Every three months, Dr. Bruce Yandle provides regular updates on the state of the economy. His most recent report, released on September 1, focuses on the continuing economic effects of COVID-19. Yandle is a distinguished adjunct fellow at the Mercatus Center, dean emeritus at Clemson University, and author of the now-famous “Bootleggers and Baptists” model for understanding unlikely political alliances. Recently, he spoke with Mercatus senior research fellow Matt Mitchell about his latest report. This transcript, as well as the audio of their conversation, has been slightly edited for clarity.
MATTHEW MITCHELL: Hello and welcome. My name is Matthew Mitchell. I am a senior research fellow at the Mercatus Center at George Mason University. Today I’m delighted to have as my guest on the Mercatus Policy Download Dr. Bruce Yandle. Many of you know Bruce. He is the Dean Emeritus of the College of Business and Behavioral Science and an Alumni Distinguished Professor of Economics Emeritus at Clemson University. He’s also a distinguished adjunct fellow at the Mercatus Center at George Mason University. He has recently written another of his “Economic Situation” reports. This one came out in early September. Welcome, Bruce.
BRUCE YANDLE: Delighted to be with you again, Matt.
MITCHELL: Excellent. We have a lot to cover. As I feel like we said in our last conversation, so much has changed since we last spoke. Let’s start there. What has changed in terms of the US economy and its footing, and maybe even what has changed since you wrote the words in the “Economic Situation” report?
YANDLE: That’s a good way of putting it. That report was posted on September 1. That seems like a long time ago when we look at what data are doing now, Matt, just as you suggested. Since our last conversation, I think we can say safely that most important measures of economic activity for the national economy indicate a bottoming-out, along about April. Lots of data hits what is obviously a bottom, and a bounce we see in the data. So improvements began to occur in May and in June and coming forward.
But then it seemed that the energy that might’ve been lifting economic activity was wearing thin. What I observe now is plateauing. I guess the most recent handle that I have put on the economy—always looking for another set of adjectives. We talk about the “Goldilocks economy,” when everything is just right. I’m referring to it right now as an “eddy current economy.” Anyone who has spent some time on the beaches on the Atlantic or Pacific coast, you know what an eddy current is. When the tides are changing and it looks as though the water doesn’t know whether it’s going to come in or go out, you get eddy currents. That’s what I see when I look at economic data now.
It’s as though there’s a hesitation. Not sure we’re going to see more improvements, but there’s not an indication that we’re going to be sinking back either. We’re just sitting there at a plateau. That’s a broad description of what I’m seeing now when I look at data. For example, employment growth in manufacturing, nice recovery but plateauing. Employment growth in government did not bottom. It just sunk a little bit and is now plateauing with the census workers added to it. Then we’re looking at the same measure, year-over-year growth in employment in the services sector, picked up steam and is now hesitating.
The only part of our economy that hasn’t lost that head of steam is construction. Construction bottomed, took off, and is sailing. It appears to be the stronger part of the economy right now.
MITCHELL: Two things strike me about this. One, when you’re talking about this eddy current or the inflection point, I’m just reminded of very basic principles of the micro idea of low-hanging fruit, diminishing marginal returns, however you want to put it. What seems to have happened is, the jobs that were easy to come back have come back. Now we’re moving into a phase where adding back some of the other lost jobs is not going to be as easy as it was. In some cases, this may require some longer-term sectoral changes—reallocation of resources, labor, and capital across sectors, maybe even retraining. That sort of thing is, unfortunately, not as easy to achieve. Is that your take as well?
YANDLE: I think that’s a good way of putting it. Then, of course, we had massive—I’ll use the word interventions—but massive interventions by governments at every level, particularly at the federal level, in an attempt to lift this economy up, to keep it from sinking. Massive transfers. In some cases, those transfers were relief. In other cases, they were stimuli. That also is affecting that eddy current.
We’ve got some 51 million people who are affected positively by the Paycheck Protection Program, for example. It’s estimated that maybe 80 percent of the employment in the small business sector is affected by that program. Big bucks—it was a half-trillion dollars. A lot of people affected by it. And I know from just anecdotal conversations with people in business, it kept them from terminating good workers, which was their salvation. But also, they did not have any business activity. They had people on a payroll but nothing for them to do. Of course, they found things for them to do, but there was nothing that related to producing salable output.
