Dani Rodrik of Harvard University talks about neoliberalism with EconTalk host Russ Roberts. Rodrik argues that a dogmatic embrace of markets has increased inequality and limited who benefits from economic growth. He argues for a more interventionist approach to the economy with the goal of better-paying jobs and more widely shared prosperity.
This week's guest:
Dani Rodrik on Globalization, Development, and Employment. EconTalk.This week's focus:
Additional ideas and people mentioned in this podcast episode:
Daron Acemoglu on Shared Prosperity and Good Jobs. EconTalk.A few more readings and background resources:
A few more EconTalk podcast episodes:
Chris Arnade on Dignity. EconTalk. Michael Munger on the Basic Income Guarantee. EconTalk. Amy Webb on Artificial Intelligence, Humanity, and the Big Nine. EconTalk. Arthur Diamond on Openness to Creative Destruction. EconTalk. Will Davies on the Economics, Economists, and the Limits of Neoliberalism. EconTalk, Mar. 7, 2016.| Time | Podcast Episode Highlights |
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| 0:33 | Intro. [Recording date: August 20, 2019.] Russ Roberts: My guest is Dani Rodrik.... He first appeared on EconTalk in 2011, when we talked about globalization. Our topic for today is a recent piece he wrote for the Boston Review with Suresh Naidu and Gabriel Zucman entitled "Economics After Neoliberalism."... Let's start off with the definition. Neoliberalism means different things, I think, to different people. It's a term that's come into more use recently. What do you mean by the term. Dani Rodrik: Let me say first that I am a little bit uneasy using the term 'neoliberalism.' It's something that, it's a term that I have tried not to use. Sometimes I've used the term 'market fundamentalism' instead of 'neoliberalism.' But it's come into such general use, and I think it does capture something real, so I did along with my co-authors end up making it the centerpiece of this piece in the Boston Review. What I mean by neoliberalism is really mostly a frame of mind that places the independent functioning of markets and private incentives and pricing incentives at the center of things. And I think in the process downgrades certain other values, like equity and the social contract, and certain restraints on private enterprise that are often required to achieve economic ends that are more compatible with social goals. Russ Roberts: And--the term 'market fundamentalism'--I would call myself, I think I'd have to admit to being a market fundamentalist. Talk about that a little bit more, what you see as the essence of that viewpoint and what you think the weaknesses are. Dani Rodrik: I think it probably will make sense to talk about this in a particular context and then to make it more concrete. But I think I would draw the distinction along the following lines: That, there is a view that places markets as, in some sense, being prior to social and political arrangements. And I think that views markets as essentially being created independently, endogenously, on their own; and that they can be sustained and they can operate in a self-sustaining kind of way. And that social and political restraints or regulatory restraints on the operation of markets is a natural sort of distortion of the way that society ought to organize itself. So that that's the position I attribute to market fundamentalists in the way that I've seen it work in the policy domains that I follow most closely--which is, you know, trade and industrial policy, and financial globalization. And it is an alternative view which sees markets to be always the product of social and political arrangements, and therefore, you know, depend inherently on social organization; and in that view markets can be constructed in a number of very different ways, and serving the, you know, very different types of ends; and some are more equitable and more in line with social values than other forms of organizing those markets. And in that view, the question about regulating and stabilizing and legitimizing markets is an ongoing process that requires thinking and rethinking on the part of society, where, you know, there is a rejection of the primacy of markets as self-creating, self-sustaining forms of social organization. Again, I apologize for being sort of abstract; but you're leading me down that path. Russ Roberts: That's okay. Dani Rodrik: It may be more, it might be more productive talking about specific domains. Russ Roberts: Yeah; we'll get to that. Ironically, you know, I agree with half of that. At least half. Which is, I agree that markets are not self-creating. Some kinds of markets are, presumably. The Smithian propensity to truck, barter, and exchange is there. But what I think we would call a market in a modern economy--and I want to be clear I do not mean a farmer's market or a stock exchange, although they are examples that are related to what we are talking about. But, certainly, markets that function well require culture. They require property rights of certain kinds. They require adjudication for disagreements. Some of those could be provided privately but perhaps are best provided by the state. I think the challenge is--I think the more important difference isn't--it's the self-regulating part and whether they should be steered: whether markets perennially or often or even occasionally produce outcomes that could be improved by various policy interventions. And those are--you know, I think we'll get into some of those. That's my level of abstraction. Which I think also is not so informative until we get a little more detail. |
