Jul 24, 2017

Lisa Cook on Households in the Great Recession, Economic Growth in Africa, and Patents

Many households were financially devastated by the Great Recession, and implementing early warning systems may make families more resilient to these shocks in the future.
David Beckworth Senior Research Fellow , Lisa Cook

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.

Lisa Cook is an Associate Professor of Economics at Michigan State University and formerly served as a senior economist at the Council of Economic Advisers under President Obama. Lisa joins Macro Musings to discuss her work on how the Great Recession affected households in the U.S. She also shares her thoughts on the prospects for economic development in Africa, and discusses the U.S. patent system and whether the system is in need of reforms.

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: Lisa, welcome to the show.

Lisa Cook: Thank you.

Beckworth: Awesome. Glad to have you on. With all my guests I always ask them, how did you get into economics? So what is your story?

Cook: So mine is slightly complicated. So I was a physics and philosophy major undergraduate at Spelman, and after doing philosophy politics and economics at Oxford, I went to Africa to see how I could actually write a dissertation in philosophy, based on African philosophy, but no program. If I wanted to get into a good program in the US, I basically already had to have the dissertation written and I had to have the networks formed.

Cook: So I went to the University of Dakar. There were three strikes in the course of the year. And, among other things that taught me that, maybe what Africa doesn't need is another philosopher, but possibly an economist. So I was climbing Kilimanjaro, as randomly paired with whoever was hiking that day. I happened to be hiking with my hiking partner happened to be Cambridge University economist whose son had just majored in econ in the United States.

Cook: And I was ruminating, "So should I do PhD in economics? Should I do PhD in philosophy?" And for five hours while we were climbing, he was convincing me that I should do a PhD in economics. And he knew the landscape from his side of the pond. He knew the landscape from the American side, and it was just a fantastic meeting and at the right time. So that's how I became an economist. It was not, I guess it was serendipity.

Beckworth: You're kind of conversion on the road to Damascus experience.

Cook: Right. Exactly.

Beckworth: Except it was on Mount Kilimanjaro.

Cook: That's right.

Beckworth: That's pretty remarkable too because you had to start from scratch. I mean, you were already doing graduate work and then you had to start over again. Right?

Cook: Well, not really. As a physics and philosophy major, I didn't have to exactly start from scratch, but one of the things that happened was that I still needed to take more … I took a math econ course at Oxford and I loved it so much. I thought it was too cool and I was too passionate about it for that to become my life's work. So I just built on that course and I just needed to take more courses and real analysis and differential equations higher level math courses. And I did those that I did them all over the country at Stanford at where I did the AA summer program, at University of Maryland in my hometown in Milledgeville, Georgia at Georgia Tech.

Beckworth: All right, so Lisa, you have a fascinating experience. You became an economist in your heart on the top of a mountain. I mean, I don't know how many other economists can make that claim. Definitely not on the show so far. So you definitely are special in that regard. Now tell us about your time at the Council of Economic Advisers. What was that like and what did you do there?

Cook: That was fascinating. So I went there to work on patent reform and it's 2011, 2012. And of course, patent reform did happen. But as you might be invited for one thing and wind up working on another thing. I was the most senior person who had worked on international finance and banking crises, financial crises, and wound up working on the Eurozone. So the first half of my time there was largely on patent and innovation. And the second half was largely on, the Eurozone crisis.

Cook: And that became all consuming. I mean, the patent reform was sort of wrapped up by the time I got there and I was just adding icing to the cake where I could. But for the Eurozone crisis, it was a daily exercise and I was in charge of the president's briefing on the Euro crisis every morning.

Beckworth: So what was a typical day like when you rose up in the morning, what would you do as a CEA economist and how would your day proceed?

Cook: So a typical day at CEA included my getting up at 3:30 and starting at four o'clock when markets opened in Europe. And when the ECB was beginning to make policy decisions or to release policy decisions, we had to be up and prepared so that we knew how to brief senior staff of The White House about the Eurozone and the president about the Eurozone. So for two or three hours, we had somewhat of a template of what we thought we might tell on things might change. And we, coordinated with other senior people at The White House. And, then it had to be on his desk by 7:00 AM.

Cook: So, until seven, I spent three hours sort of preparing and then, at about nine o'clock I'd go to the gym quickly, get to The White House at nine o'clock, we'd start the cycle all over again. So we would figure out what the big issue of the day was, how things were shaping up, sort of, which country was in trouble that day. Was it Italy? Was it Greece going forward? Was Cypress about to explode?