There are other dimensions like that. We’ve had a massive increase in personal savings. Lots of cash is falling into lots of pocketbooks, but the stores were all closed and the restaurants were closed. Maybe you could find a car lot where you might go and trade off the family vehicle, but by and large, the money is in the bank.
MITCHELL: That’s what makes this so unusual—certainly compared to the Great Recession of 2008 and 2009, when you saw so much wealth collapse. I think some government interventions have allowed people to bridge through some gaps in employment, but also people really didn’t have anything to spend money on. Restaurants and bars were closed. Not only is there not a major collapse in wealth, but in some cases savings are way up, making this a very unusual type of recession. Is that right?
YANDLE: They are. They really are. It’s something like 23 percent of personal income now, is the Department of Commerce’s most recent measure of the savings rate, where normally it might be 4 or 5. Another thing, Matt, that your comments brought to mind is that as the economy is, as we say, recovering, that perpetuates an image of, “It’s going to be like the economy before it got sick. It went in the hospital, it recovered, and now it’s back out again. Doesn’t it look good?”
It’s not the same economy. It’s a new economy that is being generated. That’s always the case. Every day when we wake up, we wake up to a new economy. Maybe minor changes that we don’t even notice, but those changes are cumulative. After a while, it’s rather different. But in this case, we’ve got an economy that is, in a sense, reinventing itself, partly because of the response to coronavirus, which in some cases is causing people and firms to discover ways of doing business that are superior to the ones they were applying. They would have never discovered those, or it might not have happened, had they not had the stimulus. There are really interesting things going on.
I mentioned that construction activity is, I would say, booming. In fact, on an employment basis, we’re almost back to where we were before all this started. That’s been the pace. But if you make a visit to your local building supply establishment, whether it’s Lowe’s, Ace Hardware, or one like that, you want to get some plywood, they’re apt to tell you, “I’ll put your name on the waiting list.” There’s a real shortage of wood products.
It’s interesting. In talking with the folks at the hardware stores, they say, “In addition to that, we can’t keep the lawnmowers.” There are a lot of folks who are now working from home on a permanent basis, as explained by their current employers saying, “Hey, this isn’t temporary. We will not do business the way we used to.” Now there are a lot of these folks working at home, and they decide to cut the grass a little more often.
MITCHELL: Cutting the grass and cutting the hair themselves.
YANDLE: And exercise equipment. There’s an expression now, the coronavirus 15—that on average, people have gained 15 pounds.
MITCHELL: That’s right.
YANDLE: All that time at home and grazing in the kitchen, we’ve got to work it off.
MITCHELL: That’s right. Also, there’s been a lot written about the reallocation of housing from different population zones. Some of this may be overstated, I don’t know. But as more and more white-collar jobs move online and more organizations are saying, “We’re going to be more comfortable with you working remotely for a longer period of time,” you’re seeing booms in places that previously were vacation destinations.
I think you and I are both hunkered down in the woods in different parts of the country. I’m on the West Coast; you’re in the East. But in my area you wouldn’t know that there was a recession. There’s a boom in housing as people who often would come here to vacation are saying, “It’s got some nice views and some good internet. Maybe this is where I’m going to live.” At the same time, people are saying, “Large urban areas may not come back for quite a while.”
YANDLE: True. Obviously there are changes in behavior, some of which by mandate. Everything is closed, so you don’t go in. Mass activities are illegal in many places up to a certain level. A lot of Rotary Clubs, for example, have just stopped meeting until things get normal again. And football stadiums are not going to be as crowded as they used to be. In a sense, that’s a forced change in behavior.
But there may be changes in behavior that, even though forced, bring new learning and bring new habits and bring a new culture. I think travel activity has changed permanently for the average American. They’ve discovered, for example, vacation spots that are closer to home that are a lot better than they thought they might have been. There is a stimulus to sales of new vehicles—RVs, SUVs particularly—where people previously were flying more often, and now they are driving more often with the family with them. Those changes, to a large extent, will be permanent changes in behavior.
Prices are falling. Air travel is 24 percent cheaper. Gasoline has fallen by 20 percent because of the decline in travel. And so, there’s another world out there. It suggests to us that the really tough spot is the hotel industry, accommodations, fine eating restaurants. That’s where the bulk of the unemployment came from, and it’s probably the biggest piece of it that is still facing difficulty in recovering.
