The Lack of European Productivity Growth: Causes and Lessons for the United States

The Lack of European Productivity Growth: Causes and Lessons for the United States. Jesús Fernández-Villaverde and Lee Ohanian. Cato Institute, Dec 05 2018, https://www.cato.org/publications/research-briefs-economic-policy/lack-european-productivity-growth-causes-lessons-united

[...]

The European economic slowdown began in the late 1970s and continues today. We make this comparison because the United States and Europe are similar in many respects and because the two episodes share many similar economic features. The post-World War II history of Western and Northern Europe provides insights into why the United States remains depressed relative to its past recovery trends. We also argue that the European experience offers guidance in terms of constructive economic policy changes for today’s U.S. economy.

[...]

From 1950 to 1980, most of Western Europe experienced unprecedented prosperity and structural transformation. The post-World War II Western European economic miracles demonstrate that economic recovery and very rapid per capita GDP growth occur even after the most devastating shocks. This is important, as it is often argued that the financial crisis and the resulting loss of wealth necessarily mean that recovery following the Great Recession will be delayed for a long time. The systematic and rapid growth of these European economies, all of which had lost enormous wealth during the war, provides a very strong counterexample of this view and is an important reason why we focus on policies and institutional factors that may be impeding the normal market process of economic recovery.

Indeed, transitional dynamics of post-World War II capital stocks being below their steady-state levels does not plausibly account for these growth miracles. While capital stock dynamics did play some role, productivity growth was the primary factor driving Western European economic growth. France, Germany, Italy, and Spain all experienced rapid yearly total factor productivity (TFP) growth between 2.6 and 3.2 percent over this period.

However, the convergence of Western European countries regarding GDP per capita relative to the United States stagnated after 1980. At the time, this long-run slowdown was challenging to identify. One reason was that the global economic slowdown that occurred in the late 1970s and early 1980s masked the underlying long-run shift in Western European economies. A second reason was the slowdown in U.S. TFP growth, which began in the 1970s. This led some observers to believe that the European slowdown was merely the natural consequence of global factors.

However, this view omits the important forces for continued catch-up in Europe. TFP levels in France, Germany, Italy, and other Western European countries remained about 40 percent below the U.S. level. This indicates that there was additional room for European catch-up and, more broadly, an opportunity for Europe to become more competitive with the United States in its export markets. Moreover, even if the European catch-up was slowing down, theory suggests this should have been a much more gradual process, in which we should observe a very slowly declining rate of TFP growth over time, rather than the discrete and sudden slowdown in TFP growth that occurred.

The change in performance in Western Europe became much starker after 1990. Since then, GDP per capita relative to the United States in Western European countries has experienced no catch-up (in Germany and the United Kingdom) or regressed (mildly in Spain and more strikingly in France and Italy).

TFP growth comes from the innovation and adoption of new technologies, business models, and managerial practices. Europe has been failing on all three fronts for the last several decades: the continent develops less economically useful technologies than other comparable economic regions, it is reluctant to allow the introduction of new business models, and it lags in the adoption of new managerial practices.

This unfortunate state of affairs is unrelated to cultural traits or idiosyncratic preferences. For centuries, Europe was at the forefront of technological innovation and adoption. Moreover, in the decades following World War II, Europeans showed a more than considerable skill in catching up with the technological frontier, innovating in relevant fields, and working more extended hours than North Americans.

The reason, instead, for the European lack of TFP growth is the pervasive dominance of what economists Stephen Parente and Edward Prescott have called “barriers to riches.” The most salient of these are widespread barriers to entry; the lack of competition in many industries and the lax enforcement of competition law; surrealistic regulations and pervasive unjustified licensing requirements across Europe; inefficient capital markets; an absence of top universities and lower research and development spending; and an aging population.

Fast European economic growth after World War II was fostered by institutions and governance that offered incentives and opportunities to adopt U.S. technologies and managerial organization, that invested heavily in public infrastructure, that favored the accumulation of physical and human capital, and that exploited the very close economic openness of the continent. But since the mid-1970s, Europe has changed course and run an unfortunate experiment that shows how institutions and policies negatively affect economic performance.

The European experiment offers a number of lessons for the United States today. European economic weakness began once institutions and policies changed. Institutional change resulted in higher taxes, much less competition (which depressed the entry of new businesses), and increased regulation of capital and labor markets. The timing of changes in European TFP growth and hours worked—the two determinants of economic growth—largely coincides with the timing of changes in European institutions and governance.

Until recently, U.S. institutional quality has changed in ways similar to that of Europe. Through 2016, tax rates increased, and in some states, they have increased considerably for the most productive earners. Regulation also rose significantly, especially in financial markets through DoddFrank legislation. This new financial regulation raised the cost of making loans, particularly small business loans. This is because there is a significant fixed-cost component in dealing with compliance and record-keeping issues that make smaller loans less profitable. This becomes even more challenging for small banks (community banks), which have a lower revenue base over which to spread the fixed costs.

