A Symposium Sponsored By The Federal Reserve Bank of Kansas City POLICIES FOR LONG-RUN ECONOMIC GROWTH A Symposium Sponsored By The Federal Reserve Bank of Kansas City Jackson Hole, Wyoming August 27-29, 1992 Contents Foreword vii The Contributors ix Symposium Summary xvii OPENING REMARKS 1 ALAN GREENSPAN, Chairman, Board of Governors of the Federal Reserve System Causes of Declining Growth MICHAEL R. DARBY, Professor, University of California at Los Angeles Causes of Declining Growth in Industrialized Countries 15 KUMIHARU SHIGEHARA, Head of the Department of Economics and Statistics, OECD Why Has Potential Growth Declined? The Case of Germany 41 HORST SIEBERT, President, Kiel Institute of World Economics THE SEARCH FOR GROWTH CHARLES I. PLOSSER, Professor, University of Rochester Commentary: N. GREGORY MANKIW, Professor, Harvard University MACROECONOMIC POLICY AND LONG-RUN GROWTH 93 J. BRADFORD DE LONG, Professor, Harvard University LAWRENCE H. SUMMERS, Vice President and Chief Economist, The World Bank Commentary: C. FRED BERGSTEN, Director, Institute for International Economics Commentary: LAWRENCE A. KUDLOW, Chief Economist and Senior Managing Director, Bear Stearns & Co., Inc. Commentary: ALLAN H. MELTZER, Professor, 141 Carnegie-Mellon University ECONOMIC REORGANIZATION AS A PREREQUISITE TO GROWTH 149 DOMING0 F. CAVALLO, Minister of Economy and Public Works and Services, Republic of Argentina INVESTMENT POLICIES TO PROMOTE GROWTH 157 ALAN J. AUERBACH,Deputy Chief of Stafi Joint Committee on Taxation Commentary: MARTIN FELDSTEIN, President, 185 National Bureau of Economic Research Commentary: NORBERT H. WALTER, Chief Economist, 193 Deutsche Bank HUMAN CAPITAL AND ECONOMIC GROWTH 199 ROBERT J. BARRO, Professor, Harvard University Commentary: LAWRENCE F. KATZ, Professor, 217 Harvard University Commentary: JAMES C. MILLER 111, Chairman, Citizens for a Sound Economy OVERVIEW PANELISTS STANLEY FISCHER, Professor, Massachusetts Institute of Technology JACOB A. FRENKEL, Governor, Bank of Israel OTMAR ISSING, Member of the Directorate, Deutsche Bundesbank CLOSING REMARKS WILLEM F. DUISENBERG, President, Central Bank of the Netherlands The Participants The Symposium Series Foreword The potential rate of economic growth in industrialized countries is now only half what it was in the 1960s. Growth of world saving and productivity has also declined, suggesting continued low economic growth in the future. If these trends persist, standards of living in the industrialized countries will improve only marginally. This prospect has generated proposals for reversing the growth slump of the past two decades. To evaluate what policies should be adopted to foster long-run economic growth, the Federal Reserve Bank of Kansas City sponsored a symposium on "Policies for Long-Run Economic Growth," at Jack- son Hole, Wyoming, on August 27-29, 1992. We appreciate the contributions of all those who helped make the symposium a notable success. Special thanks go to Bryon Higgins and Craig Hakkio, both in the Bank's Research Division, who helped develop the program. We hope these proceedings will lead to better public understanding of the policy issues related to economic growth. THOMAS M. HOENIG President Federal Reserve Bank of Kansas City The Contributors - - Alan J. Auerbach, Deputy Chief of Staa Joint Committee on Taxation Mr. Auerbach is on leave from the University of Pennsylvania where he is professor of economics and law. He is also a research associate of the National Bureau of Economic Research and the author of numerous writings on taxation, fiscal policy, mergers and acquisi- tions, and international competitiveness. A member of the executive committee of the American Economic Association and a fellow of the Econometric Society, he testifies frequently before Congress aAd has consulted for the U.S. Treasury, the Swedish Ministry of Finance, the Organization for Economic Cooperation and Development, the World Bank, and the International Monetary Fund. Robert J. Barro, Professor of Economics, Haward University Along with his professorship at Harvard, Mr. Barro is a research associate of the National Bureau of Economic Research and a con- tributing editor of The Wall Street Journal. He has written several books on business cycles and macroeconomic policy and is widely published in professional journals. His current project is a new book on economic growth. Mr. Barro is a fellow of the American Academy of Arts and Sciences and the Econometric Society and a past officer of the American Economic Association. C. Fred Bergsten, Director, Institute for International Economics Mr. Bergsten has been director of the Institute for International Economics since its creation in 198 1. He was assistant secretary of the U.S. Treasury for international affairs from 1977 to 198 1, and under- secretary for monetary affairs in 1980-81. Earlier, he was a senior fellow at the Brookings Institution and a senior staff member at the National Security Council where he was an assistant for international x The Contributors economic affairs. A widely published author, he