Do economists still have a place in policy debates? Did Milton Friedman’s proposals create modern inequality? And should our politicians scrap economic narratives in order to create a more equitable world? Here to consider these questions is Binyamin Appelbaum, the author of the newly released The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society.

Binyamin Appelbaum is a member of The New York Times editorial board, and previously served for nine years as a Washington correspondent for The Times, where he covered the Federal Reserve and other aspects of economic policy. He is a recipient of both the Polk Award and the Loeb Award, and was a finalist for the Pulitzer Prize in public service. Below is an abbreviated transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: What is the period of time that you would describe as “The Economists’ Hour,” and how was it different than what came before?

Appelbaum: This period is a revolution that begins in the late 1960s where economists become increasingly prominent in policymaking, specifically in advocating for an approach of stepping back and removing the hand of government from the economy in favor of markets.

The general rise of economists doesn’t begin that much earlier. It’s only during the Great Depression that economists even begin to measure the size of the American economy, and it’s only in the wake of World War 2 that the government begins to take seriously the idea that it can manage economic growth.

So you start to see economists in government, but not until the late 60s do they achieve this really central, primary position in the policymaking process. That happens to coincide with a particular type of economic philosophy which held that government should unhand the economy.

So there seem to be a lot of things that happen in that “hour” that you don’t think were good for us. But didn’t this era of economics also lift around a billion people out of extreme poverty across Asia?

Absolutely, and I don’t want to minimize that in any way. A turn toward more market-based policies was enormously successful in reducing abject poverty and lifting people’s standard of living. That is indeed part of the story.

However, I don’t think that there had to be a tradeoff between the increased prosperity of the developing world and the stagnation that we’ve seen in the developed world. For many people in the latter, the economy has stopped getting better, and problems like inequality have skyrocketed.

The economic problems that seemed so all-encompassing in the 70s were ended after those policies were implemented, though. Do you think that we have reason to revisit that legacy?

Yes. There’s a story in the book about Juanita Kreps, the Commerce Secretary in the Carter administration and an economics professor at Duke University. She resigns from the Carter administration because she’s so frustrated by the failure of their economic policies, and she resigns from Duke because she doesn’t know what to teach her students anymore.

That’s where we were — the conventional Keynesian approach to economic policy appeared to have failed. The economy was in trouble and there was a need for something new, so alternatives offered by figures such as Milton Friedman had an appeal.

There’s a portion of this change that’s just an unmitigated victory; lower taxes and less inflation was good. And then it kept going, and by the 1990s you had Alan Greenspan testifying  that 1 percent inflation is better than 2 percent inflation, while privately telling his colleagues that he has no idea if that’s true.

That’s a revolution that’s gone too far and coming at the expense of a higher unemployment rate.

U.S. President Donald Trump welcomes economist Arthur Laffer with Vice President Mike Pence as he participates in the presentation of the Presidential Medal of Freedom to Laffer in the Oval Office of the White House in Washington, U.S., June 19, 2019. REUTERS/Jonathan Ernst – RC17241BFEF0

How did airline deregulation serve as an example of this?

In the mid-century, everything about the airlines was regulated — from where you flew to how much you paid. Alfred Kahn was put in charge of deconstructing that system, and for the rest of his life he felt great about being on crowded airplanes because he thought it was the symbol of his victory; airplanes were half-full under regulation and now they’re 80-90 percent full. Prices are also much lower — the average American flies eight times more often today.

The downside is that the government believed carriers would compete on even footing, and so they didn’t worry about consolidation. We eventually ended up with only four airlines, and they all magically charge the same price for any available flight. So the failure to enforce antitrust means has that the market has broken down, and for the first time in history it’s cheaper to fly in Europe than in the United States. That’s an example of how that evolution just keeps going past the point where it’s good for us.

Is the solution to throw out the technocrats, like many politicians in the US and Europe have done, because they’ve shown that they can get things very wrong?

No, because some of our alternatives are terrible. Right now, we have this “turtle politics of nationalism” where you get into your shell and hope everything goes away. That’s not a great response. The point of this is not that we don’t need economists. Rather, we need better economists, and we need other people to be directing the efforts of economists.

William McChesney Martin, who was the chairman of the Federal Reserve in the 1960s, told a visitor that the Fed kept its economists in the basement, because they ask really good questions but they don’t know their own limitations. That’s not a bad summary of economists. Someone needs to make sure that they’re working for the public good.

5 questions for Binyamin Appelbaum on how economists have shaped our world
James Pethokoukis

The Great Financial Crisis soured China on American-style capitalism. And it seems to have done the same thing to America. U.S. policymakers are now embracing a sort of “capitalism with Chinese characteristics,” as The Financial Times puts it. They fear Beijing’s super-genius central planners will steal our economic lunch unless Washington adopts its own sweeping industrial policy. America must become more like China — at least a little bit — if it is to become great again.

Long-time Washington wonks have heard this story before. Back in the 1980s, Japan was the rising Asian power that had devised a superior economic recipe. And then America went on to dominate the global internet economy.

Now China is the nation that’s figured out how to do industrial policy right. But has it really? According to a new report jointly released by the World Bank, China’s Development Research Center of the State Council, and China’s Ministry of Finance, China’s “productivity growth has been slowing since the global financial crisis and has remained relatively low, despite signs of modest recovery in recent years.” Their solution: The Chinese government must become “less market interventionist and more market supportive.”

Similarly, America’s eager planners should be careful in their tinkering and worry considerably about unintended consequences. Should Washington spend a lot more on basic science research (while staying open to immigration and trade)? There’s a strong case to be made that it should. But should it also, say, try to spread the research wealth by creating mini-tech hubs around the country? Maybe not. First, government has a poor record at intentionally doing so. While military spending and the space program boosted Silicon Valley, there was no grand plan to create a Science City, as is recounted in The Code: Silicon Valley and the Remaking of America by Margaret O’Mara.

Second, be cautious in shifting innovation away from existing American tech hubs. In “The Effect of High-Tech Clusters on the Productivity of Top Inventors,” economist Enrico Moretti finds as follows:

“Clustering of the high-tech sector may exacerbate inequality in earnings and income across communities. At the same time it appears to be important for overall production of innovation in the US. Policies designed to spread innovation across communities, such as place-based subsidies that favor areas with little high-tech presence, need to take into account both benefits and costs.”

Don’t forget capitalism with American characteristics has been pretty successful so far.

How about capitalism with American characteristics?
James Pethokoukis

What if the peasants won’t pick up the pitchforks? That’s the problem facing anti-Big Tech activists and their allies in government and media. Yes, some consumers may grumble about privacy or regard those massive Silicon Valley fortunes as grotesque. They may wonder if Big Tech is simply too dominant. A poll last week by Data for Progress, a left-wing think tank, found nearly two-thirds of American would support “breaking up tech firms … if it means ensuring more competition in the future.”

Yet the weight of the evidence suggests little passion in these views. Take that push-poll. It does what activists typically do: Ignore trade-offs. Would break-ups be so popular if the respondents were told they might lead to higher prices, worse service, lower quality, and less business investment? Unlikely.

And a Morning Consult poll also out last week — not nearly as buzzy as the progressive one — finds the tech sector “ranks 15th out of a list of 19 industries that American adults said presidential candidates should be more critical of.” Then there’s the reality of consumer behavior, as I note in my new The Week column: “We keep sharing on Facebook, searching on Google, buying on Amazon, and downloading on Apple.” Few jiggle the privacy controls or bother flirting with alternative players. Maybe consumers understand and accept the privacy-free service trade-off.

But consumers are correct, in theory, to worry about “competition.” The thrust of antitrust law is to protect competition, not competitors. And if the hurly burly of the marketplace results in competitor harm and a large dominant firm — but also low prices and innovative, quality products, so be it.

Of course, the competitors often see things differently. And Washington is giving them their say. The New York Times reports that House lawmakers have asked “more than 80 companies for information about how their businesses may have been harmed by Amazon, Apple, Facebook and Google.” And lawmakers will no doubt get an earful. For example: Snap, The Wall Street Journal reports, has been keeping a dossier — impishly called “Project Voldemort” — of supposedly anti-competitive actions by Facebook.