Cook: So there were a number of different things we were walking. So based on that we prepared the briefing and sometimes it was sort of deep background, say the Fed's balance sheet or, the ECB's balance sheet or something like that just to give the president more context for a conversation that he might be having that day. Or it was sort of immediate, this is what is happening to bond yields, to bond deals in Greece or Portugal. What is the bale out countries? And, this is how the ECB is proceeding.

Cook: So that was sort of the nature of the day. And I would typically leave at about eight or nine o'clock, having presented, templates, having discussed the template with the chair of the Council of Economic Advisers and figured out what we might present the next day and it would just start over again. It was a long day. It was a long day and it was never a dull moment for, especially for the last six months of my time there.

Beckworth: Now remind me again, what was the time you were there?

Cook: 2011 to 2012. So August 2011 to August 2012.

Beckworth: Interesting. So this is a great period in the history of the Eurozone crisis, because that was the year 2011 where the European Central Bank raised interest rates twice. And I had this conversation with your former colleague, Jay Shambaugh about this point, but that seems to me to be a colossal error on the part of the ECB to raise interest rates in 2011. What was your take? What was the CEA's take in 2011 when they saw the ECB doing this? Were you guys saying, what were you thinking or were you just kind of shocked to see the ECB do this?

Reactions to the ECB Raising Rates

Cook: Well, I think the best we could do as you know, since we're not in the Eurozone and we're not part of the EU, the best we could do is offer our technical expertise and offer any advice if they ask. Because we were ground zero for the crisis. So it's not as though we could credibly in some instances offer some advice. But, I wasn't there to be clear, I wasn't there when a lot of that thinking was going on.

Cook: I was really at, and we at that time were really in reactive mode just to what's happening today. How is it going to affect the US. Especially we were worried about how it would affect our growth, how would affect our recovery. So they took policy decisions, especially with respect to their balance sheet much later than we did. And, I think that some people would have liked for the ECB to have started down our path a little bit earlier. So that probably would have included not raising interest rates. But I wasn't there for that conversation. So I can't speculate.

Beckworth: Now, were you there at the moment when Mario Draghi says the ECB will do whatever it takes?

Cook: Whatever it takes. Yes, I was there. And that was clearly what he should've said. Maybe he could have said it earlier, but it wasn't too late by the time he said it. But markets needed to know that. Investors needed to know that. Countries needed to know that. So there was a lot that was happening. One thing that I was also doing when I was at The White House was representing the United States on a number of different committees on the OECP.

Cook: So, The White House is … on some of those, and often and I had to be in Paris where the OECD is based for these meetings. And these were mainly meetings with partners in the OECD. So a lot of European partners, as you can imagine, and all of those conversations became the future of the Eurozone conversation and the crisis of the day conversation. So it was fascinating to be in the center of the conversation.

Cook: Those discussions were not supposed to be related to the Eurozone. They were related to whatever regular business was set up in the course of typically a year earlier. So we had items to discuss at each meeting. And this dominated the conversation and views of different countries became evident at every meeting. So you saw the countries that were really for fiscal austerity for Greece, for example, and others who were thinking that Greece would never be able to meet the terms of the current agreement, some who thought that there should be some countries to leave the Eurozone, and others who wanted to keep it whole at any cost. So it was whatever I saw playing out publicly was also playing out more privately in the meetings and views were sometimes fairly entrenched.

Beckworth: Very interesting. You had a great front row seat to the Eurozone crisis. Both what I consider the low year 2011 and the high year when they turned the corner with that promise by Mario Draghi. Well, let's move on to some of the other work you've done. Now you're back at Michigan state now and you have a summer program there for the American Economic Association. Tell us about that summer program.

The AEA Summer Program

Cook: So it's a 40 year old program and is open to anyone who would like to prepare for graduate school and economics. So half of it is to encourage people who may be, say sophomores and don't know what a PhD in economics is. And the other part is to, prepare students to do well in PhD programs. This is as you know there's a big gap in economics with respect to representation of minorities and women.

Cook: And one thing that I completely believe from Janet Yellen, who was the most accurate FED official on the financial crisis, I believe her when she says that the financial crisis was caused by the lack of diversity, the lack of diversity of thought, of experience. And I think in economics we've got to change that. We don't need another financial crisis to show us that. So, this is one program that could help in that regard. And there are probably many others.

