Startup Geometry Podcast: Brad DeLong and Scott Gosnell: The Honest Broker for the Week of June 7, 2015
[0.00.36] Brad DeLong is a hyperintelligent swarm of bees in human form, John Scalzi http://whatever.scalzi.com/, Lois McMaster Bujold http://www.dendarii.com/, gender politics in SF, Science fiction and economics as worldbuilding exercise.
[0.05.48] How economists are made. Jay Forrester's world dynamics https://en.wikipedia.org/wiki/Jay_Wright_Forrester model, education with Roger Wood, Gregg Erickson, Andrei Shleifer http://scholar.harvard.edu/shleifer/home, Larry Summers http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QFjAA&url=http%3A%2F%2Flarrysummers.com%2F&ei=iqqBVfHxLMfcoAS26qj4Cg&usg=AFQjCNG-8JnZPEzahpjra12o528S-iUslg&bvm=bv.96041959,d.cGU, being an assistant professor applicant in economics vs. history.
[0.09.25] Trends in the economic profession, economics considered as the Nile delta. Ulrike Malmendier http://emlab.berkeley.edu/~ulrike/index.html, Stefano DellaVigna http://emlab.berkeley.edu/~sdellavi/index.shtml, and Raj Chetty as leading researchers at the behavioral, individual scale. Thomas Piketty http://piketty.pse.ens.fr/en/cv-en and Emmanuel Saez http://eml.berkeley.edu/~saez/ at the macro, sociological scale.
[0.13.58] Keeping in mind the lessons of the Great Depression. George Osborne and the perpetual budget surplus idea.
[0.16.00] Why is Ricardian Equivalence https://en.wikipedia.org/wiki/Ricardian_equivalence not a thing? Why should the government invest? What's the benefit to putting off our bills?
[0.21.19] What about tax cuts as stimulus?
[0.23.23] Why transfer payments, tax credits, infrastructure spending, are better than cutting taxes on the rich from either an efficiency and equity standpoint. The effectiveness and politics of the 2009 Recovery Act. Christina Romer http://eml.berkeley.edu//~cromer/, Barack Obama. $600B in stimulus, where we needed $4T. A fire engine intervenes.
[0.29.54] Prospects for improving the situation now. Impact of the social safety net on JK Rowling http://www.jkrowling.com/ & entrepreneurs. "You get very few tightrope walkers without a powerful safety net."
[0.32.40] Hillary Clinton's agenda. Zero debt grads, infrastructure broadly defined.
[0.38.20] Costs and benefits, 20th c. vs. 21st c. Losing the secure middle class existence, gaining better entertainment and communication. Who's rich, and what does that mean psychologically? George Romney vs. Mitt Romney. Jan Wenner http://www.jannswenner.com/ vs. Paul Allen http://www.paulallen.com/. Spalding Gray http://www.spaldinggray.com/index.html on the Hamptons. The Buddha: "Desire is infinite."
[0.43.00] The end of the fundamental problems (fire, flood, famine, marauding Huns & water buffalo) as we climb the Maslow hierarchy http://www.simplypsychology.org/maslow.html. Noah Smith http://noahpinionblog.blogspot.com/. The entertainment revolution.
[0.47.30] The trade deals. How the TPP could be improved, and what its flaws are. How to negotiate a trade agreement that's better in its distributional effects.
[0.55.45] One policy recommendation & one personal recommendation for the listeners. Obama's most costly mistake. The R statistical package http://cran.r-project.org/. Controlling your infinite desires.
Scott: Hello again and welcome to the Startup Geometry Podcast. I'm your host, Scott Gosnell. For more episodes of this series, please visit iTunes or Stitcher and look for a Startup Geometry Podcast. For show notes, please go to http://BottleRocketScience.net or to http://WindCastleVC.com/podcast.
Today's interview is with Brad DeLong who is the chair of the Economics Department at California, Berkeley and is a senior economist with the Center for Equitable Growth in Washington, DC.
Brad: . . . intelligent swarm of bees masquerading as a human being for purposes of preparing delay for alien invasion. I thought everyone knew that.
Scott: You're perhaps the third person who said that to me this week or at least in my presence.
Scott: Bees, yeah. John Scalzi said that on Twitter yesterday.
Brad: I think Scalzi must be the source of the meaning then.
Scott: It could be.
Brad: He is the person who has the potential reach to do so to get that meaning into people's minds. So have you read his latest?
Scott: I have not, no. Although I've been reading his battles with the Sad Puppies.
Brad: I see. Well, yes.
Scott: And the other puppies.
Brad: That's a sad story, or a rabid story, or simply a crazy story. I suppose it's ultimately the craziest because the font and origin of social justice warriorhood and weird gender presentation of self stuff in science fiction is really not so much Joanna Russ who is always way out there or Ursula Le Guin who was an elite taste, but rather Baen Books' Lois McMaster Bujold who has been writing space opera and military science fictions. But it's really about gender relations and similar things for three decades or so now, and winning huge numbers of Hugo Awards doing it.
