2014 Bradley Symposium: Remarks by Glenn Hubbard

Published July 28, 2014

“America’s Prospects: Promise and Peril”

The Mayflower Hotel, Washington, D.C.

Speaker: Glenn Hubbard, Dean, Columbia Business School

Glenn Hubbard

Glenn Hubbard: This is a terrific event, and thanks to the Bradley Foundation, too, for its work. I’ll make multiple mentions of that in my remarks this morning.

When Yuval asked me to do this he gave me, although for an economist, a somewhat ambitious assignment. He said, “Look a decade out. Say what’s going on in the economy and policy, and do it in 20 minutes.” And I’m from New York, we’ve a radio station, 1010 WINS, “You give us 22 minutes, we give you the world,” so I can certainly give you the economy in 20.

The bad news, of course, for you is like most economists, I could be wrong in what I’m about to say. The good news is you probably won’t remember a decade later to mark it.

What I want to do is really two things this morning in my time. One is to describe what I will put as a fog of war in which our current economic and policy discussions are taking place. And the second is to pose some questions for you that I think will shape the evolution of both the economy and economic policy over the coming decade.

The first is the notion of the fog of war. Why are we trapped in a fog and not looking a decade out. I worry that on the conservative side, both policy ideation and policy ideas themselves are caught in a kind of fog of war.  And I don’t mean by this the questions we often ask ourselves, like “How could Romney lose?” or “How could Obama’s record possibly be acceptable to voters?” or “Are we doomed to some sort of creeping policy or political dominance by the left?” Rather, what I mean is that I fear that we are embracing very energetic discussions about the wars that aren’t really the central wars that we need to be discussing. Let me suggest they are very important too, but I don’t think that will be the defining discussions.

The first is the inequality war, which is now on both the left and the right, getting vigorous discussion. The fight here in some sense starts with undeniable data. The nation, in terms of income and wealth, is becoming more unequal. That is not a recent phenomenon, it goes back a few decades. Unfortunately the war that’s actually being discussed devolves into a fight over the rich. Invariably, when I speak to audiences, I ask them, “How many people would not like to see 50 more Steve Jobs or Bill Gates in the economy?” And of course people say, “Yes.” The reason for the question that I’ll come back to is the non-rich. What does it have to do with the skills and success of an aspirational middle. But that’s not the discussion we’re having.

The second war that’s also important, but is being miscast, is the budget war. And here we all know the problem; the nation is on an unsustainable fiscal policy, at least at current tax and spending levels. But the fight that we’re having is over the likelihood at some point of a financial crisis. And while that is certainly possible, the deeper worry that I’ll come back to is becoming a statism or a European type society.

I will talk about a bigger policy war in a moment, but I do want to mention an economic war that I think is more important than the ones we have been fighting. And here I have in mind secular stagnation.

Now, this is an old argument that goes back to Alvin Hansen in the 1930’s. I think inequality or budget debate as like the Ghost of Christmas Future, in The Christmas Carol. Remember, he doesn’t speak; he simply spots. And Scrooge asks, “Are these the shadows of things that will be or might be?” And that I think is the big question.

For the secular stagnation debate, there are two economic versions of this argument. One I would trace to someone like Bob Gordon, who’s an economics professor at Northwestern, who says essentially we’ve run out of innovative capacity in the economy. A more modern version of that argument comes from Larry Summers who says, “Well no, we haven’t necessarily run out of innovation, we’ve simply run out of the ability for that innovation to be broadly shared.”

Now, I think that we have to engage this war, because both of those views are wrong. Whenever I hear Bob Gordon talk, and since we used to have offices next to each other at Northwestern– that’s a lot– I imagine myself being in a conference 50 years after the invention of the steam engine where people say, “You know, we’ve gone just about as far as we can go. You know, we’ll never think of another use. There’ll never be another general purpose technology.” That would have been silly in the 18th century, it’s stilly today.

And to the Summers’ version of this, we aren’t trying as a matter of public policy to share these gains. I wrote a piece in the Review Section of The Wall Street Journal a few weeks ago arguing that we need a new orientation toward work and that that work orientation required different policies for low and middle income Americans than we’re currently pursuing.

So, the three questions that follow from these economic wars about policy are: Where can American be? The second is, what should our government do, if we accept that view? And then third, what should conservative thought leaders do? Whether they’re in the academy, in the policy world or the business community, what war should we be fighting?

Now, in terms of where can America be, I refuse to buy into the pessimism of secular stagnation. And that’s not because I’m an optimist, although I frankly am. It doesn’t take any heroics whatsoever to imagine America back on a growth path with potential growth in the 2 ½ to 3 percent range. That is not the same thing, however in saying that’s manna from heaven.

