The Trump Economy and the Cost of the Lockdown

interview with Tyler Goodspeed
Monday, June 14, 2021

To watch the video, click here.

TRANSCRIPT ONLY

Peter Robinson: A Trump economist, well, the former Trump economist, what did the Trump administration truly accomplish? And what does the Biden administration think it's doing? Tyler Goodspeed on Uncommon Knowledge now. Welcome to Uncommon Knowledge. I'm Peter Robinson. Tyler Goodspeed holds an undergraduate degree, a master's degree and a doctorate all from Harvard. He studied at Cambridge and Oxford and taught at Kings College London, and has published three volumes on economic history. In 2017, Dr. Goodspeed joined the Trump administration's Council of Economic Advisers. And during the final year of the administration, he served as CEA Acting Chairman. Dr. Goodspeed is now a fellow here at the Hoover Institution. Tyler welcome.

Tyler Goodspeed: Good to be with you.

Peter Robinson: It is the way of the pandemic that you and I happen to be in the same building. You're downstairs and I'm upstairs, but at some point it would be lovely to meet in person. Here's the first question for you. As I understand it, you joined the Trump administration by giving our friend, Kevin Hassett then the Director of the Council of Economic Advisors a cold call and saying, "Hire me." All right, take that, hold that thought in mind. And now let me repeat a piece of your resume. Undergraduate degree Harvard, master's degree Harvard, doctoral degree Harvard, Tyler, mother Harvard is not known as a locus of support for Donald J. Trump. What were you doing?

Tyler Goodspeed: I get that question a fair amount from my friends and colleagues in the academy and the ivory tower. So in part, it was a mix of personal and professional. I certainly liked much of what the administration stood for on the economic policy front and wanted to play a role in advancing that agenda. Also, I have to admit that I recognized that in 2016 political economy equilibrium had been perturbed and that struck me as a particularly exciting time to enter into policy, which is something that I had always wanted to do at some stage anyway. And then I guess on the personal front, my spouse and I had been planning to move back to the United States. My spouse was starting a master's program at mother Harvard. And so DC to Boston seemed a much easier commute than London to Boston. So that sort of made sense. But it was only gonna be for 12 months, and then after 12 months, the tax reform had finished up. But then I was working a lot on digital services taxation and student loans and some other issues. So I thought, "Okay, well, I've gotta stick around for another year." And then year later was elevated to member. So I thought, "Okay, it should probably stick around for a little bit longer." And then 2020 hit. And I thought, "Well, I don't wanna be one of those guys who leaves in the middle of the historic crisis." So stuck around even longer.

Peter Robinson: Tyler, you mean to tell me that you fell victim to whatever your economist learns in erky 101 to guard against creeping commitment.

Tyler Goodspeed: You know I'm feeling guilty.

Peter Robinson: All right. The Trump economy, let's spend a moment or two talking about the Trump economy. Before the pandemic, there were three fat years in there. Sustained growth of more than 2% in one quarter, as I recall I'm sure you have all this immediate recall, but as I recall in one quarter, the growth rate exceeded 3%. That was very healthy. Although 2% the Obama administration had touched that, but here's what really was different. The Trump economy at its best differed from the Obama economy at its best in the following regard the rise in real wages and real wealth of ordinary working and poor Americans. Let me quote you. This is an interview you gave to National Review. I'm quoting you Tyler. "During the first three years of the Trump administration, real wage growth for the bottom 10%." We're looking right down at the bottom now. "Was more than double real wage growth for the top 10%. Since the 2017 Tax Cuts and Jobs Act real wealth for the bottom 50% rose 28.4%, while that of the top 1% rose 8.9%. In one year, 2019 real median household income rose by more $4,400 than in the entire 16 years through 2016 combined." All right, economic growth. But those who are experiencing the most rapid increase in wealth and wages are those at the bottom. How did that happen?