And some of these grievances could be legit, as nearly a dozen ongoing or announced government investigations of Big Tech companies might well reveal. But policymakers should be vigilant against supposedly pro-consumer campaigns that are really fronts for unhappy rivals. The benefits to consumers shouldn’t get lost amid the complaints of competitors.

Washington’s ‘techlash’ risks helping competitors at the expense of competition and consumers
James Pethokoukis

Capitalism is rigged. Or maybe broken. Or never really worked at all. Such is the self-doubt pervading the world’s advanced economies. And in response, populists, progressives, and socialists have been devising ways to unrig, unbreak, or even undo capitalism. At the very least, writes Financial Times columnist Martin Wolf, there needs to be “acknowledgment of the fact that something has gone very wrong. Over the past four decades, and especially in the US, the most important country of all, we have observed an unholy trinity of slowing productivity growth, soaring inequality and huge financial shocks.”

But the ubiquitous nature of these problems across liberal democracies argues for a macro explanation. Productivity growth, for instance, has declined everywhere. Perhaps a myopic focus in America on the tax code, CEO pay, financial regulation, antitrust doctrine, or “bad trade deals” seems misplaced.

So pull back the camera and go widescreen. First, the slowing rate of productivity growth in advanced economies could just mean that innovative ideas are getting harder to find, according to researcher Nicholas Bloom, Chad Jones, John Van Reenen, and Michael Webb. Unless research inputs like public investment are continuously raised, economic growth will continue to slow in advanced nations. Silicon Valley can’t do it all.

Second, it takes time for technological advances to spread throughout an economy. And that doesn’t seem to have yet occurred, for instance, with AI. Yet. And part of the problem there may be bottleneck caused by a lack of worker, manager, and entrepreneur ability to take advantage of new digital technologies. In “Digital Abundance and Scarce Genius: Implications for Wages, Interest Rates, and Growth,” researchers Seth Benzell and Erik Brynjolfsson suggest policies “encouraging high-skill immigration, encouraging creative skills in education or widening access to top universities.”

Third, historical perspective is important. This is hardly the first time when concerns about inequality and stagnating living standards have led some to conclude that capitalism was broken. There was “Engel’s Pause” during the first wave of the Industrial Revolution. Yet as economist Timothy Taylor writes, “Historical parallels offer a reminder that when sustained shifts in an economy occur over several decades … the causes are more likely to involve shifts in economic output and organization driven by underlying factors like technology or demographics, not by factors like selfishness, conspiracies, or malevolence.” Of course, the latter musings make for a better political speeches. For now.

Maybe late capitalism is about to get a second wind
James Pethokoukis

It’s odd that any political party concerned about inequality and wealth concentration wouldn’t prioritize housing reform. There’s considerable research linking the two. In the analysis “Removing Barriers to Accessing High-Productivity Places,” economist Daniel Shoag of Harvard Kennedy School and Case Western Reserve University cites studies that show “increasing gaps in housing wealth are a source of rising wealth inequality” and that “housing scarcity is driving the increase in the net capital share of income.” It may well be the case, notes The Economist, that “surging house prices are almost entirely responsible for growing returns on capital,” an argument documented in Thomas Piketty’s Capital in the Twenty-First Century.

Yet the thrust of the current inequality debate on the left — certainly in the Democratic presidential race — has concerned taxing high incomes, whether through a wealth tax or higher taxes on labor or capital income. But the housing issue isn’t just about inequality. It also concerns economic growth and mobility.

The scope of the problem, as outlined by Shoag: “Historically, Americans have moved to the parts of the country that offered the highest wages and most economic opportunity. This tendency for Americans to move has changed in recent decades, as changes in legal land-use restrictions have limited housing construction in America’s richest locations. These restrictions have created limits on housing supply and have led to rapidly rising prices that make high-wage places unaffordable to less-educated workers.”

Thus the need for state and federal incentives for expanding housing supply. (Interestingly, Bernie Sanders has a housing plan that would combat restrictive zoning ordinances. Unfortunately he poison-pills his agenda with national rent control. It’s a truly terrible idea that would undercut the effort to boost supply.)  Among Shoag’s ideas for reform:

Why the wealth inequality debate should be a housing debate
James Pethokoukis

Will the United Kingdom crash out of the European Union without a Brexit deal? When will the Chinese trade war end? And how will the global — and US — economy be affected by these developments? Today, returning guest Desmond Lachman joins me to explore these questions.

Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies. Below is an abbreviated transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: When the morning comes around, what headline from the Financial Times, Bloomberg, or CNBC would be especially worrisome to you, and by contrast, what might make you say “Never mind, everything’s going to be fine”?

Lachman: Any number of headlines would be worrying to me right now. For instance, I would not want to see that the trade war is escalating or that it’s spreading, and now we’ve got problems with Japan and Korea on the trade side. I would not want to see that the United Kingdom indeed is going to crash out of Europe without a deal.

Hopefully we won’t see this scenario, but if on October 31 the United Kingdom crashes out, it’s very easy to predict that sterling will get hammered. The Euro will get hammered, and the European Central Bank will feel obliged to come in and open the spigots and then poor Mr. Powell at the Fed will be right in the firing line. We’ll be talking about tariffs the whole time. We shouldn’t forget that.

This is quite an important issue. This is quite an important risk that, in addition to the trade war with China, President Trump keeps talking about German and Japanese automobile exports to the United States. He feels that Germany is free-riding the system, and he’s got authorization to impose a 25 percent tariff on German automobiles. If President Trump did that on a weak German economy, then we’d really have a very big crisis in Europe. And Europe is a very large economy; we’re interlinked in so many different ways with the European economy, and that would spread to us.

Things of that sort, or the Italian situation — they’ve got a very delicate political situation. I wouldn’t want to see that deteriorating. Or I wouldn’t want to see problems in emerging markets like Turkey. The president of that country is running economic policies that seem to be totally inappropriate for their situation.

Turkey is not a massive economy, but if they took a big downturn it would be a much worse problem than Greece ever was. They’ve got something like 300 billion of dollar-denominated debt that they could be defaulting on. That would be bigger than the Greek default. The country that one really has to worry about in the long run is Italy, because that country is roughly 10 times the size of Greece. Its government bond market is the third largest in the world after the United States and Japan. So we’re talking about two and a half trillion dollars of debt that potentially Italy could default on. If we did have an Italian default, that would be a major event. You know, that would be the European equivalent of a Lehman Brothers crisis that would affect their whole banking system, but hopefully we’ll avoid that.

However, if the headlines said that we got a deal with China, that would really change my view. I would then think that the chance of recession in the United States in 2020 would be hugely minimized.

I’d also want to get past October 31 and see, and it’s possible that what Boris Johnson is betting on is the fact that deals in Europe are generally cut at the very last minute. So what he’s counting on is that there’s a very important European summit on October 17. He is counting on Europe folding, that they see that the United Kingdom is serious about getting out of Europe one way or another, and that they’re prepared to go out without a deal. That’s not in Europe’s interest to have the United Kingdom crashing.

So he thinks that at that time the Europeans will make the concessions on this Irish Border issue. That will allow him to present that to the United Kingdom population without fear of having Nigel Farage’s Brexit party cannibalize the Tory party. That probably has a 50-50 chance of being a winning wager for Johnson. You know, nobody really knows how this is going to play out.

Prime Minister Boris Johnson holds his first Cabinet meeting at Downing Street in London, Britain, July 25, 2019 Aaron Chown/Pool via REUTERS TPX IMAGES OF THE DAY – RC1BDC8F1010

Regarding the American situation more specifically: how seriously should we take our own forecasts of another recession? Is this a problem of our own imaginations and sentiments, or are the markets telling us something specific?