So it's just that a lot of people who've been reading Lois McMaster Bujold's books from Baen Books have simply not been understanding the authorial intent or indeed authorial execution at all.
Scott: That's true. And the other thing is is that they are ripping yarns as well.
Brad: Oh, yes.
Scott: It's not that Lois McMaster Bujold's, although she is an extremely competent writer, she's not doing the James Joyce of space opera.
Scott: She's doing good old classic espionage and military strategy, and at the same time, doing gender politics.
Brad: Yes. And her prose is not quite down to "her breasts folded themselves". She folded her breasts or whatever, the James Rigney line is. But it's workman-like. It's something that makes you pause at the beauty of it. It's just one damn thing happens after another.
Scott: There is nothing wrong with plot and character.
Brad: There is nothing wrong with plot and character. And if you get in a few digs, how can they possibly afford such a child-raising scheme? Doesn't it bankrupt them in terms of social duty credits as well? That's all to the plus.
Scott: Yes, that's good. And she's also very good at the business and economics side.
Scott: She has a lot of wheeler-dealers in that series.
Brad: Yes. And there's military power, there's economic power, there's sociological power, there are various forms of gender, and descent, and genetic, and the family lineage power as well. It's basically incomplete society or many complete societies. Many of them quite as nearly as weird as ours is.
Scott: Almost. Did you get into economics or did you get into science fiction first?
Brad: Science fiction first.
Scott: I think everybody does. I hope everybody does.
Brad: Well, yeah.
Scott: But it is a very popular genre though for economists though. I know a ton of economists and all of them started out on . . . whether you're Paul Krugman starting out on Asimov . . . I don't know that Ayn Rand qualifies as science fiction, but it's certainly weird fiction.
Scott: And so a lot of that concern with world building and with human behavior and human motivation seems to translate really well to the people who end up doing economics as a profession.
Brad: Yup. Well, it's the same kind of what if. And if world building is different from comparative statics, I'm not sure how it could possibly be.
Scott: That's true. So how did you get to where you are now in your academic career?
Brad: Well, I suppose it probably starts when I was 12. When my best friend and I went down to the annual meeting of the American Association for the Advancement of Science, then being held in Washington, D.C. that year, while we were trotting around the exhibits room, we found that there was a computer there, a computer hooked up to a teletypewriter and it printed graphs by printing a P for population in the 53rd column, and then doing carriage return and then printing a . . . You know how very old computers print graphs using letters as the symbols just line by line. And it had running on it "The Limits to Growth" model, Jay Forrester's world dynamics model.
And so we got to play with the destiny of the human race for the next four centuries under various assumptions about population growth and demography, about technological change and advancement, about pollution, about the damage of pollution and so forth. And so basically we took over the computer for two days down there in the basement of this big conference center in Washington, D.C. and played with it, and had an absolutely wonderful time. And then my father said, "Well, that sounds kind of like economics. Let me hook you up with my friend Roger Waud who work at Federal Reserve."
And from there followed a summer internship at the Fed, arrived at college primed to take economics, etc., etc. Wind up in college In my first year with one of my freshman roommates also very interested in economics. We got an absolutely superb Economics 10 section leader, Rick Ericson, now at Columbia, a specialist in the Soviet Union and the Soviet economy.
And the next year, my roommate, Andrei Shleifer, winds up as Larry Summers' first research assistant. And then from one perspective, we were off and running. From another perspective, I still loved history and actually wound up as being a social studies major rather than economics major, although I did fulfill the economics major requirements.
But then the summer of 1982 comes around and we graduate into the worst job market that America had seen by then. And so it seemed to me that becoming a professor looked a very good death, if rather than trying to get a good job rather than a not-so-good job in the summer of 1982, especially if things like the 1982 were to come along with any frequency, a job with security of employment looked very attractive.
And then we happened to notice that the people who were applying for jobs as assistant professors at history at Harvard tended to be 35 and have written two books. and the people applying for jobs as assistant professors of economics at Harvard tended to be 26, and one had one-half written paper and a bunch of letters saying they had great promise.
And so that seemed to me to be a no-brainer. And historians to whom I tell this story say that, yes, they agree. If I'm a person who regards obedience to market forces as a moral virtue, I probably belong as an economist.
Scott: That's good. And how would you characterize yourself within the profession, theoretically, or temperamentally, or in terms of your favorite tools and techniques and the various subdivisions of economic thinking?
Brad: What is the profession? The profession is fragmented. As you expect, given that the world we're in is one in which the number of educated people is growing exponentially. So I'd simply say that I'm part of one current, a very historically, institutionally, empirically and policy-oriented current of a giant Delta. It's not the case that where the Nile flowing through the gorges above Abu Simbel through the second cataract of Aswan, instead where the Nile Delta, with lots and lots of people doing lots and lots of different things, most of which will not, in the long, pan out, but some of which will.
Scott: Who are the most exciting people right now? Who is doing really good work, do you think?
