Economics One

Today I published an article in Project Syndicate called “The Stampede from Silicon Valley.” The fact-based message of the article is clear: Tax, regulatory, and other economic burdens that firms face in California are creating a stampede to other parts of the country—especially Texas. There are many examples–Hewlett Packard Enterprise, Oracle, Tesla, and even venture-capital firms like 8VC, who announced the exodus with an WSJ op-ed.  State and local policymakers, who want to prevent an even larger outbound stampede, need get to work.  There are some positive signs to build on, such as the California voters’ approval of Proposition 22, which frees up gig workers, and the voters’ rejection of Proposition 15, which would raise taxes on business. As one of the recent departures from Silicon Valley recently told me, “I still love California and hope to help fix it.” Well, now is the time. 

In fact, also published today was a front page story in the Wall Street Journal telling the same stampede story from the perspective of Austin, one of the go-to cities in Texas. Headlined, ‘Startup City’: Breakneck Growth Strains Austin,” the article tells the story of the arrival of the same firms: Hewlett Packard Enterprise, Oracle, Tesla, and other firms such as venture capital firms like Atomic.  The concern from the Texas side is to keep economics competitive while preventing some of the crowding effects of higher growth and land use regulations with added problems like homelessness and forest fires.

Let us hope that good competition leads to better economic performance both in and out of Silicon Valley and Austin. Indeed, some of the reaction I am getting to my Project Syndicate article warns of the failure to reduce economic burdens in the United States as a whole versus other countries, which may make the United States less attractive for business and income growth going forward. And to be sure, there are even a bigger problem globally if less emphasis is paid to economic freedom. There is work to be done in all parts of the world.

Today is George Shultz’s 100th birthday. There were so many wonderful celebrations and tributes, and many more to come. My family—Allyn, John, Jennifer, Josh, Olivia, Andrew, Jack, and I—walked over to his house and sang Happy Birthday as loud as we could.  Many of the beautiful special tributes are summarized here  https://www.hoover.org/george-p-shultz-100-celebration  

At a Hoover Fellows Roundtable on economics and national security, I started by quoting something George Shultz said almost 50 years ago when he served as Secretary of the Treasury.

“Economists have a particular responsibility to relate policy decisions to the maintenance of freedom, so that when the combination of special interest groups, bureaucratic pressures, and congressional appetites, calls for still one more increment of government intervention, we can calculate the cost in these terms.”

George Shultz’s lessons resonate today, including in a recent book we wrote together called Choose Economic Freedom, stressing that research should focus on the theme that “Good economic policy works and excessive intervention in the economy causes problems.”

We need to do this more actively as government interventions are popping up all over the world, as we hear it loud and clear. In a way, COVID has given more attention to government solutions.

So how do we better relate decisions to the maintenance of economic freedom? I say follow the methods of George Shultz. Begin with data. Look more carefully at empirical measures of economic freedom whether at Heritage or Fraser or the Word Bank Doing Business. It is convincing that economic freedom leads to improved living standards.

Next communicate more about economic freedom—on Zoom or anywhere.  Deal with the digital divide by providing Broadband for All program. Free up the K-12 system and allow charter schools and school choice as in Tom Sowell’s new book Charter Schools and Their Enemies.

Telemedicine is also in the rise and helping people.  Facebook and Google are often criticized, but they are promising many new forms of communication, and we could all do more work in this area, as far as the eye can see.  As former Google CEO Eric Schmidt pointed out recently the past few months have “brought forth ten years of forward change. … all of a sudden, the Internet is no longer optional.” From my own experience teaching economics online, I heartily agree.  And there is the amazingly quick discovery of vaccines to deal with COVID-19. George Shultz would go on and on with many more examples

Most of all remain optimistic. We cannot be discouraged that some of this will take time, and we should remind ourselves of George Shultz’s warning that “An economist’s lag is a politician’s nightmare”

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.

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

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.