Can U.S. Universities Make a Comeback? A Debate

Thursday, June 11, 2020
Tyler Cowen

Tyler Cowen and Noah Smith look at the challenges of higher education during and after the coronavirus pandemic.

Read more in Bloomberg Opinion.

The 70 Percent Solution: What Are Taxes for?

Wednesday, January 23, 2019
Tyler Cowen

Tyler Cowen has a written conversation with Noah Smith, Karl Smith and Michael Strain about the potential impact of a 70% income tax rate.

Why the US Is Stuck With a Fight Over Immigration: A Debate

Monday, July 30, 2018
Tyler Cowen

Is there reason to believe that the US will seek expanded immigration after the Trump administration? Tyler Cowen and Noah Smith debate that question at Bloomberg.

Read it here: Why the U.S. Is Stuck With a Fight Over Immigration: A Debate

Trump Embarks on a Gigantic Fiscal Experiment

Thursday, February 22, 2018
Tyler Cowen

Typically, during an economic expansion, central governments try to restrain spending and raise taxes to pay down debt accumulated during recessions -- at least that’s the theory. Not this time. Bloomberg View economics columnist Tyler Cowen and Noah Smith met online to debate what’s different now. 

Tyler Cowen: I think you’ve noticed that the Trump administration, with support from Congress, has plans to raise the federal debt and deficit. I’ve seen estimates that the tax-cut bill will add at least $1 trillion to the debt over a 10-year period, and for over the next two years Congress just approved about $500 billion in new spending.

I don’t see many fiscal conservatives left anymore, although I am one of them, and so I find these developments distressing on net. But not everyone feels the same way. I’ve been noticing that many Republicans and conservatives are more sympathetic to deficits than they used to be, and many on the left are more critical than under President Barack Obama. It had been a staple of Keynesian thought that so-called secular stagnation might require steady and growing deficits to boost aggregate demand, even in a time of recovery. Now I mostly hear criticisms of President Donald Trump’s deficits and talk that private investment will be crowded out.

What do you make of this, Noah? Is there actually a correct, nonpartisan way to approach fiscal policy, or is it doomed to be the handmaiden of politics?

Noah Smith: Fiscal policy is always going to be political. I think of it like a game-theory equilibrium -- as long as everyone believes that deficits raise growth in the short-term, anyone with a partisan slant is going to push for deficits while their party is in power and push for austerity when their party is out of power. Of course, this means the debt will tend to rise over time. Let’s hope -- and here I’m assuming that the modern monetary theory people are wrong and that there is such a thing as an unsustainable deficit -- the loyal opposition can keep it from rising too fast. It’s also possible that if debt does get so high that it starts undermining business confidence and harming the economy, people will recognize this and drop the belief that deficits are good for growth -- as Bill Clinton did in the 1990s.

In terms of actual policy, Trump’s deficits -- like the deficits of George W. Bush and Ronald Reagan before him -- seem badly timed because they’re procyclical. Keynesian theory says you should run deficits when the economy is in recession and then do austerity in the boom. Yet somehow our presidents keep forgetting that second part. Why do you think that is? And is it just coincidence that it keeps being Republican presidents who run up the debt in good times?

TC: I have a proposed rule for fiscal policy: Invest in good projects and good projects only, based on a cost-benefit test. That sounds trivial, but in reality hardly anyone follows it or even agrees.

I do understand that Keynesian macroeconomic theory suggests that in a downturn we should lower our standards for project evaluation, so as to boost aggregate demand with more spending. I’m not persuaded. For one thing, governments don’t always do a good job finding and targeting unemployed resources. For another thing, spending on wasteful projects turns public opinion against government, and this just isn’t worth it. Keynes’s recipe for spending money on wasteful pyramids, even if good economics, is a public-relations disaster and very bad advice.