Brad: I absolutely love Ulrike Manmeldier and Stefano DellaVigna who we have here at Berkeley. Ulrike trying to actually apply behavioral economics to corporate finance and corporate control in an empirically illustrative and useful way. Stefano trying to do the same thing for microeconomics quite broadly defined, along with Raj Chetty at Harvard. The basic point is that by now, we should be able to do a lot better at figuring out how people actually react to changing prices and opportunities and markets than simply drawing demand curves, assuming functional forms, and assuming human rationality in the way economists like to do.
And so the ability to actually use behavioral and psychological insights to get better forecasts of what will happen to policies and to get much, much, much better assessments of what these policies and these reactions due to human and societal wellbeing, I would say that they're at the forefront of that, and that is probably the most exciting thing that's going on at the small scale looking at individuals' level. At the large scale, looking at society's level, I think the most interesting current is that started by Thomas Piketty and Emmanuel Saez who is also here at Berkeley now, six doors down from me.
Simply looking more seriously at the data on income and wealth distribution that we have, and trying to set out scenarios and model processes, and understand the long run dynamics of how equal and unequal in social and economic power our societies have been and will be, and back when I was a young whippersnapper, I looked at this a bit and decided pretty much along with everybody else that the action was over. That we had had agrarian societies, we had early industrial societies, we had had many industrial societies like the Gilded Age, and then we had the age of social democracy, and that the story of rising and falling economic inequality was more or less over because we had stable social, democratic redistributive of governments.
And then, of course, no sooner do I put that whole area of study in the wastepaper bin as something which there's no longer anything interesting going on. Then the second Gilded Age starts to manifest itself. And Thomas and Emanuel have been at the forefront of leading the research and policy criticism effort to try to figure out what is going on, and can we at least make the increasing badness associated with it stop. And that, I think, is the most exciting thing going on on the macroeconomic, economic destiny of entire societies.
The third most interesting thing, and in fact the thing that has taken over my life in the past decade has, to my great surprise, been a holding action than simply trying to keep people from forgetting the lessons that the economics profession learned in the 1930s, 1940s and 1950s from the Great Depression and that's the retroactive study of the Great Depression because we have singularly failed to successfully and completely apply those lessons, even though they were relatively well-known and relatively consensus lessons back then.
And so simply trying to limit the gold bug and austerity craziness of economic policy in the 21st Century, and pointing out that at a time when U.S. Treasury debt is such an extraordinarily valuable asset to investors all over the world, the Treasury debt is selling at multiples of its usual fundamental value that we never thought we would see, that that is the time when we should take all the infrastructure spending we would be doing normally in the next 25 years, and compress it into the next five years and finance it at extremely, extremely good terms.
And yet we're not doing that and isn't doing that, Europe isn't doing that time. Japan isn't really doing that, they're making some moves. And I read this morning that the British Chancellor of the Exchequer George Osborne is not only not doing that, he's calling for large, further budget cuts in order to force the British government to always run a budget surplus, as if it was the very opposite of being run like a business because when a business can borrow cheap and invest profitably, a business does, and on as large a scale as it can manage to do so.
Scott: Now, I'm not in the middle of the whole debate as much as you probably are, but I still get people who will ask me, why is it that if the government is just borrowing all of this money, that money now has to be paid back. So will it not happen that immediately people will say, "Oh, someday we're going to have to pay this money back and so therefore we should spend less," and the influx of additional investment will immediately be sterilized by a downward turn in the economy.
Brad: Well, because actually we don't, at current interest rate. That is the right way to look at what interest rates are, is to compare. The right way to look at it is in terms of a fraction of society's resources that have to be devoted to the different uses we're making of it. To take the total sum of everything that we can produce in normal turns of our productive capacity as it grows over time, to take that as our numerare, as our standard of value, as the French like to say.
And if we actually say we have a 100% of our productive potential to spend on various things, and that that productive potential grows over time, then the right way to do the interest accounting is to say that the interest rate that counts is not the interest rate in dollars, but the interest rate in dollars minus the growth of the economy in dollars.
And currently the U.S. government can borrow at 3% for a reasonably long term, and if you look out at the yield curve, you see it's expected to be able to borrow at that 3% in nominal terms for the next 30 or 40 years at least. But we expect a growth rate of the economy in dollars to be 5% per year, which means that the interest rate in terms of the amount of society's collective resources it takes to pay off debts in the future is a fall, is a minus 2% per year.
Scott: That's a pretty good deal if you can get it.
Brad: Yes. The U.S. government borrows, the U.S. government uses those resources to do something now. We flash-forward 35 years into the future, 35 years into the future, the amount of money that has been piled, that needs to be spent to repay the debt is relative to society's productive resources. Half as large a share of society is productive resources as it is today.
And if you buy the psychological law, which seems completely reasonable to me, that it's equal relative changes that strike us as equally important, that if when we do a kind of sound scale, we think the gap between something half as loud as what we're hearing now and twice as loud, we think those gaps are the same. That that kind of logarithmic neural and psychological response means that that relative share really is the right way to do the accounting.
