U.S. productivity to the potential for world peace and freedom if the gap between rich and poor nations can be reduced.

While U.S. economic growth was clearly a focus of discussion, most speakers also were interested in how to maximize per capita income worldwide in the wake of the Cold War.

"Now that the Cold War is over, this country is rethinking its position, rather than taking for granted it will always be number one, and there is renewed interest in understanding the factors that shape economic life," said Stanford economic historian Gavin Wright, the director of the Center for Economic Policy Research and a conference organizer. "We believe economics in the future will be more concerned than it has been for many years with this subject of economic growth and its relationship to technological change."

Since the early 1980s, an increasing number of Stanford researchers have been looking into the complexities of economic growth, "which really means how we generate more jobs at better pay," said Ralph Landau, an industrialist-turned-economist who worked with Wright to organize the conference.

Landau, a chemical engineer by training who created a company that produced $1 billion in annual sales within 10 years, recently gave $5 million toward building Stanford's new economics building. He first became interested in Stanford's economics research in the late 1970s, when interest rates reached 21 percent, suddenly stopping the expansion of his company despite strong consumer demand.

Until then, Landau said, he assumed that good technology automatically created jobs and national wealth. He now is affiliated with economic growth research programs at both Stanford and Harvard. "I try to serve as a bridge between academic economists, industrial and business leaders, and the technologists - the scientists and engineers who develop new technology," he said.

The Federal Reserve Bank "worries about the next few months or years; we are worrying about the next 15 to 20 years," Landau said of the Stanford researchers. "What kinds of jobs our children have could be a very big problem unless we can better understand the complexities" driving differences in the productivity growth of nations, industries and firms.

Small differences in annual national economic growth can make a major difference in the next generation's standard of living, said Stanford economist Michael Boskin, who chaired President Bush's Council of Economic Advisers.

"Differences of just a few tenths of a percent in the growth rate, compounded over a generation, make the difference between the success and failure of a nation relative to its own history and to its competitors," Boskin said before the conference.

"In the late 19th century, the typical citizens' standard of living was substantially higher in the United Kingdom than in the United States. Today it is 50 percent higher in the United States, as a result of American economic growth, on average, exceeding British economic growth by less than a half percent per year."

Understanding why and how that happened has become very important to growth economists, said Paul Romer of the University of California-Berkeley.

Theory of convergence

Much of the discussion focused on the validity of the economic theory of convergence. It predicts that countries are only temporarily economic leaders, because laggards have several advantages that cause their economies to grow at a faster rate than those of the leaders, explained Moses Abramovitz, Stanford professor emeritus of economics. New growth theories, historical studies and comparative analyses of countries' postwar performance indicate, however, that economic "catching up" is my no means automatic.

"There has not been convergence between rich and poor countries over the last generation," said Henry Rowen of the Stanford Graduate School of Business and Hoover Institution. He attributed this to social and policy inadequacies in the poor countries, including a tide of economic nationalism and socialism from the 1960s to mid-1980s that discouraged economic growth.

However, recent political and social changes in the 16 most populous developing countries "provide reason for optimism," Rowen said. Such changes as declining birth rates and government policies that allow direct foreign investment, he said, should lead to a substantial closing of the per capita income gap between rich and poor nations by 2020.

And because prosperity has tended to be correlated with more democracy, and democracies have not fought many wars against each other, Rowen said, he also held out "hope for a more peaceful world."

Political and social obstacles are not always predictable, however, and they do prevent laggards from catching up to leaders, Abramovitz said he and Stanford economist Paul David concluded from a study of America's rise to economic leadership from 1870 to the present. Western European economies, Abramovitz said, had the capabilities to catch up with the United States much sooner in this century but were hampered by World Wars I and II and the Great Depression.

More questions about convergence were raised by another Stanford study of the causes of recent, rapid economic growth in the newly industrialized Asian countries of Hong Kong, Singapore, South Korea and Taiwan. These countries' above-average economic growth is not attributable to the same technological progress that accounts for growth in the United States, Japan, Germany, the United Kingdom and France, said Stanford economist Lawrence Lau.