Tyler Goodspeed: Well, I'm glad that you had those figures before you so that I didn't have to reach into my memory bank to take them out. And yes, it does put complete lie to, I think what is the standard narrative about the 2017 tax reform and the Trump economy generally is this reality that not only were the gains largest at the lower end of the wage income and wealth distributions, but we actually saw that reflected in the inequality data with inequality declining by pretty much any measure. And so, I think there are a number of things when we look at the recovery from 2008/2009 before president Trump and after. And one of the things that we observed in the recovery from July, 2009, through the end of 2016 is there were two historical anomalies. One was that we actually saw a declining labor force participation. But some of that was that coincided with the peak cohorts of the baby boom generation entering retirement age.

Peter Robinson: Some of you would have expected purely on demographic grounds.

Tyler Goodspeed: Correct, but that wasn't the entire story. We actually saw during the expansion. So this is not including the recession. During the expansion through 2016, the prime age labor force in the United States shrank by 1.1 million workers. Those are individuals between the ages of 25 and 54. And the number of those people engaged in the labor force shrank by 1.1 million. The second anomaly was that for several years, again, during the expansion we actually saw the contribution of capital deepening to labor productivity growth turn negative. What does that mean? That means that firm's investment in new plant and equipment per worker was not enough to replace the appreciation of existing capital for worker. And there were a number of reasons for that. One was that when we looked at the data we realized that the U.S. had very high effective corporate income tax rates relative to the rest of the advanced economy world. But also we saw, and my colleague Mike Bordeaux has a terrific paper on this, in the aftermath of Dodd-Frank, we actually saw a decline in commercial and industrial lending to small and medium-sized enterprises, why? Because the Dodd-Frank compliance costs disproportionately raised costs for smaller and medium-sized financial institutions who disproportionately account for commercial and industrial lending to SMEs. So when we were trying to respond to this anomalous recovery, I think what was so key to the success was this simple observations that you have to get both the demand side and the supply side, right? It's not enough to just get either or. So yes, on the demand side, it was a large net tax cut in 2017 that raised aggregate demand, but in particular raised net investment demand. And that that's just gonna... that by definition is gonna raise demand for labor but also by narrowing the gap between effective corporate income tax domestically and abroad, it actually lowers firms outside options when it comes to bargaining with workers. So there was also a short run bargaining channel through which labor and particularly lower skilled labor is going to be able to negotiate higher pay. But then it's also important on the supply side because there's a growing body of empirical literature that finds that the burden of corporate income taxation is disproportionately borne by labor, and particularly less skilled labor because they are the less mobile factor of production and they pay it through lower investment in new plant. They pay it through lower investment in new equipment, fewer establishments. And so by lowering the effective tax rate on corporate income, both through the reduction in the statutory corporate tax rate and by introducing a full expensing for new equipment investments, we helped to raise the level of investment in the U.S. economy and thereby increase that contribution of capital deepening to labor productivity growth.

Peter Robinson: I want to try to play that back to you in my unsophisticated Neanderthal way. And unsophisticated, I'm sure you can live with, but if I make a mistake, please correct me. So we continue to live... those of us who live right here in Silicon Valley are acutely aware of this but everybody's aware of it. We continue to live in a country in which technology advances, computing power becomes cheaper all the time. And what you're saying is that the federal government had layered so many burdens on firms that even the natural growth of productivity that you'd expect aided by technological process by the technological dynamism was so suppressed that we were losing ground in productivity. The corporate tax rate was too high. Was regulation part of it, or was it... I mean, if you had to assign elements, you'd say the corporate income tax was 80% of the problem. First of all, am I correct about this? That the federal government did an astonishing thing. It screwed things up so badly that it forced the America to lose ground in productivity in this glorious moment, technologically glorious moment in the 21st century is that sort of fair? That's my Neanderthal impulse. If I see a mistake, an error in the economy, I think, ah, the Fed's again, fair?