In which case, the way to look at government debt right now is not that it's expensive for the government to borrow, but that people are begging that investors of the world are so scared of risk and have such great confidence in the American government, that they're willing to pay the U.S. government 2% per year in order for the U.S government to keep their money safe. Like the U.S. Treasury right now is much more like the Medici Bank. It's not something that you put in your money as a deposit and it pays you interest, it's something that you put your money into and it takes a share of that as the price for its keeping your money safe.
And as long as we're in that situation, and it looks like we're going to be in it for the next 30 years at least, given the bets that financial markets are currently making on the future, as long as we're in that situation, it's not that there's a cost to taxpayers to borrow it. There's a benefit to putting off our bills because as we put off our bills, we also turn out to provide this service to investors of keeping their money safe for a while. Now, things could change. And if interest rates go back up, then it no longer makes the sense to pull infrastructure spending forward from the future into the present and do it now.
But we've been in this current situation since 2000 at least and possibly for significantly longer. And there are no signs we're getting out of it quickly. And in fact, there's a substantial debate, the four-cornered debate among economists right now about whether we're ever going to get out of it, or whether we're ever going to get out of it without major policy changes.
Scott: And what do you say then to the people who say, "No, we should cut taxes now," because that will also produce results, it will produce a fiscal result. It might or might not be the one that you want, it might not be as big as you want, but should we not then follow the Republican prescription and cut more taxes? Would that not fix the problem?
Brad: Yeah, if you cut taxes for people who are constrained in order to spend it, that would be as good. If you cut taxes for people who are already relatively flush and who will simply take the money and stuff it back into their banking accounts, you wind up then doing very, very little to the economy.
In fact, and this was one of the things that Robert Barro got his Nobel Prize for, if people are not liquidity-constrained, are hyper-rational, and if there are no important distributional consequences and also no immigration, no people who have no children and no descendants, no power gains between this generation and that generation over the family patrimony, then such a tax cut has no effect on anything at all.
And so if you want to actually change what the economy is doing in terms of production and consumption, you either have to rely on one of these market imperfections, or you have to have the government actually do the spending directly. And relying on these market imperfections is fine, but it requires that you find a group of people for whom they are large.
So increasing transfer payments by boosting food stamps is probably an effective way to change what the economy is doing right now. Providing refundable tax credits to everybody, cutting taxes that way is probably an effective way to change what the economy's doing right. Simply reducing taxes on the rich now, and boosting overall taxes on everybody in the future, that doesn't have any effect on what the economy is doing in the way of production and consumption right now, and it does involve a regressive redistribution of wealth in the future, when things are ultimately ironed out.
So the argument against tax cuts is simply that, as Barro pointed out, they may not be that effective a lever on the economy. That you may have to do trillion dollars of tax cuts in order to have the effect that a couple hundred billion dollars of direct infrastructure spending would actually have on what jobs people work at and what gets made. But, yes, the 2009 Recovery Act was one-third infrastructure spending broadly defined, one-third direct aid to the states, one-third tax cuts. And there are only three third's after all so I guess that's all.
Scott: How much did that help? Was it sufficient?
Brad: I was redoing the numbers the night before last. That is, everyone's forecasts were optimistic about the state of the economy in December 2009. And Christina Romer is forecast as incoming chair of the Council of Economic Advisors, Christina Romer was no exception. Her forecasts were as overoptimistic as average, in fact. And she thought that the economy needed a $1.8 trillion stimulus program spread out over three years, and after three years, things would have kicked in and we'd be getting back to normal or at least the Federal Reserve would be able to handle it after three years.
The problem was that, as I understand it, I may have this wrong, Larry Summers and the other people not named "Christi" on the National Economic Council concluded that they would lose massive amounts of their credibility with Obama, his political team and his administrative team, as well as with the great and good outside the government who really were not focusing on how bad things were, if they came in with a number above $1 trillion.
And so as one of Christina Romer's junior aides said to me in a conversation, they probably shouldn't, that at the staff level, our view was we cut the $1.8 trillion in two to $900 billion. Say this $900 billion will close half of the output gap we want to close and hope that Barack Obama can do math. But apparently he didn't or he didn't think that closing all the output gap was a goal worth pursuing, he thought that was too adventurous. And then when the bill hits the senate, it needs to get 60 votes to pass the senate, given the filibuster and given that it wasn't part of a reconciliation process, but it should have been part of the reconciliation process, hence my annoyance at the Democratic Senatorial barons of 2008 and 2009 is rather high.
It needed 60 votes. And the last 10 votes, 3 Republican and 7 Democrats, they came from people who wanted to be seen as fiscally responsible. And so their goal was that they would say they would vote for the bill only if it were more fiscally responsible than what Obama had proposed. Not that any of them had a technocratic view of how large the Recovery Act should be, mind you. All they knew was they wanted to be able to say, "We have made this thing smaller and more efficient."
