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In Schumpeterian tradition, a recent strand of the economic literature shows that economic fluctuations and recessions can have positive effects on growth which may be mitigated through countercyclical policies. First, there are models in which recessions have a cleansing effect: less productive firms are eliminated and average productivity increases. Second, there are models showing that a larger amplitude and frequency of business cycle fluctuations is likely to have positive effects on long-run growth, since the opportunity cost of productivity-improving activities falls in recessions. In all this work, production and productivity-improving activities are substitutes. In Discussion Paper No. 1130, Research Affiliate Philippe Martin and Carol Ann Rogers show that when labour productivity is improved through learning by doing, these results are reversed. Fiscal policy, when used for stabilization purposes, can have a positive effect on the economy's growth, on human capital accumulation, and on welfare, along the transition path. The paper introduces symmetric productivity shocks into a model in which productivity is augmented through learning by doing. If future benefits of learning by doing are not fully internalized by workers, then recessions are periods in which opportunities for acquiring experience are foregone. The authors find that the government can eliminate the employment consequences of the business cycle and alter the growth rate. The fiscal policy that maximises growth is a countercyclical policy because it taxes labour during good years and subsidizes labour during the bad years. The aim of this policy is to eliminate the employment consequences of the business cycle so that learning can still take place during recessions. Stabilization Policy, Learning by Doing, and Economic Growth Philippe Martin and Carol Ann Rogers Discussion Paper No. 1130, February 1995 (IM) |
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