But Noah, I have a question for you. You’ve written several columns about how the American economy is becoming more monopolistic. If true (and it is not exactly my view), that implies output could be much higher with current resources, even at full employment. A boost in demand could spur firms to produce more, rather than restricting output so much. So are you now a fan of these Trumpian deficits? They may not be your preferred form of deficit spending, but do you see them still as a net positive?

NS: Your proposed rule basically says government spending should be no different in recessions than in booms. This rehashes the debates from the Great Recession.

Some people doubted the existence of Keynesian demand effects. But the empirical literature is as conclusive as macro empirics can be -- stimulus does boost the economy to some degree. Even the International Monetary Fund, which used to recommend austerity in crises, has reversed itself and now believes in stimulus.

As for boondoggles, it seems highly unlikely that repairing dilapidated roads and bridges, or plugging holes in state budgets, will be seen as white elephants.

As you say, monopoly power could potentially increase the case for stimulus in bad times. But if you believe government debt can get too large -- as most people probably still believe -- you should reduce deficits, or even pay down some debt, during economic good times.

I have a question for you: Do you think the economy is doing well right now?

TC: I would rather rely on monetary policy for my stimulus, and indeed the Federal Reserve could have done more during some critical periods. Was Obama’s fiscal stimulus so popular? And are you happy with how our politics turned out? So many people had the impression that the government was spending their money on the government’s priorities, and in response we’ve ended up with a dysfunctional populism.

I think a lot of road and bridge repair would pass the cost-benefit test I suggested above, so that needn’t be left undone.

Don’t forget, if you believe in high and growing monopoly power, you might wish for stimulus in good times too -- the resulting higher output will help pay for it. In contrast to your views, however, I don’t see that American industry has been restricting output at anything but normal historical levels.

I still see poor productivity performance, and I’m not convinced we are investing in the right ways to boost future living standards. So, while many economic variables are rosier than a few years ago, we are not yet in the clear. What do you think?

NS: I don’t think running government deficits is the proper way to deal with monopoly power -- for that, we should use stronger antitrust legislation.

It’s hard to evaluate the effect of the 2009 stimulus on long-term political outcomes, given all the confounding factors, but it does seem like it was reasonably popular at the time. As economist Robert Lucas put it at the time, “Everyone is a Keynesian in a foxhole.” Perhaps that’s as it should be, since we are no longer in anything remotely resembling a foxhole.

Raising productivity is certainly a priority. Some Keynesians do believe that stimulus spending can raise productivity, even during a boom. For all our sakes, let’s hope they’re right. And let’s also hope that the people who argue that deficits don’t matter are right. Because one thing’s for certain -- the Republicans are about to send deficits a lot higher.

Why It's So Hard to Raise Productivity: A Debate

Thursday, June 29, 2017
Tyler Cowen

Bloomberg View recently ran a series of columns about productivity. Bloomberg View columnists Tyler Cowen and Noah Smith recently met online to debate whether it’s slowing down, and why and what if anything can be done about it.

Smith: In many economic models, there’s an idea that productivity is governed mostly by random, external factors -- the march of science and technology, population aging, etc. And many economists’ intuition tells them that there’s little the government can do to help besides adopt a light regulatory touch and lower taxes. I want to push back against this pessimism. I think there’s a fair amount the government really can do to boost productivity growth in the U.S. and other advanced economies right now.

One example would be increasing urban density. There’s good evidence that dense cities are more productive, because of clustering effects. Allowing cities such as Austin, Texas, and San Francisco to get denser would amplify those effects.

Another example would be high-skilled immigration. The U.S. can be the world’s research park, but only if it gets the best researchers, both from within the country and without.

A third example would be funding energy-storage research. Energy storage has the potential to turn solar power into a flood of abundant cheap energy, if we can just get better storage technologies. Government is the natural choice to fund a big research push.

Cowen: I wholeheartedly agree with all of your policy ideas, for reasons of liberty, justice and also efficiency. That said, I wonder if they are more likely to give us one-time gains rather than an ongoing increase in rates of productivity growth.

