Taking stock of the US economy and looking forward: My long-read Q&A with Glenn Hubbard
For the 200th episode of Political Economy, I spoke with economist R. Glenn Hubbard about how the Great Pandemic has affected and will continue to affect the US economy, lessons to be learned from the Great Recession and 15 years of disappointing productivity growth, and a variety of looming issues such as the deficit that future policymakers will need to consider.
Glenn is a visiting scholar at the American Enterprise Institute and a former chairman of the President’s Council of Economic Advisers for the Bush White House. He is also both dean emeritus and the Russell L. Carson Professor of Economics and Finance at Columbia Business School.
What follows is a lightly edited transcript of our conversation, including brief portions that were cut from the original podcast. You can download the episode here, and don’t forget to subscribe to my podcast on Apple Podcasts or Stitcher. Tell your friends, leave a review.
Pethokoukis: I want to hit some big picture issues, but I want to focus first on the pandemic’s economic impact. Are we out of the woods as far as slipping back into recession, if you even think we’re out of the recession yet?
Hubbard: I think we are recovering. From the beginning, I have thought that the recovery would look like a Nike swish sign, like a checkmark, so we’d go down and then crawl back up. I think we’re out of the easy part. The part I’m worried about falls into two buckets. One would be a reoccurrence of the virus. The second, which is more economical and is where we are now, is having to reallocate workers in firms. People are going to be doing different things. That’s going to take a while, and that process may need a little more nurturing from fiscal policy than we’re currently seeing. We’re not out of the woods yet, and I get nervous when people think we are.
At first, we needed to shut down and freeze the economy in place. Now, if we’re in the process of allowing reallocation and creative destruction in order to adapt the economy to the pandemic, does our fiscal support need to be different?
It does. In the beginning, when Congress was focused on something like the CARES Act, the issue was whether the economy would be shut for a brief period of time and then reopen. At that point, it made sense to freeze in place particular firms and particular jobs, but that doesn’t make sense now. This has lasted much longer, and we know that some kinds of businesses and occupations may be less viable than before the pandemic.
We still need support. We still need to continue unemployment insurance, but we also need to give people support to find new jobs, support for training, and support for businesses to retool for the post-pandemic world, but it is different. A reallocation problem is different than a shutdown problem, and the problem is our politics haven’t yet caught up to that. We have some people who think we should just do nothing, and we have others who think we’re trapped in some typical recession and just need to focus on that. I think it’s time for some fresh thinking, and, unfortunately, I don’t see it.
Unemployment is still much higher than it was pre-pandemic. So, for some time, a year, maybe two years, maybe longer, it’s going to be very easy for policymakers to say, “It’s too soon. We still need to be giving aid to big companies. We don’t want them to lay anybody else off. The economy is still too weak to wean it off that aid or change how we’re doing things. We’ve just got to keep pushing money out the door as fast as we can, in as big of quantities as we can, and not worry too much about the details. We’re still in the push-money-out-the-door phase.”
I think that this “size matters” approach to fiscal policy is wrong. The question is not just how much money we throw at a problem, but whether we understand the problem. When I talk to students about this, I discuss the tension between Keynes and Hayek on this approach.
In the beginning, we were taking a very Keynes-like approach. We had this big demand hole that accompanied the supply shock of the pandemic. We tried to fill it, but now we’re kind of in the Hayek phase of reallocation, decentralization, and trusting intuition at the local level in businesses requiring support. Still, it’s not the same kind of support. For example, support for businesses retooling for a post-pandemic world makes a lot of sense. Some programs that Congress has already contemplated like the Main Street New Loan Facility might help that, but the notion of freezing things in place to me doesn’t make sense.
Likewise, I can’t see an argument for continuing to throw money at large firms unless it’s for support for adapting to this new economy, and the longer we keep people on unemployment — even if they’re on generous benefits — they’re losing skills and losing a chance to reallocate. If we’re going to put money behind something, it ought to be that reallocation. It ought to be retraining. It ought to be preparing people, perhaps with a bonus, for getting that new job. However, once again, I wish I could hear more of this kind of conversation.
There may be some areas, like the real estate market, where people are more focused and concerned. Are there any areas where you think there needs to be a greater focus, because policymakers just aren’t paying enough attention to them?