MITCHELL: It’s interesting to see how this will play into longer-term trends. Towards the end of your report—one of my favorite parts of your report is you always talk about the books you’ve been reading, and you highlighted Tim Carney’s 2019 book Alienated America: Why Some Places Thrive while Others Collapse. This fits in the same category as a few other books: Charles Murray’s Coming Apart, Robert Putnam’s Bowling Alone from almost two decades ago still seems quite relevant, J. D. Vance’s Hillbilly Elegy. What a lot of these books talk about is the changing landscape and the deteriorating social connections in rural America.
Well, what you and I were just talking about is the possibility that rural America might experience a bit of a boom as people discover that they can do white-collar jobs remotely from these beautiful locations. Two decades into this literature on the emptying out of and hollowing out of rural America, maybe as we are speaking some of these trends are going to start reversing themselves. I don’t know.
YANDLE: I think that we could certainly put forth the argument that at the margin we will see some regeneration, and it may be in that intermediate zone that lies between the more remote, truly rural, where it’s hard to get cell phone connectivity, for example, and closer in but still not suburban. Sort of in that outer ring, once you leave what we would recognize as suburban, with the malls and all of the national advertised brands of fast food, and you get into the country, where you may see a barbecue stand every now and then, or something like that along those lines, but you still have access to the web, to the net, and you have good telephone connectivity.
It’s truly a miracle what you and I are doing right now. Just as you mentioned, you’re on the West Coast, I’m on the East, and we are in the country in both cases, or in a rural area. More people are discovering Zoom, and Zoom likes us. They let us use it at a low cost, free up to 40 minutes. You begin to also realize that some of your more pleasant conversations are taking place by Zoom instead of at the post office or at a church meeting or at an athletic event, which may be having difficulties. And you realize, “Well, gee whiz, it’s pretty good talking to someone. I have Zoom meetings with my grandchildren, and hey, it works pretty well.”
MITCHELL: That’s right. Interesting. Another part of the conversation that I feel like you and I keep having is tariffs and trade. Every time we sit down to talk about the “Economic Situation” report, there’s some new development there in some senses, but there’s also an old development, where it seems like we’re kind of stuck in the same story of some new intervention in foreign trade. What’s happening there?
YANDLE: At least for me, my acid test for any politician who is hoping to achieve national office is, do you support free markets—all free markets? Do you allow and encourage your citizens to shop wherever they want to and make contracts with anyone with whom they wish to? Or are you more inclined to intervene, and in which cases?
We know that we have a president who has named himself the “tariff man.” He likes tariffs. He has bragged about tariffs and how they have generated needed revenue. But after a while, when you put enough tariffs, not much is coming in the door and the revenue goes down, and that’s where we are right now in the United States. But recently, I was looking at how President Trump, our current president, is behaving with respect to tariffs. It appears that wherever there might be an opportunity, he will move in the direction of placing a tariff on goods coming across borders into the United States.
It’s interesting, neither he nor any other politician I know of refer to them as taxes because when you say taxes, everybody has a knee-jerk reaction and says, “I’m opposed to taxes, but tariffs are okay.” Because there is the mistaken image that somebody else living somewhere else pays those; we don’t. And we get rid of competition. And so in a sense, there’s the compelling political story.
But in some recent writings, I have referred to that kind of behavior as a “gatekeeping” president. A president who says, “I’m the keeper of the gate. I’m the keeper of the kingdom. Hey, this is the best Six Flags Over Georgia or Disney World anyone has ever had. I’ve got the biggest merry-go-round in the world, and everybody wants to ride on it, and so I’m selling tickets. If you want to participate in the American economy, just come knock on my door, and we’ll talk about what you may need to do in order to get here.”
That’s a recipe that may be beneficial in terms of interest group support, and we understand the politics of it, which is certainly in some cases compelling, I guess. But it’s also a recipe for slow growth, loss of specialization capabilities, hardening of the arteries, and centralization of power, which in the longer run can lead to even more severe mischief in a political economy sense. I worry about it, maybe more than any other feature of political activity.
