Taking the Long View in 2021

Today, we're bringing you a conversation between Matthew Mitchell, Senior Research Fellow and Director of the Equity Initiative at Mercatus, and Dr. Bruce Yandle, Distinguished Adjunct Fellow at Mercatus. They discuss Bruce's latest economic situation report for December 2020, new life in the coronavirus economy, and much more. 

Check out The Legacy of Bruce Yandle edited by Donald J. Boudreaux and and Roger Meiners here.

If you’d like to contact a scholar involved in this episode, please email [email protected].

This transcript has been slightly edited for clarity.

MATTHEW MITCHELL: Hello everyone. My name is Matthew Mitchell. I’m a senior research fellow at the Mercatus Center at George Mason University. Welcome to The Bridge Policy Download.

Today’s guest is Bruce Yandle, distinguished adjunct fellow at the Mercatus Center at George Mason University. Bruce is also a dean emeritus at the Clemson College of Business and Behavioral Science, and he has just released the new 2020 December “Economic Situation” report.

I’ll also note that there is a new book called The Legacy of Bruce Yandle. It’s edited by a number of my colleagues, and it was released in 2020. It includes original essays and reflections that pay tribute to Bruce and his unusual ability as a teacher and a researcher. It’s a pleasure to have you on the show again, Bruce.

BRUCE YANDLE: Matt, I’m glad to be with you. It’s fun talking with you.

The Economy, the Election, and the Coronavirus

MITCHELL: Excellent. Let’s dive right into it. We’re right at an inflection point. The last several times we’ve met, we’ve been discussing the election; we’ve been discussing, of course, COVID; and right now, we are on the transition for both of them. Is that right?

YANDLE: That’s right. What an amazing time, Matt, to be observing and trying to explain what is going on, if not to ourselves, to others as well. But we do have that—using your term—inflection point. We do seem to have a convergence of, certainly, more than one force hitting simultaneously, and then trying to sort out what the reactions may be to our economy and the political reactions that will affect the economic activity from this point forward.

MITCHELL: That’s great. Maybe a good place to start is with the stock market. It has been going gangbusters for about a month now, and I suppose you can attribute that to a few things. One is, there was the election outcome that ended up being more decisive—perhaps not in the eyes of the president—but more decisive in everyone else’s view than anticipated.

Also, there was some really promising news on the medical research front. We’ve got two companies that are waiting to get FDA approval. One’s already been approved by the UK’s version of the FDA. What do these developments mean? What does the stock market think these developments mean?

YANDLE: Matt, I think the big driver in terms of stock market reaction and the unusual move in November—and now coming on into December, let’s hope, for those who might have a portfolio—has to do with the availability, or the pending availability, of the vaccines. To me, the big unknown, yet the big power that’s affecting our economy, is the virus. We are not able to predict its movement with any degree of accuracy. It comes and goes, and as we know, it is coming back with great force right now.

In a sense, if we do not get vaccine availability and then wide distribution, there is deep concern about what the shape of economic activity will look like in the year ahead. On top of the good news about the availability of vaccine has been the continued good financial news with respect to low interest rates.

So, while earnings of corporations have not gone through the ceiling in any sense of the word, they’ve been okay. You can’t look at earnings to explain the stock market movement other than on the basis of an almost-zero interest rate. The discounted present value of future earnings goes up, even though the level of future earnings may not be going up.

So, low interest rates, good news about the virus, the prospects then for a healthier economy ahead, and less uncertainty about shutdowns of states and regions and so forth—I think that combines to be the big driver.

MITCHELL: I’m glad you mentioned the uncertainty because one of the things I’ve noticed—it looks like volatility has also dramatically decreased in the stock market in the last few weeks. I wonder if part of that has to do with the fact that we’re looking at a Democratic president and probably—we’ll see in a few weeks—but probably a Republican-controlled Senate.

That actually means a lot less policy experimentation. That maybe means that we get—today we call it gridlock; Madison would have called it checks and balances.

