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The Economic Optimism of Paul Romer and Chad Jones

November 18, 2015

Two leading economists and professors—NYU’s Paul Romer and Chad Jones of Stanford—shared macroeconomic insights about growth and inequality at separate MIT IDE seminars recently.

Jones, Professor of Economics at the Graduate School of Business at Stanford University, was a PhD student when he took a class of Romer’s at the University of Rochester in 1984. Six years later, Romer—a graduate of the University of Chicago business school — published a seminal paper on Endogenous Technological Change about economic growth and “non-rival goods” that multiply and yield rapid innovation and growth. “The paper changed the way economists understand growth,” Jones wrote recently on the 25th anniversary of the publication.

Romer (pictured at right) went on to become an urban-planning policy adviser, entrepreneur, NYU professor, and director of the Marron Institute of Urban Management. He and Jones have collaborated over the years on growth-theory research.

At an October IDE seminar, Romer described himself as an economic optimist because he takes a long-term view when it comes to analysis and the potential of new ideas. Using historical data as the context for examining current conditions, Romer sees “a much more developed system of learning now [than in the past]…

There’s a world out there of incredible possibilities,” and ideas are the greatest non-rival goods of all.

“When we perceive a threat, we don’t see other things around it,” he said. “We have to get out of that state…that distorts our collective learning” and use science to analyze financial markets. “Two decades ago, economists were preoccupied with threats posed by inflation that would spiral ever higher. They were resigned to a permanent slowdown in productivity growth. Looking back, everyone was too pessimistic about the rate of progress,” he said. “Their fears did not even get the signs right…economists are now struggling with the threat of inflation that is too low.”

The Case for Theory

During his talk, as well as in his blog, Romer questioned the current trend away from economic theory. Without theory, you can’t “explain what’s going on in context and why things occasionally fall apart.” Big data offers unlimited observations, for example, but the challenge is to aggregate the data and find a theory that you can use to manage, test and narrow down data points for specific outcomes, he said.

Also in October, Jones (pictured below, left) spoke at the IDE about his “Schumpeterian Model of Top Income and Inequality.” He pointed out that while top income inequality rose sharply in the United States over the last 35 years, it increased only slightly in economies like France and Japan.

Jones, a Research Associate of the National Bureau of Economic Research, also considers himself an optimist. At his talk, he noted that the development of the Internet and “a reduction in top tax rates are examples of changes that raise the growth rate of entrepreneurial incomes and therefore increase Pareto inequality.” However, he said,

policies that stimulate “creative destruction” reduce top inequality.

Examples cited include “research subsidies, or a decline in the extent to which incumbent firms can block new innovation. Differences in these considerations across countries and over time, perhaps associated with globalization, may explain the varied patterns of top income inequality that we see in the data.”

I’m still left wondering what economists can tell those struggling with global poverty today. How long will they have to wait to see shifts? For that ray of hope, I find the work of folks like Ann Mei Chan —who is exploring ways to use digital technology to end poverty– something to be really optimistic about.

What are your thoughts?