MITCHELL: Yes, I couldn’t agree with you more. In fact, I think a recent episode that really highlights this—and both you and I have written on this; I think we wrote pieces almost at the exact same time—is the TikTok affair. There, President Trump actually referred to it as key money. Basically the idea was, well, “TikTok, you cannot operate in the United States without the blessings of the president. You should expect to have to pay if you want to be sold to an American company that will allow you to continue to operate.” He referred to it as key money, which is apparently a term from real estate that connotes potentially illegal activity or potentially illegal bribes, but certainly under-the-table payments for the privilege of being able to operate.
I do find this disturbing, personally, both from a philosophical perspective having to do with the erosion of the rule of law. A basic principle of the rule of law that goes back really all the way to Roman times is that laws are general, they’re prospective, they’re universal, they apply equally to all, and there’s no special rules for one group or another based on who they pay off or how privileged they are politically. But it also has a real cost in economic terms.
We know that in places where the rule of law is not a universal perspective and general, that they experience sclerotic growth. You referred to the hardening of the arteries. That’s a great metaphor. You essentially have entrenched special interests who obtained government favor or privilege, who have somehow gained access. They’ve paid the key money. It means that new innovations, disruptive innovations, are much less likely in those types of places where the rule of law is eroded. Do you agree with that?
YANDLE: Oh, yes. In a sense, the behavior we’re talking about—the TikTok story or tariffs or quotas, or you pay to get in the door—it is so appealing to the mind, to the average one of us. You say, “Well, gee whiz, that makes sense.” Just get all the information together. Get the brightest and the smartest people you can find. Get them in the Oval Office. And now let’s make a list, and we’re going to decide who gets in and who doesn’t, depending on what they do for us.
Adam Smith had a famous metaphor that he used, the chessboard, describing the “man of system,” as he referred to it. What we’re talking about here is someone who attempts to take a systematic approach to operate our economy. Smith said the man of system sees the economy as though it were a gigantic chessboard where he can reach over and move the players at his will, achieving what he thinks to be the best outcome for the game, without realizing that each of the players has a sense of motion of its own. They have a motivation. They have ideas about where they’re headed. And of course, the man of system can never have enough knowledge to comprehend all of that.
It makes the prescription that I think we would try to offer in one form or another so ugly to the person who is in the position of power. We want to say, “My friend, we want you to use the right kind of nothing.”
He says, “What do you mean, the right kind of nothing?”
“Don’t do anything except protect property rights. Make sure contracts are enforced. Punish people who engage in criminal behavior. Protect our country with a strong defense. Do what you can about larger problems, but we want the right kind of nothing for the rest of the economy.”
That’s not very appealing for a man or a woman who’s running for office and they need to stand up and say, “Here’s what I’m going to do for our country if you elect me.”
MITCHELL: Yes, that’s right. I think part of the problem is, perhaps we rightly praise entrepreneurs who do rearrange the world around them, who do come up with new ideas to employ new people and employ capital in new and different ways, and that’s a wonderful thing. But if one of those businesspeople begins to think that the role of the government is to do the exact same thing, it’s very different because when a businessperson—let’s say, Donald Trump, the businessman—wants to put up his own money to support Foxconn, or to invest in a Foxconn plant in Wisconsin, it’s all voluntary.
Moreover, he internalizes both the costs and the benefits. He has a reason to think through carefully about that investment. But if Donald Trump, the policymaker, encourages Wisconsin’s governor to use taxpayer resources to invest in Foxconn, he doesn’t have any skin in the game. He doesn’t internalize the benefits. He doesn’t internalize the costs. He doesn’t have an incentive to gather the right information or think through whether this is a good investment or not. He’s essentially moving the pieces of the chessboard, but because he’s got no skin in the game, he doesn’t care whether he wins or loses the game of chess. It’s a very different type of role, I think.
YANDLE: Right. We get a further intertwined economy, that is, with the people who have the ability, and we empower them. We citizens empower them to write rules and regulations, to write constraints and enforce them. And so we get even a more intertwined economy, where it’s very difficult for anyone to be able to say, “What I’m going to do in the event I hit this problem—” They have to hesitate for a moment and say, “But I best check what the regulations are first, or I best check to see what government programs may be available first before I try to determine what I should do in this situation.” That’s the world that we have created.