YANDLE: [laughs] Right.

MITCHELL: Maybe we can all focus on our own lives and not worry so much about what idea has popped in the head of someone in Washington.

YANDLE: Yes. Well, certainly, the outcome of the Georgia runoffs for the Senate are critical with respect to what you just said. Many people who are interested in public choice and political economy and worry about the demise of the market economy and that school of thought . . . there are those who celebrate gridlock, as you pointed out—or checks and balances, a happier set of terms—who celebrate that.

When we think about what have become the normal tendencies of economic activity in our country, to be more and more focused on public, decision-making government activity and less focused at the margin on private action and market activity.

I look at the economic policy uncertainty index, which is produced daily, and in some sense of the word, I’ve been surprised in the last few weeks to see how that index has been trending downward at times when—if I had guessed without looking at it—I would’ve guessed, “Hey, we’re going to see an upshot here.” But the trend has been downward. A more calm world is being described by that index.

Trump Years vs. Biden Years

MITCHELL: That’s absolutely right. That’s interesting.

One of the things that has been a theme with our discussions, of course, over the last year has been the somewhat split-brain view that the Trump administration takes to the economy. On the one hand, you invoke this image that Adam Smith used, the man of system who believes himself capable of arranging the pieces of society as he would the pieces of the chessboard with no thought to the idea that those pieces have their own interests and their own motivations.

In many ways, there is some aspect of the Trump years that suggests he believes himself a man of system in terms of his interest in managing trade, his interest in managing immigration, his interest in forcing the sale of TikTok to US-owned companies. He wants to repeal Section 230, which allows platform companies to be immune from whatever you or I or anybody else might post on our Facebook or Twitter feeds.

Yet, on the other hand, there is the story of tax cuts and deregulation and the appointment of judges that, for the most part, view their role as textualists, not really departing from the text of the statutes or the Constitution.

We’ve talked about this for a while. What do you think, looking forward to the Biden administration? What will change from this split-brain approach to public policy in these areas?

YANDLE: Powerful question. Let’s speculate on that a little bit. That is, when we have a change in party with a new administration, there’s an understandable tendency for the folks coming into office to come in with what they believe to be a powerful agenda that they hope to bring about in the first 100 days. Maybe our country goes back to that picture with Franklin Roosevelt when he came into office.

In a way, there are a lot of similarities now to what might’ve been the picture when someone becomes president in the midst of the Great Depression and wondering, what can we do to fix things? I think there will be, probably, two categories of activities and hopes that come with that administration. One will be driven by the high priorities associated with the coronavirus. We have to come to grips with it. We have to deal with the direct damages associated with it.

But then there are the hopes and dreams of the people who elected these folks into office. To some extent, their hopes and dreams are different from those who elected Mr. Trump into office.

Along those lines, I think we will have less of what I refer to as gatekeeper capitalism, where there is a president who brings together who he considers to be the brightest and best. “Let’s get all the good brains and people who think alike in the same room and come up with a solution to this problem. We’re going to all stay here until we get that written down, and then let’s act on it.”

As opposed to a little bit more humility, perhaps saying, “We’re not really smart enough to fine-tune this entire world economy. Let’s work on the pieces where we think we can, and let’s let our grip relax a little bit on other parts.”

Along those lines, I think we will see some relaxation with respect to interferences in trade, in the world picture, a more relaxed stance there, a recognition that this world is so complicated now, if you wanted to serve a special interest, it’s awfully hard to know what you would do.

For example, I saw recently a photograph of a Boeing 787 Dreamliner, one of their big aircraft. The photograph was identifying the component parts of just the skin, the fuselage. How many countries of the world are involved in producing component parts? It might be a door or part of a wingtip, but there are 10 countries involved, and that’s just the external part of the aircraft.

If someone said, “Hey, we need to protect Boeing from foreign competition,” you say, “Well, wait a minute, we get our engines from Singapore. We get the nose cone from Japan. We get this piece from . . . Maybe you better just leave us alone.” I think there may be a little bit more of a recognition that the world is too complicated to try to control from the White House, with respect to trade.

