Have you ever wondered how we can turn around stagnant growth, get everyone amply insured against the vicissitudes of capitalism, make government work better, and give everyone a fair shot in life? Yeah? Well, then my Niskanen Center colleagues, Brink Lindsey and Sam Hammond have a treat for you. Their exciting new paper (more of a monograph, really), “Faster Growth, Fairer Growth: Policies for a High Road, High Performance Economy,” lays out a practical, comprehensive policy agenda for faster, fairer growth through a “free-market welfare state” that cuts through tired dichotomies of left and right. We talk through our shared drift away from libertarianism and a handful of the paper’s highlights, ranging widely from social insurance reform, the problems with big finance, intellectual property, green industrial policy and more.
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Readings: “Faster Growth, Fairer Growth: Policies for a High Road, High Performance Economy” by Brink Lindsey and Sam Hammond
Will Wilkinson: Hi Brink. Hi Sam.
Brink Lindsey: Hey Will.
Sam Hammond: Hi.
Will Wilkinson: Welcome to Model Citizen. Today we have a special all Niskanen episode, Brink Lindsey and Samuel Hammond. My colleagues have written a paper called faster growth, fairer growth policies for a high road, high-performance economy. It’s a bit of a monster, it’s 90-some pages long, and it amounts to the big policy picture that the Niskanen Center has been trying to develop for a while now, a year or so ago was it we published the center will hold?
Sam Hammond: December 2018.
Brink Lindsey: Yeah, almost two years ago now.
Will Wilkinson: These guys, me and Steve Teles jointly authored a paper that kind of provided a more conceptual overview of this space. And this paper is an attempt to specify what that vision means in concrete terms, if you were going into Congress and you wanted to implement the Niskanen Center policy agenda, this is it.
Brink Lindsey: The way I thought about this is kind of supplying the missing link in explaining Niskanen’s identity. We’re a new small think tank without a clearly predefined place on the ideological or partisan spectrum. And on the one hand, we’ve had a number of kind of very big picture, 50,000 feet pronouncements of where we come from and the center can hold being the most elaborate of those, but lots of others as well. And then meanwhile, we’ve got a few concrete policy departments that get really into the weeds and are very active on Capitol Hill behind the scenes and pushing legislation at a very granular specific level. What we lacked in the middle was a story that explained how those specific policy engagements that we’re active in fit into a larger policy agenda that flows from our 50,000 foot policy vision. So this is an attempt to kind of translate the big picture view into a broader policy agenda than we actually currently have resources to pursue on Capitol Hill.
Will Wilkinson: So in very broad terms, what is distinctive about the Niskanen Center’s approach to political economy? Is it pro market? Pro government? You got your chocolate in my peanut butter, what is it?
Brink Lindsey: Two great tastes. It tastes great together. So yeah, the conventional left right divide is between a pro government anti-market left and a pro-market anti-government right, and we reject that as a false dichotomy. We see a thriving public sector and a thriving private sector as necessary compliments, interdependent compliments, not zero-sum antagonists. So, a robust provider of social insurance and public goods is an important platform on which a thriving market order exists. And likewise, a thriving market order is necessary for robust public goods and social insurance to be affordable. So I think our distinctive dissent from conventional wisdom is to put together as compliments what the conventional wisdom sees as antagonistic.
Sam Hammond: Yeah. And to add to that. I wrote the free-market welfare state a few years ago, and one of the points I try to make in that paper was to draw attention to the empirical reality that, if you take the libertarian to progressive kind of spectrum, you would imagine two ideal types. You’d imagine the progressive regime that has tons of regulation and a big welfare state and you would imagine the libertarian utopia that, it’s like Hong Kong or Singapore with relatively limited welfare transfers, but a bustling free market. And when you actually map developed countries, it’s not that at all, really, you see countries that fall into one of two ideal types, one being the kind of Greece, Italy kind of regulated stagnation where, there’s not a whole lot of transfers, but if you have a job in the public sector, or if you’re part of a family run business, you have relative economic security, or there’s just not a lot of dynamism, on the other end of the spectrum is what I call the insured dynamism, where you achieve economic security not by protecting the forces of creative destruction from ever occurring, but by insuring against them.
Will Wilkinson: And in that quadrant, you have the Nordic countries of course but also the Anglo Commonwealth countries, and really a gradation in between. And the United States has always been a bit of an outlier on the more libertarian spectrum where it both has relatively limited welfare programs, but also a relatively high scores on economic freedom indices, even though they’ve been slipping in recent years. And the argument from that paper was look, if this regularity is a real political economy, sort of stylized fact that there’s like some kind of feedback loop within democracy that pushes regimes to one of these two ideal types, insured dynamism or regulated stagnation. We should take that seriously because the US is sort of out of equilibrium. And with Donald Trump, it was a kind of example of grievances rooted in immigration and destruction from free trade bubbling up into a reaction that was towards the kind of regulated stagnation where we’re not going to expand welfare programs really at all.
Sam Hammond: In fact, we’re going to cut them just even more, but we’re going to throw on trade protections and do all kinds of crony capitalism. And so that’s a very interesting sort of high level fact. But then the question is in the current context, how does that cash out in a set of ideas for a reform? And I think one of the broader sort of concepts that animates Niskanen and our view of political economy is that, it doesn’t pay for us at least to be in either camp, either super identified with the left or super identify with the right, the role we play on Capitol Hill and in our advocacy is what Philip Converse once spoke the role of idea merchants. Where there’s a Gulf between the left than the right and there’s opportunities for if you’re sort of flexible and open-minded to broker agreements and bargains.
Sam Hammond: But the social compact is the result of a kind of democratic settlement between the left and the right. When you look at the ideal types that I think are like literally ideal, like the Danish system, right? The Danish system is like super free market and has a great unemployment insurance system that sort of protects you from disruption, but that didn’t arise from anyone having that system as their end goal, it arrows from the kind of give and take of labor and capital, and the negotiations between, we want to be able to fire our workers easily and then the worker saying, well, okay, if you want to fire us easily, we have to have income security. And that’s where they sort of end up and liberalism or small L liberalism, if that’s what we represent, I think has always historically been about living in the liminal space between the conservatives and progressives and trying to broker a settlement that sort of leads to longer term stability.
Will Wilkinson: Well that’s a really interesting point, Sam, which I think is like worth thinking about for a second, that actually effective political and economic systems aren’t things that people dream up from the armchair. Right?
Will Wilkinson: They’re very seldom a political theorist or an economist just figures out what an entire system that’s going to work well is going to look like, because you can’t think of all the factors, right? It’s a sort of a Hayekian point. There’s no way to design this sort of thing. If you have healthy, liberal, democratic politics, it will lead to a process of negotiation that, it’s a discovery process in effect. And some countries get lucky and end up on a path that works really well. The important thing, when you see a bunch of countries who’ve figured something out, not because some Nobel prize winning economist figured out that the liberal democratic capitalist welfare state is the best overall system, but it’s just, you can look, you can go out into the world and look what places work the best. Where are people wealthy, long lived, healthy, all of those things. And they’re all the same kind of basic country. And one of the things I’ve always found striking about that is that this thing that we call the free market welfare state is that it is so under theorized, even though it excels whenever it’s implemented in the real world.
Brink Lindsey: Yeah. So we’ve had on the one hand- We’ve had this massive convergence of advanced democracies towards a basic model, the liberal democratic capitalist welfare state with a big state that does a lot of transfers and social insurance, and also has very complicated regulations to govern economic activity. But that provides lots of room for unplanned entrepreneurship, creative destruction competition, and most political actors, this wasn’t their druthers, but this is what we wound up with as the basic model triumphed over laissez faire and triumphed over full blown socialism, totalitarian communism. So on the one hand we’ve had this sort of triumph of this one model, on the other hand, over the course of 21st century, since that model triumphed with the class of communism, that model is working less and less well for a larger and larger groups of its citizenry. And one sign of that has been populous upheaval on both sides of the Atlantic and throughout the advanced democracies, especially here.
