Wednesday, October 19, 2011

Daron Acemoglu Interviewed

Daron Acemoglu is amazingly wide-ranging, productive, and thought-provoking. A nice sample of his work and thinking emerges from a recently published interview with Douglas Clement of the Minneapolis Federal Reserve.

On the Dodd-Frank financial reform legislation
"I think the problem with the Dodd-Frank Act is that the amount of good it contains seems to be dwarfed by the amount of additional minute details it contains. That fails to achieve the intent of the regulation. It also gives better regulation a bad name, because people who are opposed to regulation can easily point to the page after page after page of paperwork and procedural things that Dodd-Frank wants you to do. And I am not convinced that the Dodd-Frank Act is going to prevent the next financial collapse if the financial system actually continues on its current trajectory. I don’t think anybody can claim that they know what’s going to happen in the next five years in the financial sector, but the financial sector has become more concentrated. It’s very profitable, it is still investing in highly risky assets and, in fact, it hasn’t really cleaned up its balance sheet to a great degree. The bonus culture, for example, was one of the elements that contributed to the crisis—not by any means the only one, or the most major one, but it was certainly an important factor. It has remained the same. And the Dodd-Frank Act doesn’t really do anything to deal with that. ...

I think something that’s much more effective—and again, I view it as a speed- bump-type of regulation—is to increase capital requirements. ... If you increase capital requirements, you’re essentially putting in speed bumps because the rate at which a bank can expand its balance sheet is going to be limited by the capital it has to a much greater extent than currently required. Those are the kinds of things that, as long as they’re not very detail-oriented, I think hold more promise. When they are detail-oriented, they are easier to overcome and thwart, and they are also much more costly to the daily functioning of banks."

On directed technical change and reducing carbon emissions
"Essentially, the bulk of the literature in environmental economics has been about how we have to tax economic activity to slow it down so that we don’t damage the environment. If you think of a single-sector economy, with one sector that depends on coal, or on gas, that’s the only thing you can do: slow down that one sector. If you want to reduce carbon emissions, you just have to slow down that sector. Now, you don’t directly slow it down; you change its composition of factors, perhaps, but you can’t let that sector take off at a very rapid rate and still, at the same time, limit carbon emissions.

Our perspective was, well, the economy has several technologies; some of them are cleaner than others. How should we shift toward the cleaner ones? When you look at the climate science, there’s a lot of emphasis precisely on this and on questions such as, When is it that nuclear power will become economical? When will geothermal or wind or solar solve both their cost and their delivery problems?

Therefore, the perspective shouldn’t be, How can we slow down economic activity? Instead, it should be, How can we shift the composition of economic activity away from dirty technologies to cleaner technologies? Now, that’s a very directed-technical-change-related question, but it already comes with a very important implication: The focus shouldn’t be on slowing down economic activity, but on changing its composition and changing the type of technological changes that the market generates.

Moreover, and importantly, we expect there to be a distinctive cumulative aspect to research. Different technologies often build on past successes in the same line of technology. So when you’re building a new car, you build on the past advances in car technology; you don’t as much build on advances in solar technology. In the same way as when you build new solar panels, you’re building on the previous solar panels, not on the diesel engine. What that means is that there’s going to be strong self-reinforcement in changing the direction of technological change. So when technological change shifts away from the dirty technologies that are so fossil-fuel-dependent to the cleaner technologies, it will also make it potentially cheaper to produce these innovations, these cleaner technologies, in the future."
On the relationship from political structures to economic growth

"But later in college and graduate school, I started working on issues related to human capital, economic growth and so on. But then after a while, I sort of realized, well, you know, the real problems of economic growth aren’t just that some countries are technologically innovative and some aren’t, and some countries have high savings rates and some don’t. They are really related to the fact that societies have chosen radically different ways of organizing themselves.

So there is much meaningful heterogeneity related to economic outcomes in the political structures of societies. And these tend to have different institutions regulating economic life and creating different incentives. And I started believing—and that’s reflected in my work—that you wouldn’t make enough progress on the problems of economic growth unless you started tackling these institutional foundations of growth at the same time."

Some applications to "Arab Spring"
"The big question is, Is this going to be a political revolution in the same way as the Glorious Revolution in England, which unleashed a fundamental process of transformation in the political system with associated economic changes? Ultimately, such political revolutions are fundamental to the growth of nations. That’s one of the arguments we make.

Or is it going to be the sort of revolution like the Bolshevik Revolution or the independence movements in much of sub-Saharan Africa in the 1960s, where there was a change in political power, but it went from one group to another, which then re-created the same system and started the same sort of exploitative process as the previous one?...

So, there is no guarantee that such movements will translate into a broad-based political revolution, as opposed to sort of a palace coup where one group takes control for another."