Cook: But as I said, this is open to anyone who would like to do it. This is the first year at Michigan State University. I participated in it when it was at Stanford University. It's been all over the country. It is probably responsible for, 20% or so of the underrepresented minorities who are PhD holders in economics, which means that it's been a fairly successful program in that regard.

Beckworth: So if any of our listeners out there who are interested in their PhD program, they should check this out for sure. I got to ask, so this is Macro Musings where we focus on macroeconomic issues. What is your sense of the interests with the students you see? Are they more geared toward applied micro or micro economics or do you see any interest in macro?

Cook: That is a really good question. That is a very good question. So, I'm to actually tell you two stories, because we've only been here one year. They've only been here for one year or so. I wouldn't be able to say anything about any sort of trends. But I was teaching advanced macro in 2008, in the fall of 2008 and you know what was happening, especially in Michigan. Just every week, numbers concerning mass layoffs and the auto industry were happening and sales plummeting and so on.

Cook: And I would say that I scrapped about a quarter of my entire syllabus and I inserted more economic history. So of course, as a student of Barry Eichengreen, I would do that. Yes. And having been at Berkeley with a lot of good economic historians, I did that. And it made a big difference because we did not know where our models were failing. And I think history was going to be the only guide.

Cook: I had a handful of students in that course, maybe I'd say maybe 10 or 11. By the next fall that enrollment had tripled. Now this is an advanced course. This is the course that you would take for graduate school credit. So an advanced undergraduate course or graduate course depending on the credit, but at a fairly, and it was mainly modeled. But it was the first time for example, that I could explain the zero lower bound without it being an abstract concept.

Cook: So it was readily apparent. This is what happens to monetary policy. This is the implication. I think that was the task list concept that I had to get across in my macro classes and it was apparent. And the students were much more interested in macro. This is a department where much of the interest is in micro and then econometrics. And, there was a lot more interest in macro and then economic history because we were all trying to figure it out, the students and us professors alike.

Cook: Where did our macro models go wrong if at all? How has the data changed? And the data are often micro data, but they have macro implications. So to answer your question in a second way, I think that the students that I had last year in the program really appreciated the micro foundations of macro. And that's how I teach it. That's how I understand it. But I think they too have an appreciation of history.

Cook: They'd want to see, where it is going, where our models could be made better. But I think they have, I think most students want to study some sort of, some version of micro particularly labor and econometrics. And that would be true, that would be consistent with the expertise of our department. But that's probably true across the country to labor, development, health.

Beckworth: That's my sense. All of these different fields I would kind of collectively call applied micro where they're using interesting datasets, natural experiments, things like that to find some interesting result. But I also think the point that you raise here, there's going to be a generation of future economists who were brought up in this crisis, and you've got to think this will affect them and their interest and look for new perspectives on financial booms and busts and Great Recessions.

Cook: Right. And I think that the way that I think about this is, is marginally the way they were beginning to think about it. So one of my papers as you know is called, the economic violence and economic activity. So I use patents to figure out what might happen, if there are violent episodes. That turned out to be timely too. I mean, if we're thinking about terrorism and its impact on the economy, I think they started to see with the micro data sets we have, how we can think about macroeconomic implications, and how we should think creatively about macroeconomic implications.

Cook: Because sometimes macro people trained in macro are not thinking about all the data they could use. And sometimes the micro folks aren't thinking about the implications for the larger economy. And I like sitting in the middle, especially with respective financial crises because I think we have a longer history of that intersection being explored at least since the great depression.

Beckworth: Well, I'm guilty as charged because I love to download some data from Fred and run it through auto regressions. So yes, you're absolutely right. We aren't probably taking advantage of these great data sets, the micro level like we should. At the same time, I think you're absolutely right. There are perspectives from the micro field that would really shed light on some of the macro economic implications.

Beckworth: I recently had a guest on the show. We were looking at the decline in interstate migration. So labor mobility has declined in the US across state lines. There are a number of reasons. But it has implications at the macroeconomic level. Is the US still an optimal currency area? And kind of implication of this author's paper was, we may still be an optimal currency here, but we're slowly inching away with all of these state and local regulations that are making labor markets less dynamic. But you wouldn't know that unless you take in this micro perspective and then kind of made the connection to the macroeconomic implications. So that's great that we're seeing more of that.

Cook: Yes, I agree.

Beckworth: Well, let's move on to some of your research. You mentioned some of it. But again by looking at something, I don't think we've touched on the show yet and that's the household's perspective on the Great Recession. So we talk a lot about the Federal Reserve, fiscal policy, other things here. But what was it like from the household's perspective during the Great Recession and I know you've looked at data from Michigan which was hammered particularly hard and I think you can probably draw some inferences for the rest of the country from that as well.

