at the Jackson Hole Economic Symposium
Panel: Setting priorities for long-term growth
Jackson Hole, U.S.A., 27 August 2011.
"Fundamentally, technological progress and innovation are, over the long run, the prime drivers of economic growth and also important reasons for differences in international economic performance, even though demographic differences are also very relevant. Higher growth rates of technical innovation raise output and can lower the non-inflationary rate of unemployment.
But what is technical change? Cracking open the Solovian black box of technical progress has taken us from theories of learning-by-doing, to the impact of R&D on product variety and quality. The latter theories being underpinned by Paul Romer’s reflection on the fact that ideas are fundamentally non rival. This concept, by the way, was not really new. The famous letter of Thomas Jefferson to Isaac McPherson expressed it very clearly in 1813. The bottom line in all of this is that knowledge spillover between open, dynamic economies could benefit everyone. Not surprisingly, these new developments in growth theory came replete with policy prescriptions.
A more recent but allied literature suggested the following: how close an economy is to the technological frontier and whether its institutions facilitate convergence to that frontier are vital considerations. In effect, a laggard country gains by implementing (or jumping to) frontier technologies. But an economy near the frontier – or with an appetite to define that frontier – should increasingly favour innovation over imitation.
Like many close to European policy , I find this an attractive framework. Indeed, following World War II, the European economies were remarkably catching up in productivity and technological terms and today are leaders in many fields, in particular as concerns the embedding of technological innovation in manufacturing processes. Yet, there is still an enormous potential to tap, to reform our economies and boost their growth potential and job creation.
Since the introduction of the single currency in 1999, the euro area has experienced a per-capita growth rate that, at around 1% a year, is comparable to that in the United States (1.1%). This is the first fact that is often overlooked in international comparisons. In such comparisons, we often look at headline growth numbers; yet, demographics are very different. Adjusted for population growth, there has been virtually no difference between US and euro area growth over the first decade since the introduction of the single currency. The euro area, though, has created more jobs: 14 million compared with 8 million in the US. Further, over recent decades differences in country and state dispersion rates of growth and inflation in the euro area and US are remarkably similar. On employment, moreover, it will be interesting to compare our different evolutions in the coming years. What we all want to avoid is excessively volatile employment where human capital is all too easily lost and inequality deepens."
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