Sam Hammond and Brink Lindsey on *Faster Growth, Fairer Growth: Policies for a High Road, High Performance Economy*

Sam Hammond is the director of poverty and welfare policy at the Niskanen Center and Brink Lindsey is vice president and director of the Open Society Project at the Niskanen Center. Both are returning guests to the podcast, and they join David again on Macro Musings to talk about their new pro-growth report titled, *Faster Growth, Fairer Growth: Policies for a High Road, High Performance Economy.* Specifically, they detail a number of different policies the US government could adopt to achieve faster and fairer economic growth, including social insurance modernization, child allowances, and more.

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 [email protected].

David Beckworth:  Brink and Sam, welcome back to the show.

Brink Lindsey:  Hey, thanks for having us on, David.

Sam Hammond: Yeah. Thank you.

Beckworth:  Good to have you back on the show with us gentleman and glad to see that you have survived the pandemic and another presidential election.

Lindsey:  Surviving.

Beckworth:  Surviving. It's true as of this recording nothing is definitive although it's pretty clear where the direction is going in the election right now. But you have a really interesting report that you put out and I agree with much of it. I have a few questions and it's definitely great material for the podcast. I'm really looking forward to jumping into the material you've provided. Before we get into it though, I want to think about what you guys are doing at the Niskanen Center itself. What prompted this is actually part of your report. You have this Niskanen synthesis.

Beckworth:  It's a very mysterious, but enticing term, the Niskanen synthesis. I want to read a paragraph, which I think summarizes the Niskanen synthesis. It's from your paper. It says, "While traditional ideological battle lines pit a pro-market right against a pro-government left, we reject this choice as a false dichotomy. In our view addressing the daunting challenges facing the country today require simultaneous moves in both directions. We need greater reliance on entrepreneurship and competition and we need more robust provision of social insurance and other public goods."

Beckworth:  In other words we need a free market welfare state. Is that a fair characterization of the Niskanen synthesis, and then what does that tell us about the broader vision of the Niskanen Center?

Lindsey:  Yeah. I think that's a pretty fair staying on foot version of our distinctive spot on the ideological spectrum that we're trying to pioneer and settle. The Niskanen Center is a new-ish think tank. We'll be six years old in January. Trying to innovate think tank practice on operational as well as ideological lines. On operational lines, we've gone back to the original Heritage Foundation vision of a think tank as being really oriented towards engaging on a day-to-day basis with policy makers, especially on Capitol Hill.

Lindsey:  We have policy departments in immigration, in poverty and welfare, and in climate where this kind of really in the trenches work, knitting together coalitions, working on legislative language, really getting into the weeds on policy detail is our bread and butter work. Whereas a lot of think tanks in recent decades have kind of wandered away from that and more towards sort of general engagement with public opinion through a focus on being prominent in the media. We try to do that too, but we also want to be there in the trenches.

Lindsey:  Ideologically, as you hinted at, we're trying to define new terrain on the ideological spectrum. We see these are traditional left-right divide about the size and scope of government pitting a pro-market, anti-government right against a pro-government, anti-market left is a false dichotomy. We see a huge major domestic challenge facing the United States as a kind of double whammy melees, a combination of much slower growth than we experienced in the 20th Century, sputtering dynamism relative to the kind of innovation and productivity growth we saw in the 20th Century, combined with high inequality both along socioeconomic lines and along geographic lines that means that the benefits of this slowed down growth are skewed to people at the top.

Lindsey:  People in the middle and downwards are doing even worse than the slow growth numbers would indicate. That leads us to this idea that we need to work on producing both a more thriving private sector and a more thriving public sector and that these are complementary pillars of a thriving society.

We need to work on producing both a more thriving private sector and a more thriving public sector and that these are complementary pillars of a thriving society.

Beckworth:  Okay. Now, this report, is it a concrete steps version of that vision? I mean what was the motivation behind it?

Lindsey:  Sam can elaborate on this, but we came out with a paper about a couple of years ago or at the end of 2018, sort of a vision paper to lay out this synthesis, this new synthesis that we're trying to champion called *The Center Can Hold.* That was really sort of a 30,000 foot view of general principles. We've got that and meanwhile we've got our in the weeds day-to-day policy work. This is sort of the mezzanine level.

Lindsey:  We wanted to flesh out our concrete policy ideas beyond the specific departments where we're doing day-to-day work, but bring that big picture vision down from the clouds a bit and to show what a move towards a free-market welfare state would actually look like in practice on a number of key policy issues.

Hammond: Yeah. There's a sense in which our philosophy and our methodology are consistent with one another. On the ideological philosophical side, we actively sort of maintain that the synthesis of social insurance and public goods and a generally pro-government or high-performance government attitude, what maybe Tyler Cowen would call state capacity is actually more coherent when combined with a very robust free market orientation, because in some ways the market and the government both belong to a common set of institutions. We just call it are our institutions, American institutions and when you have problems in one, they often reflect problems in the other and vice versa.

Hammond: But this doesn't get picked up on the ideological level, because ideologically people want to sort based on mood, based on, are you anti-government in mood or pro-government in mood? Are you anti-market in mood or pro-government in mood? Because those things are presented as antagonists, people ideologically sort in a way that is actually kind of perpendicular to the reality. The reality is when you have well-functioning governments, you also have well-functioning markets and when you have dysfunctional governments you often have dysfunctional, corrupt, and captured markets.

Hammond: What we identify with this growth slowdown and the inequality that has increased over the last four years is a consequence of both the market and our systems and the machinery of government both decaying to some level and with harms to both productivity and equality. On a philosophical level, we maintain that you can solve both at the same time without sacrificing one or the other, because they really are both determined by this common factor, the quality of our institutions.

Hammond: Then, on the day-to-day practical level or our strategic orientation, the Niskanen Center, we're a non-partisan think tank, but we're not… We call ourselves moderate, but we're not bipartisan, we're trans-partisan, so rather than trying to split the difference between the left and the right, we want to formulate ideas and policies that they can stand alone on their own, but simultaneously appeal to the values and interests of the left and the right. A family benefit appeals to the family interests. The pro-family values of the conservative and the anti-poverty values of a progressive, it's not trying to make them compromise on their values, it's trying to construct a policy that synthesizes their values and can forge agreement in that way rather than promote the kind of bipartisan compromise in which everyone is dissatisfied.