| 7:06 | Russ Roberts: But, before we get there, I want to read a quote from your essay. You write The tools of economics are critical to developing a policy framework for what we call "inclusive prosperity." While prosperity is the traditional concern of economists, the modifier "inclusive" demands both that we consider the whole distribution of outcomes, not simply the average (the "middle class"), and that we consider human prosperity broadly, including non-pecuniary sources of well-being, from health to climate change to political rights. Expand on that quote, what you mean by that. Dani Rodrik: There are, I guess, two key ideas there, at least. One is that we do value the tools of economic analysis. We think that the, um, the habits of thinking like an economist, of making sure that we work within well-articulated, internally consistent frameworks or, you know, what we might call economic models, and that we pay attention at questions of empirical inference and developing useful evidence--that those are critical as tools. So that's Idea Number One. The second idea is that we can no longer simply focus on what we called in that passage 'the average,' or growth rates, or GDP per capita [Gross Domestic Product per capita], nor focus on the, on economic outcomes. So, we need to look at what's happening across the entire distribution of income. And we also need to look at other indicators, like, you know, social or health indicators as well as indicators of political inclusion--political access--as well. So, I would say that those are the two ideas in that passage. Russ Roberts: And I agree with that, actually, completely, especially that latter point about averages. And I would say it a little differently, and I'm curious if you would agree with this: That our focus as economists on measurability and the inevitable narrowing of focus to something like an average, which is--or a growth rate--what I increasingly think of as scalar, the math concept--it's just a number. Right? In fact, we are interested in a matrix. We are interested in a whole range of outcomes. And some of the elements of that matrix we may not be able to measure. Dignity. A sense of flourishing. Pride. Responsibility. A sense of agency and independence and autonomy. Those are things that economists ignore, because we can't quantify them even when we go to a richer multivariate approach. Or at least we struggle to. Do you think that that has hampered our appeal--certainly to the Left, which is part of your essay's focus, was to [?] on the Left to be more open to economics as a potential tool for improving the world? And, I think both the Left and the Right have focused too highly on what's measurable, and we've missed out on a lot of important human factors. Dani Rodrik: No, I agree completely with that. I think that--and I would say that it's not just, you know, a loss of relevance and legitimacy vis-à-vis the Left; but I think increasingly we are seeing the same on the Right, too: that there is a-- Russ Roberts: Absolutely. Dani Rodrik: and there isn't--that many of those values that you've listed, which I agree are completely important, are things that are very important to the Right. And things like, you know, the importance of community and, you know, self-worth and dignity, and uh, so alike. So, it is a--it is true--I don't think it is, so it is true that this has happened in economics. And it's part of the problem that we try to correct. It is, um, it is not necessarily, again, I would say, it is not necessarily inherent to the practice of economics, insofar as, you know, these are all things that are, in principle, can be studied and analyzed within pools[?] of economics. They are less directly measurable. You are right. Although, there is a movement, as you know, within economics, to, uh, um, to use to a much greater degree, um, self-assessments and that surveys [?] being-- Russ Roberts: Sure-- Dani Rodrik: and where you can track these kinds of things and do some empirical measurement. But it is harder. But, I mean, the cornerstone idea in microeconomics of utility--I mean, it's not measurable. And so, you know, and yet, it's yet at the cornerstone of all microeconomics. It is the case that, you know, the emphasis on increasingly on the empirical methods has, you know, has forced us to look at things that are more directly quantifiable. But, again, it's something that I think can be rectified. But, I agree in general with what you said, that this has been part of our problem. |