At the same time, there may be a tendency to say—I suppose to how the Trump administration has approached it—there may be a tendency to say, “We think we can come up with a better healthcare plan for all Americans. That’s something we think we can understand more clearly, and we want to make sure it has certain characteristics.” Whereas the Trump administration was, “Let’s back away from that,” sort of hands-off.

I think we will see on an area-by-area comparison of different outcomes in terms of what we might call activist government.

MITCHELL: That’s an interesting point you make. I’m reminded of this strange dichotomy that was also true during the Clinton years, the last time we had, I believe, or at least maybe it’s the most famous time we had a Democrat in the White House and Republicans controlling Congress. Actually, there was some time during the Obama years when that was true as well.

During the Clinton years, the early parts of the Clinton years, there was an attempt to essentially have a government takeover of healthcare, and it went down in flames. Then, one of the curious things that happened is some of the architects of that plan—Ira Magaziner and others—turned around and authored the Clinton administration’s laissez-faire approach to the internet and to commerce on the internet in particular. That’s where you got Section 230 and things like that.

I suppose we’re all a little bit of divided minds on everything. None of us is consistent, [laughs] but politics certainly makes that clearer than ever.

Innovation and Entrepreneurship

Another question I have for you is, moving from public policy to the actions of entrepreneurs—all of these people who are rolling up their sleeves and starting businesses at an apparently extraordinary rate. You point out that there’s two possibilities here. We’re not exactly sure what’s happening. One of them could be a trend that often happens, and we often don’t find it until decades later, which is that, in the depths of a deep recession, sometimes the seeds of prosperity are planted.

There’s an economic historian, Alexander Field, who has called the 1930s the most technologically progressive decade of the 20th century, which is hard to square with a lot of people’s perceptions of the 1930s. But if you think about all of the innovations that came out of that, sometimes in the darkest times, humans are the most innovative.

In the last few weeks, we’ve seen extraordinary innovations, everything from solving the protein-folding problem to Moderna and Pfizer coming out with vaccines in record-breaking time, to a lot of people just starting interesting business models to help people get through pandemic life. It’s a pretty extraordinary story. It’s also a possibility that it’s a blip in the data that has another cause. Can you explain some of that?

YANDLE: Sure. Yes, yes. The data that are included in my December report are based primarily on what is happening with new firm registrations by the Department of Commerce. Every new business in America has to have a number, and you get your number from the Department of Commerce, and that’s a very simple thing. This requirement hasn’t been around very long, but now we’re able to go and get a count on new business startups, and the number is huge, as you point out, in the current period.

It may be tainted a bit—when we say a bit, it may be tainted, who knows whether it’s a bit or a large mouthful—by the Small Business Administration’s Payday Protection Plan program. In some cases, it’s alleged, some people invented a lot of businesses just so they could fill in the blank and get one of those forgivable loans. There’s some of that in the data, but nonetheless, I think the data jump is large enough for us to think there’s more going on.

Then, we have more anecdotal data. Our world has changed because of coronavirus. We all know that, but the question is, has it changed temporarily or permanently? The answer, I think, is both. There are parts that will not be like they were, and there will be other parts that will be. One thing that has occurred in spades is providing more services in terms of delivery of materials and services to people who do not wish to get out as much as they did in the past.

One of the largest categories of growth in employment, for example, in the report that came out last Friday from the Bureau of Labor Statistics had to do with warehousing, distribution and delivery services.

A lot of people—I hope it’s a lot of them—who may have been working in restaurants and food service and bars that get closed down by public action decided, “Well, we are going to convert our bar and our restaurant into a takeout service. While I used to wait on tables, now I’m driving my car to deliver meals. By the way, now that I deliver meals, I’ll pick up your groceries for you also. Hey, I think I’ll start a delivery service.”