Brink Lindsey: And I interpret this political upheaval as a legitimacy crisis, if the rules of the game aren’t working well for people, then they no longer have trust in established institutions and no longer have trust in governing elites. And they start looking for crazy desperate alternatives. And so we’ve got one in the white house right now. And populist parties are gaining ground throughout Europe. So on the one hand, we have this conclusion, Hey, there’s this global consensus and we’re part of it, but you can’t stop there because that leads to complacency. And there’s no grounds whatsoever for being complacent these days. So what we are offering is a 21st century retooling of the liberal democratic capitalist welfare state to bring out his best features and eliminate some dysfunctions and deformities that have arisen in recent decades and try to get the thing actually working as it should. And so not only delivering superior economic performance and heightened well-being, but also calming our politics as well.
Will Wilkinson: Yeah. So we have identified the champion model of political economy, but in its general form, we know it works well, but it’s not working as well as it has in the past. A set of events have come to fruition that are making the system break down in important ways. Growth is stagnant. There’s a lot of unrest around economic insecurity, demographic changes, all sorts of things. And so even though we know the general shape that a good regime will tend to have, it needs to be updated for the set of circumstances that we face now. I want to go back to just one thing that you said earlier Brink to segue into our introductory question. I think one of the pivot points that gets you to something like the free market welfare state is the recognition that markets aren’t self creating and self-reinforcing that property rights market structures, the whole infrastructure of commerce and exchange is itself a creature of law and politics.
Will Wilkinson: And they’re kind of inextricably bound up with one another, which puts you in a position where you can’t. So I bring this up because this is a good example for myself of the question that I want to ask you, which is what is some big idea that you’ve relatively recently decided you were wrong about and had to change your mind about? Right. Like for me, this happened maybe a fairly long time ago now, but I remember very vividly when I shared a very common libertarian view is that we need strict separation between the state and the economy. And now I see that that is just a mistake that there isn’t a way to tease out the economy from the structures of governance and law and politics that constitute economic institutions and all that. And so what is something that you guys, it doesn’t have to do with your paper, but something that you’ve decided that you were just really wrong about?
Brink Lindsey: Yeah. So for the paper, a couple of big things that I write in there that I wouldn’t have written 10 or 15 or 20 years ago, but certainly the social insurance state generally is an area where I have changed a lot. So for a long time after I came out of my high school and college, Ayn Rand radical libertarian phase. I settled into a kind of a Hayekian classical liberalism where I conceded the need for government interventions on anti-poverty front, but was always looking to hold the line and seeing sort of government growing out of control as being a problem and needing to set firm limits to prevent this sort of metastasis from starting. And so one line I drew and tried to hold was between anti-poverty versus sort of middle-class entitlements. And so Will and I were both at the Cato Institute and Cato Institute was very prominently involved in the whole social security privatization movement of shifting away from pay as you go public pensions towards privately funded personal accounts.
Brink Lindsey: And I was on board with that. And then a couple of things happened, one, once a political leader actually came out with it and ran on it and got elected saying he was going to do it and then trotted it out in 2005, George W. Bush, it just failed ingloriously, right? There was no political support for it whatsoever. It just completely fell apart at the seams. It was also clear I thought, in the way that it fell apart, that the champions of this alternative to the actually existing welfare state were really completely uninterested in and capable of pulling it off, that just in the same way, we’ve seen even more cartoonishly the complete failure of the Republican party to come up with an alternative to the Affordable Care Act.
Brink Lindsey: We saw it there that my idea of an alternative sort of lighter, cleaner welfare state that minimized redistribution within the middle class just wasn’t part of the available set of possibilities. And so when I kind of came through that recognition, I then came around to the idea that social insurance conceived of not as just sort of altruistic redistribution, but as part of a win-win arrangement that simultaneously built political support for creative destruction while creative destruction created the golden eggs that paid for the social insurance, seeing how all that fit together, led me to move away from my old anti-welfare state position towards recognizing the crucial and vital role that social insurance plays in a well-functioning market economy.
Will Wilkinson: How about you Sam?
Sam Hammond: Yeah, I mean, I’ve had a similar evolution. I mean if I can give two examples and how they kind of bleed into one another, when I was in high school, beginning of my college career, I would probably be defined as radically strong libertarian to anarcho capitalist, meaning privatize it all and let it sort itself out. And also interested in a lot of, sort of more cyber libertarian type of stuff. Like the internet is going to set you free and stuff like that agorism for example, the idea that technology can kind of counter economics where we can, through cryptocurrency or something develop [inaudible 00:18:09]-
Will Wilkinson: What -ism?
Sam Hammond: Agorism.
Will Wilkinson: Eggor-ism?
Sam Hammond: Ago, like agora.
Will Wilkinson: I was like egg, like you’re such a big fan of Dave Eggers. [crosstalk 00:18:23] Yeah. Okay. Agorism [inaudible 00:18:25] Yeah. It’s one of those words that I have never pronounced, that I have never said out loud.
Sam Hammond: Yeah. Basically, it’s more of a strategic statement that the way we fight for liberty or whatever is developed sort of counter systems of resistance or technologies of resistance. And that’s not really critical to the point. Then at the same time, so I was reading tons of stuff, classic kind of like libertarian free market sort of treaties and stuff like that. And a lot of the debates I’d have, were sort of vis-a-vis, anti-corporate leftists. And so many of the arguments I would make were functionally trying to defend the joint stock corporation versus sort of like a cooperatively run just free economy or something like that. And the more I like understood the case for not free market capitalism, but also, these institutional forms like the corporation. I realized that the kind of classic Coasean theory of the firm and the transaction cost nature of that gives rise to these sort of like islands of socialism that we called before applied equally to the state itself.
Will Wilkinson: And really I’m not making a kind of reactionary point to call the state a corporation. I mean, literally it is like kind of a corpus it’s like a body. And it emerges from my view from very similar sort of institutional dynamics around transaction costs and economies of scale and coordination problems, all the same things that I was extolling in the case of the corporation applied to the state as well. And then, so that pulled me into my anarchist phase. And then more recently, I would what took me from being sort of conventionally libertarian to more where I am today is extending that analysis to marry areas where maybe I was more dogmatic on free trade or industrial policy topics, which are some of the things we deal with in this paper. And that was, I think, again, partly because I was failing to see the corporate role of the nation state and there is a distinction between the era of embedded liberalism and what came after seventies, where we kind of disaggregated a lot of the functions of the nation state and sort of tied our hands behind our back on different areas of public policy.
Sam Hammond: And that wasn’t necessarily the realization of some higher, ideal, so much as a coming from the other end, like kind of forgetting again of the transaction costs and coordinating role of nations. And part of that coordinating role is also coordinating within the public and more than even some sort of economic disruption. I think a lot of the backlash to globalization has come from a sense of giving up popular sovereignty and without getting too philosophical about it, I think as just, almost like a matter of brute fact, we should think about states as the natural unit, at least for now and build off from that. So that’s very different than where I was even two or three years ago where I probably had the more sort of technocratic elitist form of neo-liberalism, where I want it to use supernational institutions to their maximum, to tie the hands of the state.
Brink Lindsey: Yeah, since you’ve mentioned industrial policy and free trade, those are other areas where, well, so I was a professional free trader at the Cato Institute. I was in charge of the trade policy center there. Started it. And as an adjunct of being a professional free trader, I was often a professional anti-industrial policy guy, sort of posing the need to move to a meaty kind of model. So my views there have shifted not radically, but more in framing and priority. Back in the nineties, the US model had just beaten communism. Japan had just crumped into the beginning of the lost decade. It seemed that our system without a lot of top level guidance as to the future of economic development was just outperforming other systems clearly. And there were lots of downsides to opening Pandora’s box of broader government roles into coordinating the future of economic development.
Brink Lindsey: And so I just thought that, okay, that the downsides just way outweigh the upsides, even though I recognized at the time, the market failure of underinvestment in R&D and scientific research and the need for some sort of government role there, I didn’t see it as a pressing problem, but as the 21st century has dragged on. And as the little decade of productivity growth, boom, from via the internet from the mid nineties to the 0’s expired, and we went back into the productivity growth slump we’ve been in since the early seventies, it’s the problem of how do we spur technological advance and technological diffusion and productivity growth just seems like a much harder problem. And so therefore the idea that while this problem has gotten naughtier government support for R&D has declined, just became a fact of new salience for me. And so I’m willing now to more explicitly embrace policies that I could theoretically see the need for, but didn’t see a pressing need for, and was more worried about the downsides. Whereas now I’m more worried about the downsides of doing nothing and continuing with our current [inaudible 00:24:16]
Will Wilkinson: Alright we can circle back to some of that when we get to that part of the paper, that’s actually a good entree to the set of problems that this policy agenda is meant to solve. So the most salient and important of them, I think is just that economic growth has been pretty lackluster, pretty stagnant. What is your diagnosis of the slowdown in growth? And I guess that involves saying something about how it is that the growth happens in the first place so that you can identify which element in economic growth is not doing its work.
