Jan 18, 2021

Caleb Watney on *Cracks in the Great Stagnation* and How to Boost Economic Growth

The US economy has been struggling with the effects of secular stagnation for many years, but there are numerous possible solutions to help boost economic growth.
David Beckworth Senior Research Fellow , Caleb Watney

Hosted by David Beckworth of the Mercatus Center, Macro Musings is a new podcast which pulls back the curtain on the important macroeconomic issues of the past, present, and future.

Caleb Watney is the director of innovation policy at the Progressive Policy Institute (PPI) and he joins Macro Musings to talk about his recent piece, *Cracks in the Great Stagnation* and the reasons why we should all be techno-optimists. Specifically, David and Caleb discuss greater skilled immigration, further government R&D spending, innovative energy solutions, and more as ways to help repair an economy plagued by secular stagnation.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu.

David Beckworth: Caleb, welcome to the show.

Caleb Watney: Thanks for having me on David. Longtime listener, first time caller.

Beckworth: Great to have you on. Now, if I remember correctly, you were at the Mercatus Center when I first started there, is that right?

Watney: That's correct. Yeah, I did the MA fellowship at Mercatus. And worked with a lot of your great colleagues there.

Beckworth: And you went on to work at R Street Institute doing innovation policy there. And now you are a director of innovation policy at the Progressive Policy Institute. And I'm delighted to have you on because you've written an interesting post and some other articles on the Great Stagnation, the slowdown in productivity growth. So we're going to talk about that today.

Beckworth: And maybe bring some light to a topic that has a very dour outlook, something that many people have been worried about for a long time. And so I'm going to motivate this Caleb by describing some stylized facts about total factor productivity growth. So this is the measure of productivity that includes all the factors of production. And the one that economists typically look at when they think about long term growth trends.

Beckworth: So I think it's well known but just to repeat some of these facts from World War II up until the early 70s, total factor productivity grew around 2%, just over 2% a year, which is fantastic, what we need, we want to keep that going. And then there was a big slowdown in the 70s through the early 90s. And I was looking at John Fernald's data at the San Francisco Fed, it grew on average during that period, about 0.5%, so half a percent.

Beckworth: So major slowdown from 2% to half a percent. And then there was a little pickup, a little bump on the road there from the late 90s to early 2000s, where it got near 2% again, which is delightful, tied to the IT revolution. But since 2005, it's kind of tapered off again, it's growing only about 0.4%. So not even half a percent. It's almost flatlined.

Beckworth: If you do a graph, it's pretty striking. If you do a graph and you draw out the level of total factor productivity growth, you can see these changes in growth rates in terms of the trends that we’re falling below. So it's a pretty remarkable development and Tyler Cowen has called this the Great Stagnation, this decline in productivity growth. And maybe we should begin with this question, why do we care about this slowdown? What does it mean for us as people, as a country, our wellbeing?

The Great Stagnation and Its Importance

Watney: Yeah, great question. So the Great Stagnation is... Interesting thing, because it really only shows up if you're looking over long rates of time. In any given year, it's hard to see what is a 2% increase in TFP mean for me this year to next year. But this really starts to show up if you're looking across decades, or especially across centuries, similar to compound interest and your savings account, the longer that you can have this kind of sustained growth rate means the faster that living standards are doubling.

Watney: And it doesn't just mean new fancy gizmos, although those are nice as well. It also just means that society has more resources, it has more capacity to do all sorts of things that we want. And so it's coincided... Long term TFP growth has coincided with huge reductions in global poverty, as there's kind of this technology diffusion, we start off with better uses of energy, better uses of technology kind of at the high level. And then those slowly diffused through the rest of society. And it leads to increased living standards for everyone. So yeah, TFP growth is something we really care about, especially over the long term.

Long term TFP growth has coincided with huge reductions in global poverty, as there's kind of this technology diffusion, we start off with better uses of energy, better uses of technology kind of at the high level. And then those slowly diffused through the rest of society. And it leads to increased living standards for everyone. So yeah, TFP growth is something we really care about, especially over the long term.

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Beckworth: Yeah. So it solves a lot of our problems, just faster economic growth, driven by productivity growth is an ends to a lot of social ills and problems in society. And we need more of it, but we've had less of it. And so what you're saying is, we could be a whole lot better off than we are today have we had this growth?

Watney: Exactly. Yeah. I mean, if you had maintained that 2% growth rate throughout this entire period that we call the Great Stagnation, you're looking at 30, 40% standard of living increase compared to where we are right now.

Beckworth: Yeah, that's pretty significant. Now, there's been a lot of discussion of this over the past decade, and I went to some conferences and read some books about this. And one of the counters to this is that we're just not measuring it properly. And there's been a number of people who've made this case and others who have countered that and one of the I think better known articles that countered that came from Chad Syverson at the University of Chicago, and he had a 2017 paper where he says, "No, that's not a great explanation. There's just too much decline, too much missing that can be accounted for this."

Beckworth: And he also goes on to note a number of other reasons why this doesn't hold, including the fact that it's a worldwide phenomenon. I mean, it's not just a US phenomenon, it's around the world, and that orders of magnitude be so much, it just doesn't seem possible. We're mis-measuring. I mean, it's an appealing answer.

Beckworth: Look at my smartphone, all the things I do on my smartphone that used to be done elsewhere, there's got to be some unmeasured productivity gains there. But he makes, I think, a convincing case that can't make up for the difference. So you think he's fair?

Watney: Yeah, I think for the most part, that's correct. I mean, it's certainly true that you can look at specific technologies, and you can say, "Doesn't seem like that's fully adding up." But I might be misinterpreting this. But I think it was Adam Ozimek on Twitter, who's kind of pointed out that every decade, every era kind of has their own inflation biases, things. Different kinds of technologies, different kinds of energy productions are going to be counted in different ways, in every era.

Watney: And that's always going to have slight biases in one direction or another. So it's not enough to say that, "Oh, we don't think that this is very precisely being measured, you would have to show, why is it systematically being mismeasured compared to decades previous?"  Now, I do think there is something to the idea that if leisure time, specifically, is the thing that's increasing in quality, if you're just getting more utility out of every additional hour of leisure, but most of that leisure is free in the form of internet apps, and whatnot.