Beckworth:  Okay. Now your report begins by looking at this question of stagnation, which you both have alluded to already. The economy hasn't grown as rapidly, the inclusive prosperity has not been there as it was in the past, and as a consequence, we have these growing divides. It's probably contributed to the polarization we've just seen in our election. You give in this first section of your paper two stories for why this has happened.

Beckworth:  The first one is it's just getting harder to have rapid growth when you're this advanced of economy. The low-hanging fruit's been picked already, right? We've educated people to quite an extent, population growth has slowed down, total factor productivity growth has slowed down, but then you also point out policy failures and mistakes that have happened.

Beckworth:  In fact, Brink, you have a book on, it's on the show last time you came on we talked about it, *The Captured Economy,* how finance, housing and healthcare and we'll talk about this later in more details, have been captured. You got these two, I think areas. One, we've picked the low hanging fruit too. There's policy choices we could do differently and just kind of looking ahead, if you could tweak these as you've envisioned in this paper, what is like the bottom line number you would see?

Beckworth:  I mean do you have an idea of how much more growth we would get? We've been averaging around 2% real GDP growth on trend for the past decade or so. I mean are we talking about a 1% more so we're going at 3%, 4%. I mean what's your vision? What can we gain? If we followed your plan to the letter, where would we be?

How to Build More Economic Growth

Lindsey:  That's a very tempting question to speculate about, but a very dangerous one to just speculate about because we just… Economists can do a pretty good job of estimating the static welfare losses of bad policies that if resources were reallocated to their more efficient use, then you can measure the difference between the output and scenario one and scenario two.

Lindsey:  Measuring how fast the economy would grow if conditions were more favorable to innovation, and therefore innovations that none of us have even dreamed of would occur at a more rapid rate, there's just absolutely no way to foresee the path of the future development of the economy that way. I do think that over the course of the 20th Century GDP per capita growth in real inflation-adjusted terms averaged about 2% a year. It's averaged just a little bit more than 1% a year during the 21st Century.

Lindsey:  We identify a number of policy problems that if corrected could add tenths of a percentage point to growth. If you do that, so right now we're growing a little bit more than 1% a year, if you add tenths of a percentage point up to an additional percentage point, you could be doubling the growth rate in the economy. I don't think we're talking about chump change. I think we're talking about big structural problems in the economy, and therefore currently big sacrifices to potential output and potential improvements and well-being.

Hammond: If we just take two areas that we talked about in the paper, housing and healthcare. On housing if you believe Enrico Moretti's research, the spatial misallocation from housing sacrifices nine percentage points of GDP a year. That estimate can be quite a bit off for it to still be a substantial cost, and likewise of healthcare, the US spends double what most other industrial countries do in healthcare. We identify a number of supply side barriers and ways in which our healthcare sector has been captured contributing to this heightened cost and you could imagine if we could take health care as a percentage of GDP down from 17% to I don’t know, 9% or 10% and that's another seven percentage points of GDP per year that we can use in better ways.

Hammond: So even just in those two areas, and we haven't even talked about our sections on innovation policy, which sort of imagine new technologies that could drive us to a whole new frontier just within the current technological paradigm, those two sources of stagnation and dysfunction alone could contribute double digits to GDP growth.

Lindsey:  But just to be throwing a note of caution and realism, we did emphasize in the paper that the task of achieving inclusive prosperity has grown harder. As you mentioned, there is sort of diminishing returns to innovative activity is a pretty robust conclusion from a survey of the past hundred years. We've had an enormous increase in both the absolute number and the percentage of the workforce comprised by engineers and scientists. People who engage full-time in innovative activity and had seen nothing like a corresponding increase in the pace of innovation and productivity growth, so that suggests that we're getting less bang for the buck from every person hour of innovative activity than we used to.

Lindsey:  There's a wonderful paper by Charles Jones and Nicholas Bloom and others called *Are Ideas Getting Harder to Find?* They cite the kind of eye-popping stat that to get one more iteration of Moore's law these days, to double the processing power you can put on a single chip, takes 18 times as many engineers now as it did a few decades past. We do have natural processes making it more difficult to grow as robustly as we did in the past. Likewise, there are natural or deep structural factors that are leading towards higher inequality.

Lindsey:  The skill bias, technological change, the superstar market effects that are pushing towards incomes skewed towards the top. Policymakers have their work cut out for them, but the problem is that we've… Nature put us in this hole and we've responded by just continuing to dig. We need to go the other way.

We do have natural processes making it more difficult to grow as robustly as we did in the past. Likewise, there are natural or deep structural factors that are leading towards higher inequality... Nature put us in this hole and we've responded by just continuing to dig. We need to go the other way.

Beckworth:  In short we have picked a lot of the low-hanging fruit. It's going to be much harder to reach up high and pick up the next level of growth.

Lindsey:  But it's who knows, right? There's possibilities of breakthrough innovations in nanotechnology or in life extension.

Beckworth:  Sure.

Lindsey:  …just open up gigantic vistas of opportunities for improving well-being, but-

Beckworth:  Yeah. Using the tree analogy there, maybe the tree will come down closer to us when this new innovation comes along. I like to be optimistic too. I mean some of the things you mentioned in this report they're really like immigration. I think we really don't fully appreciate the extent how immigration could change our future, not just with more bodies, but the more people we have, the greater the chance of an Einstein being in those people.

Beckworth:  The outcomes could be very different. I mean I recently had Matt Yglesias on the show, *One Billion Americans.* The whole Julian Simon view of the world. I think Paul Romer view of the world is an important one, which could change like you said the whole dynamic there. Also, I just want to bring this up and I know we're getting ahead of ourselves. We need to get into the actual sections of the paper, but you mentioned near the end of your paper about how we become more risk averse to making decisions in terms of building things, roads, structures, some great examples. How it's taken like three decades to renovate the Penn Station in New York City? Costs have gone up.

Beckworth:  Part of that is we've become more risk averse, and so my boss Tyler Cowen had a book out a few years ago, how as you get richer, more fluent, is this kind of, I don't know, maybe a feature of nature? We tend to be more risk-averse, more careful what we do and I wonder if that is also a big constraint in being able to move forward? So even if we had these great inventions, there's always going to be people who are careful and cautious because we are so affluent and so comfortable. Is that a constraint we can see past?