Brink Lindsey: So I’m not sure Sam and I agree 100% about this, but
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Brink Lindsey: I’m not sure Sam and I agree 100% about this, but I think a couple of things going on. So first I think objectively growth is just getting harder and that could change at any moment with some new technological dispensation that then opens up vast new vistas of technological space to explore and develop. But right now we are on a secular trend of declining returns to investment in innovative activity. So in absolute numbers and in percent of the workforce terms, the number of people who do, who are professional innovators, who were scientists and engineers, it’s just hugely greater than it was a hundred years ago, right? So the intensiveness of innovative activity is much greater now than it was before. And yet that has not led to a proportionate increase in productivity growth. Rather productivity growth is actually lower now than it was in the middle decades of the 20th century.
Brink Lindsey: So we are getting less bang for the buck from people trying to innovate a nice micro example of this is we’ve had Moore’s law, that the doubling the number of transistors, you can put it on a chip or doubling the computer capacity every couple of years has been a statistical regularity. But right now it takes about 18 times as many engineers to pull it off as it did a few decades ago.
Brink Lindsey: So on the one hand, I think growth is getting harder and that means that you need better policies than you had in the past to maintain a constant level of growth. So that’s happened at the same time that the policies have actually gotten worse. This is the case that Steve Teles and I made at length in The Captured Economy. There’s just whole sectors of the economy where the rules of the game have been hijacked by insiders and written to benefit them at the expense of everybody else and done so in a way that throws sand in the gears of dynamism. So I see a combination of just natural forces conspiring against us, and then finding ourselves in a hole. We respond by digging.
Sam Hammond: Yeah, I would agree with all of that. I’d also add to it though. There’s this website called WTF happened in 1970 and it’s just a series of charts where all the kinks just happen to be right around 1970 to 1973. But I think that the two big things that happened, thereabouts were obviously the oil shock and the end of Bretton Woods. And I think both of those are probably the first order explanations for why the growth slowdown began around 1973, but I don’t think they can explain the full thing even though energy use and energy density is very well correlated with per capita GDP growth. I think the second factor was with the oil shock. There was a general institutional second order effect whereby the fact that we got hit by this sort of external negative supply shock meant that we weren’t invulnerable and that there could be lines for the gasoline and stuff like that.
Sam Hammond: And just a general matter, shifted a lot of our institutions in a more risk averse direction. And that includes the last chapter of our piece is on environmental review and a lot of the environmental laws that are contributing to our high infrastructure costs come out of that period as well for similar reasons. And I think also reflecting a kind of shifting and risk tolerance.
Sam Hammond: And the second factor is with the end of Bretton woods, and even though Bretton woods as a concept is kind of overblown, but the end of that sort of post-war 1945 to 1970 equilibrium did move us beyond that era of before I referred to it as embedded liberalism into an era of people call the neoliberal era. But I think another way of thinking about it is just the era of disembodied or disembedded liberalism, where there was a broader kind of consensus that development policies are a hundred percent costs, zero benefit, or not to the extent that there are benefits, it’s all beggar thy neighbor, that a lot of the priorities should be on doing a few things well and kind of treating government as a platform that’s kind of neutral.
Sam Hammond: And I think some of the stuff… When we talk about the decline of R&D spending and things like that. That was partly a byproduct of both the end of the cold war, but then also this deeper sort of sense that they’re going back to my point about the states and governments as kind of the [inaudible 00:29:33] incorporation of a territory that a lot of this should just be contracted out, so to speak. And a lot of that decline in state capacity more broadly has been the result of this kind of loss of in-house competency and in-house administrative capacity, because it was realized that it could be done cheaper or more cost-effective by consultants or whatever. And I think again, was sort of rooted in this misapplication of the Coase’s theory of the firm that didn’t take into account the kind of enormous transaction costs, and also the enormous sort of coordination problems that, that runs into
Will Wilkinson: That’s very abstract to answer, but a good one, to my mind, there’s basically four theories of growth that are credible, institutions, technology. I don’t really think any of these are different, but the [inaudible 00:30:31], this is the taxonomy ideas and innovation and culture, right? And it seems you can make a case for how things are going wrong on each one of those dimensions that we’ve got a bunch of institutional problems. And by institutions, I’m talking about the, kind of the incentives that are embedded in the structure of the rules of the game, right? So what people are going to do is a function of what the payoffs to doing various things are. And part of what it means to change the law or to rewrite a policy is to shift the relative prices of options people have. And when you do that, people will pretty reliably shift their energy and activity toward the thing with the higher payoff.
Will Wilkinson: And we’ve got a lot of problems that are in a way just that we’ve incentivized a bunch of the wrong things and our institutions aren’t functioning to provide the antecedents for some of these other things for growth, when it comes to technology, that’s pretty clear, this is an idea associated with Joe [inaudible 00:06:44]. We just aren’t having the kind of technological change that we used to. It seems we’ve eaten up a lot of the low hanging fruit.
Will Wilkinson: We learned a ton about basic physics in the late 19th, early mid 20th century. And we’ve basically milked that for all it’s worth and just kind of the well is sort of dry and now we’re… It’s like fracking or something where you have to come up with some whole new idea for drawing a little bit more out of the well that’s already sort of dry, and then culture I think that one of the things you mentioned, Sam is the onset of a kind of risk aversion. I think that’s true. And I think that’s a relatively predictable consequences of people getting kind of fat and happy is the more you have to lose, the less adventurous you become in a way. And what was the last one?
Sam Hammond: And also the more that you sort of demand sort of higher level goods, environmental quality or safety and security and stuff like that.
Will Wilkinson: Oh yeah. And then ideas kind of innovation that sort of Paul Romer kind of idea that growth is ultimately a product of increases in the productivity of labor that is generally a function of technological changes that make individual workers more effective and do more with less energy and time. Those technologies are a function of ideas that people have about how things work. And there are a bunch of things that are predict whether people will have good ideas or not, but we’ve done a lot to stymie that as well. We’ve done a lot to encourage it, right. As you mentioned, we had this huge boom in educational access through the 20th century. So we have introduced a much larger portion of the population into the class of people who have the wherewithal to come up with ideas that could contribute to improvements in the productivity of labor, but they aren’t, as Brink has noted. And some of it’s just… The good ideas have been taken so far. I don’t know but some of it’s a cultural problem as well.
Brink Lindsey: Let me throw in another sort of speculative thought I have, I’m not 100% sold I believe this, but it’s in my head. What is clearly the case is that throughout history state military competition has been a big driver of technological progress. And that just happened on steroids in the 20th century. We had at the same time as the institutionalization of science, we had the advent of total war amongst universalistic globally aspirational systems that had completely incompatible objectives. So-
Will Wilkinson: That’s not a coincidence.
Brink Lindsey: Yeah maximum competition turbocharged by newly empowered, scientific instrumentality, and that competition, that great power rivalry, this produced gobs of technological breakthroughs and now sort of great power rivalry is in a bayes. We’re still worried about the Chinese, but it just isn’t the same thing as the thirties or the early cold war.
Brink Lindsey: And at the same time we hit mass affluence. And I wrote a book about all the wonderful things about mass affluence, but one of the downsides is complacency. And so we had this idea, we were in this really weird time of total war and cold war, and it was producing these technological bennies that we just interpreted, well, that’s just capitalism doing its thing. So we didn’t really see that there was something really kind of special driving the intensity of technological progress. Meanwhile, we kind of turned against the whole Promethean idea of conquering nature as being anti-environmental and a general kind of risk aversion. So yeah, some factors that were unrecognized in their potency and driving things mixed with a new set of ideas that were less favorable towards exploring new ideas. And we’re in this slump.
Sam Hammond: We have a whole chapter on the captured economy and liberating the captured economy. It is objectively true that there are all these areas that are captured from excessive intellectual property protections to land use being sort of exploited by NIMBYs to prevent new housing development. But a lot of this, if you wanted to find some sort of root cause to all these areas of capture, it is I think it’s deeply entangled with the broader growth slowdown is both a cause and effect of the growth slowdown.
