Economic Policy and Foreign Policy Go Together

I gave the Peter G. Peterson Distinguished Lecture on “National Security and Fiscal Policy” at the Foreign Policy Association (FPA) in New York last week. Henry Fernandez gave a kind introduction and Tom Michaud moderated with great points. And thanks to FPA for the book edited by Michael Auslin and Noel Lateef, American in the World 2020.

Four years ago, Paul O’Neill gave the Inaugural Peter G. Peterson Lecture. Pete Peterson was in the audience. Paul and I served together in the George W. Bush Treasury, and we became good friends. Paul focused on the deficit in the 2016 lecture; he learned from Pete and I learned from both.   Last year, another good friend, John Lipsky gave the Peter G. Peterson Lecture, and he wondered creatively how long the economic expansion would last. It turned out not long, but for reasons that neither John nor anyone else could forecast. What a different time we are in now!

I really like the idea of combining national security and fiscal policy as in the theme of the lecture series. A few years ago, George Shultz (who gave Ethel LeFrak Distinguished Lecture a decade ago at the FPA) edited a book Blueprint for America which has a chapter by Admiral James Ellis, Secretary James Mattis and Director of Foreign and Defense Policy at AEI, Kori Schake. They showed that foreign policy had become unmoored. They called for a “strategy of security and solvency,” showing that economic policy is integral to foreign policy.  In sum, we need good economic policy to bolster our diplomatic and defense policies. That means action by the Departments of State, Defense and, don’t forget, Treasury.

Accordingly, I started the lecture with fiscal policy, and I looked at the response to COVID-19 as federal government outlays as a share of GDP rose from 20% to over 30% in 2020.  Projections suggest that outlays will decline temporarily in the next few years, but then rise toward 30% in coming decades with the current fiscal policy.

I argued that an alternative fiscal consolation plan is needed, and this could be put in place whenever the next stimulus package is agreed to. A good plan holds federal expenditures as a share of GDP at about the 20 percent ratio that prevailed before the pandemic. That spending restraint avoids a potentially large increase in federal taxes and prevents the outstanding debt relative to GDP from rising from its current level. The spending restraint would come exclusively from permanent changes in entitlement programs, which are the principal source of the federal government’s long-term fiscal imbalance.  Building on my work with John Cogan and Danny Heil, I argued that such a fiscal consolidation plan could become fully effective in fiscal year 2022, after the COVID pandemic has passed, and that the impact would be a substantial increase in real GDP in the short run and the long run. The reason that real GDP rises is that households expect higher after-tax incomes in the future.

Now when you think about fiscal policy you think about tax policy. The proposed consolidation plan does not call for an increase in tax rates so the corporate rate would remain at 21% following the decline from 35% in the 2017 Act. Reduced tax rates on small businesses and individuals would remain.  Indeed, there is evidence that these increased productivity growth, which drives up wages. Productivity growth nearly doubled, from 0.8% a year between 2013 and 2016 to 1.5% a year from 2016-19.

When you think about fiscal policy you also think about monetary policy. Here the Fed should return to a basic strategy. It dealt with the onslaught of the pandemic with understandable emergency actions. But the changes put in place in the past 2 months have been too vague. The Fed should return to the rules-based path of 2017-19.

Then there’s regulatory policy.  I’ve been struck by how the private sector has already been responding to the new economic restrictions.  I am giving a course to 350 students at Stanford. All online. All virtual. Students are all over the world. Thanks Zoom. Facebook will have half of its employees working remotely. On-line retail is booming. We need regulatory policy at the federal and local level which allows more of this.

Then there is trade policy, also key to foreign policy. The problem is how to negotiate down tariffs and other restrictions. The aim should be lower trade barriers. There have also been concerns about supply chains. That is an old problem: People said we needed to produce our own textiles for military uniforms. Well, we can stockpile some things!

In sum, what I tried to show in the Peterson Lecture is why sound fiscal policy and its corollaries in other parts of economic policy—tax, monetary, regulatory, trade policies–are are all essential to our foreign policy.  As Ellis, Mattis and Schake said “no country has ever long retained its military power when its economic foundation faltered.” There are also other areas where we can improve.  COVID-19 and the economic response have revealed large income disparities in the US. These have foreign policy implications too, and we need to deal with them. Again, the point is that economic policy and foreign policy go together.

