Apr 10, 2017

Tyler Cowen on Complacency, Immobility, and Stagnation

David Beckworth Senior Research Fellow , Tyler Cowen Holbert L. Harris Chair of Economics at George Mason University

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.

Tyler Cowen is a professor of economics at George Mason University as well as the general director of the Mercatus Center at George Mason University. He joins the show to discuss his new book, *The Complacent Class: The Self-Defeating Quest for the American Dream.* Tyler argues that restlessness and willingness to take risks have been key traits throughout American history. However, in the last few decades, American society has become more risk-averse. While we may have become more comfortable with less risk-taking, this complacency has led to less innovation and dynamism in the economy. Such stasis is causing economic stagnation and other woes throughout the United States.

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: Tyler, welcome to the show.

Tyler Cowen: Thank you for having me on, David.

Beckworth: Oh, it's a real treat to have you on.

Cowen: I'm a big fan, of course.

Beckworth: Oh, well, I guess I should confess to my audience that you're also my boss now. So it's a real honor both to work for you and to have you on the show. Let's begin the show as I do with all my guests and ask, how did you get into economics?

Cowen: I was 13 years old and I was a chess player. And I met some people through my father who were economists or reading economics. And I started going to the public library and I tried to read as much philosophy and economics as possible, but I actually liked philosophy more. And I've been doing this ever since then. Actually, that's now 41 years ago.

Cowen: And over time, I drifted to economics because I realized being a philosopher was not very practical, and that's how I got into economics. I was quite young and by age 14 was totally dedicated to it. Was reading Adam Smith like I was 13 or 14.

Beckworth: That's amazing. I think I read that story somewhere else and I remember reading, "Man, I will never catch up with Tyler Cowen."

Cowen: He will outlive me. Isn't that more than consolation?

Beckworth: Well, that's the first, number one, you started younger. And number two, I want to ask you about this. I read about your prolific reading speed and so I just fell back on, "Well, we all have our comparative advantages backwards." Tyler is an incredible read. And I've heard this story from GMU's department of economics that you will have a graduate assistant bringing a cart full of books, every week, and you'll just go through them quickly. Is that right?

Cowen: Sure. The problem is getting rid of the books or getting them back. And sometimes I think if I'm interviewing an RA, I need to measure the biceps, rather than look at the GRE scores.

Beckworth: That's hilarious. Now, you're not only a prolific reader, but you're also, I think, a prolific producer of books. You've had quite a few books out recently. I mentioned some of them, The Great Stagnation, Average is Over, there some other ones as well on food and culture. How do you find time to make all these books as well as oversee Mercatus, via an economics professor, blog, you're on Twitter, are you human?

Cowen: I think people should be more efficient. So take what is the most important thing and get that done early in the morning. And for me the most important thing is writing. So if you write something every morning, every morning, not like most mornings or mornings when you feel like writing, it will add up to an incredible degree.

Cowen: Just do it as a rule, every morning, start at 7:00 a.m. or 8:00 a.m. And even if it's a short amount, you'll get better and better and it will become more. And each year you'll have written a lot. And if people would just follow that simple rule, I think they all would be more productive. And even if it's bad, rewrite it, fix it, throw it out, it doesn't matter. Every morning you're in the habit, you'll be productive.

Beckworth: Okay. Let's move to your book, The Complacent Class, and let's begin with maybe an overview, a summary, then we'll get into the specifics of it. So why don't you tell us the main argument of your book?

Complacency and Loss of Dynamism

Cowen: Well, this is a macro podcast, so I'll give you a weird macro account of the book-

Beckworth: Fantastic.

Cowen: ... rather than the account I give say to NPR.

Beckworth: Okay.

Cowen: So we're all familiar with John Maynard Keynes's argument, that when everyone rushes to safety or rushes to liquidity, the economy rather quickly react in such a way so that no one really gets more liquidity at all, and you may, in fact, increase volatility at the social level rather than lowering it. It's a familiar argument.

Cowen: And Keynes's mechanism it's one that's quite rapid. Think of it as being investing in a stock market and seeking liquidity now and you can't get it now. I'm taking that logic and I'm applying it to individual decisions about whether or not to move, what job to take, how much risk to take in your career, how to raise your children.

Cowen: Really, every single decision or economic decision in an ordinary life, and I'm showing there's a general mechanism that each individual often will act to lower his or her risk and often that's a rational thing to do. But when applied at the social level, there's this counter intuitive collective result that risk for all of us can go up because we end up as being less dynamic, we have less revenue, less innovation, and a lot of us then end up in riskier positions.

Cowen: So I think of this as a macro argument, though in the book it's not framed as such.

Beckworth: No, I think it is too. In fact, this book really, for me, put together a number of strands I'd been thinking about in your previous book, “The Great Stagnation,” I'll mention a little bit more in a minute. Charles Murray's book, “Coming Apart” definitely resonated with me. To me it took it a level deeper though. He made some great observation, but it helped me see what's driving this process better.

Beckworth: Also, Greg Ip's book, “Foolproof.” I saw echoes of that as well.

Cowen: Yes, I saw Greg, of course, and Charles.

Beckworth: Yeah. And so it all comes together. I found it very interesting. Your basic argument is these rational individual decisions at the micro level build up to something that's counterproductive, that's reduced our dynamism, we're digging in. And we'll get to the specifics in a minute. But I want to go to The Great Stagnation argument because this really is a continuation or a deeper analysis of that point. And in that book, you argue and you show that our productivity growth has slowed down since the '70s. And you also make that in your current books.

Cowen: Yes.

Beckworth: And I'll confess that I was at first very skeptical with that argument.

Cowen: Yes, for most people.

Beckworth: I wanted to believe, Tyler. I wanted to believe. And I found my views changed for two reasons. First, actually, I was with you at a bloggers conference in Kansas City and I had been tinkering around with total factor productivity that John Maynard has produced. And I just sketched it out. I took it, I made it trend and then I looked at the 48 through 73 trends and ... Or wherever he starts his series. I plot that all the way out.