Well, the sentiment itself is even very important. Once you lose the confidence, you know, then the whole house of cards comes down. Banks go bust, you get “runs” on banks, people sell assets — that has consequences. But generally something triggers it, and what I’m saying is, for instance, right now the fact that Argentina defaulted on their debt of $100 billion is too small. Argentina’s a tiny economy. Defaulting happens, and we know that. That’s not a good thing, but that’s unlikely to be the trigger. A non-negotiated Brexit could be though, for all of the reasons I stated before.

Because of global risks like that, it shows that the bond market is not behaving in a totally irrational way. They’re basing their pricing and their decisions on how they see a number of issues evolving, and these issues are rather fundamental.

The rather big one is the trade war that the United States is having with China. The bond market is now interpreting that it is unlikely for the trade war to be resolved any time soon, and if anything, that can worsen. So what we’re seeing already is a slowing in the Chinese economy. We’re seeing Germany moving into economic recession. So the trade war is having a very big impact.

And while Argentina itself couldn’t provide a flashpoint for an American recession, their defaulting is still yet another indication that things are not well in a number of major economies. And we have, for instance, the International Monetary Fund. In their latest assessment, they talk about the global economy having moved from a situation of synchronized global economic recovery in 2018 to now seeing a synchronized global slowing.

The bond markets are saying that if you get the global economy slowing, the United States is bound to be impacted either through its inability to export as much as they would do before, or else through the financial market channel. If we’re getting financial market dislocation abroad that is bound to impact the United States’ market. So the bond market does have a lot to look at.

One other point I’d mention which makes one want to take the bond market seriously is that six of the last six recessions have been predicted by the bond market. When the bond market, or yield curve, has become inverted like it is today, generally that has been followed by a recession.

If there is so much risk in the global market, then why is it that stocks seem to be telling the opposite story? Maybe the stock market is overzealous because it is still counting on the Fed here in America to have greater influence than it really does.

That’s an argument one can make. For instance, one could make that argument about the previous recession. When it started, the interest rates that the Fed had at that stage were something like five percent. So they had five full percentage points of interest rates to cut before they got to the zero bound. Similarly, you know, the interest rates on the bond market were very high. So there was a lot of room to bring them down to zero.

This time, the Fed rate right now is about two and a quarter percent, meaning that there’s relatively little room to go. So it might be that the Fed is not as effective as it was the last time around.

What is of concern to me is not simply that stock market prices are very high valuations, but it is that loans to risky borrowers have been made at very low interest rates. So because we’ve had a prolonged period of very low interest rates and very easy money, borrowers who shouldn’t have been in the market have actually borrowed at low interest rates.

So Janet Yellen, for instance, is very concerned right now about the leverage bond market in the United States. Its lending to very risky borrowers has now increased as much as $1.3 trillion, and that has been done at very low interest rates without the usual covenants or protections for the lenders.

So the interest rates are one very good reason that the stock market should place little trust in the Fed. However, the stock market might not see that coming, because it could be thinking of something that has legitimately served them well in the past. This is that the central banks are there to bail them out. We used to talk about a “Greenspan put,” or a “Bernanke put.” Now we’re talking about a “Powell put,” meaning that if the stock market falters at all, what we’ll get is the Fed being a lot more aggressive.

Europe is already feeding that kind of thinking, for instance at the last meeting of the European Central Bank. Mario Draghi indicated that the European Central Bank at its next meeting, sometime in September, would almost certainly cut interest rates and revert again to quantitative easing — the whole bond-buying program — and that is very market friendly. So the stock market could be focusing on what the Federal Reserve and what the other central banks of the world will do. They’re saying that that will more than outweigh any shock to the United States economy. That might come from a trade war, or that might come from a hard Brexit.

Why should we assume that these risk factors which seem so far-flung from American politics — things like Brexit and the Italian economy — will create a domino effect that leads to an American recession? It’s important to think about what that process might look like if it can really happen.

What seems to me to be different this time around is that we’ve got a confluence of risks in very important, large economies. So we’re not talking about risk in a small country that won’t have consequences for the global economy. We’re talking about risks in places like Italy, the United Kingdom, or China.

Any of those risks, if they get triggered, they could trigger other risks. They could then create the financial conditions that will be very difficult for the other countries. So it’s very difficult to predict what exactly is going to be the event that triggers this chain, so I would liken it to something like the First World War. You wouldn’t have thought that the Archduke getting shot in Sarajevo would trigger a daisy chain of events. It’s a daisy chain — we’re talking about a structure that doesn’t look that solid.

In America itself, one precipitating effect that will impact that daisy chain is the lack of consensus about how to react to the trade war with China. President Trump looks like he is being boxed-in by the 2020 election, that he can’t afford to give this issue to the Democrats. So the two sides don’t have that much of an interest in reaching a very fast agreement. Neither of them wants to be seen backing down. That is why the situation looks fairly dangerous to me, as a bad result in the trade war could be the thing that sets off that unpredictable chain reaction.

You mentioned that reaching some sort of a resolution with China would be a positive end to the trade war — why is it so essential to resolve that situation rather than continue to let it percolate?

I would say in terms of the impact that the trade war is having on the economy, there’s no question that what the trade war has done already is lead to synchronized global economic slowing. By slowing the Chinese economy, which is the second largest economy in the world, it slows exports of places like Japan or more importantly Germany, which is a highly export-dependent economy and exports something like 50 percent of its product. It’s no accident that Germany is now in recession because China is slowing.

So the notion that the trade war is not having an impact on the global economy is just not consistent with what we’re seeing happening in the global economy. My fear is that if we get an escalation in the trade war — much in the same way as tariffs have already caused the global economy to slow — if we get an increase in those tariffs and increase a currency war, that’s bound to have an even bigger impact going forward.

There’s also a problem in that there’s been a shift in the United States’ thinking about China; rather than seeing China as an economic partner that we can bring into our system, we are now viewing China as a strategic threat. So we don’t China to get away with intellectual property theft, we don’t want China to become a technological power. So we don’t have that interest to get a trade deal very quickly with them. That is probably the right view from a long-term point of view.

But as you say, this is going to come with huge costs because we’re so interlinked with China in terms of trade patterns. And as I mentioned earlier, if China fails their other countries — Japan, Germany — that export heavily to China, we’d certainly go into a global economic recession and that would hurt us.

So the notion that the trade war is not having an impact is absolute nonsense. It really is impacting people’s living conditions globally. In terms of the recession, what is of concern is that when you’ve got mispricing of credit, and you’ve got stocks that are already very high, if you don’t get the growth, then you get market repricing, people selling off for assets, and that then has an effect on the economy. So you then get into that downward spiral where the Federal Reserve or the European Central Bank have to come out and fight it. If, as we were saying before, they don’t have that much ammunition, this could be a dangerous situation.

That’s why it seems to me that President Trump is taking huge risks on the 2020 election by having engaged in a trade war that he can’t really get out of and looks like it has got risks of escalating. Both China and the United States lose this trade war, so hopefully they sit down at the table. But as I’ve indicated, you know, there are political considerations and political dynamics that might make this difficult.

The question we’ve already got is difficult: are we prepared to take all of that pain in order to get a better relationship? It seems that the administration is going to say, “Let’s be tough on China.” So that is a reason why I would expect that 2020 is not going to be that easy a year.

5 questions for Desmond Lachman on what we should expect from risky global markets
James Pethokoukis

Do too few people own too much of America’s wealth? Many politicans and policy wonks on the left think so. They also worry the gap is getting bigger, and they want Washington to take action. One idea, put forward by Democratic presidential candidate Elizabeth Warren, would hit the superwealthy with an annual wealth tax on fortunes over $50 million and a special extra levy on billionaires. However, maybe the problem isn’t that those at the top have too much, but instead that those at the bottom have too little. That perspective might argue for different policy fixes that focus on wealth creation rather than redistribution.

To discuss wealth inequality from a variety of perspectives, I asked a group of experts to answer the following question:

Some economists estimate that the wealthiest 1 percent of Americans own 40 percent of the nation’s wealth — up from 25-30 percent in the 1980s. Should policymakers react to this apparent increase in inequality, and if so, how?