| 13:25 | Russ Roberts: I want to try to focus that point a little more sharply and see what you think. The focus on inequality, which is based on a measurement of income, which is typically imperfect--certainly comparisons of income over time are challenging because of changes in prices and quality of goods, but we do the best we can. And we are actually trying to measure something that we understand, I think, that we're trying to gather. But, as a result of that focus, I think those non-quantifiable, immeasurable, variables, at least in an objective way--certainly yes, we're trying to subjectively measure things like happiness, and I find that kind of sterile, to be honest; but we don't need to talk about that. But, to talk a little bit more richly: If we think about industrial policy or trade policy, with respect to the poorest Americans, say, the bottom 20%. And my argument is that if we only focus on the impact on their incomes, we are missing something important. And I think what economists presume is that incomes are correlated with wellbeing--of course. That's part of utility theory, for sure. It's in our blood. But I think it misses--I think the flourishing, dignity aspect of life, which I think we'd all agree is important, is not perfectly correlated with income. Certainly not, you know, various things that would substitute government payments for earned income are not going to have the same impact on wellbeing, correctly defined. Do you--is that a worry? Do you think that's a legitimate concern? Dani Rodrik: Absolutely. I agree completely with that. I mean, I think that's why--I mean, it's precisely because I think this is extremely, it's very correct. I mean, my most recent work on industrial policy in the context of advanced countries or in the United States has focused on what we've called good jobs. I mean, the notion of a good job is a very--it's an all concept. But I used to think that industrial policy should really focus on simply on increasing productivity--on, you know, increasing economic opportunity in the sense of increasing, enhancing the overall productivity of the economy. And I've increasingly become convinced that that, especially in the advanced countries, it misses out on the need to provide sort of well-meaning satisfactory work opportunities for the bulk of the labor force. And that's because, just as you said: It's much more than income. And that's one of the reasons that I think people who advocate UBI [Universal Basic Income], they can miss the boat on this. Russ Roberts: Universal Basic Income. Dani Rodrik: Right. That it's really, you know, it's only part of it. It's really about income. You can't obviously completely forget about income. But, you know, for people to live, you know, meaningful lives, to feel that they are members of the community in which they are contributing and communities giving them something back in return--I think having satisfactory, you know, jobs, is extremely important. Now, it may be that over time the nature and the meaning of what is a satisfactory job is going to change. And it doesn't have to be, necessarily, you know, 9-5, 5 days a week, kind of a traditional job that we've had. But, I think this is one of the most important sources of wellbeing for people. And that goes significantly beyond income. |
| 17:31 | Russ Roberts: So, so far, Dani, we're having a love-fest here of agreement. Which is fun. I like that. Um, and I think that's great. I'm going to push down a little narrower still and find a disagreement. I think we're close. So, the question is how, what do you do about this? This realization? Or, how do you implement a richer vision of policy? Certainly in your essay you have a number of examples. Interested readers can go look at them. And I'll also mention that there's a whole bunch of responses to your essay, that people from the Left and the Right, interventionist and more free market respondents--very interesting online colloquium. But, let's take the out-of-work, manufacturing worker in West Virginia or Ohio, that we're all increasingly talking about, because those folks are not leaving. Many of them are not leaving. Some are, of course. Some are leaving to where they can do better economically. But many of them stay behind, either for reasons for reasons where we talked about with Chris Arnade in his book Dignity either because it's home--they just feel comfortable there, they just don't want to leave, possibly the opportunity is relieving or difficult to access because of higher rents in cities and metropolitan areas where the jobs are. Possibly because the people have limited skills. Some of these are personal choices. Many of them are not. They are just the way the world is--in the current framework, in the current framework that you don't like. What should we do for that worker? What should we do either in terms of industrial policy, trade policy, or social welfare policy, to a safety net of some kind to help that person who is struggling for reasons that aren't their fault? Dani Rodrik: Yeah, I mean it's a variety of policies. One is that I think there is a lot to be said for improving both the safety nets that exist and for improving the set of policies that increase mobility, giving people the