Watney: And that might be something that's not quite being fully captured in TFP or GDP growth. And so actually, I think Erik Brynjolfsson, has had some surveys looking at how much would consumers be willing to pay for the survey... For the products that they currently get for free, be they social media, or search engines or email or whatnot. And it's pretty tremendous if you look, it's thousands of dollars a year, usually for these kinds of services.

Watney: And so you could try to add that in. But I think for long term growth rates, it's not just leisure time that matters, it's actually productive capacity. And so the fact that most of our improvements that people point to with a smartphone have primarily been showing as maybe leisure improvements is itself kind of bad for long term growth, because leisure production increases don't quite have the same compounding growth that production increases do.

Beckworth: So leisure is wonderful but we want to have more gains in productive capacity. Now, let me throw in another argument surrounding this conversation that's been brought up. And that's one given by Nick Bloom. And he's a previous guest of the show, he's an economist at Stanford and some of his coauthors, they have a paper titled, *Are Ideas Getting Harder to Find?* And they make the case that it is. That when you're doing creative growth, like we do in advanced economies versus catch up growth, it's just harder and harder to come up with ideas. And as a result, it's kind of inevitable. There's this kind of inevitable argument I remember, we were having this discussion in the blogosphere back in early 2011, maybe 2012.

Beckworth: And Noah Smith took John Fernald's TFP data and he decomposed it into consumer durables and non-durables. And the durable section, you do see rapid productivity growth, it's in the non-durables… A lot of service sector. You see this... You just don't see the kind of gains. And along those lines, our colleague at the Mercatus Center, Alex Tabarrok, he had a little book that talked about prices, but I think it gets to the same thing. He talked about Baumol's cost disease. And why do you see certain industries, prices continue to drop, appliances, gadgets, home gear, other ones like health care and education. What you do see is prices going up and up and up. And their story is Baumol's cost disease.

Beckworth: That the people who are being used in the more productive sectors, they're getting higher wages and to compete for them, you got to pay them more. And so we see this. So the point is all of this suggests that maybe there's some inevitability here, it's bound to happen as we become more affluent, more productive. Is that fair or are we just kind of giving up if we take that stand?

Watney: It's a really hard question. And yeah, certainly the Bloom, *Are Ideas Getting Harder to Find?* piece is one that I've spent a lot of time thinking about. And I think it's very plausible. But I think it would be sort of a mistake to maybe assume that it's correct. There's still so much we don't know about the scientific process, and like, how do we... We'll come up with scientific ideas in the first place. And then how do we translate them into real productive capacity. And we're looking at like a couple of 100-year periods here, where since the Enlightenment that we really been trying to take the systematic approach to scientific development. But there hasn't been quite as much like science of science or rapid experimentation in one of the ways we do science.

Watney: And so it is true that given the current models that we have for the production of scientific ideas in the university and the academy, that it seems like, yeah, there are these diminishing marginal returns. And another paper I recommend to your listeners in this vein is Tyler Cowen, and Ben Southwood had a really good kind of overview of a lot of this literature about sort of the slowdown in scientific production.

Watney: But that's not to say that those sort of relative declines would maintain if we were to dramatically change up in scientific production function. There's so many, I think, flaws in the way that citations, and sort of the incentives for researchers to minimize breakthrough research to just contribute to incremental research. There's the replication crisis. There's all sorts of problems in this sort of, yes, scientific production institutions.

Watney: And so I think before sort of declaring defeat, and saying that this slowdown in the rate of scientific ideas is inevitable, I would like us to try to be more systematic in changing up the incentives for researchers and changing up how promotions are divvied out and how tenure is given to find different ways of encouraging breakthrough research, and see if that can't help us increase the productivity of how many researchers does it take to get to the next breakthrough.

I think before sort of declaring defeat, and saying that this slowdown in the rate of scientific ideas is inevitable, I would like us to try to be more systematic in changing up the incentives for researchers and changing up how promotions are divvied out and how tenure is given to find different ways of encouraging breakthrough research.

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Beckworth: And that is why you're here today Caleb. You're here to cheer us on, to let us know that there is light at the end of the TFP tunnel, that there's hope. In fact, we're going to get to your article in just a minute titled *Cracks in the Great Stagnation.* But I want to mention you and a number of others have been making the case that we should be more optimistic. Noah Smith had a nice summary article on his substack, Tyler Cowen, you mentioned him already, Peter Thiel, he was kind of down on technology, like Pete said, you know, "We were supposed to get flying cars instead we got 140 characters”, talking about Twitter.  But he's kind of turned the corner. And like he said, "COVID, and the crisis may be a watershed moment, the first real year of the 21st century.” This may be... The pandemic itself may have catalyzed and forced us to use some of our existing technologies.

Beckworth: The Economist magazine also contributed to this conversation. And they had an article they cited by Erik Brynjolfsson, Daniel Rock, and Chad Syverson, titled, *The Productivity J-Curve: How Intangibles Complement General Purpose Technologies.* And their argument is, it's a basic point. But some of these really new technologies take decades to be widely applied. And it takes sometimes luck, sometimes it takes just something happening that was random, like a pandemic might be something that pushed us over the edge. So there's a number of people making the case like you that there might be a crack in the Great Stagnation so we can keep our hopes up. And again, look for the light at the end of the TFP tunnel. So I'm going to move into your article now. So this article is online, we'll find links to it. But in the article, you go through and give a number of examples that suggests and you don't say it proves anything but very suggestive that we are turning the corner, and we should be hopeful. So I thought we would work our way down the list, and you could maybe comment on the items as I bring them up.

Watney: Yeah. Could I quickly. I just want to make a note sort of on the broader, why we may be seeing this kind of optimism now and from a number of people. I think there's two things happening here. One is, as I'm sure we'll go into, I think there has been tangible improvements in recent technological and scientific developments that do seem to be finally paying off and seem to be very exciting, it's very easy to imagine how they could lead to real productivity gains.

Watney: I think the other part here is sort of a normative declaration that optimism is necessary for productivity to actually happen, that in some sense are like a self-fulfilling cycle or if we believe we've reached the end of history, the end of technology, then we're less likely to actually push hard on making the societal changes that are necessary for these productivities to be realized. And so I think yeah, there is a bit of a self-fulfilling nature here where people have realized, now might be the time. But in order to make that happen, we have to go in with kind of this optimistic attitude. So I recognize that yeah, to sort of really be ahead of the curve, sometimes you have to take the emotional excitement into it with you.