Eric Zwick, Associate Professor of Finance and Eugene Fama Faculty Fellow, University of Chicago Booth School of Business and NBER

Yes. Policymakers should react to this phenomenon because many of their constituents believe it is a serious problem. If policymakers disagree, they have an obligation to make the case for why. The risk of doing nothing is that a new vintage of policymakers, perhaps with worse ideas, will speak to the problem and gain support they shouldn’t have. So, the case for doing something is quite strong.

The case for any specific response is weaker, simply because we do not yet understand what has happened. Why did wealth inequality increase? And what are the bad consequences (or negative externalities) that merit a policy response? Our knowledge is so incomplete that even substantial disagreement exists across sources and methods about how large the increase in inequality was, when it occurred, and what form it took.

A better understanding of the facts is important because we want to narrow the set of policy instruments to those most likely to work without doing unnecessary harm. The list of potential policies is long and diverse, including those that target the top—such as taxes on wealth and high incomes, regulation of industry, charitable-giving reforms, and restrictions on political contributions and lobbying—and those that target the bottom—such as support for public education, affordable housing policy, and other expansions to the safety net. Whether a particular policy will have the desired effect depends on whether we correctly diagnose the disease, that is, whether we target the root causes and worst consequences of wealth inequality.

My recommendation is a fact-finding mission. Policy makers should convene a commission, hold open hearings, and work to produce a substantive conversation about the following questions. What do we know about wealth inequality and why it has risen? What is the relative importance of multi-generational wealth as opposed to self-made wealth? What role have demographic shifts and changes in the structure of the pension system played in these trends? What are the effects of wealth inequality on the distribution of political power? What are the consequences for disparities in economic opportunity, especially for children? And is wealth inequality related to income inequality, for which human capital plays a significant role, or do wealth inequality trends represent a distinct phenomenon?

A fact-finding mission would serve three purposes. First, it would help inform policymakers and the public, moving us all toward a common set of facts. Second, it would shed light on which policy ideas best suit the problem. Third, it would inject needed humility into the debate, as history is replete with episodes of strong policy responses in uncertain environments, their null results, and their unintended consequences.

Stan Veuger, AEI Resident Scholar and visiting lecturer at Harvard University.

The prompt tells us that economists estimate that the wealthiest 1 percent of Americans own 40 percent of the nation’s wealth — up from 25-30 percent in the 1980s. There are two ways to reduce wealth inequality. One is to make wealthy people less wealthy, the other one is the make people with little wealth wealthier. The first method makes people worse off, while the second one makes people better off, so I prefer the second method.

The easiest way to significantly increase the measured wealth of relatively low-wealth Americans is to convert various social insurance programs from pay-as-you-go programs to prefunded programs with personal accounts. One could adopt reform proposals sketched out by the late Martin Feldstein to do away with the Social Security, Medicare, and Unemployment Insurance programs. A back-of-the-envelope calculation suggests that this would raise middle-class wealth by some 150 percent of GDP, or about a third of total societal wealth. This would dramatically reduce the share of the nation’s wealth held by both the top 1% and the top 10% of the wealth distribution, to well below the much-vaunted levels of the 1980s.

It is unlikely to be a coincidence that wealth became more unequally distributed as the federal government removed many of the drivers of private middle-class savings over the past two generations. If one is genuinely concerned about this, the solution is straightforward: the construction of what used to be referred to as the ownership society along the lines sketched above, a better model to strive for than a society that seeks to punish success.

Melissa Kearney, Neil Moskowitz Professor of Economics at the University of Maryland, Director of the Aspen Economic Strategy Group, and Research Associate at NBER.

There is some debate about the number — whether today the top 1 percent holds 40 percent of the nation’s wealth, or some smaller share — but there is little question that the concentration of wealth at the top in the US is large and growing. This reflects an economic system that has yielded wildly disproportionate income growth over recent decades — a system that rewards high-skilled, highly educated workers and offers winner-take-all rewards to those who reach the very top. And it reflects economic policies that have done far too little to help those left behind, including many of our fellow citizens who face a perpetual economic struggle or lead lives of despair.

It cannot go on this way. Our society cannot survive the economic, social, and political fragmentation that is the predictable consequence of this system. The reason to take action is not envy or rage or to punish those at the top, many of whom through brilliance and risk-taking have provided great benefits to humanity. But rather because the marvelous benefits of the modern economy will be for nothing if the system that creates them makes it impossible for so many to flourish and hollows out our common life as Americans.

Policymakers should take dedicated steps to fight the tides of increasing income inequality. The number one policy priority should be a massive investment in education and health so that more Americans can reach their economic potential and earn higher wages. This will require increased spending on and evidence-based reforms to educational institutions, from early childhood through higher education. It will mean maintained spending on Medicaid and health services for children in particular. Policymakers should not spend billions on universal tuition benefits, but rather, offer tuition support for those who need it, and spend billions equipping all educational institutions to be universally of high quality.

Policymakers should also use the tax and transfer system of the United States to transfer more of the tens of trillions of dollars held by the top 1 percent to the millions of children and adults who live in poverty. Again, not because it is desirable to take money from those with great income, but rather because the existence of that income and wealth — and the constitutional power of the government to tax it — gives our nation the means to improve the lives of the millions of Americans who don’t have enough to eat, don’t have a safe and healthful place to live, and don’t have a standard of material well-being that allows them to reach their human potential. Apart from the moral imperative to help our fellow Americans, it is definitively not in the nation’s economic interest that nearly 20 percent of our children are held back by the grips of poverty. Providing additional resources to poor families yields individual and social benefits. Too much human potential is being lost.

To raise the necessary revenue, policymakers should reform the federal individual income tax code and personal estate and gift tax so that higher income households pay higher effective tax rates.  Tax experts have identified a number of promising ways to expand the tax base that would likely have limited efficiency losses, for example, through a scaling back of so-called loopholes such as step-up in basis, carried interest, and the more recent reduced tax rate on select pass-through income. Such reforms could raise tens of billions of dollars in annual revenue, and would be much more feasibly implemented and administered than an entirely new wealth tax would be. Any increase in taxes might come with some associated reduction in economic growth, but by using the revenue to make direct investments in human capital, we could expect a positive return on those investments — and the resulting economic growth would serve to build a stronger society where all Americans share in a common prosperity.

Michael Strain, AEI Director of Economic Policy Studies and John G. Searle Scholar.

Let’s step back. What is the problem to which Senator Warren’s wealth tax is the solution?

Is it the government’s need for additional tax revenue? The tax will likely bring in only a fraction of the revenue the senator expects. It will be incredibly difficult to administer, which explains why European countries have been abandoning their own wealth taxes. If finding revenue is your goal, there are clearly better places to look.

The wealth tax targets the 75,000 families with the highest net worth. They represent 0.06 percent of households. That the tax is designed to affect so few tells you that its purpose is much more than revenue generation. Indeed, Senator Warren’s economic advisers argue that the “root justification” for high tax rates “is not about collecting revenue.” Instead, “they aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.”

This is a bogus rationale. It would benefit from some political science. If anything, taking over 18 percent of the wealth of these families during the tax’s first 10 years — as the senator’s plan would do — would make them more politically active, not less. If they can’t keep all their wealth, they would have a stronger incentive to pump it into politically active organizations.

Besides, these families are not creating “oligarchic drift,” “undermining the social compact,” and threating democracy. It takes a whole lot less than a net worth of $50 million — the amount of wealth where Warren’s tax kicks in — to exercise political influence. And influence is much more diffuse than Warren seems to think. Just take a look at the Forbes 400 and see how effective the wealthiest Americans are at enacting their political agenda. Does Warren Buffett have his preferred tax scheme? Do Mark Zuckerberg and Jeff Bezos feel like they are basking in the warm embrace of US politics and public policy?

Let’s step back again. Why are we treating the wealth of the very wealthy as a problem to be solved? It cannot seriously be argued that the US and the world would be better off without Michael Bloomberg and Bill Gates’ contributions to the economy and to society. We need more brilliant, driven, passionate people, not fewer.