Tyler Goodspeed: I think that is fair. One word that we've heard a lot of from 2009 through 2016 was secular. That all these trends declining labor force participation, historically slow productivity growth. That was all secular. It had nothing to do with policy. There was nothing we could do about it.

Peter Robinson: This is the notion of the new normal, that phrase.

Tyler Goodspeed: The new normal.

Peter Robinson: Right, okay.

Tyler Goodspeed: And when we were looking at the empirical data, what we were seeing was that no, this was not policy in variants, that it was exacerbated in so far as these secular trends were, may have been underway. They were very certainly exacerbated by uncompetitive effective corporate income tax rates. They were adversely impacted by an elevated regulatory burden. They were adversely impacted by the fact that we had a tax code that certainly at the very least didn't help incentivize increased labor force participation.

Peter Robinson: Got it.

Tyler Goodspeed: In terms of how I would assign blame to each of these components, to be honest, I think it's a case of the sum is perhaps greater than the parts.

Peter Robinson: Got it, got it. Okay, now one thing you haven't mentioned is immigration policy. The argument would go and if the argument does go, you can see it on Twitter to this day, real wages rose under Trump, Hispanic and African-American unemployment fell to the lowest levels ever recorded because the supply of immigrant labor got choked off, but you haven't even mentioned that. So that's simply incorrect, is it? Or did it play some role?

Tyler Goodspeed: So I think that one of the bigger things that we haven't talked about is what happened on the personal income side of the U.S. Tax Code. So, first of all, we've raised the standard deduction. So that helps smooth some of those cliffs that are present in the U.S. Tax Code for individuals who are going from out of employment into employment and face very high, effective personal income tax rates. So by removing some of that, limiting some of that federal income tax liability what helps to smooth some of those tax cliffs for individuals who are reentering employment, entering or reentering employment. The other thing that we did was we reduced certain tax expenditures, particularly regressive income tax expenditures, like the deduction for state and local taxes and mortgage interest deduction. And we plowed some of those budgetary savings into lowering marginal personal income tax rates. Now, most prime age workers don't respond too much to changes in marginal personal income tax rates, but retirement and near retirement age workers do. And there's some interesting theoretical research about why that is, but basically it comes down to a young person when they work they acquire a lot of human capital on the job and that human capital pays lifetime dividends so the present discounted value of that is just massive. Whereas folks who are near to a retirement age even though they're still acquiring human capital on the job, the remainder of their career just isn't as long and therefore the present discounted value of that human capital isn't as great. And so that's why they tend to be much more responsive to things like small changes in marginal personal income tax rates. And that's actually one of the reasons why we saw one of the biggest increases in labor force participation among individuals 55 years and older.

Peter Robinson: I see they decided to keep working essentially, all right. The pandemic strikes, everything goes sideways. It doesn't go sideways. It goes south, just at the hume, what did it feel like to be working in the White House when you've got, of course you've got a president who's under assault. We know all about that, but you've got an economy under which millions of Americans are returned to, to me perhaps the most striking figure of the whole period is that for African-Americans and Hispanics unemployment fell to the lowest levels ever recorded. So you have Americans in the hundreds of thousands and in the millions who are leading better lives, better able to provide for their families, better able to pay for education, just leading better lives. And then we lock it all down and it ends. What was that like?

Tyler Goodspeed: So meaning a word terrifying, especially when the early projections, both our own internal early projections and external gave a clear indication of what was coming. In January, we had some folks from the Organization for Economic Cooperation and Development the OECD visit, and their modeling was saying that the U.S., and this was early on. And then they subsequently updated their estimates, but that the U.S. economy was heading toward a 12% contraction during the four quarters of 2020. So the U.S. economy at the end of 2020, it's going to be 12% smaller than it was at the beginning of 2020 was what their ultimate projections were.

Peter Robinson: Any precedent for that since the great depression?

Tyler Goodspeed: No.

Peter Robinson: There's no contraction on record anything like that, is that correct?