Risk Averseness as a Growth Constraint

Lindsey:  I have come to believe it is real barrier to growth, sort of a deep civilizational level that once you get rich and fat and happy, you get complacent and you get risk-averse and you've got… Most people are much more concerned about keeping what they've got than getting additional stuff. That is the loss aversion is a big motive. When more people have more to lose, there is more potential vetoes to some change in the status quo that's going to upset that status quo.

Lindsey:  Yes. I think we talk specifically about environmental review under the National Environmental Policy Act as a barrier to growth and as a major inflator of infrastructure and building costs, but sort of lurking beneath that is this general accretion like Mancur Olson described over time of these kind of barnacles that attach to the economy of vested interests, distributional coalitions that are working to push income and wealth their way.

Lindsey:  The rich, the longer you go through sustained peace and prosperity, the more of those barnacles grow and the harder it is to scrape them off. That I think is probably the deepest challenge is to summon up the willpower to take on the vested interests and distributional coalitions that are gumming up the works.

I think ... probably the deepest challenge is to summon up the willpower to take on the vested interests and distributional coalitions that are gumming up the works.

Hammond: It goes beyond just building bridges. The fact that countries like Spain, which no one thinks of Spain as having a particularly functional economy, but that they can build infrastructure at a fraction of the cost the United States can. It's not because of unions, there's things that clearly influence that are different in the US above and beyond sort of the things that are obvious and NEPA is one of the things that we do very differently.

Hammond: In the '70s a lot of countries including European countries adopted a kind of American style environmental review regime and most of those countries, same countries have moved away from it in recent decades. Germany, Australia, Canada, they've all gone through different phases where they had very long and time-consuming environmental reviews, and then over time had to streamline it, simplify it.

Hammond: The US for our own reasons hasn't yet made that leap. We're still working under a paradigm that the rest of the world has kind of moved beyond, because they've realized it's too costly. I just want to add that environmental review like I said isn't just about bridges. When I was at Mercatus back before joining Niskanen, we did this work on reviving supersonic flight. You wouldn't know it, but supersonic over land was banned in 1973 out of this sort of fear, kind of optimistic fear if you think about it that Concords would be flying over the United States hundreds of them every day.

Hammond: That turned out not to be the case, but it's incredibly difficult for the FAA to repeal that ban and they could do it, because it's just a regulation. It's not in statute. But if they do repeal it they have to justify it under NEPA that it won't increase pollution. In this case noise pollution. The only way you can justify it under the environmental review rules is to have some sort of data. They need data on airplanes that don't exist to justify repealing the rule that would make it possible to develop the market so the planes exist in the first place.

Hammond: It's this incredible catch-22 and that affects not just infrastructure, but something like supersonic flight, which is really next generation transportation technology. We have no idea what the foregone economic benefits of that are.

Lindsey:  I don't want to get in to just a sense of doom that we're destined to go into decline, because of complacency and tying ourselves in knots. One way you shake yourself out of complacency is when some new challenge comes along that makes existing ways of doing things manifestly not good enough. We're facing a bunch of those right now.

I don't want to get in to just a sense of doom that we're destined to go into decline, because of complacency and tying ourselves in knots. One way you shake yourself out of complacency is when some new challenge comes along that makes existing ways of doing things manifestly not good enough. We're facing a bunch of those right now.

Lindsey:  We've had the experience of this shambolic response to the pandemic showing that our state capacity in our governance structures and institutions just aren't nearly as good as we might have imagined. We have the longer-term challenge of climate change that if we are not able to innovate and we're not able to build a whole lot of new infrastructure with new clean energy, then we're going to be in a whole lot of trouble.

Lindsey:  We are potentially facing national security challenges with a rising and very rich China that is increasingly autocratic and hostile towards our values. Then, finally, we're right in the middle of just a terrible democratic dysfunction that we believe is at least partially attributable to the disappearance of inclusive prosperity and to the frustrations and resentments that breeds. The motivations to get off the couch and get going are staring us in the face. We're just going to have to respond.

Beckworth:  Brink, I was thinking along those lines you just mentioned. We need a shock sometimes to awaken us from our complacency. COVID has done that in some cases, and again, I don't want to jump too far ahead here, but allowing medical professionals to cross state lines, go practice in New York, for example. That's some kind of fresh thinking that we need, but it took a pandemic to get us to that.

Beckworth:  Also, going back to immigrants. I think this is another reason why we need more immigrants. Immigrants bring in a fresh perspective and by nature they're more risk-loving if they want to give everything up to come here. We need new perspectives. Occasionally, we need to be pushed. Now, I'm not asking for pandemics, but I do think it's useful that we are awakened from our complacency.

Beckworth:  Okay. Let's move into your paper more directly. This actually was like the first section of your paper what we've been discussing, but let's move into the actual policy prescriptions that you outline and there's three sections where you do this. The first one is about supporting workers and families and you have several policy proposals there. I'm going to work down the list.

Beckworth:  I'm going to fly by the first one because listeners of the show know that first one very well, but it's a call for nominal GDP level targeting. I'll just mention this in passing and we can move on to the next one, but our good friend, Karl Smith, I like the way he summarizes this point. He says, "Capitalism really hasn't been tried until we are at full employment." So unless you really got a healthy, full employed labor market, you really don't get the full benefit of capitalism. What this would do is push us there and I think all our listeners understand this point.

Beckworth:  Let's move onto your second point here. You make the case for comprehensive social insurance modernization. Explain to us what does that mean?

The Case for Comprehensive Social Insurance Modernization

Hammond: Yeah. Sure. We began work on this paper before COVID, but COVID has only brought home the extent to which social insurance and our social insurance systems should be really thought of as a kind of public infrastructure, right? We're living through a moment where whether you have access to paid sick leave is not merely a nice thing to have, but potentially implicates public health concerns about coming to work convalescent because you are faced between a choice between paying your bills or coming in to work sick and infecting your co-workers and causing an outbreak in a way that any employer would not really internalize the cost of providing that paid leave.

Hammond: On top of that our technical infrastructure for social insurance has proven very inadequate to say the least. Circa March and April this year when every Thursday, the job report would come out and we'd have another million or two million unemployment insurance claims. Websites across unemployment offices and their websites across the country would fail, you had lineups around the block. Meanwhile, there was a manhunt to find people who could program in COBOL, which is a programming language that dates back to the Kennedy administration.