Posted in Uncategorized

The Importance of Economic Policy in the 2020 Election

The following article by John Cogan and me responds to commentary on our Wall Street Journal article and emphasizes the importance of economic policy.

The Importance of Economic Policy in the 2020 Election

John F. Cogan and John B. Taylor

October 11, 2020

We published an article in the Wall Street Journal last Wednesday entitled Trump’s “Economic Dream Come True.” It generated a huge amount of commentary, both via the Wall Street Journal’s on-line platform and on social media more generally, including many entries on Twitter.

Our main purpose in writing the article was to make the point that the strong and broad-based growth in the U.S. economy since early 2017 up to the onset of the Covid pandemic is a result of the sound economic policies of lower tax rates and less regulation.  Toward the end of the article we concluded with a few words about the importance of other policies by writing: “As good as the economy was, it could be even better. To reach full potential, Americans should elect a president and Congress that will restrain federal spending to keep debt at bay, reverse restrictive trade policies, and a return to a more-predictable, rules-based monetary policy.”  

Judging from the commentary, our sentence has been misinterpreted to mean that we are recommending the platform of a particular candidate on these other policies. This was not our intent. Our intent was merely to say that in order for the economy to reach its full potential, federal spending restraint, free trade, and a more-predictable, rules-based monetary policies must be added to lower tax rates and regulatory relief. We have written much about the economic benefits of these policies elsewhere and regard the aforementioned policy mix as the right policies to maximize economic growth

Posted in Uncategorized

Economics 1 Again, But So Different

We just finished the second week of Economics 1, Stanford’s introductory economics course, and the namesake of this blog and my twitter account.   So far it has been fun, and for the same reasons that I mentioned years ago when I started teaching the course: (1) “I love to teach.” (2) “I love to do economic research” and teaching is “a natural extension of research.” (3) “I love economic policy—the application of economics to government as well as to decision-making in business.” I hope learning economics is as much fun for the students.

But things are so much different now.  A year ago, I gave lectures in a large lecture hall, Stanford’s Cemex Auditorium. It is all online now, and virtual and remote.  Students Zoom in to the lectures and the smaller sections taught by a terrific group of teaching assistants who work together with me as a team.  Students are enrolled from places over the world, in many different time zones, ranging from Hawaii to Pakistan to Bhutan to London to New York. It is like a whole new course.  I have been arguing that Economics 1 is more important than ever as the world becomes more computerized and quantified. Ignoring economics as we consider the latest ideas in artificial intelligence, machine learning, deep learning, or big data is a recipe for disaster.

But that is truer now than last year and, perhaps than any past year. The global pandemic has had huge impacts as have the policy reactions, including sheltering-in-place and social-distancing. But this course shows how it is possible to use economics to counteract these negative forces and improve people’s lives. Of course, we continue to stress the central idea that economics is about making choices with limited resources and about people interacting with other people as they make these choices. We show why free competitive markets can improve people’s lives and how such economic systems have removed millions of people from poverty. We discuss market failures, remedies to these failures, and government failure.  As I wrote ten years ago on this blog, severe setbacks such as the global financial crisis are a vindication rather than a failure of economics. Good economics leads to good policy and good outcomes, and bad economics leads to bad policy and bad outcomes. That is so true now as we adjust micro, macro and international economics to deal with the COVID-19.

COVID19 has renewed interest in alternatives to market economics, whether you call it socialism or simply highly interventionist economic policy. These issues came up years ago when central planning was still used around much of the world, including in Russia or China. Now we need new stories with new ideas.  The overall goal is to use ideas in economics to understand the best ways to react to COVID-19, and to deal better with unemployment and inequality that is now so apparent.

I am happy to say that we will again have exciting special guest lecturers even though we are online this term, including Caroline Hoxby on the economics of education, Susan Athey on artificial intelligence and economics, Chad Jones on the latest ideas on economic growth. We will also have The Best Economics 1 Lecture Ever, but that’s a surprise.