Tyler Goodspeed: No. That's correct.

Peter Robinson: All right.

Tyler Goodspeed: And the unemployment rate, the Congressional Budget Office projected that unemployment would spike to 16% and end the year still above 11%. Although some private sector forecasters were projecting that the unemployment rate would hit 25%. I mean, this was just an adverse macro economic shock of unprecedented magnitude that was staring us in the face.

Peter Robinson: That's the moment of the lockdown. If I can take you through say six months into it, seven months into it, this isn't strictly speaking an economics question but it is a question for a person who has a mind, the mind of an economist. Well here, let me quote you Tyler again in National Review, "One aspect of the pandemic recession that I don't think gets sufficient attention is the extreme regressivity of lockdowns, job losses have been concentrated among lower wage, predominantly service industries." And then you wrote a piece in the New York Post with Peter Navarro also of the Trump administration, "High unemployment boosts rates of depression, suicide, drug overdoses, comorbidities associated with illnesses such as cancer, diabetes, and heart disease. And Americans have been foregoing a wide range of elective procedures as a result of lockdowns from mammograms, Pap smears and breast cancer surgeries to arthoplasties colonoscopies and bone marrow and lung biopsies." And the two of you never even touched on what we now know is a massive cost which is shutting down schools. And Dr. Birx and Dr. Fauci and the entire, I shouldn't name names because you worked with these people. I'm not trying to entice you into making personal attacks but the public health authorities concentrated on one disease COVID and told us what we must do to combat this one disease which the further we got into the lockdown, the more we learned that it was heavily concentrated, its effects were heavily concentrated on the older population, that it was much less deadly than we at first thought for everyone else. And that children and younger people were at essentially zero risk of serious illness. So we're learning about it. And there's just a total failure in the public health authorities in my judgment, public health authorities and journalism. In Gavi 101, which is cost benefit. They said, if we do this, here are the benefits. They never even attempted to take into account the costs. And we know the cost. We know what every uptick in unemployment causes in terms of increased suicide and depression and so forth. Why did that happen?

Tyler Goodspeed: Yeah, so when it comes to pharmaceutical interventions, typically the scientific standard is a randomized controlled trial. And you administer the pharmaceutical treatment to some randomly, and then you randomly assign others to a placebo, and then you analyze study the effects and you study the side effects. And here there were, as you suggested just enormous side effects, health side effects, you listed some. Also the destruction of human capital, that there was an enormous amount of on the job training and human capital acquisition on the job that didn't take place in 2020, because of the shutdowns. There was an enormous amount of human capital formation that didn't take place because schools were either closed or in remote learning mode, which is an imperfect substitute we now know for in-person learning. There is what I call a flow stock flow costs by which I mean, there's a flow of investment that didn't take place in 2020. Firms weren't investing in plant and equipment in 2020 because of the economy of shut shutdown. Therefore there is not a stock of capital that other physical and human capital that otherwise would have been installed. Therefore there is not the flow of future services from that installed capital stock. Even if investment now bounces back to where it was pre-pandemic. And perhaps the cost benefit analysis would conclude, yes, there are these substantial costs. Yes, it's painful. But the benefits of the treatment outweigh of the non-pharmaceutical intervention, the treatment, yes, those benefits outweigh the cost, but that analysis never took place. And I think that is ought to be caused for soul searching within the public health and epidemiology profession, certainly.

