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Economic Possibilities for Our Children

From the NBER website by Larry Summers:

This is the 40th anniversary of the summer when I first met Marty Feldstein and went to work for him. I learned from working under Marty's auspices that empirical economics was a profoundly important thing, that it had the opportunity to illuminate the world in important ways, that it had the opportunity to change people's perspectives as they thought about economic problems, and that the successful solution or resolution of economic problems didn't happen with the immediacy with which a doctor treated a patient, but did touch and affect the lives of hundreds of thousands, if not millions, of people.

I learned about how to approach economic research from watching Marty. There is a central element that has been a part of his approach to economics, and it has always been a part of mine, both as an economist and a policymaker. It is the approach of many in our profession, but not all. This is the belief that we cannot aspire to know the world with complete precision; that no single parameter will measure with precision how our economy is going to respond to a policy or a shock. Rather, what we can aspire to establish is a combination of logic, modeling, suggestive anecdote and experience, and empirical measurements from multiple different perspectives that lead to an overall view on economic phenomena. That kind of overall view on economic phenomena moves the world forward much more than a precise estimate of a single parameter.

It is very much in that spirit that I want to reflect with you this afternoon on economic possibilities for our children. Keynes wrote a famous essay entitled "Economic Possibilities for Our Grandchildren." I am not Keynes, so I cannot look nearly as far forward as he did. But I am seeking to speak in the same spirit. At a moment of substantial cyclical distress, at a moment of financial preoccupation, I would like to look to the broader technological forces that are operating and that will shape the structure of our economy and how people live over the long term.

I think of my horizon as being more like a generation than the century that Keynes spoke of. At one level, by the way, Keynes did pretty well. He predicted that incomes in the industrialized world would rise eightfold between 1930 and 2030 and they've risen a little more than sixfold so far, so he's looking pretty good on that prediction. But Keynes also got some things wrong. He predicted that as incomes rose eightfold, the workweek would fall to 15 or 20 hours. The reason he got that wrong is something that I hadn't previously reflected on.

When I took introductory economics, a big feature of the textbook was the backward bending labor supply curve, where it was explained that past a certain point, the income effect took over from the substitution effect and so the labor supply curve bent backwards. This does not get much attention in textbooks today. The reason is that people with higher wages now work more hours than people with lower wages. The time series tracks the cross section. Over time, as we have all gotten richer, the number of hours worked for many people has risen.

Keynes missed many other things. He missed that there was a developing world and an industrialized world, for example. And he missed entirely issues relating to the distribution of income, either within countries or across countries. This too contributes to my desire to speak about one generation rather than more.

I believe in a much more anecdotal way than Dale Jorgenson, who has quantified it to an extraordinary degree, that the defining feature of economic growth in this era is the set of changes that are associated with information technology. The single example I find most striking is the self-driving automobile. Automobiles have now been driven from California to New York, stopping at red lights, accelerating, going through green lights, accelerating through yellow lights without being touched by a human hand. And if one thinks about almost any aspect of economic activity, it either has been, is being, or quite possibly will be revolutionized by the application of information technology. In my friend Marc Andreessen's phrase, software is eating the economy.

I am told that there exist software programs that can grade at least some kinds of student papers with more reliability relative to human beings than human beings can grade essays relative to other human beings. Larry Katz has famously remarked that computers do not do empathy, but there have existed for many years computer programs that actually do a credible job of providing psychotherapy. In response to confessionals, they prompt with responses like: "Tell me a little bit more about what's distressing you. That must have been very hard for you. Can you explain a little more fully?" On at least some occasions these programs have been an important source of solace.

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