I think...there is a bit of a self-fulfilling nature here where people have realized, now might be the time. But in order to make that happen, we have to go in with kind of this optimistic attitude. So I recognize that... to sort of really be ahead of the curve, sometimes you have to take the emotional excitement into it with you.

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Beckworth: Okay, well, let's look at your article then. So again, the title is *Cracks in the Great Stagnation,* the link will be provided in the show notes. So you have a number of items that are very suggestive that we are seeing cracks that would make us be techno-optimists. Let's begin with vaccines. So this should be an obvious story for our listeners, but talk us through why did vaccines give us hope?

Cracks in the Great Stagnation: Vaccines

Watney: Yeah, so specifically, this COVID crisis, at the beginning of it, it was pretty unclear how long it would take to develop real vaccines, if you look at the history of vaccine responses to previous diseases, it can frequently take five to 10 years, because it's pretty hard thing to develop a novel vaccine to a crisis, or to a new disease.

Watney: And certainly, we've seen Coronaviruses before, but this is... The novel Coronavirus, it was a new strain of it, we didn't have an existing vaccine for it. And so really, as a society, we almost made like a giant bet that we were going to be able to turn around a vaccine in record time. It turned out to be especially necessary, given that a lot of the other public policies around the handling of COVID with masks and trying to do social distancing, and turning out massive rapid testing.

Watney: There were a lot of failures in sort of public policy around those issues. And so it made the success on the vaccine side of things even more relevant and even more important. And so, the key technology here, though, and what's exciting about it is, it's not just that we were able to develop a vaccine to this novel disease, but also that it's a new type of vaccine. So it's an mRNA vaccine, which is... It has never been used in humans before. I think it's been used in some veterinarian contexts, but never before on humans. And what's particularly exciting about it is it could be, I think like a general purpose vaccine technology, which is much broader than just COVID.

Watney: Essentially, what it does is it allows us to kind of directly tell our body what kind of proteins to be producing. And so here, they were able to analyze the DNA sequencing of the virus, figure out what was the particular spike protein that we needed to be producing to trigger the creation of antibodies, and just directly tell our body to do it, which is super exciting, but also is you can almost think about it as like coding.

Watney: You have a general purpose language that you can use to build all sorts of applications, but for the production of proteins in our body. And so that has a wide ranging number of applications, people have been talking about using it for multiple sclerosis for cancer treatment. And so now that we've seen this real breakthrough in the application of mRNA, for COVID, I think it can have very far ranging applications for a number of diseases.

Now that we've seen this real breakthrough in the application of mRNA, for COVID, I think it can have very far ranging applications for a number of diseases.

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Beckworth: Yeah, and this is a great example of that economist article I just mentioned, where sometimes it's luck, or something happens, where you take a technology that's been in development for years, and you find a wide application for it. So my understanding is this is something that's taken decades to really come to the forefront. People have been working hard on it. And it just so happened, they found a perfect time and place to use it. And you said this is the first time they've used it correct?

Watney: In humans. Yeah correct.

Beckworth: In humans. Yeah.

Watney: Yeah. And it's also cool, because it's building on a lot of the knowledge bases that we've been developing for a long time. So if you think about the human genome project that was happening in the early 2000s. There were a lot of resources that went towards that. And it seemed like the payoffs were kind of slow to occur, but a lot of the sort of understandings of how genomes work and how you can be programming specific proteins came from those projects, and others like it, and so it's cool to see the payoffs finally happening.

Beckworth: Yeah, and the company behind the Pfizer drug BioNTech, I was reading that they've had success with multiple sclerosis in terms of like mice and lab animals. So wow, this is pretty remarkable. And they also said there could be hope for cancer as you mentioned. They're not as far along in that area. But man, this could be just, again, a wide applied new innovation, new technology that could solve a lot of our problems. Okay, let's move on to transportation. You also touch on transportation, there's here's hope and transportation, what's going on there?

Cracks in the Great Stagnation: Transportation

Watney: Yeah, I mean, when I was writing the article, I was trying to specifically focus on just what were some of the things that were happening in the last couple months, because it seemed like there was a whole slew of announcements that kind of started with the COVID-19 vaccine, but in a wide range of areas, and so the blog post was specifically trying to say, "Hey, look, just in this couple months period, we've seen this tremendous growth, and let's look at some of them."

Watney: And so in transportation there's been some exciting stuff happening with high speed rail and whatnot. But in particular, in the last couple of months, I think there's been some real developments for driverless cars. And so driverless cars are not a new idea. And I'm sure many in your audience have heard about it. And that there's almost been this kind of technology hype cycle that's happened.  And you see this happen for a lot of technologies, where early expectations for the technology start to rise, and they actually grow faster than the actual development of the technology. And then there's too much hype based on where the technology is. But then eventually, kind of after that, there's the trough of disillusionment where expectations for the technology drop down below where the actual technological development's happening, and then has to kind of self-correct.

Watney: And so I think a couple of years ago, there was a lot of hype around driverless cars, and they're going to be deployed before 2020. And obviously that didn't quite happen. But I think we're now finally reaching a point where the public expectations around the technology are actually below where the technical progress has been. And so the big thing that happened recently was Waymo, which is Google's driverless car division. And they've been doing this pretty big pilot program in the Phoenix, Arizona area for the last couple of years. But they now finally I guess, feel confident in the technology enough that they're offering the service fully to the public. And there's no safety drivers in the front.

Watney: So for a while, they've been kind of testing these, but there was always a human in the front seat to make sure to take over if anything went wrong. But they now feel like they have a robust enough test period, that they can take the human out of the road. And so now there's commercial AV service, in sort of a taxi form that's being offered in the Phoenix area, which is very exciting. And it kind of moves the question from about AVs to a “can they” or “will they” question to a “when they?” And now it's more about well, what is the deployment timeline? How long will it take for this to reach the rest of the country? And that's kind of still up in the air. And there's a lot of hard work to be done. But just even moving from a “can they” to a “when they” is itself a major development?

Beckworth: Yeah, absolutely. You also mentioned your piece, Tesla and Elon Musk made some progress as well, what's going on there?