If wealth inequality is a problem, then the solution is in helping all Americans to build wealth. The solution is not to target a small number of wealthy families with the goal of knocking them down a peg to “keep democracy alive.” I’m sure we’d all agree that a tax targeting, say, the ten wealthiest families would be an abuse of government power. I’d argue that targeting the top 0.06 percent of families is a similar abuse. All citizens deserve protection from the tyranny of the majority — even if that tyranny is fueled by populist anger. And even if those citizens are wealthy.

The New Gilded Age: Should the US combat wealth inequality? An AEIdeas online symposium
James Pethokoukis

In our populist moment, do economists still have a place in policy debates? Did Milton Friedman’s solutions to the 70’s economic problems create modern inequality? Who have markets helped, and who have they hurt? And should our politicians scrap economic narratives in order to create a more equitable world? Here to answer these questions is Binyamin Appelbaum, the author of the newly released The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: Before the 2016 Brexit referendum in the UK, British politician and Leave advocate Michael Gove refused to name any Economist who backed Britain’s exit from the European Union. He said that “people in this country have had enough of experts.” More than a decade after the great financial crisis, many Americans apparently felt the same way that year. They voted for a populist president whose campaign agenda was roundly mocked by elite economists as either wrongheaded, unrealistic, or both.

Donald Trump rejected many traditional Republican economic policy ideas, and more broadly, he rejected the economic consensus on approaches to trade, taxes and spending. It wasn’t that he had enough of experts, but rather that he never had any use for them to begin with. Yet the age of economists as key policy-and-governmental players is a fairly recent one. Their rise and fall in status is critically documented in the new book The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society by Binyamin Applebaum. He is a member of the New York Times editorial board and previously served for nine years as the Washington correspondent for the New York Times, where he covered the Federal Reserve and other aspects of economic policy. Binyamin, welcome to the podcast.

Appelbaum: Thanks very much.

The economists’ hour: when was that? And what happened that you don’t like within that hour?

So the period I’m talking about basically is a revolution that begins in the late 1960s and the early 1970s where economists become increasingly prominent and important in policymaking, specifically in advocating for an approach to policymaking of doing less policymaking. Of stepping back and allowing markets to allocate resources, removing the hand of government from the economy — freeing things up so that, as they say, the economy can produce as much as possible.

So it’s not just the rise of economic experts in policymaking, though it is certainly that, but it’s particularly what you might call the rise of the free-market, neoliberal policymaking establishment.

That’s right. I mean there’s a bit of a two-step here. So, you know, the rise of economists all-together doesn’t begin that much earlier. It’s only during the Great Depression that economists begin to measure the size of the American economy.

Right, like we didn’t even have a GDP measure at that point.

Absolutely. You know, when the Great Depression happens, the Senate doesn’t know how large the American economy is, so they commissioned a guy named Simon Kuznets to figure it out. And he comes back and says, “Well, it used to be a lot bigger and now it’s a lot smaller,” [laughs] and that was GDP. And it’s only in the wake of World War 2 that the government begins to take seriously the idea that it can manage economic growth, and in the early phases that’s our other stumbling process.

So really, you know, you start to see economists in government, but not until the late 60s do they achieve this really sort of central, primary position in the policymaking process. That happens to coincide with a particular type of economic philosophy with a view that government should unhand the economy.

And that economic philosophy really took the reins of policymaking starting in the early 1980s. Even though the economists’ hour may have begun earlier than that, the rise of that particular variant was in the early 1980s. And you don’t think it worked out so well.

Yeah, I mean I think it had a couple of big effects. The first is that, you know, we got a lot more inequality as a consequence of this particular approach to economic policy, and I think that’s been a big problem.

The second is we didn’t get the one thing we were told that we were paying for, which is more growth. The idea was that if you followed these policies, the economy would prosper, and in the long run I think it has not.

And the final aspect of this that I think is really important is that the rise of inequality has really strained, I think, our communities and our democracy. So I think there’s been real consequences for the fabric of this nation — for the idea of “We the People” that is so necessary to have a functioning democracy.

 So are you mostly talking about advanced economies, particularly the United States?

Yeah. I think that this is a phenomenon that has taken hold, to greater and lesser extent, across the developed world. So, you know, there was an embrace of markets really throughout the world, and for many nations that had very little in the way of markets or market-based policies, this was a really good thing. I mean, it elevated billions of people from abject poverty in places like China and India.

So, you know, in many respects this turn towards markets was enormously beneficial. But in developed countries, most of which already had significant market economies, the sort of purification of this market ideology, the turn toward a more rigid adherence to market-based ideas went too far, basically. It was a revolution with a lot of benefits and, like many revolutions, it kept going past the point of those benefits.

Early in the book, you say that one of the promises of having economists involved in policymaking was that it would “help mankind loosen the surly bonds of scarcity,” and that did happen in a major way.

And while you may have concerns about the change in the Gini Coefficient in the United States, eight-hundred million to a billion people coming out of extreme poverty across Asia is still a pretty significant accomplishment during the economists’ hour.

 Absolutely, and I don’t want to minimize that in any way.

That’s obviously a big part of the story here. A turn toward more market-based policies was enormously successful in reducing abject poverty and lifting people’s standard of living and that’s very important. That is indeed part of the story.

But do you think that the effects of these policies in a very wealthy country like the United States more than offsets those other gains? Because the subtitle of the book is False Prophets, Free Markets, and the Fracture of Society, and I think someone just reading a review of the book would say, “This is a book about the failure of market economics.” Because I’d say markets had a fairly massive achievement that I would say is maybe one of the biggest achievements in 200 years of economics after the Industrial Revolution. All these people became part of the world economy and their standard of living rose, lending all of these extra brains that are hopefully helping us work on the problems of the future. That is not the story of this book.

I don’t think that that trade-off was necessary. I don’t think that there had to be a tradeoff between the increased prosperity of the developing world and the stagnation and problems that we’ve seen in the developed world. I think that you could have brought more market-based policies to the developing world without having the problems that I describe in this book in the developed world. I think that there’s no necessity to that relationship.

It’s the healing power of “and” — saying we can hopefully do both. So the economic influence really begins earlier, but then the more market-based, right-of-center influence by Milton Friedman starts becoming more influential starting the early 1980s. Why was that? What was the problem that they said they would solve?

You’re about my age — I remember the 70s. Yeah, they were not great. That was not a great decade. I think there was less inequality, but as I recall it was a period of tremendous economic volatility. We had high inflation, actually stagflation. We had recessions from the late 60s to the early 80s. The stock market went nowhere — I think in inflation-adjusted terms it was down by about two-thirds. So clearly they were responding to something in the 1970s that wasn’t working.

There’s a story I tell in the book about a woman named Juanita Kreps who was the Commerce Secretary in the Carter administration and was also a professor of Economics at Duke University. She resigns from the Carter administration because she’s so frustrated by the failure of their economic policies, but more than that, she resigns from Duke University because she says she doesn’t know what to teach her students anymore.

And that’s really where we were — the standard that was then the conventional approach to economic policy was a Keynesian macroeconomic policy, a hands-on regulatory policy. It appeared to have failed. The economy was in trouble, that was very obvious, and there was a need for something new. It’s in that environment of failure that policymakers go looking for a new approach and there’s tremendous appeal to this alternative, you know, Milton Friedman sort of thing.

If you’re going to summarize it in a nutshell, his view was that government should do less, take its hands off the economy. And there was a real sort of appealing modesty to that. He wasn’t saying, “I, Milton Friedman, should be in charge.” He was saying, “Nobody should be in charge.” And so you move from this generation in which economists had the remarkable arrogance to sort of stand there and say, “Put us in charge. We will manage the economy. We will deliver better results.” You have Friedman coming along and saying, “Well, the results have been bad. We need a new approach and I’m not suggesting that I should be appointed in their place. What I’m saying is we need to unhand the economy,” and for example, you know, replace the Federal Reserve with a computer program.