On a more positive note, the slowdown in TFP triggered by so-called Baumol’s disease (i.e., the move toward services with stagnant productivity such as education) may be nearly complete, and in the future we may observe a substitution of demand toward services with higher productivity growth as their relative prices fall. Also, a large cut in the corporate tax rate is making U.S. companies more competitive with those in Europe, and a substantial decrease in business regulation, including a partial rollback of Dodd-Frank, has increased business efficiency and has reduced compliance and recordkeeping costs. U.S. labor input and investment’s share of output are growing, and GDP growth has increased. In our view, the continuation of these favorable recent developments will depend on whether the United States continues to adopt more pro-market economic policies.

NOTE:
This research brief is based on Jesús Fernández-Villaverde and Lee Ohanian, “The Lack of European Productivity Growth: Causes and Lessons for the United States,” Penn Institute for Economic Research Working Paper No. 18-024, September 2018, https://ideas.repec.org/p/pen/papers/18-024.html.

Whole number bias in humans: Seems intrinsic to the way humans solve quotient comparisons rather than a compensatory strategy

Intrinsic whole number bias in humans. Alonso-Díaz, Santiago, Piantadosi, Steven T., Hayden, Benjamin Y., Cantlon, Jessica F. Journal of Experimental Psychology: Human Perception and Performance, Vol 44(9), Sep 2018, 1472-1481. http://psycnet.apa.org/doiLanding?doi=10.1037%2Fxhp0000544

Humans have great difficulty comparing quotients including fractions, proportions, and probabilities and often erroneously isolate the whole numbers of the numerators and denominators to compare them. Some have argued that the whole number bias is a compensatory strategy to deal with difficult comparisons. We examined adult humans’ preferences for gambles that differed only in numerosity, and not in factors that influence their expected value (probabilities and stakes). Subjects consistently preferred gambles with more winning balls to ones with fewer, even though the probabilities were mathematically identical, replicating prior results. In a second experiment, we found that subjects accurately represented the relative probabilities of the choice options during rapid nonverbal probability judgments but nonetheless showed biases based on whole numbers. We mathematically formalized and quantitatively evaluated cognitive rules based on existing hypotheses that attempt to explain subjects’ whole number biases during quotient comparisons. The results show that the whole number bias is intrinsic to the way humans solve quotient comparisons rather than a compensatory strategy.

How Much of Barrier to Entry is Occupational Licensing? It reduces equilibrium labor supply by an average of 17%-27%

How Much of Barrier to Entry is Occupational Licensing? Peter Q. Blair, Bobby W. Chung. NBER Working Paper No. 25262, November 2018. https://www.nber.org/papers/w25262

Abstract: We exploit state variation in licensing laws to study the effect of licensing on occupational choice using a boundary discontinuity design. We find that licensing reduces equilibrium labor supply by an average of 17%-27%. The negative labor supply effects of licensing appear to be strongest for white workers and comparatively weaker for black workers.

The Myth of the Philandering Man and the Crafty Woman: The expectations (or predictions) from the extended sexual infidelity hypothesis are not met , most human mating behavior is dominated by ‘caring and faithful’ women and men

The Myth of the Philandering Man and the Crafty Woman. Diego Lopez. Psychol Behav Sci Int J 4(3): PBSIJ.MS.ID.555637 (2017) 001.

Abstract: The monogamous human mating system arises from a unique psychological experience (i.e. falling in love), in which both partners make a conscious decision to choose a mate and establish a long-term relationship (a pair bond); this provides both intensive and extensive care for their offspring through most of their life. It is a trait particular to humans and one that generates both wonder and incredulity. A number of scholars, however, support a converse view where monogamy is merely an appearance - they argue that sexual infidelity is rampant with both partners. Nevertheless, on reviewing the evidence, it is clear that the expectations (or predictions) from the extended sexual infidelity hypothesis are not met; instead, the results are compatible with the sexually faithful human pair bond. It is concluded that most human mating behavior is dominated by ‘caring and faithful’ women and men. A host of other sexual behaviors are present in humans but these are secondary and elicited by infrequent or rare circumstances.

Keywords: Human mating system; Marriage; Monogamy; Sexual differentiation; Sexual infidelity; Sperm competition

Hysterical recollection of data about gorillas "talking" in some way to children, others

Advent of selfhood. Sue Savage-Rumbaugh, Itai Roffman. Journal of Veterinary Medicine and Animal Sciences, https://meddocsonline.org/journal-of-veterinary-medicine-and-animal-sciences/advent-of-selfhood.pdf

Hysterical recollection of data:

1  Do gorillas per chance want to know something about we humans? Could they possibly hope to communicate something to us, just by their presence and demeanor? Observe the video on u-tube of a young adult gorilla communicating with human children, who are using the photos on their cell phones to communicate with the gorilla (https://youtu.be/vr8eMrnLLJo). This is clearly two-way communication between the gorilla and the children. There is no food reward for either species and no one trained the children to interpret the gorilla’s gesture and no one trained the gorilla to gesture to the children.