Peter Robinson: All right, we now have a new administration, the New York Times, "Mr. Biden's spending plans," three spending plans so far, one of them enacted, two proposed. "Mr. Biden's spending plans add up to about 6 trillion." That is so staggering. I just read it and it sounds like ordinary English words but the federal government with plans to spend an additional $6 trillion is not by any precedent normal or ordinary or anything we should just read without pausing to gasp over. "The spending plans add up to about $6 trillion and reflect an ambition to restore the federal government to the role it played during the New Deal and the Great Society." Close quote. So make government great again. Let me ask you, Tyler, let me take you through, of course, you could give a lecture on each one of these. I am sure, but very briefly, let's go through the big three Biden spending plans. The first the American Rescue Plan enacted 1.9 trillion. The centerpiece of this legislation direct payments of up to $1,400 for hundreds of millions of Americans. Something like two thirds of the population and the plan includes 350 billion for so-called emergency funding for localities including 195 billion for states. Tyler, would you have voted for it? Would you care to give it a grade as a professor? You may be a professor or a member of Congress, put on one hat or the other and tell us what you make of this thing.

Tyler Goodspeed: I would not have voted for it. And actually it might be perhaps instructive to take a step back and think about the contours of the CARES Act and the context within which some of the provisions that were in the CARES Act which were applicable in March 2020 are no longer applicable in spring 2021.

Peter Robinson: CARES Act is 2017, have I got the year right?

Tyler Goodspeed: CARES Act was the COVID relief package-

Peter Robinson: Oh, I'm sorry, no, no.

Tyler Goodspeed: ... emerged in March, 2020.

Peter Robinson: Right, right, okay.

Tyler Goodspeed: And so there were some salient features of that. When we were looking at what was coming, we realized, okay, by and large, unlike in 2008 on the eve of this shock we think that the U.S. capital and labor were for the most part efficiently allocated. And so we wanna try and preserve those matches between employers and employees. We want to preserve the organizational capital that's embedded in small businesses, the knowledge and efficiencies that are embedded in small businesses and who don't have the sorts of capital buffers to withstand an adverse shock like larger firms do. And we also given just the massive shutdown of the U.S. economy, we wanted to make sure that consumer spending, which is two thirds of the U.S. economy didn't fall off the cliff and there then it would infect credit markets as students default on their student loans, renters default on their rent, homeowners default on their mortgages. And you can try and play whack-a-mole and do cost mitigation there, cost mitigation there or you can try to do income replacement. Our priority was on near term income replacement. That's usually best done through the UI system because it's targeted at those using employment.

Peter Robinson: Right. Unemployment insurance. Sorry, I'm trying to, okay.

Tyler Goodspeed: But then on top of that the UI system is creaky, a lot of old state level IT systems. So there were a lot of folks who said, "Well, in addition to that, we should probably do one-off stimulus checks." I don't use the word stimulus because I don't think it's appropriate to be trying to stimulate an entity that's in a medically induced coma.

Peter Robinson: Right, right.

Tyler Goodspeed: But economic impact payments. The thing with all of these was that they were term limited. So the enhanced unemployment insurance benefits were to expire in the summer. The pandemic was still raging in the summer. So there was another term limited extension, the economic impact payments, another round went out but those were much smaller. And then the current administration has just reversed direction go in bigger. And the other big component from our perspective was in order to try and preserve those quality labor market matches between employers and employees, and try and preserve some of that organizational capital, we launched the Paycheck Protection Program which has forgivable loans for small businesses that used those loans to maintain payroll and Employee Retention Tax Credit and also some provisions on net operating losses to help firms turn current year net operating losses into tax assets that otherwise they would've paid later or they would have benefited from those later but only if they survive. So that was a budgetary neutral. But now, what made sense in the context of March and April, 2020, I don't think makes sense in the context of spring and summer of 2021. And I think the current administration is taking a great deal of comfort from the fact that in recent years the rate of growth in the economy has exceeded the real rate of return on their debt. So they think it's sustainable, but history has some contrarian things to say on that front, shall we say.

