In today’s WSJ, Stanford’s Ed Lazear argues that higher taxes reduce work effort. I argue that lower payoffs for risk-taking also reduce risk-taking, which gradually slows growth.
Risk-taking produces innovation, like Google and Facebook. Cutting-edge companies, like Google and Facebook, give workers more valuable on-the-job training and a richer set of investment opportunities than they can find elsewhere, which make these workers more productive. Experts also coalesce into synergistic communities, like Silicon Valley, that increases their productivity. Their knowledge spills over to the rest of the economy and makes it more productive. This positive feedback loops gradually raises the risk-adjusted payoffs for risk-taking, which, in turn, increases risk-taking and work effort. The U.S., for example, has produced $411 billion of unicorns—privately held startups valued at over $1 billion—8 times more than Europe. These magnifying effects accumulate gradually over decades. It takes a long time to build the institutions and train the workforce needed for faster productivity growth.