I think policymakers need to focus more on this idea of transition. The particular markets, like real estate, will have to go through an adjustment. It could be that in some cases and some cities, rents are too high. It could be that the structure of rents needs to be changed in commercial real estate, but that’s a problem the market will figure out, and I think financial institutions went into this fairly well-capitalized. While there will be real estate losses, I don’t think it will be devastating to the financial system.
This is similar to the discussion about firms and workers: Generally, we should be trying to freeze the real estate market in place. If rents need to come down, then they should. If we need to change the structure of rents, then we should. If we need to be repurposing some kinds of buildings, then we should. The question is: Can we support that transition and see to it that, rather than taking a few years, it happens faster? The worry I have is that the longer people stay unemployed or business owners struggle to get restarted, the more likely it may be that we enter another recession.
Are there any significant things we could have done differently that would have made a big difference in the economy’s state right now, or did policymakers do an okay job?
I think it depends on the type of policy. I think we could have done the shutdown scenario more smartly than we did. We know that different groups and different parts of the country pose different risks, so the shutdown and reopening could have been done differently, but I think Congress was bold in the CARES Act in terms of fiscal support. The CARES Act was a breathtaking piece of legislation, and the Federal Reserve has been bold.
We probably did too little for state and local governments, and I realize that’s unpopular in some circles because of other issues, but I think it remains important. I do think Congress did the right thing at the beginning in helping businesses, but I also think right now is not the time just to keep the spigot open without limit and without thinking about transition.
Heading into the pandemic, most long-run forecasts placed our long-run growth potential at around 2 percent. My concern is that this pandemic could weaken our potential by making us become more risk-averse, flee cities, and turn inward on things like trade and immigration. So, do you think our 2 percent economy will become a 1 percent economy?
It doesn’t have to. I think that the argument about risk-taking goes back to the kind of transition support we provide to a public policy that’s focused on productivity in supporting basic research and business investment, so it doesn’t have to turn into a 1 percent economy.
Likewise, I know cities like New York, where I live, look questionable to many at the moment, but that’s not the way I see it. Big cities have gone through cycles of different shocks hitting them — particularly in New York with 9/11 and the financial crisis — so I think it’s more a matter of letting the reallocation occur that needs to happen. This economy still has enormous innovative potential. What could kill it is less a necessary feature of a pandemic, but rather, as you described it, the inward looking-ness of public policy: anti-trade, anti-immigration, and just anti-scientific knowledge. We have got to get past this if we want to keep a 2 percent economy.
Over the past 15 years, at least as I see it, we’ve had three pretty significant economic events. We had the end of the productivity boom-let that started in the late ’90s, we had the global financial crisis, and now we’ve had this pandemic, which is primarily a health event but also an economic event. So we’ve had three of these big economic shocks. Did any of those change your thinking about economic policy in any way?
They all did. For example, the way I think about the financial crisis is that policymakers were not engaged with the markets and institutions that they were regulating and legislating for. During the financial crisis, I always felt that the Queen of England asked the most significant economic question when she said, “Why did nobody see it coming?” I didn’t interpret the queen as saying “Why weren’t economists clairvoyant?” Instead, she was asking, “Why don’t you get up and walk around? Why didn’t you see what was going on?” I think economics changed for the better, focusing more on “what’s going on?” and on “walking around,” so I think there have been improvements in economics since that time.
Likewise, it’s been not so much something new with the pandemic, although the virus was, but more of an accelerant of changes we saw already. So, where is the growth going to come from? How concerned should we be about inequality in our economy? I think those are questions in economics that are going to jump to the forefront.
However, I fear that in the policy process, rather than old economics or new economics, we’re more likely to see no economics. We are much more likely going to take part in a discussion of vague slogans on one side or the other or downright harmful policies like anti-trade, anti-immigration, or even anti-business.
We talk a lot on this podcast about when we are going to have another productivity boom, which is hard to predict. I remember Lehman Brothers predicted in 1999 that the US was going to grow indefinitely at 4 percent a year, but of course, that didn’t happen, and Lehman Brothers didn’t even last another decade. So how do think about productivity growth and whether policy has a lot to say right now about boosting it?
I’ll start with an honest description of what we know as economists and then give you a prognostication. Economists are good at looking at productivity growth cycles in the rear-view mirror, less good at forecasting them. Your Lehman Brothers example comes to mind, but economic luminaries can be optimists or pessimists.