Beckworth: So let's begin our conversation with this. The Great Recession is often framed as a perfect storm of many potential causes that all came together. There's the story of lenders making loans, that they shouldn't have Wall Street, global saving gluts, poor regulations, loose monetary policies. There's a whole hodgepodge of reasons why we had this Great Recession. What do you see as kind of the primary role if there was one for a particular culprit? Was one determinant more important than the other? And then how do households play into that?

The Great Recession from the Household Perspective

Cook: So those are good questions. So let me tell you a little bit about the data sets that we're using. We're using two of them. One of them is called the state of the state survey and it's been executed here at Michigan state for I think about 30 years, but it has a random sample of respondents, about 1,000 responded and it's done once a quarter. The good thing about this survey is that it is backward looking and we can sort of trace out and backward looking in the sense that it will ask, are you better off or worse off or the same as you were three months ago, and do you expect to be better off in the future?

Cook: So we could map these … there is a panel element to the survey and at least we can think of it as a repeated cross section. And what we found was something really interesting that households paid more attention to macro data, like the rate of inflation and the unemployment rate broadly than the situation in their own households. So, what we saw with what we saw in the rest of the economy that 40% of household had, we started asking these questions in 2010, but they were backward looking. So we had some insight. They had 40% unemployment in their households and they were more worried about and paying attention to say, the rate of inflation and as you know that has not been, that's like watching grass grow right now. Right?

Beckworth: Right.

Cook: I mean, we haven't had inflation. So that's certainly not something that they should have paid attention to. But the interesting thing about Michigan is that every five years or so we're in recession. The economy is in recession. So they might be sort of hard wired to pay attention to those data. So we thought that they may have been overreacting to some macroeconomic data and not enough to their own households.

Cook: What we also discovered was, and this was a big question in the paper that I was writing using those data, did the permanent income hypothesis hold? So did they spend out of transitory income or were they spending out of permanent income? And what we saw was that they were smoothing consumption by using permanent income. And the worrying thing about that was that it was their retirement. They were spending out as they're recovering all kinds of expenses with their retirement, especially related to healthcare. But the job losses were driving a lot of this behavior. So that's something that we found striking. So we found support for the permanent income hypothesis.

Beckworth: Interesting.

Cook: And it's not that, that was something I was looking for, but it was something that was I think, interesting. The second dataset uses financial counseling personal files. And what we do is we try to figure out what the determinants of using financial counseling were and what the outcomes were of financial counseling. Now, yes, we're still trying to answer that broad set of questions. But something else very striking happened with the data.

Cook: Like more than half the people left counseling. So something is going on here or that like it doesn't seem normal that for the studies I've read for so many people to leave counseling, and we're trying to back out. Why? What are the correlates of having a high probability of leaving counseling? So that could be for positive reasons. So, they gave them enough information that they were able to avoid foreclosure, but then we look at the outcomes and they didn't avoid foreclosure.

Cook: And one negative one could be that they were so far gone by the time they showed up for counseling that they didn't feel as though they needed to come back. So we're trying to tease this out and this is as you know quite difficult to do in this literature, but I think we have some very interesting micro data that we can use and that we can think about with respect to potential interventions. Are people catching this early enough? Are financial counselors catching this early enough? Do we need other datasets or do we have the data we need? And are the data being disseminated in a systematic and early enough way? Do we have early warning systems?

Cook: And this is what I'm concerned about as a macro economist. Do we have enough early warning systems so that we can have these times of financial counseling services kick into place, because this one just happened to be the financial arm of the extension service? Do I need to explain what that is?

Beckworth: Yeah. Go ahead and explain that.

Cook: So, this is the cooperative extension service that, is a part typically of land grant institutions. And originally its purpose was to teach farmers, get information to farmers about how to be more productive at their work. And this was sort of the, one of the original missions of land grant institutions. But subsequently it's just become outreach. So public outreach.

Cook: So the research that we have that might be more applied and could be useful for the public, this is one mechanism that is used to get this to the public. So they have a section called, financial and housing education. And in 2008, they just started noticing that people were coming to their financial personal finance classes with the same kinds of problems. So I lost my job, how do I manage my money?

Cook: So they put into place this financial counseling service and they just had an overwhelming response. I mean, they had to add new educators like wildfire. So we were trying to figure out the impact of the study. And this isn't, unfortunately you were mentioning like RCTs, there's no RCT structure here and you may not want one in this environment, but we have rich enough data that I think we can still learn something, especially in terms of possibly avoiding the next crisis with an early warning system or minimizing the impact of a financial crisis.