And by the time we were through with it, we were down to $600 billion of boosting the economy over three years. And in retrospect, going back, we didn't need $600 billion a year, we needed more like $800 billion a year, and we didn't need it for three years, we needed for five years. We really needed something like a $4 trillion stimulus program and we got a $600 billion one.
And it did about as much good as you'd expect the $600 billion stimulus programs to do, that maybe we avoided wasting an additional $1.5 trillion dollars worth. That's an additional, say, $10 million. Would it be that large? Yeah, it looks like we've actually managed to put maybe an extra 2%-3% of our labor force to work for an extra two to three years as a result of the stimulus program. And in an America with an 150 million workers, that may be 6% a year, that's $10 million, and that's the equivalent of giving 10 billion more people their job for a year than we would have had if there had not been the stimulus program. And that's very, very much worth doing. But it was, again, very small relative to the magnitude of the problem.
Scott: So we could have tripled it and kept doing it for three, four years and been in better shape than now.
Brad: Yeah, we would definitely be in better shape now.
Scott: And now, the prospects are to maybe do something on food stamps or other incoming support?
Brad: Yeah, we do need to have a more progressive tax and transfer system because there's no sign that our market income distribution is becoming any more egalitarian these days at all. And if you actually want people to be entrepreneurial, you want people to be confident that they'll have a good life even if their startup goes bust, or even if the restaurant that they want to open doesn't work and goes bust.
That we're only about half as entrepreneurial a nation as we were 30 years ago, and we're now markedly less entrepreneurial than, say, the Scandinavians. And one reason for that is precisely because we don't have a big safety net. So that like Greg Mankiw likes to argue that you want low taxes on the rich, because if you have low taxes on the rich, people like J.K. Rowling will write immensely popular books like Harry Potter that bring joy to millions and to tens of millions, by now perhaps to a hundred million kids because she can get fabulously rich by doing so. And if you taxed her heavily, she would be unwilling to do that.
But if you go and you ask J.K. Rowling why did she write Harry Potter, and the answer is she wrote Harry Potter because she was driven to it, it was a story in her that she wanted to get out. And the only reason she was able to actually get it out, to spend time writing it was because of the relatively generous British social insurance system that allowed her as a single mother to still steal away enough time to actually put the thoughts in her brain down on paper and then romp around finding a publisher.
You get very, very few tightrope walkers without a very powerful safety net and we need a significantly stronger one, especially since for the past however many years, your family's health insurance enhanced at least avoiding medical bankruptcy, if not worse outcomes, requires that you work for a large bureaucracy. And our attempts to close that may be further disrupted by the Supreme Court later on this month if it decides to rule for the plaintiffs in King versus Burwell in a party line Supreme Court vote.
We do need a different and a much more progressive tax system. But that's also not something that's clearly on the political horizon right now. But Hillary Rodham Clinton is on a bunch of family-friendly initiatives, most of which look very useful to me, but all of which strike me as relatively small in scope and in value.
Scott: I think there's some possibility that she'll end up coming out for the zero debt college grad, which should be extremely helpful. I know my students and your students . . .
Brad: It would be extremely helpful to the middle class, right?
Brad: It would be somewhat helpful to the rich as well, given how high up the income distribution people who are right now taking out student loans actually are. Look at me. What was my grandfather Bill's share when he sold his Wellman-Lord construction company to the International Minerals and Chemical back in the late 1960? Something like $10 million or so which was real, real money back then. And yet I graduated from graduate school with about $30,000 of debt simply because it looked like a reasonable thing to do.
In terms that the interest rate was low and that my earning prospects looked relatively high, and if I could take some of the cash flow drain off my parents, why not do so? Someone like me would benefit from such a program, and yet I'm clearly not in the target audience. Clearly you're not in the target group that it's supposed to hit.
That is, if the zero debt has an impact on Americans who don't complete college, it will spring from a faster economic growth in general as we get more people into college as all the people who are right now not going to college but could finish it, but aren't going because they're scared of debt, start going and then start doing wonderful and more productive things with their education after they leave.
And also to the extent that we actually train more people who have college degrees, that pushes down the scarcity and the wages of the college educators. And as the wages of the college-educated get pushed down, then by arithmetic, the wages of those without college degrees, the return to relatively unskilled and semi-skilled labor, has got to arithmetically go up.
So as a distributional policy, it's of a bank shot, probably an effective bank shot, but I don't think anyone knows how effective. As a growth policy, it's surely a good thing, but it may not be the best thing, especially when I look around at the state of America's infrastructure, and think shouldn't loose federal government change be devoted to some of those needs, rather than to essentially a middle class educational entitlement.
Scott: Yeah, it's not hard to find a bridge.
Brad: No, it's not at all.
Scott: It's a little bit worse for wear. And you have those up and hire people to fix that and soon enough, you're talking about not just real money but actually real jobs and people doing them.