However, I think we are on the cusp of a potential productivity boom. I see this because of the introduction of better artificial intelligence and robotics techniques as what economists would call general-purpose technology. By general-purpose technology, I mean things like electrification or computing or the internet — things that have the capability of really changing business and productivity. The only reason I say “on the cusp,” given that these aren’t brand new technologies, is because it takes a while for business to adjust.
If you look at each general-purpose technologies I mentioned, it took a decade or even as long as a generation to go from science to productivity, and the reason wasn’t about science and engineering as much as it was about business and organization. The companies have to change the way they do business and the way they organize, and I think that’s what’s going to be critical. That’s why I get nervous about excessive government involvement in the economy: For that to happen, businesses need to organize themselves efficiently and the worst thing that we could do is try to put the economy in a straitjacket so that growth is impossible. I think 4 percent is a little aggressive, but we could have better productivity growth in the country — by 1.5 or maybe up to 2 percent per year. It’s just going to take a much more concerted focus on both research, which is easy to say, and on organization and design, which is harder to do.
We’ve had Jonathan Gruber on here to discuss this, and he didn’t focus as much on growth. Instead, he framed it in terms of creating jobs by spending a lot more on science investment and creating these science cities and tech hubs all around the country.
Do we need a lot more public investment on the government side to boost growth, and what do you think the idea of trying to also spread the wealth of that growth around by trying to create tech hubs in places that people feel are left behind areas?
Well, I think it’s something to consider, but very hard to do. So here’s the way I think about it. The government should certainly be increasing its investments in basic research. Most of the ideas we think of as commercially exciting today for productivity were basic research in some period since World War II. So that’s important. I think we could also imagine more public support even at the federal level for community colleges to help train people to be more productive in the economy that I envision and hope to see coming.
The idea of a tech hub sounds intriguing. Still, to me, a better idea might be to have more applied research support for state and local universities around the country, much as the Morrill Act did with land-grant colleges in the 1860s. I think that is better than picking a city and saying, “You’re now a tech hub.” It’s really hard to do that. If you look at what has generated tech hubs throughout the country, a lot of it has been university partnerships. I think one way to spread the wealth would be to think of applied research centers around the country. I think basic research should go wherever it’s best done. I don’t think we ought to be picking places to do that. That money should go to whoever is most competitive in getting those research dollars.
Do you agree with criticisms of Silicon Valley — that they just create apps and social media, but they don’t build things in the physical world because regulations favor digital innovation over physical innovation?
I think there is something to these criticisms, and I would say it’s not just a problem of regulation, but also uncertainty. For example, let’s take important subjects that people are talking about, like climate change. There are a lot of commercial adaptations that are being studied. Everything from cold fusion to a number of alternative fuels, but our constant changing of regulations makes it difficult to commit capital for a long period of time. That’s one very clear example.
People focus on apps because it’s a quick return, and people are in this in a commercial and financial sense. Still, I think if the government played a bigger role in basic research and created more spillovers to be commercialized, they would be commercialized. While there may be things to criticize about Silicon Valley — I, for one, think the weather’s too nice, and I prefer New York seasons — but I think criticizing them for innovating on the wrong things is looking in the wrong place.
It seems like it is very easy to work on economic policy these days, because you can come up with great ideas and you don’t have to explain how you’ll pay for them. There seems to be very little interest in debts and deficits and those kinds of fiscal constraints. Do you still care about the debts and deficits, and if you do, do you feel like you’re in a small group that is shrinking day by day?
I do care, and I understand that I’m in a very small group, but I know that eventually, the worm will turn, and people will focus on this — not because I’m “right” but because math is math. You can argue about politics, you can even argue about economics, but you can’t argue about arithmetic, and we are on a fiscally unsustainable path.
Now, that doesn’t mean that the crisis is tomorrow, and it doesn’t even mean that we couldn’t make the additional public investment to raise productivity. We could do those things, but the notion that we could start all new social programs or have massive spending without thinking about the future and have the Fed finance it is a fool’s errand. I worry that nobody in the political process is standing for this.
Normally in an election year, we would see some tension about this, but we’re not. One side says the deficits don’t matter, and we have one particular idea. Another side says deficits don’t matter, and we have another idea. We do not see any budget constraints for the people. It’s like the old days when menus in restaurants sometimes didn’t have prices on them. It’s easy to pick things when you don’t know how much they cost, and I worry the American people face that.