Beckworth: And then you look at the level since then and it's striking that between ... If you continue to trend past 73, where we are today, it's a huge, huge difference. Very sobering. That was my first blow to my optimism. And the second one though was, it just took me some time to do the right counterfactual. And this is what I mean. When I first heard your argument, there was a video that had been out that took the show 24 and said, "What if it had been made in 1994?" I don't know if you ever saw that?

Cowen: Yes. I've seen that one or two episodes. I don't know it deeply, but I know what it is.

Beckworth: Yeah. So 24 is this counter terrorism task force team in it. And they are very dependent upon technology to do what their job. And in the video, it's a humorous video spoof of 24 they show Keifer Sutherland, the agent had been back in 1994 how incredibly difficult his job would have been. Like he has a pager, he has to go to a pay phone, computers are slow, internet slow, he has to get physical pictures. Basically, the terrorists get away. He can't do his job.

Beckworth: And I thought, "Yes, see we've made such progress then." But then it hit me that's not the right measure, it's where we could be. And that's the hard part I think in economics in general is doing the right counterfactual. And so we should be much farther along than where we are.

Cowen: Moving information around, we've made unbelievable, incredible progress, that even science fiction writers had not predicted, but moving anything else around often we've gone backwards. We have a weak and crumbling infrastructure, traffic is worse. Try taking the train to New York City, it's no better than when I was a kid. And we finally have a literature on how large were the unmeasured benefits of the internet and it turns out they're not big enough to overturn the measured productivity slow down. And that we've really just confirmed in the last year.

Cowen: But I think the reason why the stagnation they're now seen is having won the debate. It's quite an unfair reason. And that's because Trump was elected. And that actually has no bearing on what you should think about productivity. But the world is like, "Oh my goodness, whether you like, dislike him, whatever, something has gone wrong and that's just completely ended the actual arguing. Unfairly, I would say.

Beckworth: Well, if I try to sit back and think, "Okay, what is the right counterfactual," and correct me, give me your counterfactual. But I would imagine if we'd continued on that pace, we might actually have sky lanes and flying cars and then transportation would be faster. Maybe have home-building automated, because home-building's incredibly efficient, still done the same way it does many years ago. Your train's scenario, I think transportation is one of these things will be much more efficient today.

Cowen: I agree. But to use your TV show example of 24, go back to the say mid-60s, go to a TV show like Bewitched or I Dream of Jeannie, take away their magic powers. And just take those characters, put them in today's world. Other than my smart phone, what is it I operate that they couldn't operate. And they wouldn't even really need new instructions.

Cowen: They might notice the car is more comfortable or the sound system is better. The CD would baffle them for a moment, but it's not that different from earlier technology. And they could do all the things I do. Again, computers aside.

Beckworth: Yeah. So it's keeping the right counterfactual in mind. Okay, well let's move into some of the specific arguments you make in the book and they're laid out nicely and very interesting. I want to begin on the one that really resonated with me and this is a consequence of the lack of dynamism because of all these choices we've made. And one of these is the lack of vision, I got from your book. We don't think big anymore. Can you speak to that?

We’re Thinking Less Big

Cowen: In terms of grand projects, I feel our world has retreated. So science fiction today, so often it's about a dystopia, but in the 19th century and most of the 20th century, science fiction typically under predicted change. The idea that we could have put a man on the moon more or less starting from scratch in seven years seems today almost inconceivable.

Cowen: Now, there's so much more nimby mentality. There's checks and balances. Maybe just directing a wind power station, you couldn't do in seven years. We won with cooperation of other nations, World War II in a relatively small number of years. Now, the military procurement cycle is becoming longer and longer and it can take, say 12 years to get a weapon through and by the time you have it, it's maybe completely obsolete.

Cowen: Or look at music that comes out. If you take what was popular, say in the mid-90s, Alanis Morissette favorite album of mine from back then, if it came out today, it would sound perfectly fresh. You wouldn't think, "Oh, that's music from some other era." But go back to 1967 and imagine music from say 1947 or earlier being released in 1967, you think like, "That's crazy. That's retro. That's nothing like the music people are putting out today."

Cowen: So you're just looking at area after area after area. The vision seems to be getting smaller. And that ultimately is a macro idea because macro is ultimately bad expectations, forecasts, and the G.L.S. Shackle sense of, "How do we imagine the future?" that's like the ultimate micro foundations of macro.

Beckworth: So this lack of vision, it struck me this individually, because I remember as a kid, going to Disney World and Epcot Center and somewhere, maybe it's in Disney World, I'm not sure which one it was that. But you'd go to this future city and you'd see these hanging gardens, these flying cars, robots. And as a kid, I was like, "Wow, this is cool."

Beckworth: I live in Florida. Cape Canaveral wasn't too far away. And here I am, many decades later and not much has changed.

Cowen: We've made some of our cities much better. They're much safer, which is wonderful. But it gets back to the idea of this book we've over invested in safety. Our cities are more diverse, they're calmer, they're gentler in numerous ways, they're less likely to have riots and protests and blocked streets, the way they might have in the mid to late 1960s.

Cowen: But in terms of fundamentally terraforming our cities in some technological way, it's all about interiors. Staying at home, you can stay at home and watch Netflix and get an Amazon delivery, which is fine. I do that myself. But again, the sense of mentality, it's inward-looking, it's leisure time, it's not building a bigger, brighter, more glorious future in the macro sense.

Beckworth: Where there is no vision, the people will perish. That comes from the Bible.

Cowen: Yes. I'm not that pessimistic. This is a quotation from Deuteronomy, that complacency leads to idolatry, right?

Beckworth: Yeah.

Cowen: It's maybe more likely the problem.