If you want to know why I think that’s true, economists when they think about economic power tend to think about three “S” named economists. One is Smith, Adam Smith, who talked about scale in an economy, division of labor, you’ll remember, it was Smith’s big idea. And in modern parlance, that’s a word like GDP. Second “S” named economist I think that’s critical for us is Solow, who taught us that investment is an important measure of economic power. And the third is Schumpeter who focused on innovation and creative destruction. In today’s words we might think of that as productivity, where is the possibilities frontier for our economy.

Great powers decline. If you go back to historical case studies, and I had the opportunity to do this in a recent book, Balance, which by the way is a fantastic Christmas present– if you’re buying in advance–you may want to do it. Great Powers stumble when their leaders forget about those sources of economic power. In that book I looked at reasonable forecasts for where America would be between now and 2030 with good policy. There is now reason to doubt that America will be on top in economic power in 2030, much as it is today. And the clusters of power right behind it are likely to be Europe, China and India, with Japan being the one slipping behind.

But again, that’s not manna from heaven. How do we position ourselves? Well the mechanical answer of course is growth. Obviously living standards depend on economic growth. But if we’re going to have an actual discussion not about arithmetic but about economics, we’d have to be more substantive. To my mind that devolves, if I were to take the contemporary policy version of those three “S” economists into a discussion of innovation, investment, and inclusion. By innovation I mean, what is the policy framework that is likely to lead to the creation of new ideas that push out the productivity frontier? By investment, do we have a climate that is oriented toward thinking about the future? And inclusion, what social and economic mechanisms would broadly share the gains from prosperity that that kind of dynamic society has?

Now, this is a pivot from the policy environment we now face. I would argue that we are in a period of a very present orientation of policy. Our fiscal policy, for example favors the present over the future. Our economic policy is insufficiently focused on innovation and investment and inclusion. And I view this as a serious thing. You know, the greatest story in Paul Kennedy claims the Great Powers fail because of military over reach. My own view and my own research over many years is that’s really not true. That if you look at Great Power decline, it’s much less a story of military over reach than it is a story of political classification and of a society being non-future oriented, whether that society is Ancient Rome, Imperial Spain, the British Empire or frankly a discussion of America today.

So, what then should our government do? The path that we are on has the government’s role as becoming essentially a risk buffer or an entitlement state. If I were to sit here today and ask you about the evolution of federal debt to GDP, a riveting topic I’m sure for all of you, and I would ask you to think about the American Revolution to 1970 without knowing any numbers, the picture that would come to mind if you think  about it looks like mountains and valleys, because the evolution of fiscal policy, for most of the country’s history (and by the way, I could have named any industrial democracy– I happened to name our own but any would work) was really a story of war and peace.

We borrowed money to fight a war. After a war, you paid down debt and the economy grew. So, both the numerator and the denominator worked in your favor. World War II to 1960, for example, we went from a peak of about a little over 100 percent federal debt to GDP to about 40 percent– that’s the way it’s supposed to work. Now our budget institutions were all built for that world, but that is not the world we live in. Since 1970, not only in the United States but in industrial democracies generally, we’ve seen an almost steady march up in debt to GDP ratios. There have been periods of sobriety, but the trend is clear. That’s because of government shift in orientation away from the future toward the past– toward being a risk buffer entitlement state. In the U.S., that’s principally a story of programs for Social   Security and Medicare.

Now, that path of course, has the familiar consequences to economists of higher taxes and that’s the battle and I mentioned the budget wars. But to my mind, there’s an equally important consequence that we’re simply not talking about, and that’s a collapse in future orientation of public policy. That is to say a collapse in the provision of public goods, in education and research and training in infrastructure. If you ask yourselves why do  European democracies spend so little in those very areas, it’s because they are already a completely present oriented fiscal policy and unable to do that. We are on that path.

There is an alternative view of government and it is the view that I think may economists, myself included, would have us consider. That’s to see the State as an enabler and an empowerer rather than a risk buffer. That means an emphasis on true public goods, national defense, education, basic research, and an emphasis on opportunity with the term safety net meaning something that would truly catch the least well off among us, and not indemnify every American.

That’s not a radical view, it really channels Lincoln. We talk about the financial crisis being constrained on policy, but let’s go back to Lincoln. In the middle of the Civil War, Lincoln championed the use of government for opportunity. I don’t mean by that just emancipation– I mean The Homestead Act, Land Grant Colleges, The Transcontinental Railroad. In today’s language, what Lincoln was doing was transforming the use of the State to radically change empowering the middle of our society.