Peter Robinson: Right, the American Jobs Plan 2.3 trillion. This is the second. This has not been enacted. This is also known as the infrastructure plan. And this is very much in play right now. In the journal this morning the Republicans were saying, "No, not 2.3 trillion, maybe 800 billion." And as of today, the Republicans are up to a trillion. So it's in play, but let's take it the way the Biden administration has proposed it. More than 600 billion to transportation projects, bridges, roads airports, so forth, the development of electric vehicles also some 400 billion for, and I'm quoting the proposed legislation, "Home or community-based care for aging relatives and people with disabilities." Close quote. Not perhaps by many definitions infrastructure, still it's there, it's in the legislation, and the administration intends to pay for this. The Biden administration intends to pay for this by raising corporate taxes. Tyler, this one has your vote?

Tyler Goodspeed: I'm afraid, I'm gonna have to say no on that.

Peter Robinson: All right.

Tyler Goodspeed: Look, in the past, the U.S. has been in a situation where we've had a debt to GDP ratio above 100% before. This was in the aftermath of World War II. And how did we reduce that debt overhang to more reasonable, historically more reasonable level? Well, it was a combination of running primary budget surpluses, a bit of inflation and a bit of growth in excess of real interest rates. Partly due to some financial repression which I would not recommend returning to. But the key then is we also don't really want... we wouldn't want to see a return to inflation and I don't see a primary budget surpluses on the horizon anytime soon. So that means what we really need to be emphasizing is growth. And unfortunately, I don't see much in this package or the proceeding package or to succeed package, the American Families Plan. I don't see a whole lot in there that is likely to deliver sustained economic growth.

Peter Robinson: Okay, I'm going to take that answer is covering the American Families Plan, which is the third program. 1.8 trillion, some 200 billion for childcare and paid family leave. It just goes on and on. So what you mean to say is that Dwight David Eisenhower was better for the federal budget than Joe Biden looks as though he's going to be.

Tyler Goodspeed: By a mile.

Peter Robinson: By a mile, all right. Tyler, just another couple of questions. You mentioned a moment ago, inflation. Well, let me quote to you from a Wall Street Journal article but Christian Broden, Stanley Druckenmiller, quote, longish quotation here, but you'll see why. "The American economy is back to pre-recession levels of gross domestic product and the unemployment rate has recovered 70% of the initial pandemic hit in only six months, four times as fast as in a typical recession. Normally at this stage of a recovery, the Fed would be planning a first rate hike. This time, the Fed is telling markets that the first hike will happen in 32 months two and a half years later than normal. In addition, the Fed continues to buy 40 billion a month in mortgages and that's not to mention the 120 billion a month in bond purchases." Okay, gas prices are up. Commodity prices are up. Lumber is way up and that's working its way into home prices. The Wall Street Journal itself published that a couple of days after that appeared the journal itself published an editorial. "The risk is that as inflation expectations rise, they become embedded in consumer behavior and business decisions." Close quote. All right, so you're talking to somebody who is old enough to have served in the white house under Ronald Reagan. When Paul Volcker was there stepping on the money supply and Ronald Reagan was there saying, "If you have to do it, you have to do it." And inflation went down in two years from the double digits deep into double digits to two, three, 4%, which was viewed and has been viewed until the day before yesterday as a massive achievement, a massive bipartisan achievement. Is it all about to be undone?

Tyler Goodspeed: Well in, I think it was I November, 2019. I gave deliver some remarks to the Bureau of Labor Statistics because folks in my remarks was on the question of inflation because the U.S. unemployment rate had been at 3.5, had been below 4% for over a year, I think, 18 months. And we were still having these big $200,000 plus payroll employment gains each month. And there was this big question mark about when is inflation gonna show itself. And I made some comparisons then.

Peter Robinson: Tell me the year again, in which you gave these words?

Tyler Goodspeed: So this was November 2019.

Peter Robinson: 2019, all right thank you.

Tyler Goodspeed: Might've been December, 2019, but end of 2019.

Peter Robinson: 2019, all right.