Watney: Yeah, this one's a little bit more speculative. It's kind of interesting looking at the philosophies of deployment for different driverless car companies. Tesla has very much taken sort of an incremental rollout strategy, where they make a small improvement in the self-driving features of the car, and then they kind of roll it out to all customers, versus Google has really been trying to wait till they feel like they have a fully developed driverless car model and then rolling it out. And so I think I'm a little bit more skeptical of Tesla, but it's still pretty amazing what they've been doing. And there's some cool videos of Teslas driving around, but generally, it doesn't seem quite as safe as Waymo, but they're certainly deploying in a much broader array of circumstances so far.

Beckworth: Well, it's great to have all these companies competing and trying to get out the door first, that's the reason we're having innovation. This is where capitalism is great, it thrives, it has the right incentives-

Watney: For sure, and they're taking different technological approaches in terms of how they're building the car, and different yet testing approaches. And, obviously you want to make sure that there's some base level of safety. But I think yeah, on net competition, make sure that we end up getting to the best product faster.

Beckworth: Two comments on driverless cars or AV autonomous vehicles, as you mentioned earlier, one my hope was I was writing this big hype wave earlier, my hope was that my kids would be driving around. I'd put them in the car, the car would take them to do their practice, whatever. But it's taking longer than I thought so they're in high school now, so probably won't be the case. They're learning to drive themselves.

Beckworth: So that hope both has come and gone. But on another more serious level. One of the challenges with driverless cars is people getting used to them, right? So I heard this great comparison made to elevators, when elevators first were invented, you had to have an elevator operator, and the elevator operator was deemed essential. You wouldn't just get into an elevator because who knows what could happen? You can use an arm, you can use a leg. In fact if you did, people lost some of their limbs in early elevators.

Beckworth: So the idea was you had to have an elevator operator and it took some time to get to the point where people can now get into elevator feel confident, press the button and write it up and down. Now we take it for granted. And the comparison was will the driverless car go the way of the elevator or will it go the way of like commercial airplanes where you have to have a pilot still. We never got past that fear? And maybe there's good reasons. There's another discussion. But there's two paths elevator or commercial airplane, what direction will driverless cars go? And I'm wondering what your thoughts are on this. This is more of a cultural issue than a technological issue. But I'm sure you've thought about it given your job.

Watney: Yeah, I mean, certainly, I hope and I think in some ways that technology especially the economics of technology will only really work out on the way that we want, unless there can be no driver, because especially if you're looking at things like you know, taxi service, like transportation and shipping, a lot of the costs are labor costs. And so, you know, if you're still keeping the driver in there, but they're doing less, that doesn't really change the fundamental model of economic delivery method. And so yeah, you really do need to actually have the labor saving aspect of driverless cars for I think a lot of the cool economic models to work out.

Watney: But even still, you still get pretty tremendous safety gains either way. This is sort of, I think, something that Waymo has been doing pretty well is a lot of software companies have been kind of criticized for a sort of release, and then iterate model where they'll release a software program into the wild, they'll kind of see what kind of bugs there are, and then they can afterwards ship out updates to address those bugs. Which works well, if it's like a software program, or an app that helps take funny selfies or something. But it works less well if it's in like a safety critical environment like transportation. And so this has been a pretty big, like engineering, philosophy change that Waymo has been having to undertake. Their parent company very much grew up with this release and iterate. But they've been having to take a safety critical engineering perspective, which really means how do you think through every possible fail case that could conceivably happen?

Watney: And how do you have like some sort of safety practice or procedure to address that, which is why I think that there's been kind of this slowdown is, you can solve the first 90% of problems pretty quickly. But then the last five, the last 10% of problems are really where the most unpredictable errors can happen. And so you really need to have robust testing procedures to try to figure those out and get rid of them ahead of times. But I think you've also seen that a lot of these companies are taking especially I think yeah, industry leaders like Waymo are taking seriously safety and their public reputation very safely. And this kind of gets to the cultural point you're pointing out, which is one crash that happens ends up going all over the news. And now consumer confidence in the technology starts to drop suddenly, even though there's almost 100 crashes every day that humans are undertaking, and only a few of those make the news.

Watney: But because there's almost this new aspect of the technology, I think the companies know that they have to be much, much safer than humans to actually be able to deploy safely and win the trust of consumers. And so, Waymo's certainly been taking that approach. And I think other companies like Cruise have been taking a similar one. So yeah, the cultural aspect of how this deployment all takes place is also I know, top of the mind for them.

Beckworth: Okay so that's transportation. There's a lot there. And there's more ways we could go with that. But for the second time, we'll move on. What about energy?

Cracks in the Great Stagnation: Energy

Watney: Yeah, energy is fascinating, and is an area that is getting, I think, a lot more attention partially because of climate change reasons. You know, how do we make sure we have a timely transition to zero carbon energy is top of mind for a lot of people. But also, I think, I've been glad to see a renewed conversation around what do massive improvements in energy mean for the rest of the economy, because energy is really at the top of the stack for a lot of these things. If you can cut the cost of energy by 90% then that means you can have this huge cost savings flow down to the rest of the economy and means that a lot of production processes that were maybe previously too costly, from an energy perspective can now be done.

Watney: And so I think there's a lot of exciting possibilities there. A few that's worth pointing out. There's kind of almost been this whole home progress in lowering the prices of battery technology and in solar and wind especially. And that's super exciting and great. However, I do want to caution that these technologies will struggle to ever fully take over the grid, because they have these intermittency problems where if suddenly, you have a lack of wind, you have to now account for that in the grid, because a lot of energy uses end up being pretty stable across time, versus these energy production can be unstable. And so you need technologies that can account for sort of dynamic demand, where suddenly there's an increase, or there's a decrease and still be able to provide a stable amount of energy. And for those, I think there are two in particular that are pretty promising. So the first is sort of nuclear energy, which is not a new technology by any means.

You need technologies that can account for sort of dynamic demand, where suddenly there's an increase, or there's a decrease and still be able to provide a stable amount of energy.

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Watney: But there have been some pretty interesting advancements, and that there are other countries like, say, France that have taken to deploying nuclear at a much higher rate. And I think the last I saw 80% of their electricity generation comes from nuclear which exciting. But the other is geothermal. And this is one that some people like Eli Dourado and David Roberts have been writing some really great pieces about, but the basic story is that below our feet is the Earth's mantle. And there's a lot of energy coming from the core of the Earth. And the nice thing about it is, it's totally stable. Currently, geothermal kind of works, you drill deep enough, but in specific areas where there's kind of reservoirs of hot water, hot energy that are much closer to the surface, and so easier to access. But hypothetically, if you're able to drill down deep enough, there's consistent amount of heat and is everywhere across the earth. And so there's kind of been these enhanced geothermal, and then advanced geothermal, which are basically drilling down to a sufficient depth that you can then access the requisite amount of energy density anywhere across the globe.