opportunity to move to other places, even though as you say there will always be attractions to remaining home. I'm not an expert on either those broader safety nets and welfare policies or the policies that would increase mobility. Then I think the third bucket is going to be that, just as you say, that there are always going to be places where there are not enough good jobs, and the challenge there is going to be: Is there anything that we can do for such places? I think we have, you know, some experience with respect to what can work. Somehow, some communities are able to develop the kind of, on the one hand, the sort of public-spirited private action on the part of either community leaders or civil society organizations to organize certain efforts, and then to complement it with sort of public action on the part of state or local agencies, you know, that are willing to come in and not necessarily subsidize or spend public resources, but simply act as a coordinating agency for these kinds of efforts, where you are trying to bring a number of features together. You are trying to generate a vision for that community can really find itself; maybe it was a manufacturing community in the past but manufacturing isn't coming back. Maybe the future is going to be for that community to redefine itself as a tourism destination or for it to rebrand itself in a different way. You need to invest in skills, and that's going to require some action to organize the training. And you need to bring the technological and marketing and business capacity of, you know, the successful firms in or near that region to sort of engage and somehow to [?] kind of fashion to, you know, the nascent entrepreneurs or the nascent firms that could employ that. So, what we've discussed in this paper with Chuck Sabel called "Building a Good Jobs Economy" is a kind of a collaborative, dynamic set of activities that doesn't start from the premise that we know what the problem is and therefore you just can solve the problem through some application of Pigovian subsidy, but that you are involved in a kind of a fact-finding or discovery, information discovery kind of a mission of figuring out what can work, what doesn't work, and monitoring and revising these collaborative strategies over time. You know, when things work, it only really I think works out as a result of this kind of a process. So, it's a very different type of, you know, industrial policy. Again, I don't even necessarily like to call it 'industrial policy' because it may not be in the service of manufacturing industry. It could be simply to provide, you know, service-type jobs. But it is a kind of collaborative activity where state agencies are playing an important role. |
| 23:43 | Russ Roberts: And what evidence do we have that state agencies are good at that? I mean, when I listen to your very nice-sounding description of collaboration--that's usually--that's--we can talk about a family. A family, a very small group, that struggles over some issue in the house. We can get together, we can talk it out, we could work it out. Come up with some ideas. We might do some trial-and-error and then we might choose as a group--and even though some members of the group might have more power in voting than others, like the parents--you know, we do the best we could. Or, a group of siblings dealing with a challenge with an older parent. But, when you have a community, a city, something of tens of thousands of people, or even thousands, how does that work? Doesn't it require a political entrepreneur? A visionary at some level, to try some of these interventions or innovations that would help people cope with economic change? Dani Rodrik: Yes. I mean, I think, you know, it typically does. And sometimes those are people who come from the private sector. Sometimes it is people who are taking leadership role in a local economic development agency or a local workforce development program that's funded through public money. So, you do need these individuals to get these things started. At some level you need--and here we're getting into things that are really hard for an economist to talk about--which is, that my interpretation of where these things work is that, you know, you need the beginnings of some kind of social capital. You need some kind of [?] leadership to get it started. But I think to some extent, and that's where I'd like to be an optimist, that some of the social capital can also be built as you go. So that, rather than take it for granted and say that, you know, some communities will never have this because the social capital doesn't exist, I do rather like to think that part of it is, yes, you will need these leaders to get things started but a lot of the trust and cooperation that you need can be built on the go. And, does this happen, and is there any evidence that the state can play a role in this? Yes; I think the answer is Yes. The United States has very extensive history, just to talk about at the Federal level, of conducting industrial policy in areas where it has been absolutely critical for national security. So, you know, the