Brad: Yeah. People do a lot. You could do an awful lot, could've done an awful lot. And you also need to start thinking about infrastructure broadly defined, that it's not just bricks and mortar and concrete and steel. It's systems and software and integration and networks. Plus, it's investing in the human capital of 12-year-olds who will then be able to understand and work with information technology systems for the rest of their lives.
There's an awful lot we could do to make this a better and more productive society, and that we ought to be doing, especially when you think that the measured real earnings of pretty much everyone in the bottom two-thirds of the population aren't significantly different in terms of measured income from what their predecessors had 30 or 40 years ago.
People today have cheap electronics. They have more congestion, lengthier commutes, higher house prices, higher education prices, greater risks of medical bankruptcy. When we factor off location, congestion, housing, education, transportation, and medicine, when we factor that off against cheap information technology, it comes close to balancing out, at least in terms of the market value of what's produced.
What it does mean is that a bunch of people who thought that those second things were part of a secure middle class existence, that owning your home was part of a secure middle class existence, they're not worrying about paying for college for your kids was part of a secure middle class existence - they don't have that, but they do have an iPhone, and iPad, and a MacBook Air instead.
And although in economic terms those may look close to us in sociological terms, that may look as though my parents were middle class or my predecessors were middle class. And yet, I'm not really middle class, am I? I mean, there are two other considerations - one pessimistic and one optimistic, right?
The first being, to say, suppose you lived in suburban Detroit in Ann Arbor in the 1960s and you ran into the first American Motors president and then-governor of Michigan George Romney at a cocktail party or someplace . . . And it's true that Romney's house was in Grosse Point rather than in Ann Arbor or Oakland or whatever, and it's true that his house had three more rooms than yours did and probably had twice the square feet that you did.
But he didn't have live-in servants, he drove the same kind of middle American car, he had maybe another like cabin on Michigan's Upper Peninsula that you didn't have or something, longer vacations, a very fancy office with a plush carpet, and maybe a Monet on the wall, but you could figure that you would make it in America because here was a guy who was clearly on the top and yet his style of life wasn't that different from yours, you had to go to the Rockefeller's to find someone whose style of life was not that different from yours. And yet, now, if you run into Mitt Romney at a cocktail party, what - six houses, net worth approaching $1 billion? I don't know how many permanent people he has on staff, but at least two per house, plus political office aides as well.
The curvature of the income and wealth distribution up at the very top tends to make people who would have thought a generation ago that they had made it somehow feel small. And I think this was brought out to me most once when I read an article about a Rolling Stone president, Jann Wenner, who's made it, who has a mansion, who has a yacht, who has a plane.
And then at some point during this interview, Jann Wenner began talking about hanging out with Microsoft honcho Paul Allen who has not just one but multiple mansions, and who has not just a yacht but a permanently-staffed boat that seats 50 on anchor off of the South of France for him to go to whenever he wants, and who has not just a plane but a 757. And Jann Wenner began talking about how he wished he had worked harder in his late 20s, 30s and 40s and make Rolling Stone even more a success because he thought it would be really cool to enjoy that level of opulence.
And at that point, Jann Wenner says that the existence of Paul Allen makes him feel small and makes him wish he'd worked harder and gotten more and piled up even more money. You've got to say, if you're saying, that it's time to hang it up. There's never going to be anything that's enough.
Scott: I did some preliminary research a few years back where I did a bunch of surveys with people, and what you find is that as the income curve gets more and more skewed, inequality becomes greater. What you find is that at the bottom, people are doing less well. But above that, people are more insecure.
Scott: So as that as that curve gets steeper and steeper, because Jann Wenner really is living right next door to Paul Allen, one of his one of his things . . . And Spalding Gray used to say you go out to the Hamptons, and you understand that the Buddha was right about desire, that it's infinite. And he says, because here is a house and next to that house is a bigger house, and next to the yacht is a bigger yacht. And then he said, and you talk to these people and everyone feels poor.
Brad: Yes. And indeed, when I was telling this Jann Wenner-Paul Allen story to one of the princes of Wall Street, his first crack about the 757 was, "You mean nobody owns a wide-body?" And now, of course, people do own wide-bodies. Not that many of them yet, but there are a few.
But on the other hand, if you want to go all sociological and hierarchy of needs, your first need is enough food, that you're not terrifically hungry all the time, wondering where your next meal is going to come from. And your second need is enough clothing, that you're not shivering cold all the time and thinking you might die of hypothermia unless you go and exhaust yourself more. And the third need is for enough shelter, that you're not miserable and wet all the time. And after food, enough food, clothing and shelter, your fourth need is for security, that your children aren't going to die, aren't going to be gored by the water buffalo, or die of some dreaded disease or be murdered by the marauding hunts.
And we got those. We got all four of those. Before the 20th Century, people outside the first world now, they don't have all of those. They still got to worry about famine, and about hunger, and about flood, and about the thatched roof falling in. But we got all of those and once you got all of those, there's a sense in which the next human need is an interesting enough life that you are not bored, plus social status that you have, in some sense, made it and are contributing usefully.
