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Friday, July 20, 2012

How the Elites Built America's Economic Wall

Robert Solow, winner of the Noble Prize in Eco...
Robert Solow, winner of the Noble Prize in Economics in 1987. Taken with a Leica M8, Elmarit-M 90/2,8. (Photo credit: Wikipedia)
 For a century, incomes became increasingly equal across the U.S., as poor states such asAlabama caught up to rich places like California.
Economists have long taught this history to their undergraduates as an illustration of the growth theory for which Robert Solow won his Nobel Prize in economics: Poor places are short on the capital that would make local labor more productive. Investors move capital to those poor places, hoping to capture some of the increased productivity as higher returns. Productivity gradually equalizes across the country, and wages follow. When capital can move freely, the poorer a place is to start with, the faster it grows. “That’s one of the central relationships in macroeconomics,” says Daniel Shoag, an economist at Harvard University’sKennedy School of Government. “It’s an extremely strong one, and we teach it in introductory macro because it’s one of the few macro facts that are predicted by a model that isn’t a tautology and that holds extremely well.”
Or at least it used to. Over the past 30 years, the convergence has largely stopped. Incomes in the poorer states are no longer catching up to incomes in rich states. ... Continue to read.
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