Hammond: There was just a total breakdown of our systems. What we call for this paper is both to recognize that just like any other form of public infrastructure, when you rebuild, when you build that bridge back, you can add new lanes, you can add new capacities, and we have to think seriously about what it will take to revamp our social insurance system. Everything from the IRS down to state unemployment insurance programs, so that they can actually respond in times of crisis, but then also be there and be highly functional in normal times to provide the kinds of income smoothing and other social benefits that they exist to provide.

Hammond: We have a number of strategies of how to do that including everything from having a flexible technological modernization fund at Congress, to expanding the ability for agencies like the IRS to hire people outside of the normal civil service schedule so they can actually bring in software developers and other talented engineers to move the tax system into the 21st century.

We have a number of strategies of how to do that including everything from having a flexible technological modernization fund at Congress, to expanding the ability for agencies like the IRS to hire people outside of the normal civil service schedule so they can actually bring in software developers and other talented engineers to move the tax system into the 21st century.

Hammond: It's really an area where under normal circumstances, whether your unemployment program is programmed on COBOL or something else is an incredibly boring topic that no one ever wants to touch, but it's one of those prosaic issues that when the you know what hits the fan, it turns out to be all important.

Beckworth:  Yeah. You mentioned this in your paper and I remember vividly the challenge the IRS had with getting all those checks out, finding everybody, making sure you hit the right names, people who weren't on the roles of the IRS. This is a point I guess that goes to your state capacity argument, right? You need to have better or stronger state capacity and that takes investment. It doesn't just happen. It takes a concerted effort.

Beckworth:  All right. Let's move on to your next one. You have employment security and workforce development. What's the argument there?

Employment Security and Workforce Development

Hammond: Yeah. This really builds off to the modernization point once we've modernized we can talk about not just replacing the system, returning to the same system we have, but building a new and better system. What we talk about in this section is really transforming our unemployment insurance system to a re-employment system.

Hammond: A lot of companies, a lot of businesses during this COVID crisis pursued what you could call a strategy of strategic unemployment where they basically shelved a lot of the workers and pushed them onto the unemployment insurance system in lieu of paying them short time pay. That's better than nothing, but if you look across the ocean, you see much, much lower rates of unemployment in European countries, even European countries that had even more aggressive lockdowns than the United States.

Hammond: The reason for that is because they have well-developed short-time work-sharing programs. The US has technically a work-sharing system. It's just the participation is very low. Work sharing is basically this idea where instead of pushing someone onto unemployment, you reduce their hours and the unemployment program will make up for some of their loss pay. It's a way of sort of having flexible wages so to speak and to trade off hours for unemployment.

Hammond: The other part of this is according to some estimates, one-third of the people laid off due to COVID represent a reallocation shock. Meaning this isn't just a cyclical effect, this isn't just a normal recession, these are people in service industries and the cruise lines and all sorts of industries that are not going to bounce back the way they were prior to the pandemic simply because people's preferences have changed. The actual economy has changed.

Hammond: There's going to be a large reallocation of the workforce into new lines of employment. That's going to require retraining and transitional support. Right now our system is not set up for that. It's set up to basically hold you in limbo until you find a new job rather than train you and get you connected with the employers who are filling in the void of the jobs that were destroyed.

There's going to be a large reallocation of the workforce into new lines of employment. That's going to require retraining and transitional support. Right now our system is not set up for that.

Beckworth:  Okay. You've got two more prescriptions here in this section and just to be clear, this section is all about providing a social safety net, social insurance for the home, the family. Is that fair when they're moving between businesses and firms?

Hammond: Supporting workers and protecting families.

Beckworth:  Okay. Of course, keeping them fully employed if at all possible. But your last two ones on here are strengthening families with child allowances. What do we do now in the US that doesn't meet that standard?

Strengthening Families with Child Allowances

Hammond: Well, just building up the last section. We talk a little bit about active labor market policy and active labor market policy are things that encourage you to enter the workforce. The US has had basically steadily declining spending on active labor market policy since the '80s, and not surprisingly we also have declining labor force participation.

Hammond: Now, meanwhile when we turn to the discussions of child benefits, the US also has one of the highest rates of child poverty in the industrial world. A big reason for that is the absence of direct income support for households of children. In 20 other industrialized countries they have either family benefits, family allowances or child allowances. They're really two names for the same thing, but the idea is you have a young one that's a mouth to feed when you're raising dependents, on a first order the issue is essentially one of cash flow.

Hammond: You have more mouths than workers and maybe the libertarian answer is to repeal child labor laws, but in lieu of that, we need some way of filling that gap. Quite frankly, the debate has been set back somewhat in the US due to this concern of labor force participation. The concern that if we give parents money for their kids, yes, it leaves, it maximizes their choice. It gives them the ability to use their daycare or to use their church. It's pluralistic in that sense, but on the other hand we risk disincentivizing work.

Hammond: One of the reasons we put that active labor market piece ahead of the child allowance piece is to say, "Look, there's two ways you can promote a high labor force participation. You can remove disincentives or you can create incentives." When you look across the world, the US actually has declining labor force participation in spite of our relatively paltry and threadbare social safety net. The reason is not because we're super generous and the Great Society was too great, but because we have sort of fallen down on creating the carrots that draw people into the labor force.

When you look across the world, the US actually has declining labor force participation in spite of our relatively paltry and threadbare social safety net. The reason is not because we're super generous and the Great Society was too great, but because we have sort of fallen down on creating the carrots that draw people into the labor force.

Hammond: It turns out that child allowances are actually one of those carrots. It's a little counterintuitive, but when Canada expanded their child allowance in 2014, the central bank governor Stephen Poloz actually gave a press conference saying that they were going to have to raise interest rates sooner than expected, because the child allowance was stimulating the economy too much. It only makes sense because, again, when you have that extra mouth to feed, parents, families have a very high marginal propensity to consume. Moreover, at the very low end, among the poorest households, even a little bit of liquidity, a little bit of cash is what is required to hire that babysitter so you can go hand out resumes or to basically take the first steps to enter the labor market.

Hammond: We come at this as both understanding the need to promote work and actually work as being valuable to families per se, because earned income, you can't replace earned income with welfare benefits. On the other hand, we are so below the curve of diminishing returns when it comes to support for families and children that actually pushing up the family benefits we provide to the poorest households will actually, in our view, have a positive labor market effect.