Beckworth: That's fascinating. And one of the more colorful and interesting cases that I've heard for geothermal is tapping into Yellowstone, the underground volcano, and not only would it help us with energy costs, but it might save us from a huge disaster. So talk us through that.

Watney: That's true. Yeah. So this has been kind of I don't know, a meme on Twitter a little bit and some of these tech optimistic spaces. But yeah, the basic idea is that Yellowstone has a giant massive supervolcano underneath it, which both produces a lot of energy, and kind of has some base rate of eruption every year. And obviously, it hasn't gone off, I think, in millions of years. But it's supposed to be... Every couple of million years that one of these super volcanoes is erupting. So in some sense we are due for one, but of course the base risk at any given year is pretty low. But if you think about the long term survival of humanity, then yeah, things like super volcanoes do pose a serious risk. And certainly, I think after COVID, we should all be thinking about tail risks a lot more seriously.

Watney: So let's harness that energy to tap Yellowstone. And the nice thing is because it's a super volcano, like the energy that you could potentially get from it is massive. I think some estimates say that you could power most of the US's electricity needs from just the energy of Yellowstone. Now, I think, practically, that gets a little bit difficult actually transporting that energy to practically meet the energy grid across the US. But the raw energy output is pretty massive. But there's a lot of current restrictions, especially environmental protection stuff that would make drilling Yellowstone or tapping around it impossible right now, but it is something that we should be taking seriously, both for the I think climate change reasons and for the extra risk, long term survival reasons.

Beckworth: Okay, so very interesting. We'll keep an eye on that and see if one day they are drilling in Yellowstone. And just to be clear, when they drill, would it be kind of like a minimal impact? It's like a place or two they drill down or would it be an eyesore when you talk about this? How would it actually unfold?

Watney: Yeah, I think it depends on the specific... I don't know, there's different proposals for it. It would reduce the natural beauty of Yellowstone somewhat, but you have to make trade-offs sometimes. And I would say that reducing the risk of a supervolcano eruption is a pretty good risk to be mitigating. And certainly there's lots of other pretty areas around the US. We could probably keep large portions of the park. But yeah, basically yeah, you're trying to drill deep enough that you can then basically like let off a lot of the steam energy that would otherwise be building underneath the volcano and be letting out actively and actually utilizing it.

Beckworth: Okay, let's move on to another area that you think shows that there's crack in the Great Stagnation. We've talked about transportation, energy, you mentioned food. That was pretty interesting for me that you see food is as a sector where we might see productivity gains.

Cracks in the Great Stagnation: Food

Watney: Yeah, there's a couple of interesting things happening. I mean there's been some interesting advancements in vertical farming, which would be cool for one that, I think it just like looks cool. It's one of the most like sci-fi looking advancements, but you can also grow food a lot more efficiently, especially from a space perspective with vertical farming.

Watney: But most concretely, there's been a lot of stuff with plant based or fake meat alternatives, which, on the surface don't seem to have a direct connection to economic productivity. I mean, hypothetically, especially as you start driving down the cost curve, for a lot of these things, you could end up producing things that taste exactly like burgers for cheaper than burgers. And that's the type of productivity. But I think the main game here is more from a mitigating externalities perspective, which as I kind of talked about at the end of the piece, I think... If you think about long term sustainability, that should be a type of productivity that is not currently measured in TFP, but really matters.

Watney: So if you are able to mitigate climate change, and then that reduces all sorts of natural disasters, or people that end up having to migrate and leave their cities, there's a lot of damage that never gets done that you have avoided by avoiding some of the worst aspects of climate change. But you never see that counterfactual show up in TFP growth, but it still tangibly matters in the same way that having a vaccine for COVID now enables us all to go back into the workforce and is a huge productivity gain. But that only shows up in a scenario in which we actually have the COVID-19 virus. So that's, I think, one sort of meta point. And then for animal meats specifically, you could think about this as there's this unpriced externality of animal harm or animal welfare. And I don't even think you need to necessarily be a vegetarian to recognize that. But just the fact that there’s a lot of animals living pretty miserable lives in factory farms and whatnot. And you can reduce that somewhat by making the switch or making plant based and fake meat alternatives much more cost effective.

For animal meats specifically, you could think about this as there's this unpriced externality of animal harm or animal welfare. And I don't even think you need to necessarily be a vegetarian to recognize that. But just the fact that there’s a lot of animals living pretty miserable lives in factory farms and whatnot. And you can reduce that somewhat by making the switch or making plant based and fake meat alternatives much more cost effective.

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Beckworth: Well, this has nothing to do with productivity or making the world a better place, but I am a vegetarian. So I'm excited to see these developments happen. Okay, let's move on to digital technologies. So I think a lot of us are familiar with that. But what are the new cutting edge developments we're seeing?

The Cutting Edge of Digital Technologies

Watney: Yeah, there's been a number, I mean, most prominently, there's just been a ton of stuff happening with artificial intelligence. And I mean, AI is kind of a buzzword. But partially, that's because it's a buzzword, because it actually affects so many areas. And so, so many areas are trying to claim, "Oh, look, we're applying AI to our specific thing."

Watney: But if you look at some of the cutting edge stuff that's coming out of the machine learning community, it's really, really impressive. So just as a few examples, there's been a lot of stuff with video compression, that's been pretty interesting. So Nvidia took some of the same technology that was used to create deep fakes, which for your audience, if they're not familiar, basically, was the technology being talked about in sort of nefarious ways you could make it look like somebody was in a video when actually they weren't there, or just create false footage altogether.

Watney: But basically, you can use a lot of those same techniques to greatly reduce the amount of bandwidth in video transmission. So as sort of a rough perspective, you could transmit the initial image of me and you talking to each other over Zoom. But then rather than having to consistently transmit that video at the highest fidelity, you could just transmit sort of individual tracking data about which way is my nose going, or how my eyebrows moving, and that could just be dots on the screen, which is much lower information density. And then use deep fakes on the computer end to actually move those videos in tandem. And so you could greatly reduce the amount of information you're actually having to send over internet by using this AI technique, which is really cool. And I think in general, sort of bandwidth reduction techniques are pretty underrated.