Cook: But to get back to your question about whose fault it was, I think that we certainly have some clues from these data. It wasn't clear that people were assessing their situation quickly enough to do something about it. Now that you could say a lot about how they got to that point, and that could be the fault of mortgage intermediaries. So of banks, of the individuals themselves. That we don't know.

Cook: We're not able to go farther back into the future with these files. We just know what happened when counseling starts. We know the outcome. So they're just, we have a different trajectory that we follow with these data. But all of the entities you mentioned are to blame. So, yes. Lack of oversight, lack of regulatory oversight that is. Lack of information and then lack of information is a big deal.

Cook: I had kind of a mortgage at about this time and it took a lot to understand all of the documents I was signing and there are two lawyers in my family. It's like, how much more information could I have? And then we find out, expose that some people were being given the wrong credit rating, the wrong kind of mortgage. So there was a lot of mischief on every single side. So there's blame to go around everywhere.

Beckworth: So your research or you're focusing on, you mentioned this early warning system, you think that would be one way to make households more resilient to these shocks?

Cook: Yes, I think so. And even more importantly, policymakers. So I think that if policymakers saw something, let me give you a concrete example. The survey consumer finances is published every three months. So we used to find out... I'm sorry, every three years. We used to find out how mortgages were operating every three years. Of course, that's crazy. We should have known in real time what was going on with these mortgages.

Cook: So there has been a lot that's been done. I know about the efforts at the Federal Reserve of getting more timely information, collecting more timely data and publishing more timely data. So that states that are more lax in regulating mortgages can see the data in comparison to other places and possibly do something more quickly. But the same is true for the currency, the FDIC, the Federal Reserve, hopefully they'll have the data that they need earlier.

Beckworth: So the early warning system is more of an information, a new information, quicker information to help policymakers react sooner and smartly to these emerging crisis, these shocks that can wreak havoc. I want to go back quickly to your, an interesting observation you made about the Michigan residents survey you did. And if I understand you correctly, you mentioned that they were more sensitive to unemployment numbers, inflation numbers, then their own household situation are more concerned about them. Did I understand that correctly?

Cook: Yeah. That's what I can decipher from the data I have.

Beckworth: Well, that's interesting. And the idea here is that they had been through so much. You mentioned Michigan has these recessions on a regular basis, more so than the rest of the economy. So they're jaded, economically jaded. They're looking for what's the next big shock coming around the corner.

Cook: That's right. I think that's exactly what's happening and that's why, it's kind of risky as David, to write about a particular state. But I think Michigan is the canary in the coal mine. And I think the way, and for the surveys that I've seen since then that ask similar questions, you do see this kind of behavior emerging, or you see that Michigan is at the forefront of what is happening in other places that people are becoming more sensitive and in these ways as well.

Cook: So I think that, yes, I think that they are just more jaded and they're trying to figure out what to do. Maybe it's that they should have moved more quickly. They should have acted more quickly if they had. And I don't want to be too hard on these consumers. What it is the case that, 40% of the people in the household lost their jobs. If they were contributing to our mortgage and prices were so depressed, they may not have been able to move. And that is a common story. That was a common story in Michigan. So I think that we have to sort of peel back the layers a little bit before we accuse them of not behaving in a rational way.

Beckworth: Well, I just think it's fascinating, more than maybe accused. I mean, that means these folks are more likely to read the Financial Times, Wall Street journal than say another part of the country that has better economic outcomes. It's very fascinating. They're more in tuned with kind of these debates that maybe you and I would have than the average person if they're much more sensitive to these numbers. Which, as an educator, you wish everyone was having these conversations.

Cook: Exactly. And I think you put your finger on it. The Financial Times isn't something that I would have expected my students at Berkeley or at Harvard to read. But, the Michigan economy is so tied to the international economy. People are quite educated about what's happening in the rest of the world because they know how it affects them. So I think that's possibly one of the lessons that we're learning here that people are paying attention to the economic news that is swirling around them. And they may be more in tune to that than other things. But this economy is so integrated in the world economy. I think this is just one more implication.

Beckworth: Very fascinating. Now can you shed any light on how adversely affected minorities were, because there's a lot of stories on a research pointing to minorities being hit harder during the Great Recession than other folks. So any thoughts on that?