U.S. President Donald Trump cuts a red tape while speaking about deregulation at the White House in Washington, U.S., December 14, 2017. REUTERS/Kevin Lamarque TPX IMAGES OF THE DAY – RC1770A0A9B0

Do you think if we were to go back in time and ask somebody in 1980 what the next generation would be like if you had painted that picture — again, this is my impression — people would have been very surprised about how well things have worked out? I remember the movies back then in 1980s, whenever they showed the future, they were apocalyptic. Even in the early eighties you had movies like Blade Runner and Soylent Green. The future was an era of scarcity, of population gone wild, complete environmental catastrophe. You know, Blade Runner was not a very pleasing picture.

And then, by the mid-80s you start seeing movies like Back to the Future II which one that showed the future as a paradise with people on hoverboards. It was not an era of scarcity, so something happened where things did not turn out the way people anticipated. Do you think things did not work out as well as people had expected? Do you think these economies overpromised and then did not deliver?

My father was born in 1953, and three-quarters of the men born in that year ended up making more than their fathers by the age of 40. I was born in 1978; less than half of American men born in that year made more than their fathers by the age of 40. And that’s not just because we happen to turn 40 in 2008, by the way. If you do an average of the cohort with five years on either side you get essentially the same statistic.

The fact of the matter is that for many, the economy stopped getting better. And so while it’s true that the quality of the movies continued to improve and the quality of the stuff in the movies continued —

I think the optimism went up. People looked around them and they saw that things have not turned out as bad, and there was something real going on in the economy where things had gotten a lot better. Whether or not that matched the predictions — I mean why didn’t this populist revolution happened in 1990, or 2000? It’s because, in a real way, perhaps our living standards were going up in a way not captured by bad inflation statistics.

I mean, very few people I think would like to go back. I take my kids back and we go look at the old house I grew up in — they’re like, “Gee, we didn’t know you were that poor to live in a place like that.” Don’t you think the real standards of living have gone up a lot?

That’s a good question. I mean, I’m not here to dispute that at all. But the two things that I do want to say about that are — first, that I think it’s important to say that we’ve learned a lot about the degree to which inequality as such is a problem. It’s a problem that mimics poverty in many respects. And so even if absolute living standards are rising, distribution can still be an important issue.

That’s one piece of this, and the other that I think is very important is that a lot of the prosperity of those years was built on a foundation of investments in earlier years. So we entered the 90s — which we remember as this last era when the economy was great — with the most educated workforce in the developed world, and in large part that was because we’d been spending a lot of money on public education. The generation that came of age in the 2010s is below average for education in the developed world. And the reason for that is we’ve been spending a lot less money on public education.

So I think the 90s were great. But in a real sense it was, you know, people walking around in an orchard and picking all the fruit and forgetting to plant new trees.

The big economic problem coming out of the 1970s was inflation. It seemed like an unsolvable problem and there were concerns that the kinds of policies being put in by conservative politicians were just going to make inflation worse. It’s a leading question but isn’t that a tremendous achievement?

No, it definitely is.

If you told someone in 1989 that the two biggest problems heading into the 80s — the Cold War and inflation — both would be solved a decade later, they would think you were incredibly optimistic. Those two things were going to always be with us. And that’s a victory by the sort of neoliberal-conservative pro-market economists.

And one thing I’m very cognizant of — and I think that this is an important point — is that, to some extent, the policies that people love to revile — you know, you hear many liberals criticizing for example, supply-side economics, but what they often mean is the portion of supply-side economics that exceeded the part that was an unmitigated victory.

So everybody wanted tax rates to come down from the heights of the 1960s. At some point people started disagreeing about whether that process should keep on going, and that’s what they decided to call supply-side economics. Same thing with inflation. There’s a portion of that that’s just a pure unmitigated victory; less inflation was good. And then it kept going and going and going, and by the time you’re in the 1990s and you have Alan Greenspan testifying before Congress, saying that one percent inflation is better than two percent inflation, and meanwhile privately telling his colleagues that he has no idea if that’s true.

That’s a revolution that’s gone too far and is coming, at that point, at the expense of a higher unemployment rate. There start to be consequences. So we can agree that getting from ten to two was great, but it didn’t stop at two.

Ben Bernanke (L) is congratulated by his predecessor Alan Greenspan after Bernanke was sworn in as the 14th chairman of the Federal Reserve during a ceremony in Washington, February 6, 2006. Bernanke replaces Greenspan who retired after 18-1/2 years at the helm of the central bank. REUTERS/Jim Young – GM1DRXAAPSAA

When did we go off course? When did these policies take a bad turn? Was it in 1980, or was in the in the 90s that we went too far, but the 80s policies were fine?

I don’t really think there’s a year. I don’t actually think 1980 is the hinge year. I think that a lot of this stuff really is underway well before Reagan. I mean, Reagan is involved in this stuff before 1980, and I think a lot of these policies really predate the arrival of Ronald Reagan. He consolidates it — he brings it prominence by all means, but this stuff really starts in the 70s. But setting that aside, I think in some way the seeds of how it goes too far are there from the origins of this stuff, but the actual consequences take a while to be felt.

So to take an easy example — the reformulation of antitrust policy around a very simple model that says, “If prices are going up, it’s bad. If prices are going down, it’s good.” That initially works as a model but as it keeps on getting implemented over and over and over again in, say, the airline industry, you reach a point where there are ten, eight, or even four airlines. All of a sudden you run out of price competition. Workers are getting squeezed. And then you need to look around and say, “Well where did it go wrong?”

Well, it’s not that it went wrong in any specific year. It’s that if you had a model that said the only thing we’re worried about is price competition, at some point you’re going to wake up and discover that you’re having consequences that you could have avoided.

So it sounds like you’re not happy with the policy turn in the 1980s towards the market, right? I don’t want to misstate what you’re saying.

I mean, I think again, it’s a story of a revolution that went too far. I think there are things about it that were enormously productive, and there were necessary correctives to policies.

So it sounds like it starts in 1980 with Reagan and some of these things certainly start, at least philosophically, before Reagan. What is the alternative path taken in the 1980s? Is there some other country that did it better?

So I think there are examples of countries that were more effective in specific areas of policy. I don’t think there’s like one shining ideal out there, but I think the easiest way to do this is to look at specific areas of policy.

So again, you know with respect to say, deregulation of the airlines; in the mid-century everything about it was regulated — where you flew, how much you paid, what you could eat on the airplane. And economists come — a guy named Alfred Kahn from Cornell University is put in charge by Carter of deconstructing that system. And he does it gleefully, and for the rest of his life he feels great about being on crowded airplanes because he thinks that’s sort of the symbol of his victory; airplanes were half-full under regulation and now they’re you know, 80-90 percent full. And prices are much lower and the average American flies eight times more often today.

That sounds like a victory.

Absolutely, all of that is great. And we actually have regular elections on this subject; people vote by buying the cheapest available ticket every time they go shopping for tickets. So if people actually wanted higher quality service, they’d pay for it. They don’t. The marketplace is speaking and all of that’s really good. What’s the downside? Well, there’s two things that that, you know, you would have wanted to do differently in my view.

The first is that the government originally had this premise that carriers are going to be able to compete on even footing with large carriers. And therefore you don’t need to worry about mergers or consolidation. And so they don’t, and what happens is you end up with four airlines and anybody who’s gone online to shop for airline tickets recently knows that they all magically charge the same price for any available flight. So, you know, the failure to enforce antitrust means that the market has broken down, and for the first time in history it’s cheaper to fly in Europe than it is in the United States.

That’s an example of how that evolution just keeps going past the point where it’s good for us.

You mentioned these technology companies, and that’s kind of the lead story rather than the airlines or other sectors of the economy as far as antitrust goes. Those companies don’t neatly fit into that framework. They seem to act like their dominance — or what some people call monopolies — is not particularly durable. They’re acting like there’s another company that could either displace them in their core business, or will come up with a new, completely different way of doing what they’re doing. So they’re spending a lot of money on research and development. They don’t act like they have fat and happy monopolies, and they continue trying to innovate. Are they really a good example of the economy gone wrong, then?