Watney: And if you combine... Let's say we're able to get similar sort of bandwidth reductions in a bunch of other areas. And then you combine that with the rollout of technologies like 5G, which actually just increase the amount of bandwidth you have available. The combination of more bandwidth and reduced need for bandwidth means that you could be looking at a 50X baseline increase in our capacity for wireless communications, which I think could enable a bunch of new applications that we're not even thinking about.

The combination of more bandwidth and reduced need for bandwidth means that you could be looking at a 50X baseline increase in our capacity for wireless communications, which I think could enable a bunch of new applications that we're not even thinking about.

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Watney: You could be wirelessly transmitting all sorts of VR applications or things that are hard to even think about today that are much more information dense, because now we would have so much more capacity. That's one area. I think another area going back to AI. Open AI, which is one of the world's leading research labs has been doing some really fascinating stuff. Their most recent project is called DALL-E, which is a sort of a portmanteau of WALL-E the robot with Salvador Dali the artist.

Watney: Essentially, what it does is it builds off of their earlier text generation model of GPT-3, to transmit it into pictures. So basically, you can type in any sentence, so you could say an animated illustration of a strawberry walking a dog along the side of a road or something. And it could basically construct that whole cloth based on millions of examples in its database, and it can kind of combine elements, but it looks really high quality and professional and sort of the translation of any sort of thing you could write out in text into illustration is itself pretty remarkable. And then you start thinking about what are the creative uses of this in the long term? It's pretty, pretty amazing.

Beckworth: So I could tell the story. And as I tell the story, this applications AI could turn it into visual representation and video. That's amazing. Yeah, no kidding. What about chips? Are chips getting faster or better? What do we have there?

Watney: Yeah, so probably some of the most impressive stuff has been coming out, there's Apple's new M1 chip, which I think the central sort of advance here is, it's a system on a chip. So it used to be kind of, you'd have a lot of these discrete systems that would talk to each other from different chips. So as separate discrete video card and graphics card and a RAM and a separate GPU, and they would all kind of be talking with each other.

Watney: But by building them all in a tightly integrated circuit, a single system on a chip, you can actually end up pumping out pretty massive efficiency gains, both in terms of how much power it's requiring, how fast it can run, and also battery life. And so you're seeing pretty massive gains. And this is like, again I think something that right now is just being used in consumer applications. But you could see, again, new applications come from all of this new extra battery life, extra processing power that we have, and I think they're now trying to integrate this into other consumer devices that they have.

Beckworth: So this is more than a marginal improvement. This is like a leap. Right? In terms of chips?

Watney: Yeah, it kind of depends on which baseline you're talking about, but I think some of the gains I'm seeing, 2X battery life basically, from just this one improvement, which is pretty, pretty incredible.

Beckworth: Yeah. Okay. Well those are some of the examples you give in your paper about why we should think that there is a crack in the Great Stagnation. And some of these other authors that I mentioned, Noah Smith, you mentioned Eli Dourado, Tyler Cowen, they also give other examples of new technologies and developments that are going on. But I have a couple of comments I want to share with you now and get your feedback on them.

Beckworth: Two in particular, so the first one is, how important or how consequential has the pandemic been to some of these technologies? I mentioned it earlier, it could be an inflection point, it could be a catalyst, could be something moving, but do you have a sense of how different we will be because of the pandemic? I mean, there's lots of easy examples working from home or more corporate work being digitized? What are your thoughts on that?

The Pandemic’s Effects on Technology

Watney: Yeah, the pandemic is having, I think, an interesting effect, probably some in both directions. So as you mentioned, it can kind of be like an exogenous shock to the system, there's a lot of sort of social routines or social patterns in the way that we communicate with each other and the way that we do business. And oftentimes, it was developed to sort of be the best of like a previous technology, but sometimes those social patterns can end up keeping us from using the most efficient technology after it's come out. And so sort of a shock to make everybody reevaluate what is actually the best sort of system architecture I should be using, what's the best way of communicating. What kind of productivity applications should our workforce be using? Those can kind of be reevaluated in a cleaner sense now, which is useful and could be, I think, a positive productivity shock.

Watney: I do worry, sort of and I know this is a contentious topic is sort of ease remote work on net good or bad for innovation. And I think some people like Adam Ozimek think it could be very good. I'm particularly concerned about sort of innovation on the sort of superstar firms. So I think a lot has been, especially for the US economy come from agglomeration effects, where you have sort of these tight knit clusters of your tech clusters where you have cutting edge supply chain engineers, and academics and engineers, all kind of working in tandem and running into each other and having spontaneous interactions.

Watney: And also having sort of conversations that they wouldn't have otherwise or that are harder to facilitate in a digital space. And so I do sort of worry about what are the longer term effects of the pandemic on those clusters, but I also think if clusters are really as powerful as I think they are, they will end up being pretty resilient. And we should see them come back. But of course, whether they stay in the United States or whether they migrate to other countries is an open question.

Beckworth: So my second comment, Caleb, is maybe what I hope would be the great technological innovations, the big changes I want to see. And let me know if I'm being too ambitious or if I'm asking for too much here. But when I think of big changes I would like to see along some of these dimensions you went over earlier, like transportation. I want to see big changes, such as, like the Hyperloop, I want to be able to get in some kind of, I don't know, car, some kind of train that I can go from Washington, DC, down to Atlanta in an hour. Something you know... Maybe supersonic jets. I mean, we mentioned Eli, he's done some work on this. Is there a hope that we're going to see big gains in transportation technology.

Beckworth: Now, I mean, I don't want to undersell the fact that we're getting driverless cars, that will be a huge gain too. But to be able to move around the world at a much faster pace. I mean, I can go extreme here and talk about like transporter technology from Star Trek, that's never going to happen. But that idea, the kind of gains you would get from a technology like that. I mean, is there something we could do that would approximate that with faster planes, Hyperloops? I mean, is there any discussion about big moonshots like that?

The Possibility of Technological Moonshots

Watney: Yeah, that's a great question. And I think it gets at kind of... The larger pulse here is the idea that is America kind of still capable of doing big things? Ross Douthat had a book out. I can't remember if it was early this year or last year, sort of about the fact that America sort of become a decadent society, we're sort of aimless in our goals, we can't really imagine what a better equilibrium would look like.