And as for an interesting life, suppose that it was before 2000 and you'd actually wanted to see a gory play performed in your house. Well, you'd better be named John D. Rockefeller or J.P. Morgan, or in an earlier century in 1603, you better be named James I Stuart, King of England and Scotland and have William Shakespeare's acting company as king's men on retainer and hope that they had a Hamlet in their repertoire or Macbeth in their repertoire.
Whereas now, the pieces of access to entertainment experiences, spectacle, that the rich and the super rich of past generations were willing to pay fortunes for, right? To have a bard or an orchestra on staff, to have a juggler, or a harpist, or even the equivalent of Jerry Seinfeld's standup in your mead hall gear out after dinner and tell stories about the deeds of kings past, at least until Grendel shows up and tears him limb from limb.
Those things to the super rich of the past really mattered. We all have them via our cellphones and we don't even have to pay for them. Although if you don't pay for them, you get occasional nasty grams, like I do, from Google and HBO saying, "Why did you illicitly download those four episodes of Game of Thrones before they were released? Mr. DeLong, we are not pleased." So there is one sense. And my friend, Noah Smith, Sunni, somewhere, finance professor has a piece on Bloomberg News about this.
From some perspectives, the amount of societal wellbeing that has been created by the computer and technology revolution is at least as large, if not larger than the amount of societal well being created by the Industrial Revolution that moved us out of absolute poverty and into a world where people could have enough food, clothing and shelter.
That mastering entertainment and an interesting life. Our desires are unlimited, but our ability to entertain ourselves by gossiping about all our imaginary friends is equally unlimited. And once we've solved that, our next problem is simply to find a way that everyone can feel that they're playing a useful role in society. And that's not really an economic problem anymore, that's a psychological, and sociological, and moral problem.
And in that sense, the economic problem may indeed be close to being solved. Or would be close to being solved except as the Buddha said, "That not only desires are infinite" but the Buddha has had a relatively small degree of success in convincing us that our desires for material things really aren't that important in the big sweep of things, are they?
Scott: That's true. And so I ask you about the Trans-Pacific Partnership and the other trade deals that are going on right now. What do you think of them? What do you think of the critiques of them?
Brad: It seems to have three moving parts. It seems to have an actual set of important tariff reductions and export-import restraint reductions that's worth $4 trillion to the people of the Pacific basin over its expected lifetime. But then it's also worth minus $1 trillion to people who are left out, like the people of Bangladesh who are excluded from the textile market access provisions. And plus $4 trillion for people in, minus $1 trillion for people out. That looks like a winner except that the people out, the people in Bangladesh, are poorer on average than the people in. Bangladesh is a lot poorer than even Vietnam right now.
And so the utilitarian calculus of even the trade part is not nailed down and has not been nailed down properly. And the longer it goes without pro-TPP people doing the work to nail down the utilitarian calculus of the trade benefits, the more antsy I get. Because my first instinct would be to say, "Yeah $4 trillion minus $1 trillion is $3 trillion. There's a $3 trillion bill lying on the sidewalk in this thing, we should pick it up and use it.
And then we can figure out how to redistribute it later, but the important thing is to pick it up. So from the trade part, I would say I'm 100% in favor. But then the fact that the distributional argument across countries has not been made drops me down to 75%. Then there's the dispute resolution aspect, and the dispute resolution aspect worries me a lot because I don't understand it, because the case for arguing that this is a good thing has also not been made.
And because as best I can tell, once this dispute resolution framework is set up, it is then next to impossible to modify it. We're doing the equivalent of what the European Union did in setting up the European Central Bank. We're creating an organization without having any reasonable means of changing its charter or its modes of operation should they be wrong.
And I think Europe has suffered significantly over the past eight years because the European Central Bank is not subject to enough political control, and I think this is what we're getting into with the dispute resolution mechanism. And that drops me from plus 75% down to plus 25% for it.
Then there are the intellectual property provisions. And since I tend to think we should be on balance, loosening intellectual property protection in the world rather than tightening it, that drops me from plus 25% to minus 25%. So at the moment, I'm slightly opposed to the Trans-Pacific Partnership.
I'm in favor of passing Fast Track so Obama can actually finish negotiating it so then we can look at it. But if what he negotiates turns out to be what I expect he'll negotiate, I will wind up being opposed then to the final vote. Unless someone can convince me that the intellectual property protections are not as bad as I fear. Or that locking the dispute resolution mechanisms in stone is not as dumbass a move as I fear it.
Scott: I've noticed that the Europeans are now working to take out the dispute resolution in that good part of the . . .
Brad: Good. Okay. Well, they do that, that could move me. But the fact the Europeans share my worries about this makes me even more slightly negative about the thing as it is portrayed right now.
Scott: Yes, I think there are a lot of very serious concerns. I generally feel more trade is a good thing. It has, if you do it right, good distributional effect.
Brad: Well, can have good distributional effect.
Scott: It can.