Beckworth: Well, your book, and we'll get to it, does have a chapter on the great reset and there is hope for the future, but just acknowledge it. I also, I think it's mentioned in Peter Phil's comment, he said, "We wanted flying cars and all we got was 140 characters." We were excited when Twitter came out. We're excited when Facebook came out. We should have been simple, "Where's the flying car? Where's the best better transportation?"

Cowen: Or living to say 120 for the average person.

Beckworth: Yeah, why haven't we cured cancer yet? Why haven't we cured a lot of diseases?

Cowen: Nixon promised a war on cancer. This was around the corner. It would happen soon. A lot of resources were thrown at it. We were then promised that genomic medicine would be a big deal. I think eventually, it will be, but that was now 20 years ago. We're still waiting for parts of it to make my life better and not just you send something to 23andMe and get back some cute answers, which by the way, I'm afraid to do.

Cowen: In so many areas, what I expected as a kid, has been disappointed. But that said, in a few areas, sending around information, searching and matching, and safety, what we've seen has actually far exceeded what I expected as a kid. So it's that mix like, "Where my expectations fell short or were exceeded." It's so much in this direction of like safety/security/complacency.

Beckworth: Yeah, and again, going back to this like a vision, I think it's hard to get the right vision because there are those gains in those areas, right?

Cowen: That's right.

Beckworth: We are better. We're too comfortable to think about missed opportunities or potential opportunities. Well, let's move on to another point you make in the book that is behind this argument and this is the lack of business dynamism. So speak to that. What are some developments there?

Lack of Business Dynamism

Cowen: Well, as you mentioned at the beginning, if you look at rates of productivity growth, are they lower than they had been throughout much of the 20th century. If you look at startups as a percentage of overall businesses, rates of turnover or churn in business, those are down. The chance that a new business becomes the so-called unicorn, that's down. Measures of market concentration. I know they're very hard to interpret, but they're up a bit. Not as much as some people are saying.

Cowen: I do take that as somewhat of a negative, not a major social problem, but I see less turnover. Chains are cementing themselves in. Again, this is in large part because that's what consumers want. Chains are convenient, they've mastered customer service, you do returns, you know what to expect. But again, there's this long run consequence of there being less vision, less dynamism in return for some shorter end gains that are more comfortable.

Beckworth: And so we see that in retails? You mentioned it in your book?

Cowen: Absolutely in retail, most of all, I think.

Beckworth: Most of all odds. It's very evident in our lives anyhow. The stores we go to very much the same. There aren't many new entrance going on. I know it's interesting because there's been a lot of discussion lately about the increased market power. So I wondered to what extent is this tied into some of the discussions about increasing share of income going to capital? Is this related at all or is this different?

Cowen: I think it's different. Some of the higher share of income going to capital comes from greater market power, but I don't think that's the main issue. I think it's foreign competition and the form of technological change, that information technology, the forms of it we've got and are typically labor substituting. So travel agents, clerks who file papers, those jobs, they haven't quite disappeared, but they have diminished significantly.

Cowen: And the people who are in more are people who work well with computers, and that's actually a minority of us. I'm not even sure I'm one of them in many ways. So I think those are the main reasons for the labor's share of income falling. But higher monopoly is a reason.

Beckworth: It's one of several reasons. Okay. Let's move to another big point you make and that is there's less labor mobility in the U.S.?

Less Labor Mobility Across US States

Cowen: Across States.

Beckworth: Across States.

Cowen: Local mobility, very local is about the same.

Beckworth: Okay. Across the interstate mobility is declined?

Cowen: That's right. Yes. It's gone down by around 50%. There's a number of factors. Some of them are good, of course. Moving's a pain in the neck and if you don't have to move, there's a lot to be said for that. Some of it I think is the internet and cheaper travel that you learn earlier on in your life where you'd like to live and then you just go there. Some of it is just the economy is more services and less manufacturing. So the notion you moved from Mississippi to Detroit to work in an auto plant, that's an out of date story.

Cowen: If you're a dentist, the incentive to move from Columbus, Ohio to Denver, Colorado, it's not really that great, same job, maybe roughly the same level of pay. So there's a sameness that set in to the economic geography of this country. And again, that makes life easier for us. I'm not trying to say it's all bad, but it lowers dynamism. These labor markets adjust more slowly. Even though you'd think like, "Oh my goodness, we have LinkedIn, we have Google. People will now get new jobs again so much quicker than in the bad old days."

Cowen: But you look at the data and not true as you know, coming out of recessions, we've had pretty sluggish labor market adjustments and you can't blame it all on minimum wage or unemployment benefits. It's some of it, but labor markets as a whole if not really gotten more dynamic. And we're just more set in place in physical space and this contrast between information space and physical space is one of the underlying themes of the book.

Beckworth: Yeah, that was an interesting way of framing this discussion, information space versus physical space. Now, on the question again of interstate mobility, people not moving across the country as frequently as they used to. That was a little surprising to me because you hear the standard stories, I did going to school, even when I was an instructor, as a professor. There's a standard story is that, look, this day and age, you will not stay at one job very long or grandparents may, maybe your parents, but you'll be moving back and forth, back and forth. But that's a myth or at least not as true as it used to be.

Cowen: According to census data, there's a slight increase in average job tenure. That may change looking forward and it's still being debated. But if you think there's some simple story that we're just turning over jobs more rapidly, does not seem to be the case.

Beckworth: That's amazing. And it resonated with me because when I left graduate school, I went to the Youth Department of Treasury, I went to a small liberal arts school, then went to a big state university, another big state university. And I finally came here to the Mercatus Center. And my graduate advisor from grad school, "David, you are changing jobs." He's concerned about me, but he's point was actually in my view, a progression.

Beckworth: And I guess, based on what you've in your book and what he's told me, I'm putting the pieces together. Other graduates weren't moving as much as I was. That apparently there is this less mobility going on.

Cowen: I'm more complacent than you are. So I've had my current job, I believe, 27 years. The fact that I've lost track is maybe scarier than the memory itself.

