Stampede Out, Stampede In

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.

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The Best Part of the Coronavirus Relief Bill

As the Wall Street Journal reported and I tweeted yesterday, Senators Chuck Schumer and Patrick Toomey made important news when they agreed that with the new Coronavirus relief legislation, “the $429 billion would be revoked and the Fed wouldn’t be able to replicate identical emergency lending programs next year without congressional approval”

This is a welcome development because it is a start on the best monetary road back to a stronger economy. With the vaccines on the way and with markets functioning again, this is the time for the Fed to get back to a more rules-based monetary policy that it was moving toward before the pandemic struck.  

This favorable development owes much to the outspoken insistence and careful reasoning of Senator Toomey. He argued that the Fed’s new direct lending programs enacted earlier this year were not needed going forward, and that their very existence blurred in dangerous ways the operation of fiscal and monetary policy. As Toomey explained on Squawk Box this morning in an interview with Becky Quick, “These facilities were always intended to be temporary…. Their purpose was to restore normal functioning in the private capital and lending markets.”

He then explained that questionable interpretations of the legislation had been recently put forward raising doubts about this temporary status. So he took action, and he drafted legislative language to clarify the situation in the coronavirus relief bill. The concern was that monetary policy would become an instrument of fiscal policy to the severe detriment to good economic policy and thereby threaten a return to a strong, low-unemployment, low-inflation economy. With new legislative language, he said, “The good news is these programs will be the temporary facilities they were intended to be.”

 As an editorial in the Wall Street Journal said today: “The best provision in the bill is the limit on potential abuse by the Biden Treasury and Federal Reserve. Credit here to Pennsylvania Sen. Pat Toomey, who held firm on limiting the Fed’s maneuvering room without a new act of Congress.”

I hope this action is an important down payment on a return to a more strategic monetary policy going forward. As far as we can tell, the impetus for this change did not come from the Fed. But it is good news for the Fed that members of congress are supporting a more rules-based monetary policy, and they may even have some help next year from the Administration over at the Treasury.

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Happy 100th Birthday to George Shultz

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  

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”

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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.

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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

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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.

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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.

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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.

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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.

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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.

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