Keeping America’s Edge, ctd.

Several intelligent critics of my piece on Keeping America’s Edge have emerged in the past couple of days, generally focused on two sentences in it. I’ll try to deal with the lines of criticism in one place.

1. Correct facts are presented misleadingly. This was central to Jonathan Chait’s criticism, in two parts: (i) I presented an apples-to-oranges comparison of Europe and the U.S. in terms of both timeframe and geographical extent, such that the conclusion that Europe has ceded enormous share of global GDP and the U.S. has not over the past several decades is not supported by a fair reading of the facts, and (ii) I focused on absolute GDP rather than GDP per capita. As I said in response, lack of clarity is always the fault of the author. As I have also shown, I believe convincingly, the conclusion is supported by any interpretation of the data. While exact magnitudes will vary slightly, I defy any critic to display any analysis using any reasonable definition of Europe or any relevant time periods or any reputable data source that does not support this conclusion. As I believe that I have also shown, I never claimed that absolute GDP was the proper measure of “how good is an economic system”, but was clear that I believe it is, rather, a measurement of long-run geopolitical power potential.

2. I asserted, rather than proved, that entrepreneurial markets can generally be expected to lead to greater growth over decades in contemporary societies than more centrally-directed economies. This is exactly correct, and you don’t have to parse the two sentences in contention to show this. In the third paragraph of the article, I state flatly:

After all, we must have continuous, rapid technological and business-model innovation to grow our economy fast enough to avoid losing power to those who do not share America’s values — and this innovation requires increasingly deregulated markets and fewer restrictions on behavior.

The purpose of the article as a whole, never mind a single phrase, was not to provide an empirical demonstration that less regulated markets tend to provide faster economic growth under many conditions than more regulated markets (that debate has been going on for some time). Nor did it ever claim to provide this. The purpose of the article was to describe, given that I accept the advantages that less regulated markets can provide (or if you do not accept this premise, even if one were to accept this), this does not lead to the conclusion that we can or should continue on the deregulation-oriented path on which we find ourselves without considering the balancing consideration of social cohesion. In effect, I am accepting that in the long-run, we must find some way to address the dysfunctions that free markets always engender (or at least leave unaddressed). I don’t, on the other hand, accept that there is a free lunch available to us – if you restrict creative destruction, you will restrict growth versus what it would otherwise be, at least at the scale of decades. (Again, for clarity, I assert that I believe this to be true, rather than assert that I have proven it empirically in this post.)

Before you call this smoke and mirrors, and label me as a partisan shill for unregulated markets, you ought to confront the fact that 2 of the 4 recommendations I make are for certain kinds of regulation: (1) a modernized version of New Deal financial services regulation, and (2) pursuing competition and family / student empowerment in education within the regulated public school system, rather than (at least for a long time) across public and private schools.

3. It’s all population growth. In effect, this argument is GDP = GDP / Person X Population, and that GDP / Person has grown at about the same rate in the U.S. and Europe over this period, so the only real difference has been population growth. This is a factually (approximately) correct statement. There are two big problems with arguing that this shows that therefore policy differences didn’t matter. First, it is almost always harder to maintain a lead. Europe and the U.S. had previously been on a generally converging path of GDP / Person, and maintaining this lead in productivity (by this metric) was very far from preordained. Second, it is difficult for a society to maintain aggregate power indefinitely if its population share becomes small enough relative to other countries. Said differently, as much of the rest of the world applies some approximation of basic techniques of market capitalism and technological development, it will be very hard to maintain a huge enough productivity advantage for the West to retain aggregate power. DiA, in this vein, amusingly charges that

…if Mr Manzi thinks America needs to maintain its GDP share to counter the rising third-world menace, then he is arguing that Americans should allow more immigration and have more babies.

Of course, one of the four recommendations I made was precisely to “reconceptualize immigration as recruiting”, both as a mechanism for increasing the GDP / Person impact per immigrant, and maintaining population growth (among other reasons).

The key practical point of the article is that I believe there is a different efficient frontier of smarter political action available to us than is currently being provided by our two major parties if we can try to see both sides of the eternal argument more clearly – that is “the inherent conflict between the creative destruction involved in free-market capitalism and the innate human propensity to avoid risk and change”, that in our case is exacerbated by both “ever-increasing international competition” and “the growing disparity in behavioral norms and social conditions between the upper and lower income strata of American society”.

As I also said in the piece, I believe that this three-part problem “has actually undergirded most of the key political-economy debates of the past 30 years. But a dysfunctional political dynamic has prevented the nation from addressing it well”. It’s a shame to see that dynamic replicated in this instance.

Update: As I re-read that last sentence, it sounds like I am blaming my interlocutors for misinterpreting me. I believe what I said about the responsibility for lack of clarity resting on the shoulders of the author. I stand by every word in the article, but I should have exerted greater powers of imagination to understand the reaction of somebody who does not share some of my premises, and should have reflected this in the article. The rough-and-tumble of direct exchange always improves thought and expression, so I thank all of my critics linked to in this post for their focused attention.