"Capital investment has been the overwhelming source of growth in both developed and developing countries for different reasons," Lau said. His research group's comparisons of the two groups of countries' productive efficiencies over time indicate that the industrialized nations grow by investing physical and human capital in order to gain labor efficiencies from technology. The developing countries invest capital at a high rate as well, but achieve growth in output without increasing efficiency per worker. Technological change, therefore, does not seem to be driving growth in economic output as much for countries at the beginning stages of industrialization, Lau said.

The study results are "at total odds with the World Bank's recent report on the East Asian miracle," said economist Dale Jorgenson of Harvard's Kennedy School of Government. However, the results should hearten policymakers and neoclassical economists, he said, because they indicate underindustrialized countries can grow through "one-shot inputs" of capital and by diverting excess labor from agriculture to higher-value industrial jobs.

The policy implications of his work, Lau said, are that all countries need to invest in industrial infrastructure and intangible technology development and an educated work force.

"For developing countries, it's important to invest heavily today in research and development to support the next stage of growth," Lau said.

On the other hand, industrialized countries cannot just invest in research and development of new technologies, because they need investment in physical and human capital to be in a position to take advantage of new technology, he said.

"The complementarity between human capital and physical capital has great relevance because human capital can be increased only with long lags," Lau said.

Savings, trade considered

Adequate savings for investment in economic growth and liberalized trade were also frequently discussed topics of the conference. Protectionist sentiments in the United States threaten the open trading system upon which world economic growth depends, said Stanford economist Anne Krueger, the incoming president of the American Economics Association. But Clive Crook, deputy editor of The Economist, said that the strategic trading theory of Paul Krugman, who will be joining the Stanford economics faculty next year, has led many people to question whether free trade is as important to economic growth as believed in the past.

There was little doubt at the conference that the world's population needs to save some of its earnings to keep economic growth happening, however. One major source of American capital - workers' private pensions - will dry up as a source of investment when the baby boom workers begin to withdraw their pensions to finance their retirements, reported Stanford economist John Shoven, dean of the School of Humanities and Sciences.

The cost of capital worldwide also could rise in the near future, other speakers said, because of the huge capital needs of Eastern Europe and China as they industrialize. Because of the lower cost of their workers, companies will seek funds to build labor-intensive factories there.

Michael Spence, dean of Stanford's Graduate School of Business and chair of the National Research Council's Board on Science, Technology and Economic Policy, said that the committee will soon recommend that the U.S. government, through tax reforms, encourage Americans to save more for private sector investment in technology. "The savings rate net of the federal deficit is under 3 percent of gross national product and at times recently has fallen close to zero," he said.

Industrialized nations that now rely on the U.S. taxpayer for support of basic research also may have to contribute if basic research is to survive, Spence said. It made sense for American taxpayers to finance basic research by themselves after World War II when the United States was the only nation well off enough to take commercial advantage of the research. Now, he said, many countries can apply the research done in American universities, and it would be impossible to deny access to non- Americans without losing the benefits of an open system of science.

The best solution, Spence said, is for basic science to be thought of as "an international public good" and for its financing to be subject to multinational negotiations in much the same way that an open trading system has been negotiated.

Stanford economist Roger Noll and Linda Cohen of the University of California-Irvine also expressed doubt that a political coalition to support U.S. taxpayer financing of basic science research can be maintained now that the Cold War is over.

"We in Japan are criticized for our lack of research and development, but we didn't have defense [needs]," said Fumio Kodama of the University of Tokyo and a visiting scholar at Stanford's Asia/Pacific Research Center. "Now you will have more sympathy for our problem of getting basic research done in Japan."

Portions of the conference also focused on growth at the industry and firm level because newer economic theory "emphasizes that changes in the micro economy, where real growth originates, may well have real macro consequences," Landau said.

In his ongoing study of the chemical industry, for example, Landau said he has found that Great Britain first dominated it in the 1870s but let its advantage slip to Germany by the 1880s. America began with an organic chemical industry dependent on Germany, but positions shifted after World War I. Germany regained dominance as Hitler prepared for World War II. America became the leader again after the war and grew rapidly into the 1970s, when macroeconomic shocks slowed its growth.

While government policies and investments affected these events, Landau said, "it's also evident that countries don't compete, firms do; but it all adds up."

The conference will form the basis of a third book by Stanford researchers on economic growth, Landau said. Earlier books were The Positive Sum Strategy in 1986 and Technology and the Wealth of Nations in 1992.

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