Beckworth: Well, it's interesting because as I was reading this book, I was talking to my wife about this. How are we complacent? How are we not complacent? We're going to get that in a minute, but it definitely led to some soul searching introspection on my part. I know you have a quiz now online too you can take?

Cowen: It's correct, with an international version now.

Beckworth: All right. So listeners out there, in addition to getting your book on The Complacent Class, you need to take the quiz to see what level you fall into. All right. Let's move to another point made in the book that's both, I guess the cause and a consequence of this and this is the reemergence of segregation. In what form do we see that?

Reemergence of Segregation

Cowen: The most prominent form in which segregation has re-emerged is segregation by income. And that's up quite clearly since the 1990s. So wealthier people are more likely to live together. And so are poorer people. Now, it's a much more complex question, how that intersects with segregation by race.

Cowen: Segregation by race is not up overall. And in fact, it's down quite a bit in the suburbs. But if you just look at the most segregated by race urban areas, if you think of those as having special significance in those areas, the problem has gotten worse in large numbers of school systems, especially in the South, the problem has gotten much worse. And you can take that as a predictor of the future.

Cowen: So on racial segregation, the story's pretty mixed, but it's not the happy ending a lot of us hoped for is the civil rights movement was getting underway and winning big successes. Segregation by politics is much worse. You see this in the difference between the electoral college and the popular vote.

Cowen: You can on one hand drive across the whole U.S. coast to coast without passing through a single County that Hillary Clinton won. But on the other hand, in Washington, DC, Trump wins 4.3% of the vote. And you have many people, I know them personally who say, "How can Donald Trump have won? I don't know anyone who voted for him."

Cowen: And it was not that way, even in the 1980s. You look at that Reagan's landslide capturing democratic strongholds. That can't happen anymore. And I think that's the big negative about American life, dating by politics. Like, "Oh, I won't date a Republican." Much more common today. It was almost unheard of several decades ago.

Beckworth: And this is where your book is very helpful and helping put the pieces together with Charles Murray's book, Coming Apart, because he talks about these bubbles that someone who goes to Harvard, marry someone from Harvard ... And we'll talk about matching in a minute. And they live in the world. He calls them, the elites, the Washington, DC area is one example he gives. And they simply do not know anyone who lives outside their bubble.

Cowen: Yes.

Beckworth: It's almost like a foreign land. You have to get special travel from it to come down and visit these people in the fly over country or somewhere in United States. So it was interesting to see that and I guess what the book does, it helps us understand why these things have emerged, why they've happened. And then let's go, I think, to the next part of this, which is really important piece of the story and that is increased matching that's going on. So talk about that.

Increased Matching

Cowen: Well, think of matching as a very general technology. It's finding out the piece of music you would like to listen to or it's dating the person you want to be with or it's finding out what job or what city is best for you.

Cowen: And one of the great advances of contemporary times is we've gotten much better at matching and I don't know that there's anything about how we calculate inflation rates to take this into account. This strikes me as a bias we have not adjusted for yet.

Cowen: I know all about changes in the quality of goods and we adjust for that imperfectly, but we really do. Downtown in Washington, DC, make a serious attempt to get that right. But here's the way of thinking about matching.

Cowen: Again, when I was young, all the time you would buy a record album, bring it home and then realize you didn't like it very much or you only loved one or two songs. Maybe you'd feel vaguely disappointed and most of what you bought, you wouldn't listen to much. Today, you either just get it for free outright or you've heard it in advance on YouTube, Spotify, Pandora, any number of other places, iTunes. You only buy it song by song and you're close to never disappointed because you've already heard it.

Cowen: So the music market, there's less revenue in it. It looks like some GDP catastrophe. It's not. People are only buying the music they actually want. And we don't know how to count that yet. That's one of the big gains of living in a world that's so complacent and has these information speeding up and matching technologies.

Beckworth: Yeah, it was a great point your book brought out, I hadn't thought about it was that there's welfare gains. We're better off because we can better match.

Cowen: Yes.

Beckworth: Of course, the flip side of that is at the societal levels creating this complacency, this lack of dynamism.

Cowen: Well, when I pointed that in the book is matching, it sounds so positive. Segregation, it sounds so negative, but it's actually the same concept.

Beckworth: Yeah. And so going back to the example of someone who goes to Harvard, marries someone from Harvard or someone from an Ivy League School as opposed to maybe in the '50s or '60s, they'd marry a high school sweetheart or maybe a neighbor down the street.

Cowen: Yes.

Beckworth: And you've pointed this out in your book that increasingly we're marrying into the same socioeconomic levels. So these structures in society are being reinforced. There's less flexibility. You don't-

Cowen: Inheritance is a doubling, in essence.

Beckworth: Yeah. And so everything and it creates all problems and even measurement problems. You see increasing inequality, for example, is inequality going up because it's some other force, maybe is it taxes, is some policy, or is it just people matching?

Cowen: It's both of course, yeah.

Beckworth: Yeah. So it may help us realize that things are complicated, but also there's this story going on behind it. Another part of the story, and again, this is some ways we repeat ourselves here, but a different way of flushing this out, is this increased concern for safety. So part of being complacent is you're being more risk averse. Talk about that.

Increased Risk Aversion

Cowen: If you look at people's portfolios, one reason short rates have been so low is people want to hold more of the safe asset. You've written on unrelated issues yourself.

Beckworth: Yeah.

Cowen: A higher percentage of our deposits at banks are insured than before. So we're safer in that way. And implicit insurance would probably be higher yet if we had a way of measuring that. So again, it's all feeding into this general pattern of where the underinvestment is, is in risk-taking.

Cowen: Kenneth Arrow was right, the social returns to risk-taking are higher than the private returns and technology is helping us get better and better at internalizing the private return. And thus it's making the social discrepancy in some ways bigger or worse.

Beckworth: And you give some great concrete examples of this increased risk aversion. So you just mentioned finance, but also things such as there's less rioting, less overall violence in the U.S.