Minority and Working Class Impact of the Great Recession

Cook: So, we didn't have data on... Well, we had information on income, but we didn't have data on wealth. And the big hit for Hispanics and African Americans was with respect to [inaudible]. So there was this big divergence. So basically the last 30 years of progress and closing this racial ethnic wealth gap just evaporated. So for Hispanics and for African American. So I think the figure is that the last time I looked it, I haven't looked recently, is that the average white household wealth is about a quarter million dollars. And for African Americans it's about a $12,000. So this is post-crisis. $12,000 is the price of a used car, not a Camry, a pretty bad used car.

Beckworth: I've heard some interesting work, I just mentioned some of the points they made on this. So first off going into this Great Recession you mentioned their progress was made in narrowing the gap, but still there's kind of this lasting legacy of some of the discriminatory policies and housing the federal government had. So the African Americans are wrestling against that legacy and then comes along this Great Recession.

Beckworth: And one of the interesting sad facts is that as you just mentioned, African Americans have a disproportionate of their wealth in homes. And so when the housing crisis hit, it just completely knocks them flat where, white Americans typically have more diversified portfolios of their assets. So it was harder for them in that regard. Also, I've read in some places that some of the riskier, more exotic mortgages were just proportionately targeted or …

Cook: Marketed to.

Beckworth: Marketed to lower income groups and minority. So, who was the recipient of that was these groups. Finally, another story I've heard is that African Americans tend to be disproportionately represented in the public sector jobs and those took a big hit during the Great Recession. So even though we had at the federal level a big fiscal stimulus, the state and local governments cut back dramatically and that disproportionately affected the African Americans. So among all those things, there's probably some others as well. That those things really made...

Cook: That is right. All those true. And yes, that was a perfect storm. Perfect bad storm in a sense too. I'll just add one more thing. A lot of the loss of wealth came from the loss of a family home due to tax foreclosure. So family homes were lost for African Americans. So it wasn't just sort of a home, it was sort of the longstanding family home that would've been passed down in the family.

Cook: Now there's no wealth, there's no ability to smooth income or smooth consumption across generations. And this is, or across recession. Let's say across recession, because that actually makes more sense. So if that ability was taken away, yes, they'd wind up a lot worse off.

Beckworth: Let me ask you about another group. I'll call them the white working class, the folks that are kind of the centerpiece of the Hillbilly Elegy book that's been a big hit. But the folks that elected Trump. So I wonder to what extent do we know, did the Great Recession really make them vote for Trump? Or maybe, I know there's many causes behind how one votes, but I guess if you had a counterfactual world where the Great Recession wasn't great or had a quicker recovery with the white working class, would they have voted differently?

Cook: So, that is a very interesting question. So first, I'd like to be very careful here because when I'm doing this research with, say, the state or the state survey, I'm not integrating political information because I'm not good at matching those things up. And I have, there are too many political scientists in my family. I'll let them duke it out by themselves. So I stay away from them.

Cook: But, if we look at who the Trump voters were in Michigan, they were in the wealthiest part of the state. If you're thinking about … this is not where minimum wage workers are. These were the people with some of the best jobs in the state with much higher than median incomes working in those areas. So, I'm just not sure exactly-

Beckworth: Interesting.

Cook: ... who the Trump voters are, I suppose. But I would say this, I think that there are misconceptions that were heightened during the campaign that drove a wedge in people's minds about what was actually going on in the state. So, in the same state, the state survey, it is asked, what share of the population do you think is white in the state and black in the state? Typically, the white respondents say about 30% of the state is black, and it's about 12, and African-American say it's about, 10 to 12%. They're much closer to right.

Cook: But this is one of the most segregated states in the country. So when that happens and then you have, this rhetoric that suggests that there is a shrinking pie and certain people are getting more of that pie, I think that that's where the voting pattern comes from. I don't think it's actual job loss. I think it is, possibly thinking about the 2040 census when the country will become a majority minority when it is predicted to become a majority minority country.

Cook: I think a lot of that is what is in the background. So I think that I wouldn't be able to decipher this fully from the data I have either the micro data from the counseling files or from the state of the state survey. But I think that there are a lot of misperceptions that have been allowed to as a result of the segregation patterns in the states.

Beckworth: Very interested. We could spend a lot of time discussing that, but I do want move on to some of your other work. You had a paper in The American Economic Review in 2009 that was titled, *Metals or Management: Explaining Africa's Recent Economic Growth Performance.* So tell us what is that about?