Sam Hammond: Because when we sort of hit that kink and GDP per capita dropped down a percentage point or two people had built in expectations about the kind of life they want to achieve the kind of income and jobs opportunities they can expect. And when those expectations aren’t being met, there is a kind of pyramid scheme sort of dynamic or a Ponzi scheme dynamic where to keep the Ponzi scheme from collapsing, you need to sort of grab what you can through other means. So a lot of the rent seeking that comes out of the post seventies, period, I think is partly kind of substitute to doing actual productive things.
Will Wilkinson: Yeah. I mean, that’s one of the great things historically about growth is that the more the economy is growing, as long as the benefits of growth are relatively widely distributed, that the relative payoff to extraction diminishes, right? So you get more people going into productive stuff, fewer people going into extraction. But if the pie just starts… The rate of growth of the pie, isn’t sufficient to keep the growth of fortunes constant, then there is a strong incentive to move back into the extraction business. And I think that’s one of the problems that we have.
Brink Lindsey: Another way to put that in terms of the relative prices that you were talking about. If you’re in a wide open technological space where there’s just all kinds of opportunities to invent better mousetraps, then that’s how you’re going to try to make money. But when that technological space gets constricted and making a new mousetrap is hard, then it’s just a lot easier to rewrite the rules to make money that way through extraction than it is through innovation.
Will Wilkinson: [inaudible 00:38:05] who made the mousetrap.
Will Wilkinson: Yeah. You can only buy the kind of mouse trap I make. Okay. So the paper has three big major sections supporting workers and protecting families, liberating the captured economy, and reviving innovation and dynamism. These are the things that are going to crack open economic growth, make sure that it is more fairly distributed and basically to make America great again. So supporting workers and protecting families. First thing you have in mind is kind of the overall context for the economy, which is the monetary climate, and you recommend level targeting in monetary policy. Tell me why? What’s so good about easy money and tight labor markets,?
Brink Lindsey: Sam.
Sam Hammond: Well it’s not so much easy money as taking the dual mandate, the fed’s dual mandate, full employment and price stability seriously. And I think in our view over the last 50 years or so it’s privileged price stability, and actually not really stable prices, but as low of inflation rate as possible over full employment. And we cite a study by Jared Bernstein that suggests that the U.S. economy has had labor market slack for 70% of the time, since I think 1950 or 1960, or since the post seventies, at least. So that suggests that we have a lot of-
Will Wilkinson: What does that mean? What’s the labor market slack?
Sam Hammond: We are not at full employment. So the conventional sort of new Keynesian model talks about the non-accelerating rate of inflation. And whether you believe those models or not, the basic idea is you can only get unemployment down so far before inflation starts to kick up. And so there’s this inherent trade off between inflation and employment shown by the Phillips curve. And so we need to sort of have a guess of what the quote unquote natural rate of unemployment is, and that natural rate corresponds to the rate of stable inflation. Over the last five or six years, the federal reserve has repeatedly had to lower its estimate of the natural rate of unemployment, because it keeps going below that rate and the inflation is still subdued. So I think there has been a realization at the fed that the quote unquote natural rate of unemployment is a lot lower than anyone realized, and that we can sustain three and a half percent on [inaudible 00:40:34] inflation.
Sam Hammond: And that’s led to a sort of a rethink about how they do monetary policy and the basic idea with level targeting, it sounds kind of complex. But the basic idea is instead of targeting the rate of inflation or the rate of nominal spending in a given year, you target a path of inflation or path of nominal spending.
Sam Hammond: So let’s say that we target 4% nominal GDP growth. That means every single year we want the US economy to increase by 4% split between inflation and real GDP growth. A level target means if you deviate from that, if you fall short of that and in year one and year two and beyond, you have to make up for your deviation, you can’t let bygones be bygones.
Will Wilkinson: And the point about level targeting is it provides a superior anchor because if the fed misses its target today, it will not just try to meet it tomorrow, but to overshoot it, to make up for any lost aggregate demand from the previous deviations. And there’s a lot of sort of theoretical reasons to think that that would lead to tighter labor markets over the longer run, but also prevent and reduce the impact of recessions, which I think a lot of American politics has been sort of defined in recent years from now this recession and prior the 2008 financial crisis and recessions are just such enormous sort of violent events that almost like a pandemic that it really pays to put a lot of effort into preventing them.
Will Wilkinson: That’s hard for me to follow. Monetary policy is weird and it’s very difficult to understand, I think, to the common man and woman, why it is that monetary policy so directly affects demand for goods, the rate of unemployment and things like that. It’s hard to follow. So could you say a little more about just why it is that monetary policy that is just not supplying the market with the right level of money is going to cause a problem? I still don’t really fundamentally get it.
Brink Lindsey: Yeah. So one way to think about this is in terms of that the amount of liquidity out there, the amount of spending needs to match expectations. So that if you expect the total amount of spending next year is going to be four or 5% higher than it is this year. Then everyone’s investment decisions, hiring decisions are geared towards that kind of collective good of this overall increase in spending. And if those expectations are frustrated and actual spending is less than what everyone expected, then you end up like musical chairs and you stop the music. And some people don’t have chairs and you have a recession.
Brink Lindsey: So Scott Sumner, who is one of the leading proponents of this idea of nominal GDP level targeting sees this as a development of old style market, Milton Friedman monetarism, which envisioned macroeconomic stability as a function of stability and monetary growth. But that idea was premised upon the idea. So you have money times velocity equals spending. So the premise there was that velocity was going to be constant. So if you control monetary growth, you would control overall macro economics conditions. And [inaudible 00:19:08]. Velocity is super volatile. So monetarism and the old style doesn’t work. But if you take money times velocity and get spending and try to shoot for controlling the growth rate of spending, you’re in the spirit of what Milton Friedman thought of matching reality with expectations, but doing it in a way that is truer to how the world actually works, than what he had in mind.
Will Wilkinson: All right. So that’s good. So that’s the overall context. The first big initiative that people will actually understand is social insurance modernization. I know this is your bailiwick Sam. Why do we need to modernize the social insurance system? What’s the problem?
Sam Hammond: Yeah. We started writing this paper prior to the pandemic, but the pandemic I think has underscored this piece of the plank or this plank of the agenda in particular. So in the heart of the pandemic-
Brink Lindsey: In the early days of the pandemic, we’re still in the heart of it.
Will Wilkinson: Heart of darkness.
Sam Hammond: Yeah. Sorry. I was just blanking on Marc Andreessen’s name.
Will Wilkinson: Marc Andreessen, the venture capitalist who invented the modern web browser.
Sam Hammond: Right. Yeah. Marc Andreessen wrote this essay called, It’s Time To Build clearly written in a bout of frustration where he was basically screaming through his keyboard. How has our government, which built all the technology it needs to tax us, never really built the technology to send us money when we need it. And when you look at the fallout from the coronavirus crisis, in the first five or six weeks, there were a million plus people per week who were losing their job. Unemployment offices were shutting down. The websites were crashing. There was a manhunt for anyone who could program cobalt that stretched across the country.
Will Wilkinson: An ancient programming language.
Sam Hammond: Yeah from the punch card days. At the IRS, they have their own issue. They were trying to send out stimulus checks, but of course the IRS was never conceived of as a welfare agency it’s a tax collection agency.
Sam Hammond: And so the sort of refundable credits or these credits that sort of go to everybody, you have to sort of have this convoluted. You kind of have to pretend that people owe taxes when they don’t really owe taxes to get the credit. And so how do you reach the 47% of Americans that don’t regularly file federal income taxes. So that they had a problem there, the SBAs Paycheck Protection Program, its website was crashed for the first week or two of its rollout. And by the time most banks were able to actually process those loans, the money had run out. And so there’s just a series of areas where social insurance infrastructure is well below its potential definitely well below the kind of gold star of Estonia, where your transfer payment just drops right into the bank instantly.