Cowen: Correct. Crime is way down, that's a good thing, of course, but even the drugs we use. So cocaine was a big drug up through the late 1980s, and then it slowly and then later rapidly declines. That was a drug that hypes people up. It makes them violent. Today, much more common is marijuana, which is now semi illegal in many places. That's a drug that puts people to sleep.

Cowen: We used to have an age where music was socially very important. It moved people to various causes, good or bad. It was socially significant as were movies. Today we've replaced that with food. Food is quite a political, noncontroversial.

Beckworth: Interesting.

Cowen: It's a way of vaguely signaling you're politically correct. Look, I had a wonderful Senegalese dinner last night. You don't have to defend anything about the actual culture. So is vague enough, but it's a distance from it and food makes you slightly less mobile, makes you slightly more sleepy, unlike music. And that's what's culturally central. To me it's sad though, actually. I love food.

Beckworth: I understand. It makes me think of sports. Sports has become more politically contentious.

Cowen: correct.

Beckworth: There used to be a very neutral place to go, but now people don't like watching ESPN or they don't like what certain players are doing, but food is still the place you can go that has some semblance of neutrality.

Cowen: And the new ideal in food is people who boast that they will eat anything. The kind of Anthony Bourdain, "Oh, I love that fried tarantula." Food in the past has been politically powerful or controversial in so far as people refused to eat certain things. That's not kosher. That's not Halal. But what's mainstream in our culture is to boast you will eat anything, any and all things. And that too is a way of neutering the discussion of food.

Beckworth: Interesting. Now, other examples of our increased risk aversion. Again, going back there's less rioting. And you mentioned very clearly in the book, you're not for more violence, let me make it very clear to our listeners, but it is a reflection of our risk aversion. You also mentioned the police now use management science and public relation firms. So they nip it in the bud before something even emerges.

Cowen: Correct.

Beckworth: And so it's a safer place.

Cowen: I wonder what is the counterfactual if you ran the 1960s civil rights movement today? So the famous Selma March, they closed the interstate highway for five days to allow the march. Now I'm very glad they did, but I suspect today you'd have a much harder time getting that. It might be impossible. Close the highway for five days, what will the truckers' lobby say? How will this woman pick her daughter up from school and so on.

Cowen: And it was a very different world. And one of the small things I tried to do in my book is just make people see how different that world of the mid-60s was than today.

Beckworth: No, it is very striking. I think of like Black Live Matters. Occasionally, they would go up onto a freeway, shut down a road, but it was such a big deal because never happened. All of a sudden they shut things down.

Cowen: Yes.

Beckworth: And people were talking about passing laws. You can run people over if they do that. Well, what you've noted in the book is in five days a highway was shut down. That's a totally different world.

Cowen: That's right. And we're glad they did it. So that to me is really the stunning thing.

Beckworth: Yeah.

Cowen: So what are we missing out today? We don't know. Again, I'm not advocating we allow all these roads to be shut down, but the greater convenience of today I now have a much greater unease about because I feel discourse in some ways being stultified in a way we don't even really see.

Beckworth: Also, just another, I think interesting example you mentioned in Washington, DC, here where we are, that it's hard to protest a group of more than 25, is that the number I believe I read?

Cowen: Yes.

Beckworth: Do you think it permits? There's a professional protest organizers. You can't protest around certain key monuments anymore.

Cowen: It can always invoke national security too and just-

Beckworth: Yeah, so take the life force out of any, "Let's change the world enthusiasm or energy."

Cowen: That's correct. When I was a teenager, I organized an anti-draft registration protest in New Jersey and I had to get a permit. It took maybe an hour, hour and a half. It was almost no time. Had the permit, held the demonstration, that was it. No further paperwork required. Again, a very different world from today.

Beckworth: Now, you also mentioned in there the history. So you contrast it with earlier history even in the protest March. You mentioned, "The American West was an outlet for national energy," I find that interesting. So people could ... All these immigrants, you are risk loving and they would love to go push the limits. They may lose a child, they might be willing to die, but it was a chance to use that energy to explore, to try new things.

Cowen: That's correct.

Beckworth: We don't have that. And it reminded me of a story I heard actually on NPR's Radio Live how early American football was the same way. The Wars were over, frontiers have been settled. So men had to prove themselves. They had this energy. So early American football was brutish. It was violent. And it was this outlet of-

Cowen: Yes, still is.

Beckworth: ... Still is, but even more so back then. And it was a way to have that outlet for energy. So we're finding ways to contain, to manage it, whereas before it was free roaming.

Cowen: And society is more feminized. That's a huge factor for the better, for the most part. But nonetheless, that's part of this big basket of trade offs we've accepted.

Beckworth: And continue with the football example now, we hear conversations about concussions, helmets. So again, I see more evidence more in this direction. You also mentioned that ... I'm a parent with young children. So this resonated, helicopter parenting. Some schools they don't allow dodge ball anymore or-

Cowen: They don't allow tag even.

Beckworth: Wow. So my kids' school does allow that, but I was like, "Man, where'd all the fun go. Can't play dodge," I love dodge ball. I still play it occasionally.

Cowen: I did an interview a day ago. Someone was asking me like, "Why should they let them play tag? Kids can get injured playing tag." And that's true, you can get injured doing anything, right?

Beckworth: Right.

Cowen: But there's a point at which if your children never see any risk, never learned to exercise any caution, I'm not sure you're making them safer for the longer run, even though you might slightly lower the few kids who sprained their wrists from playing tag the wrong way.

Beckworth: Right, so it's a trade off. Short term gain, long term loss for these individuals. One other antidote. As I mentioned, I first got all grass go over for the U.S. treasury department and worked in international affairs. One of my assignments was to follow the Canadian economy. So I met people from the Canadian embassy to finance attache. And one of these attaches told me, he goes, "David, you know the difference between you and me, between Canadians and Americans?" I said, "No, what is it?" He goes, "Americans are revolutionary. Canadians are evolutionary." After reading your book, I'm not so sure anymore.