As you point out, all of a sudden, something is born out of necessity, and then a spark ignites another dimension to it. So, we do have that. That is another way of saying, I guess, capitalism is still working in the trenches. These new small firms that are sprouting up—many of them will survive and become something else. There’s reason for optimism there with respect to what that data seemed to be telling us.

MITCHELL: That’s fascinating. I keep getting struck by all these COVID-19 economic stories of unexpected places where you’re seeing firms pivot and people pivot. Just this week, we heard that Universal is going to release all of its 2021 full-length feature films directly to streaming.

A couple of weeks ago, the story was about the surge in chessboards being bought by people watching The Queen’s Gambit, which is an excellent series if listeners haven’t watched it. It’s really fascinating how we’re seeing dramatic changes in people’s consumption behaviors and production behaviors in very unpredictable ways. If I had thought to go long on chessboard pieces in October, I definitely would have done it.

[laughter]

YANDLE: Another area where we’re seeing a similar response, a change in marketing behavior, is automobile dealers and autosales. It was probably a little bit better than a year ago that there was a firm that started up and said, “Hey, we’ll deliver your car to you. You can go online and tell us what you want, show it to you, guaranteed money back. And by the way, we’ll bring a check for the car that you own, and we’ll do all of that in your driveway.” “Wow,” you say, “That’s really something. Does it really work well?”

Well, coronavirus comes along, and it’s discouraging people from going and kicking tires and slamming doors at the dealership. So this model now is becoming the dominant model. You trade online. We deliver the vehicle. If you don’t like it, we give you your money back. We’ll take your old heap back, and we’ll settle the whole deal right there in your living room.

The discoveries that take place where you didn’t even realize that there was a more convenient way to do something, and sometimes that new convenient way does stick, and it becomes the norm for an industry.

MITCHELL: That’s fascinating. Personal anecdote: I live in the mountains of New Mexico, and my house is at an altitude of 10,000 feet. I have a friend up here who did just that. She bought a car that way, and interestingly enough, she was unhappy with one aspect of it. I think there was a problem with something shorting out. She swapped it out, and they brought her a new car within a few days, delivering it to 10,000 feet in the mountains of New Mexico.

[laughter]

YANDLE: Sounds like the consumer may be winning a little bit in this competitive battle.

MITCHELL: Yes, it does.

Biology and Human Behavior

One of the things that maybe a lot of people are doing in this time is, with so much short-term uncertainty, sometimes it’s nice to take a step back and look at the long picture. You do that in one of my favorite sections of your economic situation reports when you review what’s on your bookshelf. You write very eloquently about a new book that explores some of the evolutionary biology that makes us who we are, and it revolves somewhat around how we eat. Can you delve into that a little bit?

YANDLE: Yes. Looking at the biology, one of the fascinating things about that book that just tickled me, really, was trying to explain what might’ve been key events in the early, early evolutionary history of human beings that turned us into human beings. The thing that turns us into human beings is the size of our brains. We happen to be a relatively small-statured animal with a very large brain that distinguishes us from other animals who might have about the same body weight and size.

When we look at the book, Genesis, which is talking about that phenomenon, the size of that brain gets to be determined by an accident in nature: fire. It was lightning—so the story goes, or the assumption—fires that develop in those ancient primitive way beyond and before prehistoric times that enabled people to discover cooking.

Now, with fires and cooked animals that resulted from them, the human animal could increase his or her consumption of proteins, which then—over probably thousands and tens of thousands of years—fed the growth of the brain, which required a huge, a large diet of meat, preferably cooked.

But also, the fires then become important to defining human habitation. I think maybe the tendency now for us to want to sit around an open fire with our friends—who knows how primitive that may be? But as we go back in that prehistory of human beings, it’s sort of tantalizing to think about those things, and then to perhaps reflect for a few minutes on the fact that there’s a good bit about our behavior that is not in the forefront of our brains. It is something that we just do as humans.

That’s one of the reasons that I really enjoyed that book, Genesis, and talking about it.