Watney: And we're kind of sort of play acting previous cultural fights. And I think a big part of that is sort of the capability of doing big things that are acting in concert with each other. I sometimes think, could America build like the interstate highway system today? Could it do a massive renewal in energy grid, could it build the Hoover Dam, there's big tangible changes in the physical environment, that don't seem to be happening at the same rate anymore. I think there's a lot of potential reasons for that. I mean, one that I think is as a pretty big factor, and which again, our friend Eli, who I feel like we've been mentioning a lot has been doing good work on is sort of NEPA, the National Environmental Protection Act, which ends up putting a whole bunch of sort of technical delays on the process of a lot of these physical changes to the environment. So to build a Hyperloop today's going to get stuck up in three to five years of litigation from NEPA, as you're going through environmental protection review.

I sometimes think, could America build like the interstate highway system today? Could it do a massive renewal in energy grid, could it build the Hoover Dam, there's big tangible changes in the physical environment, that don't seem to be happening at the same rate anymore.

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Watney: And a lot of this doesn't actually have any tangible protection of the environment. It's just sort of a process hurdle that you have to overcome. And I think this also connects to sort of a broader cultural NIMBYism. There's this big offsite wind project that's being debated in New York right now, that would build a bunch of wind turbines off of the coast of New York. And to actually get the energy from the wind turbines back to the New York grid requires sort of this big cable, but a bunch of sort of wealthy landowners in the outskirts of New York are blocking the project because they don't want to have to deal with a couple of months of construction as the big cable is built underneath their town.

Watney: And these kinds of holdups are everywhere across the economy. And I think there needs to be a serious conversation about how can we turn back, how can we let there be less promiscuous distribution of veto points, as I think one phrase calls it, that prevents these big projects from happening. Because yeah, I would love to see a Hyperloop as well.

these kinds of holdups are everywhere across the economy. And I think there needs to be a serious conversation about how can we turn back, how can we let there be less promiscuous distribution of veto points... that prevents these big projects from happening.

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Beckworth: Yeah. Okay. So I said to comments, I want to add a third one in there. And that is the question about government's role in developing R&D. So if you go back in space program, about 10% of the government's budget, federal budget was brought into R&D, a lot of to the space program. Today it's 4% or less.

Beckworth: And we just went through an amazing experience that you talked about earlier with the vaccines, but those vaccines were a private public partnership. And we know the Operation Warp Speed project was key to that. It guaranteed I believe 100 million sales of vaccines, units and sales that also reducing the regulatory hurdles it took on some of the risks that the private sector normally would.

Beckworth: Vaccines are often tough to develop because of all the uncertainty. But we saw this partnership work out. And both of us come from a more right-of-center traditions and we're usually a little more nervous about engaging in these things. But this seemed to work out pretty well here. So what does this teach us or tell us about R&D going forward?

The Future of Government Research and Development

Watney: I think what this shows is that the government has a really important role to play. Partially when you need things to go really, really fast. There's kind of like a coordination role that the government plays. The fact that so much of society dedicated its efforts to vaccine production was not only because this was a big deal, but because there was this guaranteed market that the government was able to do. It was essentially leveraging the price's system to say this thing, and all of its inputs are really, really important and dedicate more time and attention to them. And that's part of what you can do with things like government purchase guarantees. My colleague at PPI, Alec Stapp and I wrote a paper closer to the beginning of the pandemic, talking about how this could be used to greatly increase the production of masks and of other personal protective equipment.

Watney: And I think a similar approach ended up happening for the vaccine, so I was glad to see that happen. I think there's also if you take step back though, a lot of investments the government has been making for decades now, that ended up paying off here. So things like the Human Genome Project, took a lot of government funding, and then ended up increasing our sort of understanding of human biology, which then led to mRNA vaccines.

Watney: And so this was not just the result of R&D decisions made in the last couple of years, but from decades, and this kind of gets to a broader discussion of basic versus applied R&D. And I think one of the strongest cases for government spending is on basic R&D, because it's frequently in sort of a basic understanding of science that doesn't have any immediately actionable profit or ways of commercializing it, but do lead to very large advances down the road.  And if you look at how the government has been spending money, it's been actually decreasing the share of... If you look at R&D spending as a percentage of GDP, especially for basic research. It's been declining, basically, since 1960. And so I think, to make sure that a lot of the advances we're having today are the result of investments that were made from decades ago.

I think one of the strongest cases for government spending is on basic R&D, because it's frequently in sort of a basic understanding of science that doesn't have any immediately actionable profit or ways of commercializing it, but do lead to very large advances down the road.

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Watney: And so we want to make sure that we're getting the payoff for decades from now, we need to start making the investments today in basic science and basic R&D. And so I think there's a lot to be done there. There's kind of starting to be some momentum, which is exciting. And I hope that the Biden Administration takes that seriously.

Beckworth: Alright, Caleb, and the time we have left, I want to transition into an area that we both agree is important and key to idea generation, and that is people and immigration. And you have a great new article out called *The Egghead Gap* in the New Atlantis. It speaks to this not only to the importance of immigrants and getting the high skilled, highly trained individuals from abroad, but the role that America specifically plays in that process and how it's been a part of our history for half a century, and it's going to be more so going forward with China. So why don't you summarize and tell us the high points of that article?

*The Egghead Gap*

Watney: Yeah. So the article I think is trying to do a couple of things. It's trying to tie together the fact that there's kind of this emerging consensus that we want to ensure the US maintains its lead in technology and science and especially vis-a-vis China. And as part of that, there's been some discussion of sort of, well, what about all of these talented students that are frequently coming from China and from the rest of the world that are studying in American universities.

Watney: And one of the things I wanted to show in this article was that the United States has always played this role as kind of the global melting pot for the world's top scientists and technical practitioners. And really, our rise to technological prominence in the first place was almost a story of us systematically stealing the top technical talent of our rivals. So if you look back at 1900 and before, the US was a bit of a backwater technologically, a lot of the top research scientists and a lot of the top universities were in Europe, and especially in sort of Germany and Austria. And then there were sort of three successive academic waves of account that ended up arriving to the United States and help firmly establish us, as the world's preeminent leader in science and technology.

