Robert Terrin


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Draft for comment: Ideas getting harder to find does not imply stagnation

What a helpful and comprehensive guide to the economic study of human capital and productivity. Thank you for writing this! I like the idea of a model as a good way of testing various hypotheses. Models are undefeated for inferring causality. As a matter of prediction or even for generating hypotheses, I'm less optimistic about models.

Pulling on the institutional thread does seem like the right move, as opposed to ideas. They do at least roughly map to the slow pre-enlightenment, fast modernity and slowing post-modern pattern of progress. Still, privileging institutions over individuals as the most important factor doesn't make much intuitive sense to me, since each new idea only happens once. It's possible that institutions are getting in the way of idea execution (regulation, etc.), but missing key ingredient seems to be coordination more than anything.

The "one-time-boom" version of the ideas are getting harder to find argument is one you hear often that does seem to map to the general pattern of progress and is Cowen's favored variant. I'm partial to the idea that in the wartime hurry to push innovation we reordered our institutions to achieve great short-run gains at the expense of a kludgy emergent system that was working fairly well. Over-optimization of talent sorting and centrally directed R&D may extract progress from promising individuals at the same time that it destroys the system for creating promising individuals. Somewhere between a "Seeing Like a State" argument and a more individual and metaphysical explanation.

US State Income vs. Federal Income

To add on to what John Buridan already correctly shared about major changes to the tax code in the early 20th century you might want to check out the Federalist Paper No. 30-36:

Hamilton and the Federalists were arguing for taxation and a central bank to deal with the Revolutionary War debts that the U.S. had racked up (foreign loans and veteran backpay and pensions). Since direct taxes were declared illegal in the constitution, most of the money raised by the Federal Government was in the form of tariffs:

Abraham Lincoln instituted the first national income tax to raise funds desperately needed to prepare the Union Army for the Civil War, and to administer a more complicated system of taxation, he also created the IRS. There were numerous repeals and court battles until in 1909 the constitutionality was settled by the 16th amendment. 

To answer your question, the big driver of federal taxation for the past 80 years has been social security (and medicare to a lesser extent), instituted in the 1930s(medicare in the 1960s). If you sum up state and local revenues (mostly property and sales) they are greater than federal, when you take out insurance programs ($ you get back) and intergovernmental transfers ($ state/local get back) from federal taxes. Here's a good breakdown of the revenue sources: 

To answer why there's so much federal taxation relative to state and local, even if there's greater spending by state and local, you have to examine the expansion of federal government programs from the New Deal through WWII, to the Great Society, the Cold War, the Green Movement, and 9/11. 

  • Dept. of HHS was created in the early 1950s along with medicare/medicaid. 
  • NASA in the 1950s to carve out space programs from DoD.
  • NSF in the 1950s to unify and manage federal R&D.
  • HUD in the 1960s to support urban renewal. 
  • Dept. of Transportation in the late 1960s to regulate interstate travel (mostly air traffic and highways). 
  • EPA in the early 1970s to regulate clean air and water. 
  • US Consumer Product Safety in the 1970s for consumer protection.
  • Dept. of Energy to carve out nuclear weapons from DoD and manage U.S nuclear power in the 1970s.
  • Dept. of Education in the early 1980s to measure performance and redistribute funds to ameliorate inequities.
  • VA in the late 1980s to carve out veteran health from the DoD.
  • Dept. of Homeland Security to standardize and unify national security.

As you can see, many of these agencies and departments deal with externalities states may impose on their neighbors, collective action problems that encourage bad actors to defect and of course, plenty of pork projects to spread federal money around the country.

Something Is Getting Harder To Find But It's Not Ideas

I agree with your conclusion, Maxwell, and this piece was a joy to read. Jason's comment also seems correct to me in that subdomains very clearly exhibit the phenomenon of ideas getting harder locally. Still, the fallacy of composition tells us to be wary of summing up these subdomains. Diversification across subdomains may the answer to how the innovation frontier can continue to expand despite ideas getting locally more challenging.

I'm curious to hear what you think is the scarce resource. After trying my hand at starting a company and working in venture capital, I've come to appreciate that often the idea is quite important. The old hobbyhorse of execution vs idea feels like a false dichotomy though. The best companies do not spring forth from entrepreneurs' heads like Athena, fully dressed for battle, but they are also not A/B tested into existence. Similarly, science seems to move forward through a combination of dogged empirical work and theoretical insight.

Here are a few areas I'd like to read more about: courage, ignorance/fools and subversion/tricksters. I always think of the strange case of Medicine Nobel Dr. Barry Marshall, who debunked long established medical beliefs about stress being the cause of gastric ulcers by performing risky self experimentation that involved infecting his gut with bacteria:

What I've been reading, July–August 2023

Thanks for sharing the "the unreasonable effectiveness of insurance" books and pieces about fire safety. This is also a theme that fascinates me, and while I was working in reinsurance modeling for cybersecurity I became fascinated with the history of steam boilers. This technological innovation is a great case study for progress that creates problems that requires more progress to solve. 

The Hartford Steam Boiler Inspection and Insurance Company (now a part of MunichRe) was created to address this problem and the blog post below describes why the sinking of the Sultana steam ship in 1865 was a critical turning point:

I believe this precedent setting case predates the UL by about 30 years and well before the commercialization of electricity (besides nascent telegraph systems). Prior to the HSB Inspection and Insurance Company, insurance was limited to covering mostly natural causes of marine/storm (ancient) and property/fire (Stuart Era) losses. There was risk of piracy, so some of the losses were man-made, but prior to the Industrial Revolution technological risk was solved by lack of progress.