MITCHELL: That’s fascinating. I recall reading Jonathan Haidt’s The Righteous Mind. He touched a little bit on this. I think he’s been influenced by the author of this book, Edward O. Wilson. To some degree, Wilson has challenged the long-held notion that all natural selection takes place on the individual level, and he, to some degree, breathes some life back into Darwin’s idea of multilevel natural selection, that we’re not just competing with one another as individuals, but entire groups are competing with one another.

It helps to explain social behavior. It helps to explain why we share some similarities with termites and ants, a lot more than you maybe want to admit, in that we do think as groups, right?

YANDLE: Yes. What you’re underlining there that I think is so important, Matt, is, it’s about cooperation. When we economists talk about markets and human behavior, we tend to use the word competition, and it’s a fairly good word to describe what’s actually going on there. We use that word more than we use the word market cooperation, but those transactions that are taking place in those markets are cooperative. They’re voluntary.

While the process is competitive, when you get the two human beings together in the room, negotiating and reaching an agreement, you’ve got a beautiful side of cooperation. I just love it that Darwin reads Adam Smith and wow, says, “Hey, there’s a unifying thought here about human behavior.”

And I’m enjoying the same point you are about group selection and cooperation as defining our ability to survive in this highly competitive world, which I guess gets us back to the coronavirus and—

MITCHELL: That’s my original—

YANDLE: —the world we’re in right now, finding ways to cooperate, dealing with an unknown—well, we know, but in a sense an unknown biological enemy and trying to work our way through these woods.

MITCHELL: Yes, that’s fascinating. It reminds me also of another piece from several decades ago. Don Lavoie, in one of his books, talked about Lamarckian natural selection versus Darwinian natural selection. One of his points there is, if you go back to your history of biology, Lamarck suggested that the way people evolve is actually more intentional. If I work out really well and develop these huge muscles, my son will also have these big bulging muscles.

It sounds silly from a Darwinian perspective, but Lavoie’s point was markets, interestingly enough, have some of that characteristic of Lamarckian evolution because natural selection in the natural world is driven by accident, but firm evolution in a market economy or innovation in technology—that can be driven both by accident, but also by imitation. You can look out your window and see what works and what doesn’t work. You can purposely move yourself and your firm in a direction that will accelerate evolution.

Those two processes can work together—accidents and purposeful human action.

YANDLE: Yes, and it’s going on all the time.

The other thing, within every organization there’s always somebody who’s an eight ball. We do our best to knock the sharp edges off and to make that eight ball look like and act like the rest of us. But usually, it’s an eight ball that has an idea that’s going to lead to a different way of doing things. Sometimes the organization that has to deal with the eight ball finally says, “Look, I think we would all be better off if you just took your idea somewhere else.”

A lot of times that’s where the innovation is occurring. It’s a disruptive technology. It was disruptive to the existing firm, but lo and behold, you look out, and these are the people who are advertising the cars online, and “We’ll deliver them to you.” Probably that was someone who had worked for a major auto company or auto dealer, and they probably had said, “Hey, why don’t we start doing it this way?” Maybe the boss said, “Look, get with the program, or go on off and start your own company somewhere else.”

Maybe that’s part of the story of free enterprise.

MITCHELL: That’s right. Excellent. Let me end on the final words of your paper today. Building off of your readings here, you say, “The tentative evidence suggests that more social time led to larger brains, so a cookout with friends and family is a good idea. Don your mask and make it happen. You’ll be glad you did, and so will they.”

Well, I’m glad to have this time with you today, Bruce. I hope maybe someday in the not-too-distant future, we could perhaps sit down over a fire and some barbecue and see each other face to face.

YANDLE: Matt, I would love it. It’s always fun talking with you. See you then.

MITCHELL: Thank you so much. My guest today has been Bruce Yandle. Please check out the new “Economic Situation” report, and also pick up the new book, The Legacy of Bruce Yandle, edited by Don Boudreaux and Roger Meiners. Thank you so much.