Sam Hammond: And there’s really no reason for that to be the case, right? Marc Andreessen had this other essay years ago called Software’s Eating the World. And you would think that software and bureaucracy would go well together, that we wouldn’t need as we have an abandoned mine in Pennsylvania that has been repurposed as a Social Security Administration processing facility, because everything is done on paper and needs to be stored in filing cabinets. And this is-
Will Wilkinson: Well you don’t say it, but I feel like what you’re describing really points up a big part of our larger structural problems in this case, with respect to the government in particular. Republicans for the last couple decades, have no interest in making the economy, making the government more efficient. They’re wedded to a narrative about the administrative state and how it’s unconstitutional and how we have to gut the size of government. And it’s an advantage to them to make things seem dysfunctional because then they’re like, see, the government can’t do anything. We got to cut it. Democrats on the other hand, who are profoundly committed to the idea that government ought to be providing these services are in many ways, captured by some of their constituencies, including government workers who always have an interest in the status quo, nobody wants to lose their job to an app.
Will Wilkinson: And so you put those two things together and you get one party that would rather the system be broken than efficient and a party who is just really most concerned about catering to its various constituencies, which leads to intentionally or not a kind of kludgeocracy where you just get old stuff piling up on other stuff and they keep throwing money at it because they want to keep the people doing those things employed, but nothing ever happens. Right. So there’s nobody in the system has the incentive to give us, why isn’t there just an automatic federal reserve bank account associated with your social security number. And if you get a tax refund that goes into that, and that account transfers it instantly into your Wells Fargo account. That seems dead simple. I trade stocks on Robin hood, some free app, and it works seamlessly and beautifully. I can get myself some Apple stock in two seconds, but boy, try to get a tax refund,
Sam Hammond: [crosstalk 00:49:53] intersects with the captured economy piece too. Right. Cause in the paper we talk about the sort of case study with the IRS where they have.
PART 2 OF 4 ENDS [00:50:04]
Sam Hammond: … But, the case study with the IRS. Where the IRS had an internal team of software engineers, that were in the process of migrating their old tax records to a modern programming language. Which would have allowed them to drastically simplify, and streamline the tax system. That was a year away from being implemented, when the chief engineer’s employment contract lapsed. It lapsed because it was a special slot outside of the normal hiring schedule. That had higher caps for salary. Because you need to pay software engineers, much more than your typical bureaucrat. So his employment contract lapsed, he left. And that’s an area where broader civil service reform would help us, build a better welfare state. Because he’d be able to bring in talent. But that gets blocked by special interest groups on the left, like you said. But it gets blocked by groups on the right in the business community.
Will Wilkinson: So that hiring authority was reinstated in 2019. But in the bill that reinstated the hiring authority, they also inserted a provision banning the IRS, from creating its own free tax prep [crosstalk 00:01:09]. And that was placed there through lobbying efforts by Intuit, the creator of TurboTax. And it’s an area where we took one step forward, two steps back. Because it’s a microcosm of the Trump administration as well, in some respect. To the extent that he’s given the National Weather Service over to the CEO of AccuWeather. We’re going to just let TurboTax run the IRS at the end of the day.
Brink Lindsey: The pandemic experience has really, I think, brought home my new-ish epiphany about the complementarity of social insurance, and well-functioning markets. Economic activity works better when there’s good insurance. If there isn’t good insurance, then people self-insure. If there are risks out there, you’ve got to do something to protect yourself against them. And self-insurance can be incredibly wasteful. It can include things like, dependence on extended families, and mistrust of everybody outside of your bloodlines. Because that’s how you self-insure in an uncertain world. But when all those kinds of unmanageable risks are now manageable, and you don’t have to worry about them. You don’t have to be in this, these defensive crouches and wasteful expenditures. Where everybody is trying to take care of these big picture events. And where market forces permit commercial, for-profit insurance, great.
Brink Lindsey: But there are plenty of hazards that aren’t insurable by commercial for-profit insurance. And that’s where government steps in. And if government can step in cleanly and efficiently, not doing this out of some altruism. Or trying to take from the haves, and give to the haves nots. But just ensuring against risks, to make the system work better. It’s just part of the infrastructure of a well-functioning modern society. And our infrastructure is backward, and patchwork, and messed up.
Sam Hammond: And paid sick leave is a perfect example of that. We talk about, in the paper, social insurance is a kind of public infrastructure. In the case of paid leave, basically it’s brutally obvious that individual employers and employees, don’t have necessarily the incentive to provide robust sick leave. But it has massive social externalities. If you end up coming to work when you’re convalescent, and you spark an outbreak. That in the case of the White House, is what paralyzed it.
Brink Lindsey: Yes.
Will Wilkinson: The pandemic, I’ve had very complicated ideas about it, with respect to state capacity. Because clearly, the economic side of it, our inability to efficiently deliver unemployment benefits, stimulus checks, stuff like that. The lack of that infrastructure, and the people to build it, and all of that. That’s clearly a state capacity issue. In terms of disease control capacity. We had really good state capacity, but it didn’t get used. So I think it’s important to distinguish between the cases in which you really lack the capacity. We just do not have the wherewithal to immediately send people relief checks. It’s stupid that we don’t, but we don’t. We have no mechanism to just quickly deliver, subsidize employers for sick leave. We should be able to do that stuff readily. It’s a huge state capacity problem. But with respect to the disease control question, it’s almost like we did have all of that stuff. And then the administration took a bunch of sledgehammers, and smashed the machines to make the transfers. So, there was the state capacity, they just ruined it.
Will Wilkinson: I would say in both cases, it’s a little column A, a little column B. Because the deeper you look into areas, where you would think that there’s just missing capacity, you run into the deeper issue, which is diffused authority. Or authority is not being used or granted. And in the case of, for example, the stimulus checks. The treasury department’s, perfectly capable of interfacing with state governments to tap into their Medicaid, and food stamp programs. Which have home addresses of low-income people. They choose not to do that. The capacity is in a sense there, it’s missing authorities. And the CDC is another, or the FDA. And in a sense this makes us somewhat optimistic, because we don’t have to invent the capacities that don’t exist. We have to just unleash the capacities that are already there.
Will Wilkinson: Yeah. Let’s move on. We’ve got a section on employment security and workforce development. Strengthen families with child allowances. Fix health insurance, with universal catastrophic care. What do you guys think is the most innovative, out of the box of those ideas?
Sam Hammond: Well, I don’t know how innovative any of them are, in part, going back to our previous discussion. We want to implement policies that have an international trial track record. Not utopian about anything here, whether it’s healthcare, obviously most countries have some form of universal health care. We have the child allowances, 20 industrialized countries have child allowances. Employment training, countries like, Germany, or even Canada, spend much more on retraining programs than we do. In many ways in all of those areas, the U.S. is playing catch up. And people from the right will read this section in particular, and accuse us of being just everyday progressives who just want to expand the welfare state. But it just remains the case. That the U.S. has this bias, or this perception of being a country full of work requirements, and the Protestant work ethic.
Sam Hammond: But we have one of the lower forced participation rates of the OECD. And the reason, is because we don’t actually incentivize people to work. We don’t provide them the childcare, or other preconditions to integrate the force. We don’t provide them with skilled training, and alternative pathways beyond the four year college degree. To accumulate human capital, and support a family. And I wish these things were innovative, but in fact, they’re brutally obvious. It’s just that there’s very little appetite on the right to work on these.
Will Wilkinson: Yeah. I do think it’s significant, that these are all fairly tried, and tested ideas. But in today’s political climate, well, not just today’s political climate. The political climate for most of my lifetime, being in favor of this package of policies. Better unemployment insurance, large child allowances. And that would be a every family. It’s a monthly thing, instead of a yearly thing. So every month, if you have kids, you get a certain amount of money to help, to use however you want. Basically, to either you buy a childcare with it, you can pay for food. Whatever you need. Health insurance, these aren’t crazy new ideas, but they’re relentlessly characterized as socialist and un-American. And in some sense they are un-American, but that’s not good in this case.
Brink Lindsey: Back in the 19th century, we were happy to borrow textile technology. Steal it from England and bring it here. And happy to learn from the rest of the world. And happy to import German science. But we’ve definitely wandered into a ‘not invented here’ syndrome on a whole bunch of different fronts. The child allowance thing, of the elements in that part of the paper, that to me, is the lowest hanging fruit. It’s just really easy to do. Designing a new health care system, is always going to be an incredibly fraught, big, heavy political move. But just writing checks to kids, is within our capacity for sure. It has an amazing huge effect on wellbeing, by slashing child poverty rates. There’s no moral hazard problem, because kids don’t choose to get born.