Posted in Uncategorized

Bridge Both the In-Person and the On-Line Educational Divides

In a new Policy Brief just released by the Stanford Institute for Economic Policy Research,  Jack Mallery and I show that In-person and online learning go together

Yes, America must prioritize in-person K-12 elementary and secondary schools as soon as it is safely possible. Quality in-person learning is essential.

But America must also increase on-line access whether or not in-person schools open now or later  Data available since the start of the pandemic has revealed a big educational divide in on-line access. It is much less available for people who have low income.

Unfortunately, the in-person versus on-line issue has become polarized politically with the presidential campaigns and other campaigns staking out strong positions on one side or the other. But the choice should not be between in-person and on-line access. We need both.

The task is daunting and the road ahead is full of challenges, but there are several good solutions available and bridging the divide has never been more pressing. Our paper shows that there are many policies which increase access both on-line and in-person.

Many of them are part of proposals made by the executive branch and by legislators in Congress. Many are part of state and local proposals. Many are from the private sector, and they would thrive with good school choice legislation. But whether federal, state, local or private, it is a national security and economic imperative.

Posted in Budget & Debt, Fiscal Policy and Reforms, Teaching Economics

Keep Those Remittance Flows Going

The importance of remittance flows to low and middle income countries is the subject of an important recent tweet from William Easterly @bill_easterly. His tweet includes this amazing chart:

What is most striking about the chart is the sharp increase in remittance flows around 2002 and 2003. But why? This was the time that there was a huge new emphasis on the potential importance of these flows.  It was also a time when a special policy effort was made to  keep the flow of remittances going and increase them with the new proposals and initiatives. Could there have been a connection? It is also important to remember that some efforts were made to counter pressures to combat the flows because of concerns about the funds going to terrorists.

I was Under Secretary of Treasury for International Affairs at the time. We noticed that the flows of legitimate funds from immigrants in developed countries to developing countries were growing and starting to rival in size the official flows of development assistance from rich to poor countries.  These remittances were frequently sent through the informal financial networks known as “hawalas,” in which funds could be sent to other counties without detectable movement of funds taking place.  We encouraged the use of the formal banking system rather than wire transfers or informal networks for two reasons.  First, it lowered the costs of remittances, and, second, it made it harder for terrorists to avoid detection, which has a high priority in the period.  The Bush Administration’s early work on remittances in 2002 and 2003 eventually grew into a Global Remittance Initiative which President Bush presented at the G8 Summit in Sea Island in July 2004.

I talked about the efforts in these years in a speech “Remittance Corridors and Economic Development: A Progress Report on a Bush Administration Initiative”.  The speech was presented at the Payments in the Americas Conference at the Federal Reserve Bank of Atlanta on October 8, 2004.  It is item 6 on this list of talks which I gave back then. The speech describes the remittance initiatives and relates then to an overall development agenda. It outlines the new initiatives and argues that remittances have advantages over other forms of assistance, including grants and loans from government and international financial institutions. A very important question is: “Did the policy initiatives discussed in that talk help cause the improvement shown in Bill Easterly’s chart.”  As one who has done a lot of causality tests over the years, I think the answer to the question is “yes.”

Many more technological advances are happening now, including, the widely discussed Libra proposals. And at the same time many are questioning immigration itself.  And of course, COVID-19 is a truly global pandemic which is straining government budgets everywhere. In this context, it is more important than ever not to forget about such flows of funds to those struggling in developing countries. My guess is that the pandemic will lead to creative public and private sector solutions which should be beneficial in the end. But we are not there yet.

Posted in Fiscal Policy and Reforms, International Economics

All Fireworks Shows Cancelled in Bay Area

Yes. That’s the San Francisco Chronicle digital headline, and it’s true all over the United States of America, with some exceptions like Mount Rushmore last night and DC tonight.  Back in 2010, I started writing on each July 4th about the the exploding fireworks and comparing them to the exploding long term projections of the federal debt by the Congressional Budget Office (CBO). The exploding  debt charts looked so much like the exploding Fourth of July fireworks, as you can see blogs from year’s past 20102011,  20122013201620172018, 2019

One can only hope that such writings and opeds and testimonies had some influence, and it is good that the budget situation improved compared to some of the earlier projections.  But this year, not only are fireworks missing, so are CBO’s budget projections.  So there is not much to say now.