agencies like DARPA [Defense Advanced Research Projects Agency]. You have sort of very related activities around the Department of Energy, which for all practical purposes is industrial policy. And then, interestingly, the operate along very much, you know, similar kind of principles--the state is very much the leader. The state does spend the money and the resources. Although, the key thing is not the money or the subsidy or the resources. It's really the ability to get these activities going and to establish a framework for ongoing collaboration between businesses and universities and innovators and small- and medium-sized firms. And, as I said, this is also more recently has worked with the manufacturing institutes that were set up under the Obama Administration. And so, in terms of whether has this worked in the past, are there examples? The answer is Yes. Where I think we have not used this accumulated experience and this sort of inventory of models of collaborative industrial policy, is we have not deployed these kinds of arrangements in the area of good jobs--in the area of focusing on jobs per se. They've been focused on issues on sort of green technologies or in defense-related technologies or in advanced manufacturing with respect to innovation. And I think, given where we are today in the U.S. economy, that we need to use the same toolkit for, in the domain for good jobs, and in geographical areas that they are feeling left behind. Russ Roberts: A lot of that, the way you described it at least, is already in place. Obviously, localities that struggle economically desperately try to bring jobs. They often do that in a really bad way--they subsidize--they give away money to employers who come, at a high cost often per job. Not productive. They reward their friends-- Dani Rodrik: I agree. I agree; and I think that's exactly what we should stay away from. I think that's [?]--one element which is already in place which we could build on at the local level is a range of workforce development programs, basically skill [?] and increasing the skills of young school-leavers or young students. Russ Roberts: Those don't have a very good track record. Dani Rodrik: No--they do, actually. There's a number of randomized evaluations that have been taken, that have been undertaken, of these kinds of programs. And they do work. So, there is a fair amount of evidence on that. Russ Roberts: You'll send me some links and we'll put those up for listeners. Go ahead. Dani Rodrik: Yeah. Absolutely. There is a good recent piece that did that. The area which doesn't work--and I completely agree and I think that's where we need to get away from--is this, the typical way in which a local community will try to do this is, as you say, by subsidizing inward investments. So, putting up these, sort of, we've seen this of course, you know, the major disappointments recently in Wisconsin with Foxconn, more recently with Amazon. And these don't work, because they are exactly the wrong approach compared to what I was describing before, which is that these tax incentive programs are essentially, they are all based on the idea that you can ex ante contractually identify and resolve enough of the uncertainty, that you can all put it into a full contract ex ante, where everybody knows what they are getting up front. And what both Foxconn and the Amazon cases show is that in fact there is so much uncertainty about markets and consumer preferences and technologies that, you know, before the ink is dry that there are things that contribute to the unraveling of these contracts. And then, you have no--then they become political scandals and there is really no way of actually renegotiating these, because they weren't supposed to be renegotiated in the first place. Whereas, the right approach is what I was outlining before, which is to start from the premise that in fact a lot of this is going to evolve over time, because there's so much information elicitation that has to happen over time. Russ Roberts: I'm talking with Dani Rodrik of Harvard University; I want to thank Plantronics for providing his headset, the Blackwire 5220, as part of our efforts here to improve audio quality, which is challenging, given that my guest is far away. And, I'm trying to do an increasing number of interviews face to face; but for anybody who is at a distance, I'm trying to improve that quality, and I hope that is working for listeners out there. |