Brink Lindsey: So you’re just not breeding dependency. It’s just a clear upside, that then relieves a lot of stress on households. That then will have much longer term benefits. For kids that aren’t raised in poverty, will be much more productive citizens down the road. And meanwhile, all of this can be seen as a clean, relatively free market alternative, to a much more hands-on intervention, as social engineeringy kind of alternatives, like universal daycare. Where we think we know the best way to raise your kids. And we’re going to fund those things. And shunt all of you into those things. Versus, parents raise your kids. And those of you who lack the means to do so appropriately, we’re going to help you out here. And leave the decision making to you.
Will Wilkinson: Cool. That’s something that we desperately need. Something that just keeps coming up during the pandemic, that I’ve actually been aggravated by. Because it doesn’t get covered, nearly as much as it should. Is schools in many places aren’t open. And what are working class parents supposed to do? What are you supposed to do? If you have to go to the hotel to change the linens, because that’s your crappy job that you can get. And you’ve got two kids, ages four and nine. The pre-K is not open, the elementary school is not open. Are you going to leave your four year old, with your nine year old, and hope for the best? I’m sure that’s happening everywhere. And it’s just a tragedy. And I think it’s so shameful, that people almost don’t want to talk about it. That we’ve done nothing, to ensure that working class parents who can’t work at home, have no way to have their kids looked after. It’s just egregious.
Brink Lindsey: The PTSD broadly understood, and hysteresis broadly understood that’s going to come out of this. Come out of our studied refusal to do what it took to subdue infection rates. It’s going to be a terrible price we’re paying for years, and years.
Will Wilkinson: Well, let’s move on to liberating the captured economy. One of your things, Brink, that I’m always interested in, because I don’t understand it as well as you do, is the huge expansion of the financial sector. What’s the problem there and what can we do about it?
Brink Lindsey: There’s area where my thinking has changed. Once upon a time pre 2008, the U.S. financial sector seemed to be something that we bragged about. We were masters of financial innovation, in coming up with all these tools for managing risk better. And while other countries, the Asian crisis had foundered on poor and cronyfied financial systems. Our financial system was much better. And we had engineered the great moderation. And Democrats liked finance because it didn’t pollute, and you paid people pretty well. So it was an easy way to be pro-business.
Brink Lindsey: And plus we were exporting it all over the world. And so it was a competitiveness success story. And then the housing bubble burst. And what was revealed was that a whole bunch of the expansion of the financial sector, wasn’t really value creating. It was just arbitraging differences in regulatory rules. And privatizing the upside, and socializing the downside of increasingly harebrained risk-taking.
Brink Lindsey: Made possible by sky high levels of leveraging. That is, being borrowed up to your eyeballs. Which, if you borrow up to your eyeballs and invest, and you make a little bit of money. Then the returns based on your own capital are much higher. On the other hand, even a minor loss will wipe out your capital entirely. But our whole financial system is built on 90+% debt to asset ratio. So very highly leveraged, which means crisis prone. And basically throughout my adult life, we just had one near crisis, after another. From Continental Bank in the mid 80s, and the third world debt crisis in the ’80s, where we had to bail out banks on the sly. And did then the peso crisis in the ’90s. And the Asian crisis, and the Russia crisis, and the Brazil crisis. And then long-term Capital Bank at the end of the ’90s.
Brink Lindsey: And all of those timely interventions were able to keep disaster at bay. But not in 2007, 2008. And so we have just a global blowout. And that I believe has revealed that a great deal of what was going on in the expansion of the financial sector, was just rent seeking, rather than value creation. And most of that predicated upon, getting to take risks with other people’s money, through short-term debt. And through regulatory systems, that allowed financial professionals to take these crazy risks. So the whole purpose of finance is to match people with money with people with good ideas. They’re not the same people. So if you can get the people with good ideas, you get the money in their hands. Then you can accelerate economic growth and development. That portion of the financial sector, of industrial loans just didn’t grow much at all. What was growing was just trading of assets, and increasingly arcane ways of trading assets.
Will Wilkinson: So there’s been no real improvement, in the ability of our system to efficiently allocate capital to productive projects?
Brink Lindsey: No. As evidenced by the massive mal-investment, of the housing boom.
Will Wilkinson: Because it’s not that hard. It’s important, and there is real financial innovation. Sometimes really important projects can’t get off the ground, because the financing doesn’t come together. And there may be new ways to structure the financing, that will allow things that otherwise couldn’t happen, to happen. That’s important, but that’s not what’s going on.
Brink Lindsey: Right. And all through the ’90s there was this big literature showing a positive relationship, between the size of the financial sector, and productivity, and growth. And that’s because you can definitely have a stunted financial sector, and most less developed countries did. They had very high inflation, and they had interest rate controls, which meant negative real interest rates. Which really suppressed economic activity, or financial activity. So people got to just keep money under their mattress. And there was just a lot less credit floating around, that greases the wheels of commerce. And so, economic activity was starved by a lack of liquidity in a lot of less developed economies. So you see this robust relationship between more finance, the better.
Brink Lindsey: But now in the aftermath of the financial crisis, we’re looking and seeing that this is really an inverted U-shape pattern, of the relationship between finance, and growth. That yes, you can definitely have too small of a financial sector. But it looks like you can have too big of a financial sector as well. That when it gets past a certain stage, it’s really more involved in rent-seeking and regulatory arbitrage, than it is in financing commerce and innovation.
Brink Lindsey: And it’s diverting the best and the brightest, who could be pushing the technological frontier. Who are instead figuring out ways to cut tenths of a millionth of second off trading times. And there’s just a diversion of energy, away from its most productive uses. And the constant courting of recessions, which as Sam said, are these violent events, which have terrible lasting repercussions.
Will Wilkinson: So briefly, what do you do about it?
Brink Lindsey: Going forward, I think what we want is a smaller, humbler financial sector that spends much less on short term lending. All the stuff that finance is good for, could be done with equity financing. So that when banks go under, you don’t have these chain reactions of doom. And so pushing in as far in that direction as we can, through capital requirements that are significantly higher than we have today. Right now, they’re still just in the few percentile percent capital to assets. If it was 20 to 30%, that would be a gigantic improvement. And would lead to a very different looking financial system. So just ask that one fix, would have systemic consequences.
Will Wilkinson: Let’s get them. So these are the other captured economy elements are; rolling back intellectual property excesses, reforms to boost competition in healthcare, and reducing barriers to houses. To me, the really significant one in this big structural sense, in the way that our economy is structured, is the IP one. I think there’s not enough recognition, of the extent to which everything, and all of the incentives, are about getting an IP monopoly. And how rents from intellectual property are the source of the largest fortunes that the world has ever known. To a large extent. And so, what should we do about that? How do you ease back on patent protections, on copyright protections, in a way that doesn’t reduce any of the incentive to innovate. But instead actually creates incentives to innovate, by opening up the field in a way that is currently closed?
Brink Lindsey: This is a big kettle of fish to talk about. Dan Takash, and I wrote a paper last year called, “Why Intellectual Property is a Misnomer.” This idea that you should own productive, useful ideas. And that giving exclusive rights to the developers of useful ideas, is the necessary foundation for innovation. It’s all very wrong-headed. A little bit of exclusive rights given to innovators can be helpful. But the idea that the more the merrier, which is very much in the U.S. mindset in recent decades, is I think, profoundly mistaken. And leads to just a real gumming up of economic activity. It’s the original robber barons. Where these guys on the Rhine river who built these lovely castles you’ll see now in river tours. But back in the day, they pulled chains across the river to hold up ships coming down. And hold them up for tolls.
Brink Lindsey: And there was one every mile. So if you’ve got these robber barons, holding up commerce every mile going down the river, you get a lot less commerce, than if you were allowed the free flow of traffic. Likewise, technological progress is all about borrowing, and the free flow of ideas, and mixing and matching. And the more barriers you erect in that, and the more toll booths you erect in that, fundamentally, the more disrupted your innovation space is going to be. So I think there’s just a really radical misconception of how innovation works. The idea that innovators have to appropriate the lion’s share of the value they create, or else they won’t have incentive to produce it, is just nuts. There’s a wonderful study. Now I’m forgetting the author. But it will occur to me, that estimated that, innovators capture about 4% of the social value they produce, over the long-term. Really interesting methodology to come to this conclusion.