The budget projections are coming later in the summer, or so it is said in CBO’s abbreviated outlook for economic growth, inflation and interest rates.  As the Congress and the Administration deliberate about the next budget bill, it would be helpful to have such a budget baseline from which to evaluate the alternatives. Researchers in the private sector, including John Cogan, Daniel Heil, and me, must create a budget baseline in order to consider alternative fiscal packages.

In the meantime, I recommend considering what the Committee for a Responsible Federal Budget is saying, Here is a chart from their recent article on the budget. It shows long term debt projections.

Note that the debt had a certain July 4th feel to it before the pandemic struck the economic deeply. The March 2020 outlook had the debt exploding to nearly 180% of GDP. But the CRFB now has the debt growing to 220% or even 268% as a result of the actions taken in response to the financial crisis. Few are talking about these large numbers now, but many models show that reducing the upward trajectory would be good for economic growth, incomes and employment.  So let’s hope that point of view gets into the debate even if we do not have as many Independence Day fireworks this year.

Posted in Budget & Debt, Fiscal Policy and Reforms

Happy Birthday and a Terrific New Book by Thomas Sowell

Thomas Sowell has a new book. It is terrific and timely. It is called Charter Schools and Their Enemies, officially published today, June 30, 2020, which happens to be his 90th birthday. Happy Birthday, Tom, and thank you writing such a beautiful book.

The book and his recent Wall Street Journal article “Charter Schools’ Enemies Block Black Success” about the book, focus on the enormous success of charter schools in delivering better education, especially to the predominantly black and Hispanic students in low income neighborhoods. One example, discussed especially in the Wall Street Journal article, is the Success Academy in New York City. The Success Academy started back in 2006, and it has grown from 1 to 47 schools. And it is a success.  All involved—those with the idea, the teachers, the students—should be applauded.  In 2013, as Tom Sowell points out, the fifth graders in one of the Success Academy schools in Harlem scored better on the mathematics test than fifth graders in any other school in the whole public-school system in NYC. At a recent count, there were 50,000 students on the waiting list.

A big question addressed in the book is why such a clear success should have enemies. And charter schools do have some enemies—in the public schools, in the unions, and in the government of New York City itself. Tom Sowell considers and shoots down many criticisms of charter schools, including the criticism that charter schools only admit top students, when, in fact, those who get in are chosen by lottery.  The explanation that the critics are simply protecting their own operations is the most plausible.

Tom Sowell has written many good books, and like those, this one is carefully researched, well-written, entertaining, and readable. Five years ago, he wrote a book about income inequality, which in my view was one of the two best books of 2015. The book, Wealth, Poverty, and Politics, offered a refreshing and stimulating view of income distribution. He shows that the spread of prosperity is far more effective in eliminating poverty than a focus on reducing income gaps, which often turns into a counterproductive blame game, breeding resentment, hatred and ethnic conflict.

The income distribution problem is of course related to the education problem. The existing school system restricts educational opportunities for those who are disadvantaged. An explanation for the widening inequality is this restriction.  Remember the students from the movie Waiting for “Superman”: Bianca, Emily, Anthony, Daisy, and Francisco. They had a very small chance of winning the lottery to get into a better school.  Not removing the restrictions is only one example of how deviations from freedom can adversely affect the distribution of income. Tom Sowell has written often about theses issues, whether regulatory capture by large firms, crony capitalism, and deviations from the rule of law. And for this we are very grateful.

Posted in Regulatory Policy, Teaching Economics

More Important Than Ever — Principles of Economics — Online

This summer we will again be offering Stanford’s Principles of Economics course online.  The course is more important than ever.

We will offer a for-credit online Principles of Economics course for matriculated Stanford students, students from other colleges and universities, and high school students in Stanford’s Summer Session. To register for the course, go here. The course starts on Monday, June 22 with the first week’s video-lectures and other course content. This is the same as the on-campus course, Economics 1, which I give at Stanford during the academic year, and it fulfills all the same requirements. In addition to watching the video-lectures online, you get course credit by doing regular weekly graded homework, taking three tests online, and participating in a weekly lively session with dedicated teaching assistants. We will all have regular office hours by Zoom, and we will discuss important current events including the economic impact of COVID-19.