Tyler Goodspeed: And I made several comparisons between 2019 and the late 1960s highlighting differences. So one difference was that in the 1960s you had very high labor force participation rates among prime age males couldn't really go any higher. And it takes a while for females to really enter the labor force in a big way. In contrast, in the United States, given the exit from the labor force of all those prime age workers during the recovery through 2016, there were still over a million workers who had exited the labor force. And if we just returned sort of 2000 levels of labor force participation that was a huge additional pool of labor. A second difference, oh, and actually further to that point just to illustrate that, at the end of 2019, beginning of 2020, three quarters of the flows into unemployment were people coming in from out of the labor force which is just a staggering statistic. A second difference was the composition of fiscal policy. So in the 1960s, we saw a big increase in government spending, but in the short run supply can't respond to that. So we actually saw several quarters and several years of double digit inflation in certain sectors of the economy and in the aftermath of the great society programs of President Johnston, particularly in health care sectors double digit inflation that persisted because supply just can't respond that quickly. Whereas in the aftermath of tax reform in 2017, yes, that was at least in static terms, a $1.5 trillion tax cut over 10 years, it was a tax cut tax reform package that increased labor force participation, that increased capital deepening, increased investment, there was a different composition of fiscal policy. And then I think a third key difference was that we had learned a lot about monetary policy in the 40 years, 50-years sense because back in the 1960s, there was a great deal of hubris on the part of monetary policy that they had hit upon a stable relationship between inflation and the unemployment rate that they could exploit. And it turned out that that was not the case. And I hope that there's not a similar level of hubris within the Eccles Building these days. But my worry is that all of these differences that existed between the 1960s and 2019 may no longer be differences, but may actually be similarities.

Peter Robinson: Tyler, two more questions. One time is a little bit tight here and I'm going to do a dirty trick and ask you another question that deserves a show or a lecture all to it or a book all to itself. The question is China and economics. Trade economist Dugger went at Dartmouth College. I'm sure you're aware of Dugger when he wrote the definitive history of American trade policy. And here's Doug Irwin in an email exchange with me just a couple of days ago. "One can debate whether the Trump administration's tariffs on China were the right approach, and certainly having allies would have helped, but we have such problems with China that I concluded the tariffs were justified." Close quote. Now that feels to me like a new moment on loosely put our side of the economics profession. The classical position, the Milton Friedman position would have been much, well, it would have been, you engage in free trade, even with bad guys because you're better off as a result of free trade. Now, this position that China represents such a threat that we have basically two tools to use against China. One is military, and nobody wants to think about that and the other is trade. And so it was sloppy and crude and in some ways, as much as it might violate the teachings of Milton Friedman it's valid to think about that now, is that right? Is there an intellectual shift taking place? That's what I'm trying to get at and in trade economics as a result of China.

Tyler Goodspeed: So I think the shift I haven't heard it frequently articulated, but I think what it boils down to is a recognition that when you were talking about a multi-trillion... that at the end of the day the People's Republic of China is not a market economy. Now Milton Friedman would say, even if they wanna subsidize their steel producers, that's good for users-

Peter Robinson: That's their purpose.

Tyler Goodspeed: ... of steel in the United States. It's good for consumers, but when you are a multi-trillion dollar, now $14 trillion non-market economy, you are not a price taker. You impact the global allocation of capital and labor. And one thing we know about non-market economies is that they don't allocate resources and factors of production efficiently. So whatever the global allocation of capital and labor would have been over the past 20 years in the counterfactual state of the world in which we hadn't established permanent normal trade relations with China in 2000, we know that it would have been a more efficient global allocation of capital and labor. And let me just put two data points on that. One is Melissa Kearney and I think Kathy Abraham had just produced recently came out with a survey of the literature on the decline in the U.S. employment to population ratio between 1999 and 2018. And of the factors, the contributing factors to the decline in labor force participation in the United States that they could quantify, the single biggest was exposure to the so-called China shock The establishment and permanent normal trade relations with China. There is now a growing body of literature on not only the local labor market the displacement effects of the China shock but also the effects on patenting activity in U.S. manufacturing sectors that were more exposed to the China shock so-called deaths of despair from diseases that deliver and opioid overdoses. And one additional data point is there's also now a growing body of literature pointing to the contributing role of the China shock to 2008/2009 because you had the accumulation of massive volumes of U.S treasuries in the People's Bank of China. They had to park those treasuries. They had to park the dollar somewhere. They parked them in U.S. treasuries that drives down the yield on safe assets, creates a global scarcity of safe assets. How does supply response by creating synthetic safe assets i.e credit collateralized debt obligations? So these are just the sorts of global effects on the allocation of capital and labor that a multi-trillion dollar non-market economy can have. And I think it's important that we think about that.