Lindsey:  Just to bring this back to the kind of ideological framing. In the conventional left/right division, you hear these proposals for upgrading and modernizing and expanding social insurance. Sounds like a whole bunch of big government, anti-market socialism. We very much do not see it that way. We see our proposals as very much pro-market and that comes out of our sense of things.

Lindsey:  Let me just back up here and say both of us are recovering libertarians. For Sam, it was a youthful phase. For me, it was 20 years of career, but we both retain the sense that competitive markets are an amazing social technology and their creative power is almost impossible to overstate. However, I have come to see in a way that I did not earlier. The extent to which markets are neither self-executing nor self-sustaining. That is markets work well when they are embedded in a set of supportive policies and institutions.

Lindsey:  I think most libertarians recognize that when it just comes to things like the rule of law, which is an incredibly valuable public good that the government provides, but we see that the case for market enabling public goods goes beyond just enforcement of contracts and the like that just to take the child allowances, children raised in poverty are almost certain to be not very productive workers in their adulthood. So if we can have the child poverty rate, we see that as a very pro-market move that is going to expand the capacities of people to participate in and thrive in the market economy. If we can have active labor market policies that can, with less friction, move people from one job to another, from one sector to another job to another, help them make these transitions, then we have a more fully engaged labor force that is working at close to maximum potential rather than the waste that comes from friction and depressed labor participation.

Markets work well when they are embedded in a set of supportive policies and institutions.

Lindsey:  This is our pushback against this sort of hoary ideological frame that would see anything like what we're proposing as anti-market when we see it is very much essential to good market performance.

Beckworth:  No. I completely buy that. Go ahead, Sam.

Hammond: I think one of the last times I was on your program, David, we talked about the China Shock. The striking thing about the China Shock and David Autor's work there is not just the devastation to economic variables like household earnings, but the effects on marriage and family, right?

Hammond: The ability to transition people out of declining industries into new industries is a pro-family policy in a strange way, and likewise, providing families with direct cash benefits is in a weird way a pro-work policy. Brink mentioned a bit of our libertarian background. You should think of it this way. We've abandoned our fiscal libertarianism. We think that what matters is not the quantity of government but the quality.

Hammond: When it comes to issues like family benefits, we much rather just give parents money and let them make informed choices based on their local knowledge than say having an elaborate bureaucratic universal daycare program or something like that. We remain very leery about the potential for bureaucracies to be captured, but we're critical of the sort of quantitative anti-government stance as sort of flattening a lot of the differences in the ways of going about different programs.

Beckworth:  Now, this is all very good and I'm very sympathetic to it, but I do want to flesh this out just a little bit more. In this specific case, we're talking about evolving or changing the existing child tax credit into an allowance. I'm a parent, I have three kids. I can claim that tax credit. I mean how is a child allowance different? How would it help someone on a lower income level? Tell me the concrete steps that would be different.

We remain very leery about the potential for bureaucracies to be captured, but we're critical of the sort of quantitative anti-government stance as sort of flattening a lot of the differences in the ways of going about different programs.

Child Allowances vs. the Child Tax Credit

Hammond: Right now we kind of have a two-tiered system in the United States. If you're very poor, if you're a single mom or just very low income, you probably do not qualify for the child tax credit. You might qualify for a partial child tax credit, but even then you have to have a minimum income. So if you're out of work or maybe you just can't work because you're home raising the kids, you're kind of out of luck. But what you end up falling into are these safety net programs like TANF. The traditional welfare system in the United States, which can provide you some cash benefits and some social services.

Hammond: Meanwhile, as you said, David, someone comfortably middle class, you just get a simple tax credit. We kind of have this bifurcated system where if you're poor and have kids, you're treated with a level of suspicion and if you're middle class and have kids, you basically have full degrees of freedom on how you choose to spend that money.

Hammond: A child allowance is partly about simplifying the system, but also extending the equal dignity that you are shown through the tax code, to the entire suite of families up and down the income ladder, to say, "We're going to treat the poorest of the poor with the same dignity and respect as we treat David Beckworth." It's to say, "We are going to trust you to make the best decisions for your family and not put all these strings, not attach so many strings to the meager benefits we're providing you."

Hammond: If there are cases where you do need social support services, those should still exist, but the idea that just because you're poor means you are basically untrustworthy is mistaken. When you look at this internationally, in Canada, for instance, when they implemented their universal child allowance, low-income families reduced their alcohol and tobacco consumption by about seven cents on the dollar. Now, that surprised a lot of people who thought, "Well, they're just going to spend this money on alcohol and cigarettes."

Hammond: What it actually sort of validated was this theory of household stability. When you give parents money, the benefits flow both in educational inputs like direct inputs to rent, to the kid's education, to food, and groceries, but also to these intangible channels of household stability where there's less stress, less internal domestic dispute, marriages end up being stronger, and all that has compounding benefits that go above and beyond sort of the first order of things you'd expect and end up building stronger families.

Hammond: When we go full circle, when we talked about the China Shock last time, it wasn't just the destruction of those jobs. It was the breakdown, the abject breakdown of family formation that has really I think awoken a lot of people, especially on the conservative right, to the need to do something more proactive, because if you look across the country, there is no marriage crisis among people who earn upper middle-class existence that the marriage and family crisis is really highly concentrated on this working-class population that we've decided for various reasons belong on a totally different track when it comes to social policy.

Lindsey:  Right now we have a child tax credit that is heavily constrained. Its availability is heavily constrained by you have to pay taxes to claim it. We've introduced some refundability recently, but not full. A tax credit like that is absolutely in terms of its economic effects completely the same as if you pay the normal taxes that everybody else does and the government writes you a check. Right now the government is sending checks to middle and upper middle class families for their kids and not to poor folks and that's wacky. We want to change that.

Beckworth:  Okay. Makes a lot of sense. All right. For the sake of time, we're going to fly through some of these policy prescriptions, but I'll mention them.

Lindsey:  We did a whole thing earlier about the captured economy, so that middle section is…

Beckworth:  Yeah. That middle, you have a whole section on the captured economy and you have one more item here. I'm going to skip for the sake of time, but you make the case for universal catastrophic care. I'll let the listeners go check out your paper. Let's move to the last section of your paper where you talk about reviving innovation and dynamism. Let's begin with your first proposal there and that is to pursue aggressive decarbonization. Tell us about that.