| 32:34 | Russ Roberts: So, all of that's nice, but it strikes me that, at the Federal level--like, when you described this collaborative process idea--you know, that's a more, what we might call a decentralized or bottom-up--still government because it might be done at the local level; but the local level, you could argue has more information. Doing it at the national level, Federal level, strikes me as a pretty blunt instrument. Green--you said we've tried some, DARPA, national defense, energy, environmental green programming, programs of subsidization--those are not well-targeted. They might be a good idea in certain settings: some of those programs might have been a good idea. Some of them, presumably not, by the nature of the world. But, it strikes me that that's a really challenging way to help an out-of-work manufacturing worker in, um, Ohio or West Virginia, wherever. Wisconsin. I want to talk about a more difficult issue, at least for me--maybe not for you--which is: What level of protectionism, what level of local-focused subsidy from the Federal government would you be supportive of to keep those jobs, say, in place to begin with? And would you favor anything to bring them back? Dani Rodrik: I don't think the jobs are really coming back. I mean, the manufacturing jobs that were lost to China or to Mexico are, for the most part I don't think they are coming back, because, just the technology, the nature of the technology has changed so much that even if there is significant re-shoring that takes place, it's going to show up in output but not in employment. So, that's a fact that we need to--so, there's no going back. Now, if I were to re-live that period and you were asking me the question from the vantage point of, let's say, the late 1990s or the 2000s, and what role might trade protectionism play--I assume that's really the question you want me to answer. Russ Roberts: Either one. I mean, I think there's a--a lot of people think--I don't, but a lot of people think that putting tariffs on Chinese goods as Trump has been doing is going to bring jobs back to the United States, raise incomes in certain sectors. Which I think is potentially true. I think the cost is too high, but reasonable people could argue otherwise. Not on the grounds that he uses, in my view: I think he's got the structure wrong. But the argument that protectionism or keeping out Chinese jobs or making them more expensive could increase U.S., say, manufacturing, I think is true. I just don't think it's a good idea. So, I wouldn't rule that out, from your perspective, at least as I understood it in the article. Dani Rodrik: As I said, you know, when you talk about trying to create good jobs and improving incomes overall, and life chances, I would my first, second, and third priority on the kind of domestic programs that we've been talking about, because that's really where the action is. Now, where would I stand on trade policy? I'm not a fundamentalist on the question of free trade. And I think that there might be circumstances when, you know, your domestic programs are falling short; and that you need to establish some space for protecting some of employment in particular regions that might be adversely affected. And, I wouldn't be doctrinaire in saying that kind of protection sometimes can be warranted in order to protect jobs that might be economically inefficient but then has the other benefits of people creating people's--people employed--and creating sort of the vitality of these communities sustained. And, again, it's not my first, second, and third option; but I can see how it could play a role. And let me give you an example of when this did happen and I think was generally successful. Prior to the creation of the World Trade Organization [WTO], world trade rules were much more flexible, as you know, so that countries could resort to protectionism much more easily. And there were two significant instances when the United States availed itself of this flexibility to increase protectionism significantly. And, in doing so, I think managed to buy some time, without giving the world trade regime significant--without significantly hampering world trade or undermining the world trade regime. But I think with hindsight those were instances where the trading of some gains from trade against upholding social contract and social stability paid off. And those two instances I have in mind is first, in the 1970s, the Multifiber Arrangement [MFA], which was a way of rich countries like the United States imposing higher import barriers--tariffs and in particular quantitative restrictions, quotas--on low-cost textiles from what were then called newly-industrializing countries. And then, in the 1980s, the use of Voluntary Export Restraints, mainly against Japan, in steel, in autos, and other areas. These were examples of economically inefficient policies which economists roundly condemned, but which I think with hindsight look a lot better than they did at the time. Neither did significant damage to the world trade regime, as I said. In fact, they were, to use the term of a political science colleague of mine, they were 'system maintenance': they weren't norm-breaking but actually system maintenance departures from the rules. So, in other words, they actually reinforced the system acting as sort of a safety valve or escape valve to let some of the pressure escape. What we lost, I think, after the 2000s, was that kind of flexibility. So, I don't think the United States would have been significantly worse off in the 2000s if it had occasionally protected certain communities or certain sectors. And, if as a result of this, we would not have gotten this much worse and much more senseless nativist protectionist trade backlash that is being led now today by President