The African Economic Experience

Cook: So there was this African, what was being called in African renaissance that in the 1990s and 2000 where macro management was getting better. And after many years of trying, it was actually beginning to work and stabilizing some of the economies in Africa. So we were asking whether we could attribute this renaissance, this set of high growth rates that we were seeing growth rates on average, six to 10% for most countries in Africa and certainly among those not in the middle of a civil war.

Cook: They were fewer in the middle of a civil war. So, these were growth rates that were only second to Asia, to China in particular. So we wanted to know whether you could say that they were due to higher commodity prices such as oil or due to better management. And what we found was that it was if you were an oil exporter in particular, you were going to do a better.

Cook: But you can see the virtuous cycle that might arise from high oil prices. If people can afford better education, there are more revenues, there's more state revenue. You can invest more heavily in public education. More public education means that, the students who are educated in economics in particular might be able to manage the economy better. So you could see this potential virtuous cycle.

Cook: But we haven't looked at it. My coauthor and I have been thinking about redoing it because after 2008, there was a screeching halt. And certainly, this is partly due to the fall in commodity prices and a secular decline in commodity prices, not just oil. And we wanted to look to see if macroeconomic management actually helped them in those times is as well. So we look forward to extending this data and looking to see, extending these data and seeing what happened after 2008.

Cook: I've been looking at Nigeria and Nigeria has had a very hard time of it because it's so dependent on oil and it has been. And I think that, the macroeconomic management that it really needs to focus on is diversification. And that has been true since the independence. They've had this problem with Dutch disease. They've had classic problems that are associated with having an oil dependent economy. But they used to be the leading producers of palm oil for example, Nigeria was. So I think that there are still a lot of kinks that need to be worked out in many different African countries.

Beckworth: I can imagine countries like Nigeria probably were hammered. And it's mid-2014 and on the oil prices fell dramatically and that had adverse consequences. However, I went online preparing for the show and I went to the IMF, so world economic outlook database and I just looked at 2008 to 2016. I took the average real GDP growth rate. And this is not per capita, which maybe I should have done, but just the overall growth rate.

Beckworth: So for the advanced economies, so they have groupings and they have advanced economies which is the US, Europe and maybe Australia, Canada, other places like that. They averaged 1.08%. So basically about 1% growth from 2008 to 2016 the advanced economies, which to me makes a lot of sense. You think of Europe. I mean, we had a weak recovering the US. Sub-Saharan Africa, the category they call Sub-Saharan Africa grew 4.6%. So they may have been affected by the Great Recession too, but man, they did a lot better than the advanced economies did. So that's-

Cook: That's right.

Beckworth: That's encouraging. And the world, just to compare that to the world, they have a world GDP growth rate. It was 3.27. So Sub-Saharan Africa did relatively better, even if they may still been hurt by some of the fall off from the Great Recession.

Cook: That's right. And for mature developed economies, we're doing what we would relatively expect, one to 2% a year. For these other economies what we should expect is something between three and 5% a year and that in the late 1990s and early 2000s, they were outperforming even the 5%. So that was really striking.

Beckworth: Now, are there any issues moving forward for Africa? I mean, some countries are poster child for really good institutions, good management. Like I think I have Botswana. Is Botswana still kind of a poster child for Africa?

Cook: I think it is. Tunisia was before the Arab spring. Let's see. What other country would I put in that? Ghana was for a time. Let's see what happens with their oil discoveries. But there were quite a few countries. I mean, one of the problems in Botswana though is, my colleague and I, my coauthor and I looked at was macroeconomic management. We didn't look at public health management and that is the big problem in Botswana, the fact that AIDS was allowed to spread, HIV AIDS was allowed to spread as it did.

Cook: And at one point, Botswana men had a life expectancy of about 54 years. So that was a blind spot. So yes, it was a poster child for good long term management, certainly management of natural resources, diamond. But they didn't do as well I think as they could have with respect to preventing the spread of HIV AIDS. And a number of its neighbors did. So Uganda did and Senegal did. But its immediate neighbors, there's so much the borders between Botswana and the rest is Southern Africa, are pretty porous. So a lot of what was happening in those other countries was transmitted to Botswana too. So I think that is something that we have to think about when we're thinking about macroeconomic management in these countries.

Beckworth: All right. Well, and the time we have left, I want to go to another area of your research and this is the role of patents. You've done a lot of work in patents. You mentioned earlier you went to the Council of Economic Advisers to study patents before you got thrown into the Eurozone crisis. So this in a nutshell tell us how important are patents to US economic growth?