Watney: The first happened sort of in the lead up to World War II, with the prosecution of Jewish scientists in Germany and in Austria. And there was a wave of academics that included people like Albert Einstein and Teller and lots of other brilliant scientists that ended up forming the basis of the Manhattan Project that came over from this wave. And it was sort of the first wave, the second wave was Operation Paperclip after World War II, essentially, Wernher von Braun and a bunch of other German scientists who had stayed in Germany, there was almost a race between the Soviets in the US for the sort of the leftovers of top German scientists.

Watney: And then the final wave was, as the USSR was sort of starting to collapse a little bit, there were a lot of top mathematicians from the USSR that were looking to find a new home in the United States. Tried to make us a very attractive destination. And if you look at the Nobel Prize in Physics, as an example, in the first 30 years of its existence, it started in 1900 or 1901, United States was only involved in about 10%, three of the 30 prizes that were given in that period.  But then, as you look in the next period, basically, two thirds of the prizes in physics included an American scientist, and many of those were either directly one of the members of those three academic waves or their descendants. And so immigration and especially sort of this top of the line scientist emigration has played a huge role in the development of American science and I think it should going forward.

Watney: But there's also ways in which we could take a more proactive approach. And so that's kind of the rest of the essay is sketching out not only a bill that... And they will come approach to talent attraction, but a proactive we should be trying to proactively identify who are the world's top scientists, and making them offers to come and reside in the United States.

Immigration and especially sort of this top of the line scientist emigration has played a huge role in the development of American science and I think it should going forward. But there's also ways in which we could take a more proactive approach... we should be trying to proactively identify who are the world's top scientists, and making them offers to come and reside in the United States.

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Beckworth: This is a very interesting article, and it resonated with Matt Yglesias’ book *One Billion Americans.* He also is a previous guest of the show. And one of the arguments he makes, I believe the key argument he makes, and I think you're making it too in this article, is that we want to have more Americans so that we can set the norms for global markets, for products for services.

Beckworth: And I think you're making the same argument here for the development of R&D and technology, you want the US to be the leader, we want our norms to guide the world, right? We don't want... As we see in some other industries like Hollywood, media, their movies are being catered to the large Chinese market. In fact, I read this year that the Chinese movie market now is larger than the US. And so if you're a major producer, you're going to be careful on what you put in the content. And so there are norms that are beginning to shape the output, and we want to be able to use our norms to shape the development of R&D. Is that fair?

Watney: Yeah, that's correct. So yeah, I think Matt's book does a good job of just pointing out. Yes, sheer market size ends up dictating a lot about how companies and industries try to think about their positioning vis-a-vis different kinds of countries, but especially for something like science and technology, where there's a huge amount of path dependence, I think sometimes there's this idea of technological determinism, that we develop technology, and it's almost always going to be developed in the way that it was.

Watney: And there were very few paths it could have taken. But just to use a couple of examples. Now, the fact that the United States has a very sort of car-centric modes of transportation across a lot of our cities. When compared to Europe, was partially a policy choice of what kinds of infrastructure are we going to be building. We did a massive build out of highways, and of cars and transportation in the United States, which helped facilitate the emergence of auto transport as the key method of transportation in the United States in a way that it doesn't look across Europe.

Watney: And so we could have hypothetically made different choices around that. This also shows up in how does a particular technology, not only choices between technologies, but also choices within a technology. So there's really good paper by Tim Wong looking at artificial intelligence. And there's kind of this assumption that China who tends to have much more lacks privacy laws or almost non-existent privacy laws will sort of have an advantage in the development of AI because they're just going to have so much more data about their citizens and about their habits, that will end up forming a huge basis on which the Chinese AI industry can develop.

Watney: But there's ways that we could offset that in the United States by strategic investment into techniques that reduce the importance of data. So things like simulated learning, where basically instead of taking a real world data set, you're almost just simulating an environment, can end up offsetting the need for real world data or something like one shot learning, how can you help AI be just as efficient on a much smaller data set? There's lots of interesting AI techniques that are being developed in that way too. And so the United States, you're trying to be thinking about the terrain of AI landscape and thinking about how can we strategically invest in techniques that make it more likely that firms in a US context can be successful without compromising on privacy laws in the same way that China does.

Watney: And so yeah, path dependence really matters for technology development, we should acknowledge the fact that yeah, the norms that we take as a Western liberalized country, will end up shaping how technology is developed. And thus, I think one of the best ways that we can make sure that the future of technology happens in, or develops in sort of a way that is compatible with liberal democracy is to make sure that it is developed in a liberal democracy. It's very difficult to regulate technologies that we don't have control over. And so if China ends up taking the leading edge in quantum computing, and in AI and in genetic editing and geoengineering, the concerns of US watchdog groups or regulators won't matter in the first place. So there's kind of like, I guess, there's a question of how should the US govern technology firms? And then there's sort of a meta question of does the US even get to make these decisions in the first place, that only happens if the technologies are being developed here.

Path dependence really matters for technology development, we should acknowledge the fact that yeah, the norms that we take as a Western liberalized country, will end up shaping how technology is developed. And thus, I think one of the best ways that we can make sure that the future of technology happens in, or develops in sort of a way that is compatible with liberal democracy is to make sure that it is developed in a liberal democracy. It's very difficult to regulate technologies that we don't have control over.

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Beckworth: So we want technologies to develop here, we want immigrants who have the skills to develop them, we want to keep them here, we want to pull them in. And maybe under this past administration, there's been some tendency to discourage those highly skilled individuals. So moving forward, we're going to make sure this is something that will continue to be a source of innovation and growth for the US economy.

Watney: Yeah, I think you put that very delicately. There was a huge drop off in skilled immigration over the course of the last four years. And I think it really hurt the US's reputation as the place where you want to go if you're a young, enterprising entrepreneur, or a young academic, and we want to reestablish the reputation of US internationally doing that. And so I think yeah, especially early on a lot of the policy choices we make in this administration and prioritizing the fact that we want to broadcast that the United States is this kind of place, and that we will welcome you with open arms will end up making really the big difference.

Beckworth: Just one concrete example, just put a face to this idea. The two scientists who developed the Pfizer vaccine were Turkish immigrants into Germany. It's both German and US firms that have worked together to develop this, but these are immigrants and they developed the vaccine. We want people like that coming to America, and making us a leader in technology so that we can set the norms. Help guide the world in the right direction. With that our time is up. Our guest today has been Caleb Watney. Caleb, thank you so much for coming on the show.

Watney: Thanks for having me, David. It was great to talk with you.

Photo by Mladen Antonov via Getty Images

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