Take battery storage and solar power. With some luck, breakthroughs in that area will forestall the worst scenarios for global warming and climate change. But for the most part that is protecting current rates of growth rather than extending them.

I also favor more high-skilled immigration. But keep in mind that these days the rest of the world is much more scientifically advanced than it used to be. Shifting the most talented researchers to the U.S. may not do much to boost overall productivity growth, though again I support it because it would bring greater human liberty. I even have a slight worry that we might concentrate too much scientific talent in the U.S., when the world might be better off with a greater number of decentralized and competing scientific locales.

Finally, you and I both want higher urban density and greater freedom to build in America’s most productive cities. I think the big gain there is that it will help more people enter the middle class and enjoy more social and economic mobility.

But higher rates of innovation and thus productivity growth? I don’t know. The two cities you mention are Austin and San Francisco. It’s already easy and still affordable to live in the more run-down parts of Austin, which by the way are quite charming. San Francisco could do much more to boost affordability, and it should. But that would increase traffic and congestion, which are why current residents oppose such plans. In other words, we will be taking some of America’s most currently productive residents -- including you, Noah Smith of Berkeley -- and lowering their productivity. There may or may not be a net boost in there for innovation looking forward.

So to conclude, we agree on the policies, but I still think boosting rates of productivity growth isn’t as easy as it might at first seem.

Smith: I agree it's important to distinguish between one-time boosts and long-term accelerations. For productivity growth to rise for more than a few years, we need to raise the rate of technological progress. But I’m not so pessimistic about the policies I suggested.

Solar power, with adequate storage, might give us our first real breakthrough in cheap energy since the advent of oil a century ago. With adequate storage to solve the intermittency problem and the transportation problem, “energy too cheap to meter” could provide the base to power decades’ worth of innovations. Just think of how much growth came from previous energy revolutions, and how long that growth lasted! Of course, in addition to research breakthroughs, we’ll also need the government to help build better electrical transmission and storage infrastructure.

As for immigration and urban density, the long-term growth boosts would have to come from greater research output -- concentrate the smart people, and they’ll start putting out a more rapid stream of innovations. There is evidence from both the past and the present that this works.

There are also other technologies that might be able to boost research and innovation output for decades. Machine learning might advance to the point where it can do research for us. And human enhancement might greatly enlarge the number of people who are capable of doing cutting-edge research. Government efforts to fund breakthroughs in these areas might yield long-term success.

In the same vein, I wonder if we’ve exhausted all the gains from public health. New research is showing how important lead is to human brain development. A major campaign of lead abatement might raise the overall capabilities of our populace quite a bit.

Cowen: Solar power is great because of its climate-change benefits, but storing power through batteries just isn’t very efficient and I don’t see that changing anytime soon. I call it a price worth paying, not a big source of future productivity gains. Besides, energy had its biggest productivity upside when it was very scarce and a limiting factor behind high-powered manufacturing. Today it’s mostly a service economy with low energy-intensity.

As for immigration, it's been a long time since the U.S. had as a high percentage of foreign-born residents as today. And our rates of productivity growth are especially low. That in my view is entirely a coincidence, but it does suggest high immigration doesn’t solve the productivity problem. The deeper point is that we don’t seem to have the social and political capital to support higher immigration levels, even for the skilled. Of course, there are plenty of productivity improvements you can wish into place, if you are willing to assume that people are better than they really are.

The sad truth is that American productivity growth was, for the most part, considerably higher in the 1920s and 1930s, a time when most institutions were far worse than they are today, including of course public health. We didn’t even have a National Science Foundation back then. What we did have was a lot of technologies ripe for further exploitation, namely the combination of fossil fuels, electricity powerful machines and a somewhat freer economy.

Let’s hope the internet and artificial intelligence can lead a new tech revolution, but so far it is looking like a long, tough slog.