Impact of Patents on Economic Growth

Cook: I think they are really important. And let me just give you a quick illustration. So I was giving a few talks in China two years ago, and China's line for, I'd say the last 30 years has been, we don't need US style patent protection and intellectual property protection to grow. We should be allowed to aggregate those patents and so on. So, I go to China and I go to this place called Shi Huang. And, there are the soldiers, the terracotta soldiers. Have you ever seen those?

Beckworth: I've seen pictures of them.

Cook: They’re amazing. So I went to see this and on every single soldier... Now every single soldier was modeled after an actual person. So some of these traits that you see in people's faces are very similar to a particular village, a particular family. So they're actually tracing, they're taking pictures of the terracotta soldiers and people are finding their relatives.

Cook: But you know what I also noticed about these from where I stood was that the model was signed, the actual soldier with signed by the artist as was the weapon. The weapon was made specifically for that terracotta soldier and it was signed by a different artist. And these things are, 1500, 2000 years old. And so I looked at them and I guess the tour guide was kind of surprised. He was like, "Oh yeah, they are signed. That's interesting."

Cook: And I was like, these comes from the time when we in the West had like Winged Victory, and we still don't know who created Winged Victory. That's sort of our collective history of art. But you had the actual person whose work this is, and you can attribute it to someone. So, I gave my talk two days later at Wu Han University and they were kind of stunned. They were prepared to make the argument that they needed to have their own kind of protection that they needed to abrogate the kinds of intellectual property rights, until they caught up.

Cook: And I was like, "Who's been protecting these wives for 2000 years? Are you kidding? You like intellectual property just like we do. Why then would you put someone's name on not only the statue, but on the weapons?" And what I found was that, there were wineries that wanted to sell wine abroad, billions of dollars of wine abroad, and they had two sets of patents. They had patents, the Chinese patents that were, they're not really patents. It's almost like a registration. It doesn't say who the original inventor of that wine is.

Cook: But they at the same time took out patents in the United States so that they could defend them. So there was a big contradiction that I would, and I don't mind there being a contradiction. All I'm saying is that I think that, there's a level of intellectual property rights that one must have to engage in international trade. And I think that this was evident from my time in China. I've done a paper on this with respect to Brazil and Argentina and for Brazil exporting biofuels, you see the same kind of pattern, getting these international patents to be able to defend their intellectual property rights.

Cook: So I think there's a minimum amount. Of course it can go too far, especially with respect to smaller firms that are trying to innovate and who don't have the money to defend their patents or to make sure that their rights are not aggregated. So yes, I think there can be too many. They can be too frivolous. And what you don't want is for innovation to be cost, especially among small firms.

Beckworth: So patents are important to rewarding innovation, new idea generation, creating growth. But I guess that last point you made as a one where I was kind of going into this in the US there's a lot of discussion about patent trolls and people kind of abusing the patent system and there need to be some kind of reform. Is the patent system in the US need of reform?

Cook: Well, I think the reforms that have been put in place need to be articulated and enhanced. So, there was this big push to hire more patent reviewers at the US PTO. And I think that, that was a good thing so that you aren't waiting forever to get a patent while somebody gets a leg up on you after you disclosed your invention. So I think that, that part needs reforming the first to the patent office that we have aligned ourselves more with the rest of the world.

Cook: We used to have a rule that was first to invent and that would be the person to get the patent. Most of the rest of the world uses the first two, the patent office, and that person gets the patent. So I'm waiting to see exactly how that works. But I think that it is on a trajectory to do better. And especially if the frivolous patents start being thrown out more. And, the example that you gave about, I think was that Tyler Cowen? I think it was.

Beckworth: Tyler Cowen has written about this.

Cook: Right. So there has to be, I think a stop to the wanton or uncheck almost unchecked giving of these patents and I think that's happening. But just by hiring more and more qualified patent reviewers, you're going to have better, I think, outcomes. So I think that's happening and I hope that it doesn't happen so slowly that it diminishes the incentives of smaller firms to be nimble and to innovate.

Cook: But patent protection is just one thing. As you know the money that we spend on advertising is larger than our budgets for R and D. So for most firms, that's a much larger line item. So I think that intellectual property protection is just one part of it and it shouldn't be overstated.

Beckworth: Absolutely. It's an important input to the final product, but not the only one. So we are out of time unfortunately. Our guest today has been Lisa Cook. Lisa, thank you so much for coming on the show.

Cook: David, it's been my pleasure. Thanks so much for having me on.

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