The longer we wait to make the choices we need to make, the more likely it is that there could be real damage by cutting support for other things like research or education or national defense, cutting support that seniors and others have come to expect, or raising taxes to the point where we can’t have growth. I see these choices as very unappealing if we don’t act.
It’s hard to believe, but there used to be in presidential campaigns fights about budget scoring…
You are so right. I was saying to a reporter the other day that I can remember being nervous that somebody would question your numbers. We spent so much time “back in the day” on scoring tax plans and spending plans for presidential candidates so that they could pass muster, and now one can say, “Well, something will cost a few trillion dollars and we’ll figure out how to pay for it or maybe we won’t.” I was amused by some comments I’ve seen in the paper where staffers have said, “Why do people ask how we’re going to pay for it?” Well, because you have to. So yeah, I get very worried about where we are.
There’s an investment strategy called “momentum investing,” and momentum investing is built around the idea that you let your winners run. This is a very popular strategy. I used to work at a newspaper called Investor’s Business Daily, and they loved momentum investing at that paper. I always used to hear that — “let your winners run.”
That seems to be the new Fed monetary policy: If the job market’s running, we’re going to let that job market run. What do you think of the new change in focus by the Powell Fed, which I assume will be a long-term change in direction?
I think there are some good things about it and some things to be worried about. To start on the positive, the Fed had done a poor job of hitting its stated inflation targets. Other economists and I have urged for the past several years that the Fed think more about an average inflation targeting of making up for bygones. I think that’s easier to suggest than so-called price-level targeting, which is mechanically something similar but really hard to explain to the public. So that’s good. I think the Fed giving up on its model-based monetary policy is positive.
Still, I think it’s incredibly naive to think the Federal Reserve is the answer to any of the structural problems we’ve been talking about. The Federal Reserve is not going to facilitate the reallocation of workers in the economy. The Federal Reserve is not going to facilitate productivity growth.
While I agree that the Fed should not be snuffing out potential employment booms that aren’t inflationary, the notion that we can relax on fiscal policy and regulatory policy and let the Fed rip is a mistake. It is also the case that it constantly draws the Fed into political concerns the more it promises and under-delivers. So while I commend the Fed for doing a study — for saying that it was wrong and it needs to change — I still think it’s naive for them and for us to think it’s going to fix our problems.
Might low-interest rates interfere in that reallocation process?
Definitely. They can keep some weaker firms alive that probably shouldn’t be. It compresses returns in the financial services sector, which slows down credit intermediation and risk transfer. For many individuals, particularly the retired or people near retirement, it’s a problem. Going back to Hayek, he thought one of the price system’s geniuses is that it aggregated all the information from markets. You didn’t have to solve equations.
If the Fed is compressing risk premium, pushing interest rates down, we’re shutting off Hayek’s “use of knowledge” argument. That may not be in the fashion that the Fed is part of Constitution Avenue, but it’s something I worry about a lot.
Will we ever have an economic consensus on the Trump tax cuts, given that they went into effect alongside a big trade war and shortly before a pandemic? Will we ever know whether they worked?
I think it’s really hard. As a theoretical matter, we know the corporate tax pieces of the Tax Cut and Jobs Act of 2017 should have been very pro-investment, and in the early days of the tax reforms enactment, it was. As you said, going the other direction, both bad trade policy and bad trade policy uncertainty, really chilled business investment. What theory told us would work — and that theory has been tested many times and many places — was working, so I think that element of the TCJA remains important.
We do need better policy around this. And I don’t think anybody believes that tax policy alone is going to change investment productivity without better public policy generally, so I think we won’t know. To me, President Trump did some of his best policies right at the very beginning: He put a spring in the step of many business leaders with a view toward a more pro-business public policy and a regulatory approach that would focus more on economic analysis. However, his administration then moved very far away from that with enormous policy uncertainty. So it makes it very difficult when somebody steps on his own lead.
In a vibrant free-market economy, there is going to be inequality. Are you concerned that the level of income or wealth inequality is now such that it is defeating, it’s crimping growth, it’s crimping economic opportunity, and if you do, what do we do about it?