We will also offer an open online Principles of Economics course for the general public.  To get more information and sign up, go here. This course also begins on Monday, June 22. These video-lecture are also based on my on-campus Stanford course.  People who watch the video-lectures in this open online course and take short quizzes can earn a Certificate.

These on-line courses cover all of economics at a basic level.  They stress the key idea that economics is about making purposeful choice with limited resources and about people interacting with other people as they make these choices. Most of those interactions occur in markets, and this course is mainly about markets, including the market for bikes on campus, or labor markets, or capital markets.  We will show why free competitive markets work well to improve people’s lives and how they have removed millions from people from poverty around the world, with many more, we hope, still to come.

For both the for-credit course and the open course the textbook is Principles of Economics by John B. Taylor and Akila Weerapana, and it is available online.

I am looking forward to summer quarter. Virtual online economics courses are, of course, becoming much more popular with the Coronavirus epidemic and many campuses closed. But, economics is more important than ever, and we have been doing the online course for several years now, and have a great deal of experience, including the just completed Spring quarter as COVID-19 was spreading around the world. Here is a sampling of views about the online course, either for the general public or for credit, which have been posted on Twitter:

Russell Roberts‏ @EconTalker: Great class. Great teacher. No charge. Get your basics right here.

Ike Brannon‏ @coachbuckethead: The most entertaining economist I know.

Brian Wesbury‏ @wesbury:  If you want to learn Economics from one of the best, click on this link!  What great news!

Juan Carlos Martinez‏ @juank700410: Educación gratuita y de calidad

Tom Church @TomVChurch Interested in economics? Take Econ-1 online. Pass the quizzes and get a statement of accomplishment! Plus, you’ll learn a thing or two.

Chris Pippin @ChrisPippin This is the class and the professor that made me an Econ major. Thanks to the generosity of @EconomicsOne and the miracle of the internet, now anyone can take it.

Nicolas Petit  @CompetitionProf Great course by terrific teacher, comprehensive & more than all eye opening on real world problems like trade wars and monetary policy.

Posted in Teaching Economics

Macroeconomic Modelling of Pandemics at Warp Speed

A pressing research issue with deep policy relevance concerns how econometric models should be adapted, changed, or modified in light of the COVID-19 pandemic.  A new Webinar series–Macroeconomic Modelling and Pandemics–has been created to examine this issue, to exchange views among researchers, and to bring more attention to the policy questions.

Here is a list of topics in the series on the Hoover website, including previews of coming attractions with more to come. You are welcome to click on a topic, watch the video, or inquire about future events. Videos of presentations and question/answer sessions will be posted, as have been recent ones including by Harald Uhlig on “Macroeconomic Dynamics and Reallocation in an Epidemic,” Mathias Trabandt on “The Macroeconomics of Epidemics,” and Daniel Gros on “Strategies for Controlling the Medical and Socio-economic Costs of the Corona Pandemic.”  Volker Wieland or I do the hosting.

Yesterday, Warwick McKibbin of Australian National University spoke on “The Global Macroeconomic Impacts of COVID-19.” He showed how an econometric model of 20 countries and 4 regions with thousands of equations is used to investigate global contagion scenarios and alternative economic policies. The webinar series is sponsored by the Hoover Institution at Stanford University, the Institute of Monetary and Financial Studies at Goethe University Frankfurt and the Center for Economic Policy Research in London with the help of a grant from the Sloan Foundation.

Aside from the global reach of this webinar series, what is most striking is how rapidly models are changing. There is not only a great deal of interest and enthusiasm, but people are genuinely interested in contributing to solutions to this terrible problem. There was similar excitement around the time of an earlier revolution in econometric modeling to deal with the inflation and unemployment problems in the 1970s by applying rational expectations and monetary strategies, but the amazing internet technology now allows everything to move at warp speed.

Posted in Fiscal Policy and Reforms, International Economics, Monetary Policy

A Conference That Would Have Been and Still Will Be

Two months ago, on March 14, 2020, we cancelled our annual Hoover monetary policy conference at Stanford on “Central Bank Strategy Reviews and Their Global Impact” then scheduled for May 1, 2020. The reason was that Stanford declared that “university units should cancel or postpone events they are hosting that involve more than 50 participants.” We were all were disappointed, as the conference was to give a careful review of the monetary policy reviews of the European Central Bank and the Federal Reserve, building on the experience of the May 2019 Hoover monetary conference.