We are on a path in our present orientation of what I would call a “Freedom From Society,” a view that the State is to provide a buffer. A freedom from this, that or the other thing.

The Lincoln version would be “Freedoms To” –freedoms to work, to save, to take risk. That requires a different orientation of policy. That is the war that I think we should be fighting.

Now, the size of government is clearly relevant in that war, I don’t mean to say it’s not. I’ve devoted a lot of my own writing to that very subject. But two other aspects of government are equally important, and we’re not talking about them. One is the scope of government and the other the efficiency of government.

The Entitlement State, by a matter of arithmetic is crowding out public goods, empowerment and a true safety net for the poor. Look at both sides of the Atlantic in policymaking after the financial crisis, we virtually gutted most of what the public thinks of as what government does, because we’ve lacked the courage to really tackle these longer term problems. If we’re seriously interested in that scope of government that I’ve laid out, it would require a different policy– one that focuses much more on human capital, on subsidies to work, on training programs, and a support for getting on the ladder.

This may mean a reorientation of spending. Our labor market policies come from the 1930’s, they come from a world we don’t live in, and they’re not meeting the needs of Americans today. Many on the Right don’t want to have that discussion, and many on the Left would rather think about unemployment insurance, but that’s the discussion we need to have.

The other is efficiency. What’s happening in the Veteran’s Administration healthcare system is perhaps the most egregious example of the notion of government trying to do too much– in trying to become like the equivalent of a 1960’s mainframe computer when the world has moved on. The VA is a microcosm of comments that could be made about the design of Social Security, of Medicare, of public support for education and training and the management of our nation’s armed forces. Government has a legitimate role in all of those areas, but not necessarily a role in direct provision and it needs to improve its efficiency.

If you go back to the notion of Great Power decline, which is what people worry about over the next decade for the United States, these stakes are high. Again, in case studies of Great Power declines, a present orientation is frequent and policy calcification results as interest groups simply use the State to favor themselves.

Now, what should conservatives do in this environment? I know that frustration at a moment like this, especially with the current administration, is unavoidable. The opportunity, I don’t think presents itself is not one simply embracing a fuzzier or more middle income friendly version of the welfare state, because that too is the present orientation.  We need to adapt the view, I think, of my colleague Ned Phelps at Columbia, who’s a Nobel Laureate in Economics focusing on dynamism, on the interaction of innovation and mass inclusion– a true future orientation.

If we adapt innovation, investment, and inclusion to policy– the new ideas should center on labor market access (where we have discouraged people from work, be they young or old), healthcare reform that could actually connect to incentives to work and to earn, a focus on regulation away from rent seeking and incumbent  advantage– where it lies now, to actually empowering people in a decentralized society, and re-examining the role of a big institution, our central bank, and what it does to promote growth and stability.

In terms of investment, we need to use the states as laboratories as we have before. We need to massively promote ideas to the public. This has been a learning process. My own research is focused in three main areas, all three of which were actually supported by The Bradley Foundation, so I thank them for that. One is welfare reform, the second was the gains from reducing inflation and the third the gains from lowering capital taxes. In my profession, we’ve had broad consensus now in each of these areas because of education efforts. Then finally in terms of inclusion, we need to think about universal empowerment not interest group therapy.

Now to wrap up, where is the future going to be? Imagine behind me were two pictures, one of Agatha Christie and one of Ben Franklin. I grew up in a farm town, which meant I had nothing to do as a kid, so I read a lot. I always loved reading Agatha Christie, because the mysteries were set in posh places far removed from the town I grew up. One of my favorite stories was, And Then There Were None, where it’s a murder mystery, you’re having a dinner party at a posh place and then somebody’s murdered, and that puts a damper as it turns out on the dinner. But it comes back, it comes back. Of course the title gives it away. Another murder takes place, and then another and then there were none.

That’s really how great societies fail. They don’t fail from a single military over stretch, they fail from a series of present orientation blunders.

There is an alternative view and it’s Franklin’s, because at the end of the Constitutional Convention he reminded himself that he’d spent too much time staring at the back of George Washington’s chair which was carved a sun and Franklin was trying to decide if the sun was rising or setting. He decided that it was rising.

When my son turned 21 last year, I did what most boring economists would do, which is to think about numbers. So I thought you know, if he just experienced between his age and mine, which is to say somewhere north of 21, the same growth experience that I had in my lifetime over that period, he and his friends that day will have more than twice the income that people of my age had to play with. Which means, whether they’re concerned about defense, the environment, safety net, whatever the issue is– they’d have twice as many chips as my generation does. That’s the big issue and do we have a future orientation to get it. The war we need to fight is a “Freedom From” versus a “Freedom To.”

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