I don’t think the answer is “let’s solve the inequality by soaking the rich and bringing them down.” To me, the real issue is about the opportunity. If you go back in economics as far as Scottish Enlightenment thinkers and people like Adam Smith, they were concerned about mass flourishing as social support for a market system. So to me, that means everybody should have the opportunity to participate in the economy and prosper in the economy. “Participate” means the opportunity to have the skills to get the jobs that are and will be, not the jobs that were and have been. And “prosper” means, can I buy a home? Can I start a business all in a fair way without barriers or discrimination? Those are legitimate focuses of public policy. However, I don’t think the number of Jeff Bezos’s or Bill Gates’s that we have are getting in the way of that. Each of those people symbolizes something that was good for business in the country.
Do we have tax problems with some of the rich? Yes, it is a problem. If some people can accumulate wealth and not pay taxes on it, that’s an issue, but we should go after that narrow issue. The whole idea that we need to focus on envy about the rich is a mistake in public policy. It’s also a missed opportunity for going after the real issue, which is participation and prosperity for everyone.
One would assume Jeff Bezos did not go into Amazon thinking that he would someday be worth $200 billion, and the same with the Google guys or just about any super-successful entrepreneur. They probably did not have the expectation of those kinds of levels of wealth. Based on that, people have suggested things very close to this: After $500 million or $1 billion, the government takes everything else. People would still start companies. They’d still be doing fantastic, but they do not need that obscene level of reward to start companies that end up being very successful.
I don’t know what words like “need” or “obscene” mean in this context. I think to the extent that it is possible to accumulate great wealth without paying any tax on it, we should go after that. There are some pretty simple reforms of capital taxation and the estate tax that do it, but remember that very wealthy individuals going back at least a hundred years have been big sources of enormous private philanthropic initiatives in the country. To my mind, when you say, “Let’s take all that wealth above $500 million or a billion or a hundred billion, whatever number you want to pick…”
Some would pick a number remarkably dramatically lower than the ones I just gave you as well.
Maybe, but I think that what it’s saying is that the government will somehow do better with that money than those individuals, and I guess I struggle with that. Is a hundred billion dollars a lot of money? Of course, it is. Would Jeff Bezos have started Amazon if he could have made $20 billion? Likely, but I don’t think the solution to that is to nationalize their wealth instead of smarter tax policy.
I could remind everybody if we had a tax reform that focused on cash flow taxation — I know, it’s a somewhat arcane topic, but still, it’s of general interest at AEI and in many parts of Washington — we would be capturing taxes on many of these rents that made these people so rich. However, we’re focused on other things. So if we care, there are tools, but the tools shouldn’t be shutting down certain people or certain activities.
People on both the left and right are talking more and more about how America needs to take a page from China’s book and start enacting industrial policy to protect our companies from competition. Does that concern you?
It does. I remember not long after I became chairman of the Council of Economic Advisers, an extremely prominent venture capitalist whose name I won’t mention came to see me with other venture capitalists in tow from Silicon Valley. He started the meeting by asking me what my plans were for the economy, and I said, “Gentlemen and ladies, I was going to start by asking you guys that question. I don’t see why my plans are particularly relevant at all.” To my mind, if the government is doing its job and supporting basic research and science, and we make sure that there are limited barriers to the formation of those new industries, they will happen.
Where we get into trouble is picking certain uneconomic activities and just subsidizing them or letting politicians choose. I’m all for government involvement to level the playing field to ensure we have competition and make sure we have strong support for basic research. Still, I think it would be a little naive to imagine a group in Washington picking the future industries. In fact, I think it would be scary.
And to wrap up: I hear a lot that America is experiencing “late-stage capitalism.” So, inequality is exploding, economic mobility is falling, and corporate concentration is harming workers and our democracy. Do you think we’re experiencing late-stage capitalism, or does our system still work?
I think we’re experiencing evolving capitalism. Marx, of course, thought capitalism would inevitably fail. He forgot, among many things, the notion of regeneration, some through industries and the efforts of individuals and businesses, and some through better public policy. I do think capitalism will evolve. I do think we will see interventions to support better competition and, hopefully, interventions that promote opportunity, but we cannot and should not write capitalism off.
My guest has been Glenn Hubbard. Glenn, thanks for coming on the podcast.
Learn more: Is the pandemic damaging America’s ability to innovate? My long-read Q&A with Caleb Watney | The future of US R&D spending: My long-read Q&A with Jonathan Gruber, Tony Mills, Margaret O’Mara, and Bret Swanson | How does human progress come about? My long-read Q&A with Jason Crawford