I think that they’re certainly a different case than some of the industries that we’re talking about, but here’s my concern with those companies in particular: we’ve allowed them to keep on eating their competitors. So I compared it in the book to the Greek god [Kronos] who kept on eating his children.

The problem is that it’s fine to say that it’s an industry in which we see a pattern of emerging competitors displacing monopolists, and that’s good as long as you allow those competitors to emerge. But as a business model, companies like Google and Facebook have adopted the policy of essentially buying their emergent rivals. And that allows them to essentially become the next monopolist. I think that has the potential to cause real problems.

A pillow is placed on a couch at Twitter headquarters in San Francisco, California October 4, 2013. REUTERS/Robert Galbraith (UNITED STATES – Tags: SCIENCE TECHNOLOGY BUSINESS) – GM1E9A507B301

The economists’ hour — I mean, that phrase suggests that the hour is over with. And so we’re running a big experiment in the US economy, saying, “What happens when we ignore what the economists have to say?” How do you think that experiment is working out so far?

Well, so I think that the reason that I still think it’s an important thing to write about is — as you said in the introduction, we’ve clearly reached a different moment where we have policymakers dismissing the ideas of technocrats and the value of technocrats.

I think we reached an inflection point in 2008 in the aftermath of the crisis where, you know, it felt as it did in the 70s or the 30s; the way we were doing things was obviously broken. And we were confronted by a moment when alternatives began to emerge. Some of those alternatives are terrible. And so you have what I think of as the “turtle politics of nationalism” where you get into your shell and hope everything goes away.

That’s not a great response. We’re living with it right now. You know, you’ve got those who are saying, “If the technocrats got it wrong, then we don’t need technocrats.”

I think that’s the wrong answer as well. So, you know, we’re at this point where I think it is critically important to have a better version of technocratic advice, basically, and I think the lessons of history have a lot to tell us about how we get there.

Has the case been that the advice was not great, or is it that in many cases the advice was ignored? Because it took me about 30 seconds as someone who looks at policy to write down a list of things which economists generally think are pretty good ideas that politicians seem not to think are good ideas. I wrote down things like reform entitlements, reforming the tax code with something like a value-added tax, eliminating agricultural subsidies and massive tax expenditures for things like mortgages, and housing reform (which economists think is huge contributor to inequality). All of these things the politicians seem to really ignore.

Have we overestimated how much influence these economists are having when there are so many areas where our politicians don’t really care to follow-up even though they’re fine recommendations?

I think the burden of this book is that it’s 300 pages of detailed storytelling about the ways in which economists did tangibly influence policy. And, you know, I think anyone who reads it will see that demonstrated in its pages. One of the things that was very striking to me in researching this book was that I was not sure how easy it was going to be to trace the path from an idea to its adoption as policy. And in many of these cases the paper trail is just clear and undeniable.

You can watch economists directly influencing the adoption of policies that emerged from their academic work. And so the through-line is just bright and clear. Does it mean that economists got everything they wanted? No, of course not. Are there policies that economists, you know, almost unanimously favor that have been ignored by policymakers? Obviously, but there are a lot of instances in which the economists were influential and there’s a pattern to that influence, and I think it’s been consequential.

And the so the ideas that you highlight which you think of been the most damaging ideas are what? Taxes would seem to be the big one, maybe even trade. Do you think we’ve just kind of gotten it wrong?

So I don’t think we’ve gotten trade wrong. Karl Polanyi has a wonderful part of his famous book where he talks about the role of government in regulating the pace of change, and I really subscribe to that. So I don’t think the problem is trade. Trade is enormously beneficial when it’s handled properly. I think that government has failed to regulate the pace of change and the consequences of change. So the failure of our trade policy is that, you know, we adopted the premise that the aggregate benefits exceeded the aggregate costs without ensuring that the losers actually, you know, shared in those benefits.

But economists would have said, though, that we can’t forget about helping people — whether it’s some sort of expanded trade adjustment or something else. So that seems to me like another area where they’re not listened to.

No ­— to the contrary. Economists were explicit about this. It’s actually explicit in their writings that you do not need to actually measure the distribution, that the aggregate is enough.

I mean, this is explicitly the justification for trade policy and indeed for many distributional policies is that it doesn’t actually matter if the benefits get into the hands of the people who are losing. What matters is that the aggregate is favorable, and I can give you any number of examples of economists making that case. It’s not that their advice wasn’t followed about distributing the benefits — it was that they did not argue that the benefits need to be distributed.

And taxes are also another one of these areas?

I think on tax policy, actually it gets a lot of the heat, but actually a lot of the regulatory stuff is probably more important. But yeah, I mean with taxes I think that in general I would say this: I think inequality is a problem and I think the solution is to make reducing inequality a focus of policy.

My first order preference is actually not to use tax policy to do that. I think it’s much more effective to act on opportunity and on pre-tax income distributions then to use taxes to redistribute income after the fact, but I do think that taxation has a role to play. And that it’s been minimized in relative importance.

In the mid-century, the wealthiest Americans paid slightly more than half of their income in taxes on average. That’s now down in the mid to low 30s. I’m not sure we’re better off as a result of that.

But would you fundamentally change it? Would you have the top tax rate go up to 75 percent? Would you institute wealth taxes? I mean, that’s sort of my core question, is to what extent is this book a critique of economists and to what extent is it sort of a proposal for change — and here’s how here’s how it could be better? Or, here’s how it could’ve been better if we had done these things twenty years ago?

So I think of this book primarily as a history. It is a story of the way that economists influenced the course of policy and the nature of American life. And frankly it is my hope that people who have disagreements about, you know, whether those developments have been good or bad will still find the story interesting and important.

So that’s number one. But I do have my own conclusions. They’re not the primary focus of this book. They come towards the end and I think the book has value without them.

But if you’re asking for my own views, I do tend to think that the role of taxation in particular in limiting the growth, the accumulation, and the preservation of large fortunes would be beneficial, that the government should take a stronger hand in preventing people from just passing down massive amounts of money to their children who haven’t done anything to deserve it, and we’re not particularly, you know, good at using those resources. I think that that would be beneficial.

But during that “hour” from the 1960s up until recently, with economists being highly influential, do you think that era would have been better — just from what we’ve looked at over the last two years — if there had been far less influence from economists and far more influence from, I don’t know, the alternative world of politicians?

I look at the current environment and I see a professional economists being ignored, and I see that they’re being replaced by TV pundits and people who write investment newsletters. Oh my gosh, TV pundits — couldn’t find a worse group of people. By the way, tune in on CNBC.

So who could have replaced them from that lead policymaking position, or do you think they could just do a better job?

I think I would say two things about that. The first is that I think that politicians ceded to economists too much of the responsibility for determining the goals of policy. The implementation of policy is something where economists have a real advantage and real skill, but in determining what we’re trying to achieve as a society, there was a defaulting to the assumptions of economics that I think was enormously harmful, specifically with regard to the premise that inequality was not a first-order concern of public policy.

So I think I would have liked our politicians to be much more active and insistent on what the goals of public policy should be, and then to rely on technocrats to figure out, you know, “Okay, if this is the goal, how do we optimize tax policy to get there? How do we optimize trade policy to get there?”

The point of this is not that we don’t need economists. It’s partly that we need better economists. But also it’s partly that we need people to be directing the efforts of economists.

I begin the book with a quote from William McChesney Martin, who was the chairman of the Federal Reserve in the 1960s. He told a visitor that the Fed kept its economists in the basement, because they ask really good questions but they don’t know their own limitations. I think that’s not a bad summary of economists. Someone needs to make sure that they’re working for the public good.

But that exact period ended up as the chaotic decade, the 70s, before they listened to the economists.

Politicians were running things and we ended up with a decade that was one of the absolute worst economic decades — it’s not going to be called like the 1930s, but anyone who lived through that decade saw the sheer economic pessimism that stems from a period before economists were looked to.

That does not give me a lot of confidence in sticking the economists back down to the basement and letting the politicians occasionally ask them for a policy paper.