Brink Lindsey: That means that 96% is not captured. And that’s how capitalism works. Capitalism doesn’t work by appropriating everything. It works by this massive free lunch. Where innovation then, and the free flow of ideas, feeds on itself. Over the past 30, 40 years, we’ve gone in precisely the opposite direction. So copyright terms have extended vastly. Used to be you had to register your copyright to have protection. Now, your emails. If you forward a friend’s email, you’re engaging in unauthorized copying. That’s a copyright violation, whether he sues you or not is up to him. So everything is copyrightable now. And meanwhile in patents, we issue about five times as many patents a year now, as we did in the early 1980s. First, because things that were never considered patentable before, or were rarely considered patentable. Software and business methods now are. But beyond that, just a general reduction in this lowering in the standards for patentability.
Brink Lindsey: So lowering the standards of being able to set up a toll booth, and hold up people who were trying to do the next iteration on a good idea. So all of that is just going in completely the wrong direction. If we went back to copyright and patent law, as of the 1970s, we’d be fine. But almost everything that’s happened in recent decades, has just been going in the wrong direction. Based on the fundamental misconception of how innovation works. And based on just fantastic, really effective rent seeking by IP producing industries.
Will Wilkinson: Let’s talk about reviving innovation and dynamism. The elements that you have here are; pursue aggressive decarbonization, fuel growth with expanded immigration, double down on science and RD, promote diversified economic development, reduce barriers to geographic and labor mobility, and overhaul environmental review. That’s a lot. Let’s tackle the first one pursue aggressive decarbonization. What are the virtues of that, in terms of reviving innovation?
Brink Lindsey: Let me tackle the first two together. Because those are both areas, where [Niskanen 01:14:06] currently has big active policy departments, on climate change and on immigration. And so part of this paper is to show how those departments fit into our larger scheme. The first step of innovation is innovation should be towards higher wellbeing. Creating even more carcinogenic cigarettes is innovating, but it’s not the way we want to go. And one way in which economic activity can go awry, and the invisible hand will not work, is if you can shunt the costs and downsides of your activity, onto other people who don’t have a say in the matter. You externalize the costs of your activity. And so they don’t factor into your profit, loss calculations. So you can engage in activities that are narrowly profitable for you, but socially a loss. And that externality is-
PART 3 OF 4 ENDS [01:15:04]
Brink Lindsey: … Their loss and that externality is of global dimensions when it comes to carbon and climate change. The first step in having an innovative economy is making sure it’s innovating in the right direction. And we have this massive externality that we have not appropriately coped with and therefore the rules of our game are not steering us towards generally beneficial innovation but are steering us towards global tragedy. And once those incentives are in place, that just opens up a gigantic technological space of innovation. So the whole world of clean carbon-free energy is just a gee whiz, 21st, 22nd century world of selling it. Thinking of climate change as a hair shirt and as a reason why capitalism and economic growth are terrible, that’s not where we’re coming from. Seeing this as an opportunity that there are enormous opportunities for innovation and for heightened well-being, but we have to have the incentive set up to push us in that direction.
Brink Lindsey: And a carbon tax is the single most generally effective incentive tweaker to get people to take into effect the cost of carbon emissions and push them towards a clean energy future. On immigration likewise, we’re very involved and Niskanen’s very involved in pushing for more liberal immigration. And so the single easiest way to get more growth is to have more people, more inputs, more output. But even when you were talking about how to increase productivity growth. So first we’re a magnet for high-skilled workers and we turn away lots of them. And we can attract a lot more if we weren’t trying to be as repellent as possible towards them as we have been in the past few years. But even before that, we still had closed doors to the world’s best and brightest for… That’s just completely and totally dysfunctional as far as our economic interests are concerned.
Brink Lindsey: Beyond that it’s becoming clearer and clearer that declining population growth is bad news for productivity growth, that growing markets which are fed ultimately by growing numbers of people are a major incentive for innovation. And when that dries up and when the population ages, there’s a whole bunch of different dynamics that kick in that are bad for innovation. So there’s a whole lot of reasons to be in favor of relatively open immigration, humanitarian justice reasons. But just through the lens we’re looking at through, how to pump up American dynamism, it’s a no brainer on that front as well.
Sam Hammond: If I could, to both those points. Within the climate community or the environmentalist movement there is this divide between the limits of growth people and anti-technology mood. And the camp that we fall in, which is that climate change it’s a collective action problem. The fact that you can pollute and it’s individually rational for you but collectively it’s self-defeating and no one has the individual incentive to reduce their consumption of dirty fossil fuels. Those are two very different outlooks, right? Because if you are in the former camp, you’re inherently pessimistic about modernity. And I think we are coming from the opposite perspective of, if anything, going back to our discussion about what happened in the 1970s. The fact that energy plays such a big role in our stagnant growth since then, suggests that if we had breakthroughs there’s actually just this year a reported breakthrough and the confinement technology needed to get fusion to work.
Sam Hammond: And if that bears fruit finally after decades of promise, that will lead to a world of more abundance than we’ve ever really experienced. And especially on the Republican right, I think when you talk about clean technology or anything that’s green washed, there’s a dog whistle, for them it sends up red flags, that this is some environmentalist mumbo-jumbo. And they like industry, they like drill baby drill, but if the goal isn’t to just drill baby drill, the goal is to have cheap high density sources of energy. And ideally those energies should be clean and if we have real innovation in renewable energy that will lead to a world where the U.S. is not only more dominant in the global economy, because we will be exporting a lot of this cutting edge technology, but also lead you just more of everything.
Sam Hammond: So rather than being a message of, you have to stop eating meat or stop taking so many flights, I think you were coming at this from a perspective of abundance. And then on the immigration point, there’s a lot of debate about why the U.S. is the center for breakthrough innovation. And really has less and less to do with our corporate governance system or this or that regulation, and really 90% of it is market size. And no company wants to commercialize anywhere else but the United States or now China. Because if they can get to market they have 330 million people they can sell to.
Will Wilkinson: Relatively rich people.
Sam Hammond: Yeah, relatively wealthy people. So both of those factors make the climate discussion and I think especially, climate is a global issue but there is… Again, because of the market size of the United States we have particular advantages and being able to commercialize new clean technologies that smaller countries don’t.
Will Wilkinson: Yeah. That’s a point that I try to reinforce, is that yes, it’s a global collective action problem, the United States doing anything unilaterally with respect to policy, isn’t going to be decisive. But because of the size of our market, because of the fact that we still are a world leader in innovation in all sorts of technology. If we significantly shifted the relative prices between clean and carbon intensive energy sources, plus one of our, your other ideas here, threw a bunch of money at basic science, R&D relevant to the development of clean sources of energy. We could be producing incredible technology that does not emit significant amounts of carbon that produces a unit of energy, more cheaply than burning some natural gas or something like that, that’s the holy grail in this. And if you get to that point where the prices crossover and using solar wind or clean nuclear or whatever it is, just becomes the cheapest option it gets pretty instantly adopted.
Will Wilkinson: People want to spend less rather than more and so that is the way in which we can have a gigantic global effect just by doing something serious here. So I think things are more hopeful than a lot of people suggest when they’re just like, “How are we going to keep India from just burning coal forever?” Well, you create some-
Brink Lindsey: We’re going to make sure that’s cheaper.
Will Wilkinson: You make something that produces more energy for less money. And yeah, I agree with you Sam, I think that’s a hopeful, it’s the opposite of the limits of growth mentality. What we’ve been dealing with is the limits, we have run up against the limits of carbon based energy production. It has a noxious externality that is having gravely negative consequences and we could get a little bit more economic growth if we just burn all the coal. But that’s just going to destroy things, so we have to back off of that, we just have to, it sooner is better than later. And so giant investments in the central input to all economic activity, which is the energy could go a long way.
Will Wilkinson: Well, I think we’re running up against the limits of growth in the length of a podcast. So let’s talk about one more thing, one thing we didn’t talk about at the outset was one of the big developments that’s happened in our economy is that economic production has become more and more concentrated in a relatively small number of large cities. So economic production, when we were an agricultural society was very, very diffuse. You have people all over the country making stuff in a picked corn, whatever they’re doing, raising cattle. As we’ve industrialized and now as we’ve moved into information communications based technology.
Will Wilkinson: The centers of innovation and production have just really concentrated and that has created a big problem. We have vast swaths of our country that are now like second world nations. There’s a high level of drug addiction, there’s a high level of depression, there’s early mortality, things are just going bad. I was not doing so badly but there’s lots of small towns, not so far away from here that are just basically just busted out husks of their former self. And there are still some people who live there and it’s unpleasant because there’s nothing there for anybody, so what can we do about that, Sam?