Reviving Innovation and Dynamism: Decarbonization

Lindsey:  The first step in innovation is and encouraging innovation is innovation needs to be innovation in the correct direction. Developing more addictive and carcinogenic cigarettes is a form of innovation, but it's not really what we're looking for, right? In the presence of externalities, you can have increases in measured economic activity, which look like growth, but if the costs are being shunted over onto other people, then it could be and those costs are not being taken into account by the people partaking in the activity, then you can have bad innovation.

Lindsey:  We want to get the prices right. We want people to internalize the costs of their activity and right now the costs of increasing carbon dioxide in the atmosphere are global in scope and ramping up over time. So to orient all of our innovative activities towards improved well-being rather than just towards improving numbers on a GDP spreadsheet, we need to address this massive externality, which is threatening all of us, and so we see the cleanest, most market-friendly way to address this is through putting a price on carbon through some kind of carbon tax.

To orient all of our innovative activities towards improved well-being rather than just towards improving numbers on a GDP spreadsheet, we need to address this massive externality, which is threatening all of us, and so we see the cleanest, most market-friendly way to address this is through putting a price on carbon through some kind of carbon tax.

Lindsey:  Beyond that, I think there is a clear government role in encouraging scientific advances in R&D that is a public good that we believe is an important government role. In this case, there are a whole range of policies that can be broadly seen as encouraging research and development of nuclear energy technologies and we lay out what those possibilities are.

Beckworth:  That's a nice segue to one of your other proposals and that is to increase federal spending on R&D and you raise a good question in here that you answer, why do we need federal spending in R&D? Why can't the private sector do all the heavy lifting here? Why is it important to have both partner in research and development?

The Importance of Research and Development

Lindsey:  Yeah. Firms can be expected to invest in innovation when they see a good prospect of commercializing that innovation, and then actually monetizing it in terms of additional… That they can capture the benefits of that innovation on their own bottom line. When scientific advances are too sort of abstract and remote so that you can't see an immediate commercializing possibility or they're so broad in their welfare enhancing potential that it's very difficult for you to capture the benefits of them, everybody is going to benefit, then we should expect firms to under invest in that kind of activity.

Lindsey:  I think that is a very well established market failure that governments can correct. The problem in our case is kind of twofold. First, government R&D spending as a percentage of GDP has declined rather markedly in recent decades, as it happens in sync with declining productivity growth. At the same time and to some extent because of this declining investment in R&D, public investment in R&D, the whole process of funding R&D has become more cludgy, bureaucratic, and unwieldy.

Lindsey:  The percentage of grants that succeed or grant proposals that succeed has gone way down in recent decades, and therefore the amount of time you have to spend raising money has gone way up. We've cited figures that something like 40% of researchers' time is now spent on compliance issues rather than actually inventing a better mousetrap, and some of that is because there's less dollars, and so there's more of a scramble to chase scarce dollars, but in addition there's just a kind of a bureaucratization, ossification of the whole public research enterprise.

Lindsey:  We both think we need more money and we need to spend it more wisely and we need to restructure how scientific funding is done, so we get more bang for the buck.

Hammond: One of the things we say is we should really, instead of prescribing one way to fix say NSF grant funding for research and development, that we should take a scientific approach to science itself and allow some of these agencies to set aside a certain portion of their budget, say 10% a year to just trialing new ideas, to changing the committee process for evaluating grant proposals, to experiment with peer review.

Hammond: We referenced one proposal, which is actually has been implemented in New Zealand of setting aside a portion of research money for a lottery system where the most sort of innovative out there risk-taking ideas, the top 40% of them are taken and put into a pool and taken out by lottery. There's actually a theory in economics, the theory of contests which suggests that a lottery system like that reduces the need to spend and waste so much time writing and rewriting grant proposals, because there's a sense in which if you made it into that 40% pool, but weren't lucky enough to get pulled, that your grant is still good enough and you should just reuse that grant again rather than have to go all the way back to the drawing board.

Hammond: These things are, you can't know them in advance, what's the best way to fund science, but instead we should turn science in on itself and apply an experimental method. Right now we can't actually run those experiments because the degree of bureaucratization is just so great, even minor tweaks to the way NSF does grant funding require multiple year rule making processes and so on, and a base a lot of this comes down to a kind of lack of trust, right?

Hammond: The bigger and more bureaucratized and organization becomes, part of it is we can no longer monitor people on a sort of micromanaged basis, so we have to start implementing a process and process is the enemy of any kind of creativity, and to some extent the underlying solution is just to restore trust in scientists.

The bigger and more bureaucratized and organization becomes, part of it is we can no longer monitor people on a sort of micromanaged basis, so we have to start implementing a process and process is the enemy of any kind of creativity, and to some extent the underlying solution is just to restore trust in scientists.

Beckworth:  Well, I want to go back to this question I raised that you answered, Brink, about the need to have the federal government kind of complement what the private sector does in terms of R&D because the private sector can't see beyond the bottom line. I want you to use a concrete example that you did in the paper, GPS. Walk us through that story, because that was a long journey that could have easily been ended along the way, but it lasted and today we benefit immensely from it. Tell us the story about GPS.

The Story of GPS

Lindsey:  Okay. We can peek behind the curtain of co-authorship here, Sam wrote that, so I'm going to turn it over to him.

Beckworth:  Okay.

Hammond: I mean the story of GPS is that it really emerges out of the DARPA research project. DARPA being the main sort of defense research agency at the Department of Defense. DARPA is very unique in that it has a relatively small team. I think currently really no more than 100 program managers. Again, going back to this theme of trust. They're invested with a ton of trust. They're incredibly smart, driven people. They come in on a short-term basis and have the ability to get an idea approved, it could be a very far out there idea and have a lot of pre-approved money to go and sort of make it happen.

Hammond: GPS emerges out of DARPA as America's sort of like wake up call to Sputnik. What was striking about it is early on the only idea, the only application that the Department of Defense understood was, "Oh, this will help our weapon system. We need to target missiles better." It became very unwieldy. It was delivering very minor benefits even in that context.

Hammond: In 1979, the GPS program at the DOD had its budget slash by 30%, $500 million, and actually for several years in the 1980s, the budget was entirely zeroed out. I think in 1980, we dropped, we went from 24 satellites down to something, either dropped 2 or 12. Anyway, we were taking satellites out of the sky because we couldn't figure out how to use them.