It could be that the coronavirus experience is cutting both ways. Any time a people, a society, is challenged by a common foe, I think there’s a natural tendency for us to, “Let’s all hold hands together and, so to speak, circle the wagons. We have a common enemy. It’s going to require a unified, centralized approach.” So there’s that force. But there’s also identifying constraints that we didn’t realize were so bad before, and they are blinding us. We’re tripping over barbed wire that we put out in the field for some other reason. Now we’re saying, “Let’s cut a little bit of this barbed wire and generate a different economy.”
MITCHELL: It’s been a fascinating experience to see the change in governance. On the one hand, the power of the state, I think, is quite visible. It’s right up in front of us with governors across the country issuing stay-at-home orders. At the same time, the state is receding in some places. There have been, by some measures, 600 significant deregulations around the country, easing everything from the ability of physicians to see patients in other states, to easing restrictions on what nurse practitioners can do without physician oversight. Certificate-of-need laws have been eased or suspended in about two dozen states. Even the home delivery of alcohol has been legalized in many places.
We’re finding that there are plenty of rules that have stymied the ability of entrepreneurs to deal with the problem, healthcare workers to take care of those in their community, and even everyday people just to handle the stress of the pandemic. A lot of these rules have been swept away at the same time that we’ve seen large increases in the regulatory state’s ability to order you to stay home and the fiscal state’s ability to borrow and spend money at an incredible pace.
YANDLE: One of the wonderful, positive aspects of our country, our wonderful country, is the fact that we have the 50 states. That by itself is not necessarily wonderful. It is in some ways, but it gives us 50 laboratories to experiment when we have a common problem. It enables us to learn a whole lot more as a nation of people than we would be able to learn, let us say, if we were a country like Sweden, which has an economy the size of North Carolina, and they decide to do everything the same way.
The difference across states now in terms of economic performance is partly explained by what were declared to be the necessary industries or activities that would be allowed to continue. When governors of states said, “Okay, we’re going to be shutting down”—now we are talking about back in February and March—where a governor says, “We’re going to shut down the economy,” and then there was the big question at the end of the table in the conference room, “Which industries are essential?”
It varied across states significantly. In some states, construction was viewed as an essential activity. It was in South Carolina, for example. It was not considered to be essential in other states, and so construction shut down more than it would have otherwise. In some states, the governor even went inside Walmarts, let’s put it that way, or Targets, and said, “By my judgment, this department is essential, but this one over here is not essential.”
There were some economists at the Federal Reserve Bank of Philadelphia who have looked at county-level data to examine performance, partly on the basis of what was the mix of activities that was allowed to continue. And so we are getting various outcomes, and we are learning from that. There will be a lot of lessons, I think, Matt, from this experience that will come. You will probably be involved with graduate students chasing after numbers for a long time speaking to some of these questions.
Just recently, the unemployment compensation program, the federal component of it, ran out on September the fifth, where the feds were providing $600 a week on top of whatever state unemployment compensation was paid, and that varies significantly across states. That money ran out. Then President Trump, in an effort to try to find some way to soften that blow, said, “Well, the feds will come up with $300, and the states should match it with—not match it, but should add another $100, and that gets us to $400.” He issues an executive order calling for that. FEMA, Federal Emergency Management Association, is tapped as the source for the $300.
But in order to get to $300 at a state, you got to do the $100. Montana announced this week, “Sorry, this whole thing is over,” which is getting to my point about state experiments. Montana says, “We can’t afford the $100. As a state, we are strapped. So, folks, sorry. Get used to it. We’re not getting the $300; you’re not getting the $100. You’re getting the part that we always promised. Let’s all get back to work,” was the message. So we will see a variation in that program as we go forward also.
MITCHELL: That’s interesting, and certainly there’s going to be a lot of work for graduate students in the next few years—lots of new data coming out and certainly plenty of fodder for those projects.
Well, we’re running up against our time here, Bruce. As always, it’s been a delight to chat with you. Thank you so much for taking the time today. My guest today has been Bruce Yandle. Please check out his “Economic Situation” report issued at the beginning of September. You can read more of Bruce’s work at mercatus.org. I hope to talk to you next time. Thank you so much.
YANDLE: Great being with you, Matt.
MITCHELL: Thank you so much, Bruce, for taking the time to chat with me.
Image credit: DenisTangneyJr/Getty Images