Tuesday, 26 April 2011

What can the government do about growth?

A new NBER working paper is out on Public Policy, State Business Climates, and Economic Growth. The paper, by Jed Kolko, David Neumark, Marisol Cuellar Mejia, has an abstract which reads,
State business climate indexes are a popular means of summarizing the "bundles" of state policies that might affect state economic growth. But the rankings of states' business climates vary wildly, raising questions about what these business climate indexes measure, and hence about which policies they capture are more important determinants of state economic growth. Business climate rankings tend to focus on policies related either to productivity, or to taxes and other costs of doing business. States that rank poorly along one of these dimensions often rank quite highly on the other. Business climate indexes that focus on productivity-related variables have essentially no predictive power for economic growth. In contrast, business climate indexes focusing on taxes and costs predict growth of employment, wages, and Gross State Product. Looking at sub-indexes that disaggregate the policies captured by the taxes-and-cost related indexes, two types of policies are associated with faster economic growth: less spending on welfare and transfer payments; and a more uniform and simpler corporate tax structure. But factors beyond the control of policy, like a state's industry mix, population density, and weather, have a stronger relationship with economic growth than even the tax-and-cost-focused business climate indexes. (emphasis added)
So state governments in the U.S. can do some things to help growth but the things that are outside the government's control are the big factors in growth. There could be a lesson there.

But may be the strangest finding is that productivity-related variables have essentially no predictive power for economic growth. After all isn't the whole argument made here in New Zealand that we need increases in productivity to increase growth?

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