Brad: Not always or even most of the time, but it can. And if you trust your social democracy, the fact that it has bad distributional effect isn't something that you really should really worry about because you can always fix those. And indeed, one kind of wonders. Given that if this thing passes, it's going to pass the house with 170 Republican and 50 Democratic votes. And if it passes, the senate, it's going to do so with 50 Republican and 10 Democrat votes. Since this is a Republican priority, why isn't there something attached to the package to make the entire package a distributional win rather than a distributional lose or a distributional zero?
That is if Obama is going to support this, why hasn't he extracted a price in negotiations in terms of something else? A food stamp extension, a minimum wage extension, an extension of the Earned Income Tax Credit to childless workers, something to do with family and medical leave. Many of the huge numbers of priorities that are his, but that are not getting passed in the next year-and-a-half with a Republican congress, unless they are linked to something the Republican congress really likes. Here is something the Republican caucus and congress really likes. And yet, there has been no attached.
This causes me to wonder about the minimal understanding of what game they are playing on the part of White House congressional relations and indeed on the part of Obama's inner circle, and of the president himself right now, that there has not been a price extracted for White House agreement.
Scott: If you had to make a guess, what do you think brought that about?
Brad: Damned if I know, right? I really don't think I understand the guy. It does seem like such that if you are negotiating a bill that is in the end, like Bill Clinton thought that NAFTA was, by and large, a good thing. And he may have been wrong, he may have been right, in retrospect, I still think the jury is out. Although I'd probably say a slight minus now. But he certainly thought it would be a good thing and it was already negotiated. And so Clinton went off and negotiated labor and environmental side agreements and added them to what Bush had and then submitted the thing as a package.
Obama should have named Mitt Romney to be special trade representative for negotiating the Trans-Pacific Partnership. Let Romney negotiate it and then gone to Boehner and McConnell and say, "Look here, here's what your guy, our special trade representative, has negotiated. I'm worried about the distributional consequences. What you will give me in return for my signature?" And yet, that's not what he did at all. And I do not understand why not.
Scott: So what would be one change you'd like to see in the policy area that would make a big difference and what might be one personal change that you might advise, either for your students or for people individually who are going through this period of great inequality, uncertain growth and uncooperative political systems?
Brad: For the public sphere as a whole, simply the lesson that John Maynard Keynes, Sir John Hicks, Abba Lerner and others were trying to teach in the 1930s, that Milton Friedman's teacher Jacob Viner was trying to teach in the 1930's, that Milton Friedman was, in fact, trying to teach when he was in technocrat mode rather than ideologue mode, which is that a market economy is a sensitive and delicate emergent beast that requires proper management at the macroeconomic level.
And that the tools the central bank has at its disposal, the creation and destruction of cash money in exchange for bonds is an important tool, and the government's balance sheet as well. How much the government funds by debt by issuing bonds as opposed to taxing, and how much the government spends on infrastructure and other long-lived assets, plus the proper regulation of the financial system.
But these are important issues that are win-win or lose-lose for everybody, and they need to be decided on a relatively based technocratic point of view that takes truth from facts and that Marx believes the market, rather than some prior ideological belief in - as Martin Wolf of the Financial Times was criticizing the British Chancellor, the Exchequer before - from a belief that if only you would hear of what you imagine Victorian values work, that everything will then be right.
But that simply isn't true. And we need to look back on what government spending, taxing, debt issuing, on what monetary and what financial regulatory policies have in fact worked and make them work again. Rather than talk about how, as Obama did in perhaps the most idiot move of his presidency in the January 2010 State of the Union address saying that because private households have to cut back and tighten their belts, the government must do so, too. Talk about an absolute disaster, right?
Even Tim Geithner said he disagreed with that, although he did say that some of his colleagues thought he was an asshole for not going to bat against it, for just disagreeing with it quietly. That's warped us, that's some multi-trillion dollar mistake. And I hope it'll be only be a mistake that's a multi-trillion dollar mistake. But at the moment, it looks like it's going to be not several trillion, but several tens of trillions of dollars that we lose as a result of that great conceptual mistake.
On the private level, I would say that first, one you should learn to do one's quantitative work by programming in R. And one should learn to handle numbers by programming in R. Because the only way to understand whether the anecdotes you're being told every day are, in fact, reliable or informative is to check them statistically and see whether they're, in fact, characteristic rather than weird. That's one.
And on the other is to listen to the Buddha and to reflect that your desires may well be infinite, but that you can control whether you care that much about your desires. And it's fine to care about, to desire things, and to care about getting them. It's not fine to care too much because then, at the end, you found that you've missed your entire life as you worked so hard to get yourself into a position to achieve your desires.
Scott: So where can people go to find out more about you to see more of your work?
Brad: Best place to go is to the WashingtonCenter on Equitable Growth, which is http://EquitableGrowth.org/blog and that will get you to the start. More frivolous things tend to show up at http://Bradford-DeLong.com. And that's where you start. But otherwise, simply Google "DeLong" and "Brad" or "Bradford."
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