Peter Robinson: That is fascinating. Last question, you said a moment ago... I keep saying last question, this one I promise really is. You said a moment ago that we've learned something over the last 40 years and that reminded me that back. You won't remember this, but I'm telling you about it. Back during the Reagan administration I was just a lowly speech writer, but it felt as though we were getting some place. Milton Friedman and George Stigler and Gary Becker, the discipline of economics was learning permanent lessons. And as late as Bill Clinton, the profession was such that politicians believed that they had to comport with these lessons. Bill Clinton himself said the era of big government is over. Okay, all of a sudden, it seems as though Milton Friedman had never been born and John Maynard Keynes had never died. And even Larry Summers of all people, I'll put up this tweet. Even Larry Summers is a little bit shocked by what's taking place in Washington. "Whatever else may have been true several months ago preponderant macro risk facing U.S. today is over heating? Okay, so here is my question to you as someone who has young as you are, you've dedicated your life to the field, to the discipline, you've published three books, you've already established yourself as a figure within the discipline, but as an intellectual matter, what do you see for yourself? Are you simply now engaged in a professional fight to recapture lost ground? How can we have come to this past and what is the discipline to do about it?

Tyler Goodspeed: It's a big question that I have found myself thinking more and more about, and I'm reminded of the quote of Henry Kissinger that the reason academic politics are so nasty is because the stakes are so small. But I increasingly think that that Kissinger had that wrong perhaps the stakes are very large and actually certainly in some disciplines, I mean at the end of the day, academia is a closed shop Guild. And so there are certainly some financial rewards to those who can achieve superstardom within the field. But also more generally that the stakes are quite large because we are educating those who go off to be leaders in business. Those who go off to be leaders in law, those who go off to be leaders in politics and public policy. And so when I think about how to regain momentum there are some of the, what I might call for lack of a better term, the more traditional tools for which it's important to still be making the case. And here, I think there's still room to go on tax reform. When you think about perhaps making equipment investment permanent that the full expensing of equipment investment permanent, extend that to structures and intellectual property investment. And there's always room to go on the deregulatory front, the benefits of which disproportionately accrue to lower income households. But increasingly I feel that those traditional policy issues just don't resonate. And that's why increasing, I'm thinking more about how does one make a positive policy, formulate a positive policy agenda in the education sphere and also in the housing sphere, because on both those, I think the budgetary requirements aren't massive but the potential impact on so-called total factor productivity growth is massive. There's some research recently that shows that if only the states of California and New York had median levels of zoning restrictions, U.S. productivity growth would be double digits, would be hired by double digits because there's something about people being able to move from where unemployment is relatively high and productivity growth relatively low to where unemployment is relatively low and productivity is relatively high. There ain't no such thing as a free lunch but that is a pretty cheap lunch. And so I think thinking about how we continue to improve our human capital given the demographic weight that we have hanging over us but also thinking about how we can enhance the ability of factors that production to move are too fertile areas for a positive agenda moving forward, ideally in less wonky terms.

Peter Robinson: Tyler Goodspeed our new colleague here at the Hoover Institution, thank you.

Tyler Goodspeed: Thank you.

Peter Robinson: For Uncommon Knowledge, to Hoover Institution and Flux Nation, I'm Peter Robinson.