Cowen: We're much less revolutionary than we like to tell ourselves. And furthermore, I think Canadians, their own self image is a bit off because they have the outlet of coming here. It's like they still have their frontier. Now, they've removed it from Canada so they can disown it selectively when they want. But a lot of Canadians, including my co-blogger, Alex Tabarrok, they come here to be raucous. Alex has a more confrontational intellectual style than I do and he's the Canadian and I haven't failed to notice this.

Beckworth: Ironic. But going back to your book that, we're becoming more risk averse. We're becoming less revolutionary. It counter what the Canadians say about us. All right. So you go through these things, a couple of more points. Is technology reinforcing these trends?

Cowen: So often it is because the big gains in technology or information technology and we're using those to settle in to stay at home more, again to watch Netflix, to have things delivered to us. The big advance and transportation recently is Uber, which is fine. Nothing against Uber, but it's really just a taxi cab that comes a little more quickly and maybe costs a bit less. And when we get all excited about Uber, that to me is a big disappointment, though it is somewhat more convenient. And the net effect of information technology is to allow us to slow down changes in our physical environment more.

Beckworth: Yeah. So the other night I got here, I tried Uber Eats. So I'm reinforcing that.

Cowen: And how was it?

Beckworth: It was good. But the thing is actually, was in my hotel room. I didn't get out, I wasn't bored. I was being complacent. And we'll talk about that in a minute. You have a chapter that says, okay, here we've discussed this problem. So what does the dynamic society actually look like? And what example do you give?

Cowen: China, of course. China has been growing at about 10% for roughly 30 years, then about 7% or 8%. Now, we're not sure what it's growing at, but it's still growing at a much higher rate than America. It's an incredible string. They've had extraordinarily upward mobility. Most wealthy people in China today did not from wealthy families, because there were hardly any such families period. In the sense of what is possible, the can do spirit, the willingness to take risks to avoid risk. I'm not suggesting we replicate China's level of per capita income, but at the margin, there is something we can learn from them.

Beckworth: Yeah, you mentioned the founder of Alibaba.

Cowen: Jack Ma.

Beckworth: Yeah, his story is incredible. He came from poverty up to being ... He's the richest man in China. Is that right?

Cowen: He was when I wrote it, I don't think it's true anymore, but he's one of the richest.

Beckworth: Okay. He's an example of this generation of folks who were dirt poor they came up, reminded me of the Robert Barron and John Rockefeller who in that environment could become something big.

Cowen: That's right. And there are non complacent people here. So often they're the immigrants, right?

Beckworth: Right.

Cowen: Almost by definition, if you switched countries, there's something you're yearning to do. You're in for big changes. You might be slightly even irritable yourself and you're up for some challenge.

Beckworth: Yeah. That was a great point you brought out in the book that we've outsourced, so to speak, our mobility or our energy to the immigrants who come into our country, but figures who go across state lines.

Cowen: Let them move for it, yeah.

Beckworth: Yeah, fascinating point. Now, you also get into the great reset. Tell us about that. Is there hope? Are we going to change or are we going to be complacent forever?

Cowen: I don't think we're going to change, but I think our environment will force more risk on us. So what in the book I call the great reset can in macro terms be explained like the Minsky moment. So we know in Minsky macro, if an economy is safe for too long, risk-taking and indebtedness they build up, right?

Beckworth: Right.

Cowen: And then there comes a discreet point where something just pops. It could be someone can't pay back a debt, that's the most common story, not the only. It could be some mistake in government decision making, but usually it's somehow debt triggered. It could be CDS contract triggered or default, some big financial institution going under. So what I say in the book is simply the Minsky logic applies at the broader social level.

Cowen: At some point, a crisis will come that we are not able to respond to. It could take the form of an international crisis where we don't have the flexibility to respond, it's possible. It could take the form, actually of a debt crisis that we had some of this with the great recession homeowners not able to pay back debts. You could imagine a bigger, broader national version of this. We stayed in federal debt in an unwillingness to do what it takes to make that system work.

Cowen: But I think the form we're seeing most rapidly is a decline in the quality of governance resulting from people being so much in their bubbles. And I think we're living that right now, this very day, just a few miles to the East of us. We're in Arlington, Virginia here, folks.

Beckworth: Yeah. So interesting statistic that you brought up in a book that wasn't aware of is that an increasing amount of the federal budget is non discretionary. That we were ... Less and less amount is actually determined by Congress and the president.

Cowen: There's a sense in which Congress could vote to Obama and Medicare, but practically speaking-

Beckworth: Right, the politically tough calls.

Cowen: ... there's less and less for discretionary spending, even in Obama's budgets, which were just dreams, they were an actual numbers to be enacted, but he had discretionary spending declining in real terms. And Trump, of course, does too. So that's the trend, but that's where our flexibility and a lot of our federal R&D comes from. So to me that's a worrying development.

Beckworth: Yeah. And at some point, if we don't address this, that might be one of the shocks that-

Cowen: Exactly.

Beckworth: ... throws us off or resets us to some extent out of our complacency. As I read the book, I was reminded of a piece you wrote for the New York times back in 2014 and this title, The Lack of Major Wars May be Hurting Economic Growth.

Cowen: That was their title, by the way, not mine.

Beckworth: Oh, what's your title?

Cowen: Well, I'm never allowed to give a title, but I felt the title was a little misleading. People thought I was defending war. I was just pointing out in world history, Europe had been so dynamic because you had States that competed often on military terms and that induced a lot of innovation.

Beckworth: Yeah. And one of your colleagues, Mark Koyama wrote a paper on this.

Cowen: Great piece, yeah.

Beckworth: Yeah. It's fascinating argument that because Europe was fractured and had to contend with it kept people on their toes, innovation high where ... The counter example is China. China was centralized. It was great for safety, security, but complacency set in.

Cowen: That's right.

Beckworth: So one application of this, which I don't hope for by any means, is a war could be one of those shocks that could disrupt the complacency in the U.S.

