Drivers of growth

Tyler Cowen offers up a list of mistakes commonly made by right-wing economists (his list for left-wingers is here), among which is this:

We know much less about the causes and drivers of economic growth than we like to admit, and when pushed on this issue we fall back to citing relatively simple cases with extreme differences, such as East vs. West Germany.

That's probably true (at least the first part). My own list of factors that determine economic growth looks like this (I don't pretend this is comprehensive):

Quality of human capital. This is simply huge and was described to a large extent by Francis Fukuyama in his book Trust. Imagine starting a country from scratch and being given the ability to import your population from anywhere in the world -- would one group be as good as another? Plainly not. Swedes will probably turn out to be more productive and better citizens than, say, those from Afghanistan. While education plays a large role in determining human capital, it isn't a sole determinant, with cultural norms, values and attitudes playing a significant role. Placing an emphasis on education is a cultural value by itself.

A prime example of human capital is on display in Japan, where looting in the wake of a massive natural disaster has seemingly been far less prevalent than that which took place in New Orleans in the wake of Hurricane Katrina. Culture matters.

Location. Is a country landlocked or does it have access to the sea? A landlocked country is largely dependent on the transport infrastructure of its neighbors for foreign trade. Speaking of neighbors, are they close by (Germany) or far away (New Zealand)? Are the neighbors rich or poor? Well behaved or troublemakers? 

Climate. Life is short, so why not spend as much time in the sun as possible? Beyond helping to attract residents, a nice Mediterranean climate is also economically efficient, keeping heating bills low in the winter and moderate in the summer. Note that North Dakota, which has the lowest unemployment in the country at 4.5 percent, experienced population growth of only 4.7 percent over the last ten years despite jobs being readily available while the country as a whole averaged 9.7 percent growth. As USA Today points out:

The state's weather makes it hard to lure new residents. The average January low temperature is four degrees below zero.

It's surprising that the weather angle isn't raised more often in the California vs. Texas economic debate. While Houston and Los Angeles both have temperatures that average in the upper 60s in January and December, Houstonians must contend with summer highs that average in the low 90s and lows in the mid-70s, along with suffocating humidity. Dallas and San Antonio aren't much better. Angelenos experience average highs in the mid-80s, lows in the mid-60s and ittle humidity.

Taxes. Low taxes encourage economic output and leave more capital to be allocated by the private sector instead of government, thus producing higher returns. Beyond tax rates, equally important is the tax code/structure, with deductions and loopholes distorting economic decision-making and leading to suboptimal outcomes. One notable example here in the US is the mortgage interest deduction, which encourages over-investment in the housing sector. 

Regulation. Every law passed that business must abide by is one more burden that must be borne and a hurdle that must be overcome, typically in the form of increased paperwork and added expense.  While some of this makes sense, much does not pass a cost-benefit analysis. Worse, regulation is frequently hijacked by established players as a device with which to stifle competition. A great example of regulation run amok is India's notorious "License Raj." The US experience with deregulation in the airline, railroad and trucking industries is also instructive.

Rule of law/Quality of institutions. Are contracts enforced? Can disputes be readily settled in impartial fashion at the local courthouse? Are government officials honest or susceptible to corruption? Are elections free and fair? Essentially, do things work as they are supposed to? Businesses need a predictable environment in which to operate, and arbitrary enforcement of the law is a severe disincentive.

Monetary policy. Will a dollar today be worth a dollar tomorrow? In order for money to be useful it must provide a secure store of value. Is enough money in circulation to grease the wheels of commerce?

Government spending. Not only does the amount of government spending matter -- as every dollar spent is one less dollar available to the private sector -- but the composition does too. Government spending on, say, maintaining roads and basic infrastructure, is likely to produce higher returns than allocating the money for gender studies. Worse, government spending can promote resource misallocation (subsidies) or a reduction in economic output (welfare payments that allow individuals to withdraw from the labor market).