Zoo’s sometimes do not approve of this kind of behavior amongst gorillas in their collection, because it causes them to appear “too human” and they tend to discourage it. But there are many u-tube videos of gorillas looking at the photos on the iPhones and iPads of guests. They especially appreciate seeing  videos of other gorillas [1]. It is wrong for two closely related species to desire to communicate? It may be that the gorillas interested in photographs.


2  The oral histories of many indigenous groups in Congo and in Mali, speak of time in the past when apes and humans communicated linguistically on a regular basis and even shared words in overlapping languages [2]. Maybe [3] the children in this video, who don’t yet know that it is politically incorrect to do anything with apes that is not part of their “natural behavior,” are starting to break down the human/ape barrier. They may be [3] harkening back to an earlier time when communication between us and them was part of the “natural behavior” of both species. Of course it would be possible for zoos to set up an electronic means for apes and visitors to begin to learn how to talk to and another and for gorillas to communicate by video with gorillas in other zoos and even in the wild.


---
[1]  Why is this so special? A killer whale watches other cetaceans in TV: https://www.bipartisanalliance.com/2017/10/a-killer-whale-watches-other-cetaceans.html

[2] Great source! She proceeds to comparing the indigenous groups to children.

[3]  Maybe, maybe, maybe, lots of possibilities, multiverses, etc. Amazing.

Landscapes preferences in the human species could be influenced by the evolutionary past; no universal preference for images of savanna landscape; the rainforest landscape was the preferred one

The Influence of the Evolutionary Past on the Mind: An Analysis of the Preference for Landscapes in the Human Species. Joelson M. B. Moura et al. Front Psychol, Dec 07 2018. https://doi.org/10.3389/fpsyg.2018.02485

Abstract: According to some evolutionary psychologists, landscapes preferences in the human species are influenced by their evolutionary past. Because the Pleistocene savanna is the least inhospitable landscape, it was the most suitable environment for survival and influenced the evolution of hominids in such a way that even today the human being has a universal preference for these environments. However, there is controversy regarding this statement, because in some studies it was evidenced that people prefer images of landscapes that are similar to those of the environment where they live. In this sense, we want to test whether there is indeed a preference for images of the savanna landscape and how the current environmental context may influence this preference. We performed a study in three environmental contexts with different landscapes in order to be able to observe the influence of the familiar landscape on landscape preference, of which two rural communities — one presenting a landscape similar to the deciduous seasonal forest and another presenting a savanna-like landscape — that totaled 132 participants and one urban community with 189 participants. The stimulus consisted of 12 images representing the six major terrestrial biomes and two images of urban landscapes. The variables analyzed were the emotional responses and the preference of the participants in relation to the images of landscapes. We analyzed the data using the Kruskal–Wallis test. The obtained result did not corroborate the idea of universal preference for images of savanna landscape. The image of Rainforest landscape was the preferred one among all the three environmental contexts studied. In this way, the preference for landscape may have been shaped at different periods of human evolutionary history, and not just during the period when hominids lived on the savannah. As much as selective pressures of the Pleistocene savanna have shaped the human mind during the evolutionary history, other factors and different types of environments may have influenced human preferences for landscapes. Thus, evolutionary psychologists who analyze human preferences for images of landscapes, guided by the idea of the past influencing the present, must be cautious before generalizing their results, especially if other variables such as the cultural ones are not controlled.

The belief that honesty is effortful predicts subsequent dishonest behavior because it facilitates one’s ability to justify such actions

Lee, J. J., Ong, M., Parmar, B., & Amit, E. (2018). Lay theories of effortful honesty: Does the honesty–effort association justify making a dishonest decision? Journal of Applied Psychology, http://dx.doi.org/10.1037/apl0000364

Abstract: Are our moral decisions and actions influenced by our beliefs about how much effort it takes to do the right thing? We hypothesized that the belief that honesty is effortful predicts subsequent dishonest behavior because it facilitates one’s ability to justify such actions. In Study 1 (N = 210), we developed an implicit measure of people’s beliefs about whether honesty is effortful, and we found that this lay theory predicts dishonesty. In Study 2 (N = 339), we experimentally manipulated individuals’ lay theories about honesty and effort and found that an individual’s lay theory that honesty is effortful increased subsequent dishonesty. In Study 3, we manipulated (Study 3a; N = 294) and measured (Study 3b; N = 153) lay theories, and then manipulated the strength of situational force that encourages dishonesty, and found that an individual’s lay theory influences subsequent dishonesty only in a weak situation, where individuals have more agency to interpret the situation. This research provides novel insights into how our lay theories linking honesty and effort can help us rationalize our dishonesty, independent of whether a particular moral decision requires effort or not.