But in the weeks since March 14, monetary policy has changed so dramatically that the issues are much bigger and more fundamental than a review of review would suggest. Effective March 16, 2020, the Federal Open Market Committee voted to cut the federal funds rate to “a target range of 0 to ¼ percent,” introduced a host of new purchase or lending facilities, and took actions to let the balance sheet explode, as shown in this figure.

It is now clear that a whole new conference is called far—not a simply a review, but a thorough examination and evaluation of what has happened at the Fed and other central banks in the past two months and what will happen going forward. We are thinking about the best time, recognizing that the normal time of May 2021 will likely be too late, and that October 2020 may be more constructive.   We are also thinking about how to have the conference on-line and remote while preserving the very essential interchanges—many one-on-one–that  have always occurred at the conferences. More on that later.

The aim of this monetary policy conference series has always been to have a rigorous analysis and discussion outside of central banks, but including central bankers as well academics, researchers, market participants, and members of the press at which the best research could be presented, debated, and heard. The proceedings of the May 2019 conference on Strategies for Monetary Policy edited by John Cochrane and me are thus quite relevant for the current debates.  You can download individual chapters for free here with contributions by Clarida, Williams, Bullard, Daly, Kaplan, Mester, Rogoff, Hamilton, Levin, Bordo, Minerd, Papell, Piazzesi, Shultz, Warsh, Wieland, and others.  Our preface summarizes each of the papers.

Now that it is likely that we will move on from a review of central bank ongoing reviews to an evaluation of very recent policy, I should also note that the four papers which were to have been presented at the May 2020 conference are excellent and worth reading, even if they were prepared just before COVID-19 and the responses. Most important they focus on strategies and rules for monetary policy. They are thus quite relevant for the ongoing debates, and you can read drafts of the four papers on-line using these links:

The Elusive Gains from Nationally-Oriented Monetary Policy which was to have been presented by Luca Guerrieri of the Federal Reserve Board

Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases, and Fiscal Stimulus in a Low-Interest-Rate Environment which was to have been presented by Frank Smets of the European Central Bank

Eight Centuries of Global Real Interest Rates, r-g, and the ‘Suprasecular’ Decline, 1311–2018  which was to have been presented by Paul Schmelzing of the Bank of England

Recovery of 1933. How to Stop Deflation with Fiscal Policy: Past Lessons for the Future, which was to have been presented by Eric Leeper of the University of Virginia

I thank these researchers as well as those who had agreed to attend and discuss the papers including Matteo Maggiori of Stanford, Michael Bordo of Rutgers University, Ramin Toloui of the Stanford Institute for Economic Policy Research, Barry Eichengreen of UC Berkeley, Harold James of Princeton University, Peter Koudjis of the Stanford Graduate School of Business and Volker Wieland of Goethe University, Frankfurt

There also were to have been informed debates on these key policy panels: The Integrated Policy Framework and the Goal of Open Markets, The Balance Sheet and the Supply and Demand for Reserves, and Monetary Policy Strategy Reviews and Financial Markets. I thank those who had agreed to attend and be part of these discussions including John Lipsky of the Johns Hopkins School of Advanced International Studies, Andy Filardo of the Bank for International Settlements, Jacob Frenkel of JP Morgan Chase, Lou Crandall of Wrightson ICAP, Darrell Duffie of the Stanford Graduate School of Business, Beth Hammack of Goldman Sachs, William Nelson of the Bank Policy Institute, Mickey Levy of Berenberg Capital Markets, Rob Kaplan of the Federal Reserve Bank of Dallas, Scott Minerd of Guggenheim Partners, Randy Quarles, Vice Chair for Supervision at the Federal Reserve Board, and Richard Clarida Vice Chair of the Federal Reserve Board.

The word strategy appears in the title to the 2019 conference volume published this May, and it was to be in the title of the May 2020 conference volume.  That theme is part of the papers in all the conference volumes in the Hoover series as shown in the book covers below. It would be appropriate to have that stay in the title for a fall 2020 conference.

Posted in Monetary Policy