Hammond: In retrospect this seems kind of insane, because global positioning satellites and satellites in general, power, communications, and navigation, the world over. Elon Musk is about to turn on Starlink, which will use low-earth satellites to broadcast broadband internet, high-speed internet around the world. The delta between the potential of the technology and what was seen at the time is just enormous with GPS. It's one of those stories where if you ran back the experiment a thousand times, you can't be guaranteed that we'd be sitting here today with satellites up in the sky.

Beckworth:  Okay. Well, that's a fascinating story and I encourage our listeners to go read that account, but it really speaks to this ability to see, to be able to do research beyond a short horizon that many private firms would have to operate within. All right. In this section on reviving innovation and dynamism you also speak to immigration. We've spoken about that earlier so we'll pass that up. But one of the big things you touch on here is promoting a diversified economic development approach or development policy.

Beckworth:  I want to reframe this because this is I think the friendly version of industrial policy in the paper. Industrial policy is a word that creates allergic reaction among some people, including myself, I'll be honest. It's not the first word I would like to use. I've followed some of the discussions online that you've had, particularly you, Sam, with some of my colleagues, will remain unmentioned.

Beckworth:  You've tried to make the case that there's a nuanced way of looking at industrial policy, right? I mean when I think of industrial policy, you know what comes to my mind? India. 1940s, state planned industries. It really was a disaster, but there's other examples and other ways of thinking about this. Help me out. Help David Beckworth see this in a more nuanced light.

Reframing Industrial Policy

Hammond: Well, in that section we also talk a lot about bad examples of industrial policies. The way I kind of think about it is every country has an industrial policy whether they like it or not. It's sort of like tax policy, you got one. The question is, is it good policy or bad policy? 100% expensing of investment could be seen as a good tax policy, because it promotes capital deepening and so on. An 8% wealth tax is probably a bad tax policy, but it's hard to be against tax policy per se.

The way I kind of think about it is every country has an industrial policy whether they like it or not. It's sort of like tax policy, you got one. The question is, is it good policy or bad policy?

Hammond: The US has an industrial policy, we see it all around us. We have an industrial policy for ethanol. We have an industrial policy for sequels by the Disney corporation.

Lindsey:  We have a medical policy for finance. We subsidize that heavily. We have an industrial policy for single-family home construction.

Beckworth:  It's everywhere, huh?

Hammond: Exactly. If you want to look at this in a different way, is what is your industrial policy oriented towards? In my view and my evolution on this question was really influenced by Joe Studwell's book, *How Asia Works.* Because he really walked through what is this Asian development miracle? How did China and Korea, Japan, Taiwan not just grow at remarkable speeds, but surpass countries like Bangladesh and the Philippines who were liberalizing their economies around the same time?

Hammond: The way they did it was, again, through diversification. Under conventional sort of Ricardian theory of trade, your goal as a country should be to specialize, to become the best at doing what you do, and then you just focus on that and trade your surplus with other countries. That is actually a very good description of what sort of happens on autopilot.

Hammond: You look at Bangladesh, their economy has tripled in size in the last 40 years. On the other hand, China's economy has quintupled in size. What did they do differently? Well, Bangladesh leaned into its comparative advantage, which at the time was low-wage labor, sweatshop labor, and lo and behold 30 years later they still are heavily specialized in the garment and textile industries.

Hammond: China took a different approach. It said, "If we want to break out of the middle income trap, if we want to become a truly developed economy, we need to invest in moving up the supply chain, moving up to higher value goods." We do that not by picking winners and losers and micromanaging the economy, but in some cases by turning on capitalism's power of creative destruction to the max, right? These special economic zones are both a free market success story and also a kind of industrial policy, because they are really… Like the Shenzhen Zone is really a kind of mega industrial park.

Hammond: You can sort of apply pressure on the economy to be more innovative and more embracing of creative destruction than it would be on its own and to channel those energies into sectors where you don't have any pre-existing endowment, because if you leave your economy sort of running on autopilot, it will just pursue your natural endowment. As we talk about in the paper, America's natural endowment as a wealthy country are a certain form of human capital, namely college-educated labor.

Hammond: Over the last 20 years, as we sort of have let the economy go on autopilot, we've become highly specialized in the kind of intangible knowledge work that gets done in cities like New York, Boston, and San Francisco by software engineers, finance, investment bankers, intellectual property lawyers, what all these industries have in common is they are exportable global services that are done by people with graduate degrees or bachelor degrees otherwise and the result has been this phenomena of job polarization, where it's not just that the median income has stagnated, but that the type of jobs, the kind of monopoly of jobs that are available in the US economy has bifurcated, has pulled away and hollowed out the middle.

The result has been this phenomena of job polarization, where it's not just that the median income has stagnated, but that the type of jobs, the kind of monopoly of jobs that are available in the US economy has bifurcated, has pulled away and hollowed out the middle.

Hammond: You have these very low-skill service sector jobs that pay poorly and a growing number of highly paid knowledge working jobs, creative jobs that are, unfortunately, out of the reach and aptitudes of two-thirds of Americans. Only 30% of the country ends up getting a bachelor's degree, and so part of the point of diversifying is not just moving our economy to another frontier, to not be satisfied with sort of walking down a developmental cul-de-sac where we become highly specialized, and therefore highly fragile, but also to promote a kind of productive pluralism where maybe on paper the most efficient outcome is for New York City to become 99% of the economy and for the rest of the country to hollow out, but that is not politically stable.

Hammond: The upshot is that this is both good for GDP and good for growth over the long run and it can kind of redistribute the fruits of economic growth in a more geographically distributed way.

Lindsey:  I'm I like you, David, I'm allergic to the term industrial policy part of this. I convinced Sam to not use the term in the paper. Let's use development policy instead. Part of this is temperamental. I'm old. I fought a lot. Sam likes to use it because it riles people up. I'm world weary to want to rile people up unnecessarily anymore, but I like the term development policy, because it gets at this terrible false dichotomy between developing economies and developed economies like it's this one-off thing that you move to develop status, then you don't have to worry about the future structural changes in your economy anymore. It's done. You're developed, which is silly, right?

Lindsey:  Development is a perennial challenge and keeping things going in the correct direction is a perennial challenge and so two things. First, it's just a fact that government has massive effects on technological progress and the direction of innovation. If through no other channel than through military competition. That has been a driver of technological progress throughout human history. It's a sad fact, but it's the case. There's a huge payoff in better weaponry. Governments have a huge incentive to invest in it.