Cowen: A war that we can't win. Think of the second Iraq war is an early warning sign. In the early stages, we won in military terms. But in terms of the will to do whatever you thought or the vision or the understanding, we completely fell down and we made a huge mass thing, turned out to be a terrible, terrible mistake. We were poorly informed to begin with. That would be an example of this decline in the quality of governance.

Cowen: North Korea today, later on China. You can imagine more coming down the road where it turns out like it's not that there's one Vietnam and we got our act together again, but a string of of losses for this country. It's now quite easy to imagine.

Beckworth: Okay. Now this cycle ... And then going back to your reset, you have a cyclical view of history in it, is that right? Fair to say?

Cyclical View of History

Cowen: Yes.

Beckworth: Okay. So tell us again, what the cyclical view is.

Cowen: So in the 1990s, most of the '90s I believe this, but once you got to the right place, progress was more or less self-reinforcing. You could get a better or worse version of it. But you had a globalized world, a lot of democracies, more or less free trade among many of the more important nations. And you might grow 2% or maybe 3.1% but you are more or less locked on that track and competition in the economic sense would keep you on it. And that made a lot of sense in the '90s.

Cowen: But I also think it was wrong that the notion of the Minsky pressure is building up when things are too good. One problem is when you have a lot of complacency, rogues will arise and the rogues will take advantage of the complacent. But in other is just the system loses some dynamism, productivity growth declines and you rack up more debt for political reasons to keep your voters happy. And at some point you can't pay the bills.

Cowen: So for me, the cycle, if they're not deterministic, but just the notion, there's no self reinforcing track you're on where you can pat yourself on the back and say, "Let it reap, now it's fine, lottie dah, sit back," I don't believe that anymore. History is refuted that.

Beckworth: All right. So history will, at some point, repeat itself, maybe we'll have some event that will be a reset. And the cycle that it's in your book, you document it starting in the 1970s and then it accelerated in the 1980s, is that right in terms of timing?

Cowen: No, I would say that's when the move to complacency started coming.

Beckworth: Okay. Move to complacency.

Cowen: Would be the very early 1980s. So the '60s and '70s are chaotic, full of turmoil. The '70s large parts of that are just a train wreck, right?

Beckworth: Right.

Cowen: We can't control anything, interest rates, inflation, my goodness, president Nixon trying to wreck the constitution, gets impeached. Everyone thinks the American era's over, crime is at incredible levels. It's crazy. And then America sets the shipwright and says, "Look, we totally missed this up. Now, we're going to do it right." We fixed so many of the problems of the '70s. To me it's extraordinary how many of them we got rid of. And we made our main cities much, much safer. I think in New York city the murder rate fell by a factor of 20.

Cowen: But at the same time we locked into many structures and did away with too much dynamism. And when is the reset coming? I would say the signs of a reset starting maybe in the last two years, you're starting to see some signs. Or you could say the great recession was one early warning sign or losing the war in Iraq.

Beckworth: Okay. As individual, how can we fight this pool of complacency?

Cowen: Well, one option is to be an altruist and take more risks against your own self-interest. I'm not sure if I should advise people to do that. But there's another way to look at it. And that's to look at behavioral economics. There's a lot of evidence that even for purely selfish reasons, there's excess status quo bias. The endowment effect is too high. People are too unwilling to make decisions of change.

Cowen: There's this new Steve Levy people where they flip coins for people and if the coin comes up one way, you've got to make the change. And the people who make the changes, they end up being quite happy in the end, even though it was the coin flip that made them make the change.

Cowen: So at the margin, I would just say realize that you to pretty much all of us has status quo bias. If you're really not sure, maybe you ought to make the change and altruism a selfishness there can work together.

Beckworth: Well, I think at this job here at Mercatus was good for me and-

Cowen: Exactly, and I told you this when I was talking you to dig it.

Beckworth: Right. So a little background, Tyler was trying to get me to come up here and many opportunities, new unforeseen opportunities have arisen and it would've been very easy to stay that a 10 year job at a state institution because lifetime employment, that would've been the complacent thing to do.

Cowen: Yes, and a cheap place to live with a happy family. Kids in school.

Beckworth: Right.

Cowen: Who would leave that? You did. As I said, you're probably less complacent than I am.

Beckworth: Well, the thing is I thought I was until I took your quiz. I came out about right in the middle. So I wasn't as high, wasn't at the bottom …

Cowen: I did worse on the quiz than you did.

Beckworth: Okay. All right.

Cowen: I sometimes joke, "If you finished the quiz at all, you ought to be docked 30 points," because a truly uncomplacent person wouldn't see through the whole thing.

Beckworth: Yeah, there you go. Okay. A few minutes I have left. This is Macro Musings. What are the implications for macroeconomic policy? Any lessons for the fed or for interest rates or anything like that?

Implications for Macroeconomic Policy

Cowen: Well, if we think about issues like the safe asset shortage, I think we need to consider the possibility there's an over-investment in safe assets. That's not such an easy thing to fix. Now, you could think like a micro economist and tax safe assets, but I suspect that could just make people more nervous. Like, "Oh my goodness, they're taking part of my T-bill from me. I better save all the more. Better buy some gold now."

Cowen: So the intuitive response is probably going to be counterproductive. But I think it points our attention at the notion that getting risk-taking going again is extraordinarily difficult. There's not a single policy lever. It's unwinding of a whole set of coordinated networks and decisions which are now fairly well meshed together. And that's a big reason why the fed has found it so hard to get things done and revitalize animal spirits.

Cowen: People like to blame regulation, Obama, Obamacare, whatever. Well maybe ... But a lot of it is simply when you're stuck, it's very hard to get unstuck because we've built so many social institutions around the idea of minimizing risk taking. I would say to me that's the main macro implication.

Beckworth: That's very fascinating. It does make sense. Like you said, I've looked at some of this before, but from the broader perspective, it's a natural outgrowth of where we've been going for the past few decades.