testifies frequently before Congress. In addition to several other posts, Mr. Bergsten serves on the Competitiveness Policy Council. Domingo Cavallo, Minister of Economy and Public Works and Services, Republic of Argentina Mr. Cavallo assumed his current ministry position in 1991 follow- ing two years as Minister of Foreign Affairs and Culture. Earlier, he was chairman of Banco Central of Argentina, vice chairman of the Bank of Cordoba and undersecretary of development for Cordoba. He was national representative for the Province of Cordoba between 1987 and 199 1. Mr. Cavallo taught at the National and Catholic Universities of Cordoba and won scholarships from the Organization of American States and the Ford Foundation for post-graduate study at Harvard University where he also earned his Ph.D. in economics. Michael R. Darby, Professor, University of California at Los Angeles Mr. Darby joined the economics faculty at UCLA in 1973, and in 1987, became a professor in the school's John E. Anderson Graduate J School of Management. He is also a research associate with the National Bureau of Economic Research, an economist working with statistics of income for the Internal Revenue Service, and chairman of The Dumbarton Group of Los dngeles and Washington, D.C. Between 1989-92, he was undersecretary for economic affairs for the U.S. Department of Commerce. He is the author of numerous publications and recipient of a number of awards, including, in 1989, the Alexander Hamilton Award, the U.S. Treasury's highest honor. J. Bradford De Long, Professor, Haward University Mr. De Long is Danziger Associate Professor of Economics at Harvard University where he teaches economic history. He spent the 1991-92 academic year as an Olin Fellow at the National Bureau of Economic Research where he is also a Faculty Research Fellow. From 1988 to 1991, he was head tutor in the Department of Economics at Harvard. He has written on the evolution and functioning of the U.S. and other nations' stock markets, the course and determinants of long-run economic growth, the changing nature of the American business cycle, and the history of economic thought. His latest research The Contributors xi has resulted in the publication, as author or co-author, of one book and three journal articles. Willem F. Duisenberg, President, Central Bank of the Netherlands Mr. Duisenberg was named to his present position in 1982 after a year as executive director. Earlier in his career, he was a staff member at the International Monetary Fund (IMF), professor of macro- economics at the University of Amsterdam, finance minister of the Netherlands, a member of Parliament, and a member and vice chair- man of the executive board of Rabobank Nederland. He has also served as a director of the Bank for International Settlements, as governor of the IMF, as a Crown-appointed member of the Social and Economic Council, and as a member of the Advisory Board of the Public Expenditure Research Institute in The Hague. Mr. Duisenberg has been decorated by the governments of the Netherlands, Luxem- bourg, Sweden, Senegal, and Belgium. Martin Feldstein, President, National Bureau of Economic Research Mr. Feldstein is George F. Baker Professor of Economics at Harvard University as well as president of the National Bureau of Economic Research. Since joining the Harvard faculty in 1967, his research and teaching have focused on problems of the U.S. economy and the economics of the public sector. From 1982 through 1984, he was chairman of President Reagan's Council of Economic Advisers. He is a fellow of the Econometric Society and the National Association of Business Economists and a member of the Trilateral Commission, the Council on Foreign Relations, and the American Academy of Arts and Sciences. Stanley Fischer, Professor, Massachusetts Institute of Technology Mr. Fischer, the Elizabeth and James Killian Professor and Director of the World Economy Laboratory at MIT, joined the MIT faculty in 1973. From 1988 to 1990, he was vice president for development economics and chief economist at the World Bank. He has also consulted for the U.S. State Department, the International Monetary Fund and the Bank of Israel. Mr. Fischer is a fellow of the Econometric Society and the American Academy of Arts and Sciences, a Guggen- heim Fellow, and a research associate of the National Bureau of xii The Contributors Economic Research. A native of Zambia, he holds several other appointments with international institutions. Jacob A. Frenkel, Governor, Bank of Israel Mr. Frenkel has served in his present position since mid- 1991. He had been economic counselor and director of research at the Interna- tional Monetary Fund since January 1987. Earlier, he was the David Rockefeller Professor of International Economics at the University of Chicago. He is a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society, and a member of the Group of Thirty, the advisory committee of the Institute for International Economics, the executive committee of the Centre for Economic Policy Research in London, and the G-7 Council.