Sam Hammond: Well, just from high level coming first to take this full circle and going back to what I changed my mind on, I think this is another area of my evolution back towards a view of embedded liberalism. And this also ties in too with the financialization discussion, where you could imagine or you could imagine someone making the argument that the pure economic, the free market calculus is that all of industries should basically cluster in one or two metropoles and that’s actually the efficient outcome. And if you end up living in a de facto slum or if your community falls apart, you’re living on the street, that’s all just tough luck. You should have pulled up your bootstraps or learned to code.
Sam Hammond: And there are just certain type of person where that argument is very resonant still and I think we’re coming at this again from this view of a country, as a cooperative enterprise for mutual benefit. And part of that social contract is that we have to promote the kind of productive pluralism, the kind of diversity of opportunities for people of different aptitudes. Part of the diagnosis and what went wrong, is that over the last 20, 25 years, we’ve really leaned into our comparative advantage and [inaudible 01:26:17] to get labor. And that has produced a professional class of knowledge workers who cluster in the San Francisco’s, the Chicago’s, the New Yorks and Bostons of the country and have both produced a brain drain in other parts of the country. But also I think really tilted the economy as a whole towards imbalanced growth trajectory.
Sam Hammond: So, a big piece of this paper is to not just talk about the science and R&D, although we talked about that quite extensively, but to say that it’s not just enough to fund the basic science and research, that’s an important thing but there’s also these other issues of economic diversification. And if we become too narrowly specialized, we risk walking down a developmental cul-de-sac in the same way that developing countries have been prone to do. And so when it comes to some of our policy ideas, one of the pilot, one of the key facts about U.S. economic development policy is that we don’t have one. Our first step is to fix that but we don’t have a national development strategy in the same way that we have say a national security strategy. Instead of we have the series, we have 50 states each with multiple economic development authorities often competing against one another. So in the case of Amazon HQ2, those are just a classic bidding war where Amazon would accept 200 different proposals with inducements, each more outlandish in the last
Will Wilkinson: It’s very clearly a race to the bottom dynamic where they’re just looking for the jurisdictions that’s going to give away the most stuff.
Sam Hammond: And it’s a dynamic that ends up accelerating the vicious cycle of de-industrialization and economic decline. Because if you’re Northern Virginia, you have ample tax revenue to forego in the form of incentives. You already have investments in human capital, a young educated workforce and if you’re rural Mississippi or Louisiana, you don’t necessarily, you’re starting from a lower base. And if you don’t have the tax revenue in the first place to fund these programs, to fund the human capital to fund the training, then you’re just never going to get off the ground. So one of the things we propose in the paper is to establish a regional development authority or agency at the federal level to help coordinate some of these issues. Not necessarily to take them on wholesale but to prevent a lot of these race to the bottom dynamics.
Sam Hammond: But also on the margin to invest in sectors and activities that we know to be high productivity, whether that’s filling gaps in capital markets for advanced manufacturers that want to scale up or quadrupling the manufacturing extension partnership, which is the long standing program that goes into and partners with small, medium innovative manufacturers and provide them with technical resources but which we fund at a fraction of what other countries do. And part of the recognition here is that, in a globalized economy there is manufacturers that get disrupted, they’re not just going to stay rooted and upgrade on their own. There’s no reason why they do that when they could just move to Switzerland or Japan. And we’ve really dropped the ball on that side of the globalization equation, and it’s turned people against globalization per se, rather than against our failure to build these complimentary institutions.
Brink Lindsey: Just to add one point, innovative industries have always clustered, Detroit as the automobile industry and LA as the motion picture industry. One of our problems now is the incredible concentration of all of American productivity growth in IT. If you decompose overall productivity growth by industries, it’s just like IT and asterisk. So IT naturally is clustered but that means that all the dynamism in the American economy is basically in places that are IT intensive places. And so unless we can stimulate technological dynamism outside of the IT space, this very unhealthy geographic concentration of dynamism, which is producing all kinds of social dysfunctions and political dysfunctions in its wake, it’s going to be hard to tackle.
Will Wilkinson: So all these things work together, right? The economic geography is pretty much the same everywhere, within a state the population is becoming more and more concentrated in the few Metro areas that that state might have for a number of reasons. But primarily because nobody makes money from agriculture anymore. So what you want to do is those clusters are growing, even if the state is shrinking its population, those clusters are growing in size. They ought to be able to be more productive if the average level of human capital of people who lives there goes up, that’s something that’s not too hard to subsidize. We could have new state universities that we locate near these clusters, we could have subsidies for whatever high output or promising manufacturing that they’re doing in that place. And I think that combination of policies, and it’s not central planning in any sense, it’s just trying to cultivate the conditions for an increase in local productivity.
Will Wilkinson: And I think if you did that in a pretty concerted way, it’s not going to work everywhere. Some places are, for whatever reason, they’re not going to get their acts together but some places will develop specializations and you’ll get real clusters, but it’s just not going to happen if there’s no investment at all in education, in basic science. That’s another way these things can work together, if you have the new campus of the state university, you can put one of the centers for science and R&D there, we’re going to spend more money on that. That doesn’t have to be all spent in the places where we already spend it. We can spend it in these other places and different areas are going to… Like Iowa, for instance, it still is a fairly agricultural state and consequently there’s some specialization here in the genetic manipulation of seeds and things like that.
Will Wilkinson: Investment in companies that are doing that, it’s a big export field, into the basic science of stuff like that can really have a big output without saying, we’re going to make you… In our five-year plan, you’re going to be the genetic engineering center. You can just see what’s going on and try to cultivate that and move it to the next level.
Brink Lindsey: They’re cultivating innovation and dynamism is just a wonderful phrase that then provides a great metaphor for thinking about the mindlessness of dismissing any cultivating or enabling policies of socialism. It’s like using fertilizer or weeding, the things you do to actively cultivate to ensure that your crops grow. If you dismissed all that as top down central planning and socialism, the real free agriculture is just letting God’s wind and rain and sun do its thing. No. To be a good farmer you’ve got technologies that you can use to cultivate your crops to maximize the chances of their having high yields. And likewise there are things that governments can do to create enabling conditions, to cultivate the conditions for innovation and dynamism and that’s what they ought to be doing.
Sam Hammond: There is a view that the government’s role is just as referee and here we’re saying that the government’s role is as referee, but also as coach or as gardener. It’s not just that we’re calling balls and strikes, we also want to get the team a pep talk and make sure they’re getting the right nutrients and stuff.
Will Wilkinson: The United States Federal Government, America’s life coach.
Sam Hammond: But also stresses one of the misconceptions about, “Industrial policy.” Which is certainly is a lot of crony, pure graft of forms of economic development policy. But where industrial policy has actually been successful, doesn’t look anything like that in fact, it’s the opposite. It’s the government pushing more creative destruction and more competition and more innovation than the companies themselves are willing to do adulterated. And so it flips the thing on its head where laissez faire produces a certain amount of competition, but you can actually push that even harder and try to actually get companies to innovate and level up. And one reason why the U.S. has more innovative companies, is also because it’s easy for companies to fail through a bankruptcy law. And that enables fresh start and that capital to be recycled.
Sam Hammond: There are other institutional arrangements where it’s seemingly laissez faire, but you don’t have that same impetus to have churn. And so I think one of the goals of economic development policy writ large is to push a degree of churn and dynamism that wouldn’t result on its own. Encouraging companies to try to sell into China or something like that, find export markets. There’s just a ton that companies don’t do, because they’re just not aware that they can do it.
Will Wilkinson: Well, we will do our best to make them aware. We’ve only scratched the surface, even though we’ve come a long way, but I think that’s all we can do for today. The paper is faster growth fairer, growth policies for a high road high-performance economy. Thanks, Brink, thanks Sam. And I encourage everyone to go to Niskanen Center website, download it, clear some space in a Sunday afternoon, make a cup of tea and get cozy with a discussion of industrial policy and economic capture. Thanks guys.
Brink Lindsey: Thanks, Will.
Will Wilkinson: Model Citizen is brought to you by the Niskanen Center. To learn more about the Niskanen Center, visit niskanencenter.org, that’s N-I-S-K-A-N-E-N center.org. To support this podcast or any of our programs go to niskanencenter.org/donate.
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