Cowen: That's right.

Beckworth: All right. Beyond the safe asset problem then, what about the Fed's ability to kickstart the economy in terms of creating robust demand growth? So some people have argued, well there's I think two competing stories that compliment the story of your book. One is Robert Gordon, which is very similar to your version. We've run out of ideas, lack of innovation, supply-side decline. The other-

Cowen: Though Robert thinks that will last forever and I don't.

Beckworth: Okay. That's a key difference. On the other side, there's the Larry Summers of the world who think it's a persistent demand efficiency that's-

Cowen: He thought that until Trump got elected, he's not so sure. Now we need free ticket.

Beckworth: Now we need free ticket, right. So weigh in on that debate. Was there demand efficiency? If so, was it tied to complacency or not?

Cowen: There was a significant demand deficiency. And as you probably know, I've long been a fan of what Scott Sumner calls, an NGDP rule to target the growth path for nominal GDP. But I think the reason we don't do it is complacency of the public. So a lot of economists have been convinced by Scott, by Bennett McCallum, your work, others, I'm fully on board.

Cowen: But the thing is that means in downtimes you need to increase the rate of price inflation. And even if that's only a small amount, the notion that people as they're more worried about their future then see the prices rising for the things they buy, that's such a horror, such a fear like, "My goodness, what are they going to take from me next." That they insist on price level stability or maybe even some deflation.

Cowen: And I think that's ultimately a sociological problem. Why we don't do nominal GDP targeting. It's because of complacency of the public.

Cowen: Economists get it, but-

Beckworth: You've just made a big connection for me because I've had this discussion with previous guests, Gauti Eggertsson was on here, we had this discussion. And he agreed with everything you just said, and my views to the idea of level targeting is inflation has to be flexible. Long run, it's Anchorage has to be flexible. So you make up, you have some reflation after a sharp drop. But to do that would take the fed outside his comfort zone, would take Congress outside its comfort zone, would take the public outside it's comfort zone.

Cowen: That's right.

Beckworth: And that's interesting. I've viewed this as ... I know the problem. They wouldn't do the reflection, the temporary overshoot. Okay. Why wouldn't they do that? Well, the fed, maybe there's institutional bureaucracy, the availability bias or Janet Yellen's finding in 1970s war, but it's bigger than that. It's Congress is the public and as you just framed it, it's a broader complacency issue.

Cowen: And then go back to this contrast with the past. Look at the rates of inflation people tolerated in the 70s. I'm not saying they liked it, but it went on for a while. And although people were critical, they really could have just brought it to an end and they didn't. And it happened. And it's unimaginable to think of that occurring today. It's like today it hits 2.3 and everyone gets nervous, like, "Oh, better pullback in the QE or whatever."

Beckworth: Exactly.

Cowen: The 70s burns, the whole system goes insane. Crime rate at what, 20% or higher. And again, there's criticism, but it happens and it's debated. And I think that's another way of thinking about from a macro point of view, how different these worlds are. Even though a lot of the technologies are the same, the mindsets have so changed. And I'm trying to make that visible in my book.

Beckworth: That is at a super fascinating, also super discouraging, maybe, because it means it's a long haul to convince people to do something like level targeting.

Cowen: Correct.

Beckworth: We have to overcome this complacency, so maybe it will be the Trump shock. Maybe it will be some other shock that will require us to shake us up, get beyond our risk aversion, be willing to embrace true flexible inflation targeting. One thing to me is in the big ironies is, we talk about flexible inflation targeting, but really if you become more of a strict inflation target or we can't really do that.

Cowen: And it's a maximum, it's not even an average, right?

Beckworth: Right.

Cowen: I'd be much happier with 2% if it were an average and you'd be willing sometimes above, sometimes below, but it's a cap and you end up at 1.7 then you're scared you'll hit 1.9, so it ends up back at 1.4. That's crazy. No macro theory recommends that and that's what we have. And I'd say the public is to blame, not the economist.

Beckworth: Yeah, they're just a reflection of the broader society. There was a recent NBER paper, I forget the author's name, but we'll put it up on the website, that documented that how you view inflation, how much you respond to it as tied to whether you lived in the 70s, your-

Cowen: That's right, yes.

Beckworth: And then we see this anecdotally, Neel Kashkari just recently had a piece where he explained why he descended from the last FMC vote. He's the only one who put it against the rate hike in March. And one of the explanation ... Was the only thing. One of the reasons he gave is because they have not taken a symmetric approach to their inflation target.

Cowen: That's right.

Beckworth: Now, I have a server freshman and he was honest, said, "Look, we're treating this more as a ceiling and as a target." And I look at people like him. I would throw in also a governor, Lael Brainard, who's been more cautious, I think, James Bullard. Again, this is anecdotal, but as you group them, there are the younger part of the FOMC, and the older part of the FOMC is as much more risk averse.

Beckworth: So I don't know, maybe is there any hope that this can be solved by just generational forces or not? You need an actual shock.

Cowen: I suspect we need a or a crack up. First, we got rid of symmetry for fiscal policy. It used to be sometimes you're on a surplus, other times you're on a deficit, but people don't like higher taxes. So over time, we ended up always running a deficit with the total debt, basically always growing. No symmetry anymore.

Cowen: Now monetary policy, well, people can feel they're suffering a loss in their real wage. So we've got to undershoot 2% and that symmetry has gone. So my question is, what other symmetry are we going to lose next? Not when are we going to fix these things? There's more downside in this.

Beckworth: Oh, boy, I like-

Cowen: ... if this country is not yet anything close to a total wreck, right?

Beckworth: Right. Okay. Well, on that pessimistic note, we will end. Although there is hope at the end of the books to read the book and see how things can get better.

Cowen: And I'll see you all on the other side of 2% inflation, right?

Beckworth: Oh, that's right. All right. Our guest today has been Tyler Cowen. Tyler, thank you for coming on the show.

Cowen: David. Thank you very much.

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