Lindsey:  Capitalism is very good at taking spin-offs from military progress and turning it into stuff that we enjoy around the home. But that's just sort of a completely, which kinds of technologies you're going to get. Then, is just this sort of weird artifact of what happens to be militarily advantageous rather than what happens to be advantageous for human beings in their civilian lives.

Development is a perennial challenge and keeping things going in the correct direction is a perennial challenge.

Hammond: Can I give you a quick example of that?

Lindsey:  What's that?

Hammond: Can I offer a quick example?

Beckworth:  Please do.

Hammond: We mentioned DARPA, one of the proposals we endorsed in this piece would basically create a new directorate at the National Science Foundation that has sort of DARPA like authorities. The same level of flexibility and risk-taking ability as DARPA. The reason we like that idea is because DARPA does a lot of cool stuff. DARPA helped launch driverless cars and so on, but the imperative of framing it in a militarized or defense context leads to a lot of strange things.

Hammond: A good example of this is DARPA is leading some of the research on gene editing, but the program that they're leading on is to temporarily alter the genetics of soldiers so that they are resistant to radioactivity.

Beckworth:  Wow.

Hammond: Right? That's a current DARPA project, and maybe mutant soldiers are a good thing and maybe we need mutant soldiers. I think that comes with some moral hazard.

Beckworth:  Certainly.

Hammond: I would rather we have similar agencies that are able to invest in breakthrough and sort of science fiction stuff that isn't necessarily militarized from the get-go.

Lindsey:  The other kind of big picture point that led me away from my sort of instinctive knee-jerk aversion to anything that sounds like industrial policy is just this idea that industrial policy is like tax policy, everybody's got one. It's just in the nature of large governments that they have a big influence on the structure of the larger economy and in all kinds of ways that weren't necessarily intended.

Lindsey:  We've got an industrial policy that subsidizes heavily. The financial sector, it subsidizes perverse land use patterns through zoning. It subsidizes the incomes of health care providers to way above and beyond what is necessary to provide for the health of the citizenry. First, there's a theory of second best here that there's all kinds of ways that the government is destroying the economy in a bad way that perhaps if we could completely root out all of those perverse interventions, a laissez faire might be in a more positive direction, but if we can't, then we very much need government to step in and encourage positive economic developments to counter balance against the bad things it's doing.

Lindsey:  All of that plus always recognizing the theoretical possibility that government could accelerate progress, but worried about the downsides of crony capitalism. My cost-benefit calculation has changed just after decade after decade of depressed productivity growth that what we've been doing just isn't working and it's getting harder as for reasons mentioned already to get high productivity growth. We need to try some new things.

Beckworth:  Just to summarize and if I understand correctly, what you're saying is whether we like it or not, we have industrial policies here with us, why not use it to promote capitalism, to promote creative destruction in a manner that would increase our growth as opposed to just kind of ignoring it and not pretending it is there?

Hammond: Yeah. Dani Rodrik, the economist says as a kind of taxonomy of good and bad industrial policy. One of the signs of a bad industrial policy is picking winners and losers. It's targeting particular firms and that is very fraught. What seems to work a lot better are targeting certain kinds of activities and certain sort of high productivity sectors.

What we've been doing just isn't working and it's getting harder as for reasons mentioned already to get high productivity growth. We need to try some new things... One of the signs of a bad industrial policy is picking winners and losers. It's targeting particular firms and that is very fraught. What seems to work a lot better are targeting certain kinds of activities and certain sort of high productivity sectors.

Hammond: Germany has these well-known institutes for small and medium manufacturers, they're publicly funded, but their job is basically to take practical research and development and translate it and transfer it to their manufacturing sector to keep it competitive. That is directly supporting sort of a particular type of activity, a willingness for a firm to upgrade its processes rather than going out and saying, "We're going to pick Volkswagen and give it a bunch of money."

Hammond: Those two things they get conflated a lot, but they're actually two very different approaches. One of the things that annoys me with the industrial policy conversation is there's often this conflation of totally different styles of policy all under one roof, right? We're very much against industrial policy for sports stadiums. There's all kinds of bad stuff that is clearly not aligned with the lodestar of productivity growth.

Beckworth:  Okay. Well, we are nearing the end of the show here. I want to end on a question tied to the current environment we're in. I'm wondering how do you see this proposal unfolding within the Biden administration? Do you see it jumping on board, embracing some of your proposals? What direction do you see it going?

Prospects for Pro-Growth Proposals in a Biden Adminstration

Lindsey:  Well, in President-elect Biden in his stump speech stresses again and again sort of three big crises, the COVID crisis, the economic crisis that grows out of the pandemic, and then the longer-term climate crisis. All of those are areas that indicates an openness to the kinds of policies that we're pushing, a recognition that improvements in state capacity is important, a recognition that revving up dynamism and prosperity is important, and a recognition that technological change in a particular clean energy direction is important.

Lindsey:  We have no illusions that our whole agenda is going to be blocked, stocked, and barreled by anybody, but we think that there are definitely possibilities for making headway in the coming years.

Hammond: One of the theses that the paper is on the progressive left there are elements whose theory of political change is basically, we have to wait until America becomes California and we have united government and have stacked the deck with progressive politicians, and then we're just going to impose our vision of America on the rest of the country. For various reasons, national politics is always going to be much more competitive than California politics and that vision is very unlikely to come true, and if it was to come true, I wouldn't be sure it's desirable, right?

Hammond: The American system is built for compromise and going into a Biden administration where it looks like Republicans retain control of the Senate, I think the policies we offer provide not just a kind of coherent way that the moderates in both parties can sort of form an identity, but also a roadmap for areas that they can cooperate and work towards that as a byproduct turns down the heat of our politics.

I think the policies we offer provide not just a kind of coherent way that the moderates in both parties can sort of form an identity, but also a roadmap for areas that they can cooperate and work towards that as a byproduct turns down the heat of our politics.

Beckworth:  Okay. With that our time is up. Our guests today have been Brink Lindsey, Samuel Hammond and their paper is titled *Faster Growth, Fairer Growth: Policies for a High Road, High Performance Economy.* Brink and Sam, thank you so much for coming on the show today.

Lindsey:  Thanks so much for having us.

Hammond: Thanks, David.

Image by Al Drago via Getty Images