I would complicate that story for you a little bit. The first log on that fire is basically that the Kennedy and Johnson administrations — Kennedy in particular — starts to listen to Keynesian economists who haven’t previously been that influential in government. And the big advice that they give him is that you can spur economic growth which is already doing pretty well, but you can maximize, they argue, that growth.

There is what they call an “output gap” about the size of the Italian economy, and that you can increase the growth of the American economy with it. Their preference was actually for spending increases, but Kennedy knew that wasn’t politically viable, so second-best was tax cuts. So they start cutting taxes and the economy booms. And Johnson start spending more money on poverty programs and the economy booms — also designed by economists. And the economy booms.

The problem was that the Keynesians, whose worldview was premised on a better understanding of human behavior, hadn’t studied political behavior. Because, you know, when they come to Johnson in the late 60s and they say, “Well the way you get the economy to grow faster is you cut taxes, and you get it to grow slower as you raise taxes, and it’s time for a tax increase.” And Johnson looks at them and says, “I’m not raising taxes, that’s crazy.”

And so, you know, the Keynesian model of how you regulate the economic temperature broke down at that point. That’s the beginning of the runaway inflation of the 1970s. You get more failures of management in the early years of the 70s. The oil shock is interpreted not as a supply-side event, but as a demand-side event that’s catastrophic. And so, you know, you actually do have economists in the engine room at this point contributing to the problems. So I’m not sure that that was the pre-economics era. It was just a mismanaged era.

So when you look around the globe, who’s getting it right? Who’s closest to your view, where it looks like they have a good balance?

I don’t think that anybody is absolutely getting it right, but I’d say a couple of things about this.

The first is if you look at the growth of the French and American economies, everyone knows, and they’re right, that the American economy has outpaced the French economy. If you remove the top one percent of the population in each country, income growth for the 99 percent in France and in the United States has been faster in France.

So aggregate growth isn’t everything. Distribution matters, and there are countries that have done a better job — indeed almost all developed nations have done a better job of distributing prosperity than the United States. So that’s number one. Number two is that life expectancy in the United States is in decline, which I regard as, like, the single most shocking fact about modern life in the United States. We’re the wealthiest nation on earth and we’re dying sooner. And who’s dying sooner? It’s people with less money.

And so you’ve got this huge growing divergence between life expectancies for the wealthy and for the poor. I don’t know of any greater indictment of our economic policies than that simple fact. And then number three: I would contrast our economy in recent decades with the economies of, in particular, Asian nations that have invested heavily in development and in specific infrastructure and have experienced much greater success in, you know, technology industries and in manufacturing industries than the United States.

So I think that there are lessons in other countries.

What are those other countries?

 Taiwan and South Korea are two standout cases there.

How many of the largest tech companies in the world are Taiwanese and South Korean?

Well if you’re counting internet firms, then you’re in a different world. If you’re counting the manufacturing firms, then you’re talking about those countries. And the key difference is that, you know, the number of people who are living comfortable lives on the back of Google is, you know, a bunch of millionaires, but not actually that numerous by comparison with the number of people who can live middle-class lives if you’re Samsung and you’re actually building the products.

My guest today has been Binyamin Appelbaum — thanks for coming on the podcast.

Thanks for having me.

How have economists shaped our world? A long-read Q&A with Binyamin Appelbaum
James Pethokoukis

Anti-China hawks in the US are eager for a New Cold War that would disentangle the two mega-economies, especially their technology sectors. They see the inevitable economic disruption as a necessary evil to bolster US national security. And there might be even a partially beneficial economic offset if a slice of Asian manufacturing returns to American shores.

But some nationalists are more optimistic about the potential economic gains from escalating the current trade conflict into something broader. According to this view, the New Cold War would pit the two economies in a high-stakes competition for technological supremacy — and thus geopolitical dominance — in the 21st century. The sense of urgency would force each side to marshal all of their resources and talent in pursuit of victory. Space Race meet the AI race. The resulting scientific advances and tech innovation would boost both economies. And with prosperity rising, neither side would risk the cold war turning into hot one.

The seeds of this hot-take argument might be found in the 2014 book War! What Is It Good For?: Conflict and the Progress of Civilization from Primates to Robots. In it, archaeologist Ian Morris argues that war, over the long run, “has made humanity safer and richer,” in part because of the military-driven investment in scientific and technological research. Or maybe the inspiration was the 1998 film Armageddon which has a scene where the American president tells a global audience that “all of our combined modern technologies and imaginations, even the wars that we’ve fought, have provided us the tools … to prevent our own extinction’’ from an approaching planet-killer asteroid.

The stirring music of composer Trevor Rabin beneath that speech almost wins the argument. But I have a few notes. First, I might be more open to the idea that closed-off tech ecosystems are good for growth if I wasn’t in the middle of rereading A Culture of Growth: The Origins of the Modern Economy, where economic historian Joel Mokyr argues that scientific openness and collaboration across a fractured Europe between 1500 and 1700 — a transglobal marketplace of ideas — was pivotal in laying the ground for the Industrial Revolution. A reminder: there might be costs in trying to keep apart American and Chinese AI researchers or making America otherwise less hospitable to high-skill immigration.

Second, is war really necessary to drive and diffuse technological progress? Or is it the opposite? In A Great Leap Forward: 1930s Depression and US Economic Growth, economist Alexander Field documents US productivity gains during the Great Depression, finding World War Two “disruptive of the forward pace of technological progress made in the private sector.” And it was the “expansion of potential output during the Depression … that laid the foundation” for the postwar economic boom. While the Cold War-driven Space Race between American and the Soviet Union certainly generated economically valuable spinoffs, it is interesting to note that both of the leading books on the history of American economic and productivity growth — A Great Leap Forward and The Rise and Fall of American Growth by Robert Gordon — ignore the Space Race.

Third, there are other ways to drive technological progress other than the threat of losing a war — hot or cold — especially if that threat prompts self-defeating policies. How about the positive pursuit of audacious tech goals, such as seriously advancing clean energy, genetic editing, transportation, and space commerce? Americans seem ready for it.  Or maybe the reality of America’s long economic stagnation will provide a catalyst for action. It’s been a decade after the end of the Financial Crisis and even big tax cuts don’t seem to have shaken the economy out of its 2 percent growth torpor. Higher living standards seems like a goal most politicians should be able to get behind.

Pro-growth war?
James Pethokoukis

Andrew Yang had his best policy moment of the Democratic debates last night when he said, “This country has been a magnet for human capital for generations. If we lose that, we lose something integral to our continued success.” Yang should talk more about immigration. And more about thorium-fueled nuclear reactors. Maybe also flesh out his VAT idea.

But Yang’s main idea, a universal basic income (UBI), is less appealing. It’s an elegant idea that would quickly look less so when filtered through the reality of government sausage-making and flawed human behavior. Then there’s Yang’s alarmist argument that we need UBI to meet the looming and “unprecedented crisis” of widespread technological unemployment. Yang: “In the next 12 years, 1 out of 3 American workers are at risk of losing their jobs to new technologies—and unlike with previous waves of automation, this time new jobs will not appear quickly enough in large enough numbers to make up for it.”

Maybe. But history would suggest probably not. Sure, you can find some pretty scary studies, but also reputable ones that are far rosier. In the paper “Automation and jobs: When technology boosts employment,” Boston University’s James Bessen writes that automation “often leads to growing employment in the affected industries,” and although “automation may eliminate jobs in some industries, it creates jobs in others.”

The big labor market challenge may be job disruption and reallocation rather than sharply elevated unemployment. New skills and relocation may be necessary. What’s more, different technologies have different job impacts. In “Automation and New Tasks: How Technology Displaces and Reinstates Labor,” Daron Acemoglu and Pascual Restrepo differentiate between technology that replaces what humans currently do and technology that creates new tasks and employment opportunities. And policy has a role in encouraging technology of the latter sort. (More on all of this in my long-read Q&A with Acemoglu.) Better to focus on shaping the future — and our ability to shape it — than succumbing to scare stories and dire forecasts that lead to unhelpful, if unintended, policy suggestions like “robot taxes.”

Here come the robots: We can prepare for the future without fearing the future
James Pethokoukis