Trump. So I think these are the questions that we need to ask ourselves. I don't know that we will ever know the counterfactual, whether in fact I am right that if the United States in the 2000s had the kind of flexibility that it had in the 1970s and 1980s, and to be in what you would call more protectionist, whether in fact would have been better off and had a sounder trade regime today. And that we would have less room for a nativist waving a protectionist flag coming to office or not. So, we don't know. But I'm saying that after the 1980s, what we got was, you know, hyper-globalization. What Reagan did was to protect, to increase protection; but at the end we didn't undermine the open trade regime. Russ Roberts: And, with Reagan, you are referring to the Voluntary Export Restraints-- Dani Rodrik: Exactly-- Russ Roberts: which is a euphemism for the threat of quotas. But, we asked Japan, the United States asked Japan, Reagan asked Japan to restrict "voluntarily." Then of course the result of that was to move a lot of--every Japanese automaker moved a factory to the United States. Nissan is in Sparta, Tennessee; Honda is in Ohio; and I think Toyota is in Kentucky. So, they found non-union places to put factories that--I don't know, maybe those were good for the skillset of workers there who otherwise would have struggled. But-- Dani Rodrik: But the genius of the Voluntary Export Restraints was--I mean, I'm not--you know, as long as we are creating good jobs, I don't care whether they are union jobs or not, although I favor unions because I do think workers should be organized and have means for collectively bargaining against, with management. But the genius of the Voluntary Export Restraints was precisely how they distributed this cost of the adjustment, because they said, 'You know, look: We need some space for our domestic labor markets, our domestic industries; but we understand that your enterprises are going to suffer a cost. So, why don't you keep some of the rents, and some of the benefits?' and therefore allowed Japan to administer these export restraints, as you said. And then Japan kept those rents. It was the same, by the way, in the MFA--that, the quotas under the Multifiber Arrangement were administered by the exporting countries. So, you know, this was an understanding, that both sides got something out of it, albeit at the usual cost of higher consumer prices. Yeah--I think these are--again, with hindsight, these bargains don't look nearly as bad as they did at the time. Because they maintained the system. |
| 43:31 | Russ Roberts: Well, but one of the reasons that they "looked bad" at the time, were, people like me and other market fundamentalists like myself, we said, 'These are costly.' We might have been wrong, of course, about that. It's--I don't think anyone thought they would be, you know, destructive to the future economy of the United States, but we did argue at the time that they would raise prices--as you say. They would encourage cronyism, which I think has been the case. I think we have a problem there with--those restrictions that you're saying weren't as costly as we thought--of course, they weren't put in place because somebody thought it was good for policy overall. They thought it was good for particular geographic areas that had political representation that was powerful enough to get them for those groups but not for others. And that's led to a more complicated set of encouragements, incentives, that I'm deeply unhappy and concerned about in all kinds of industries. The risk of these kinds of industrial policy interventions, whether it's protectionism or subsidies, is always that very bad decisions get made for what seem to be good reasons, and are difficult to stop in a republic like ours with few constitutional constraints. Increasingly few. Dani Rodrik: Well, even though these are cases where precisely they were used for temporarily and then they were removed. Russ Roberts: That's a good point. Dani Rodrik: Now--and where we failed is that, you know, we didn't take the underlying logic--again, I want to reiterate that I'm not suggesting these as examples of first-best responses. These would not be anywhere near the top of my list of how to deal with social or labor market problems. But, as poorly designed as they were, I think they served an essential function that we need to think about how to have a mechanism for. So, I think there are ways of creating trade rules that are sensitive to this need, that have fewer costs than straightforward trade protectionism would do, would create. But I think, going back to where we started from, I think one thing that neoliberalism or market fundamentalism did was to blind to the need for those kinds of escape valves or safety valves. |
| 46:25 | Russ Roberts: So, let's go look at that a little more deeply. I think--it's a horrible policy in effect; in theory it was pretty good--but, one of the things we had over this time period was something called Trade Adjustment Assistance that was kind of, I would say, an economist's dream policy. It's idea is: 'Well, the overall pie is going to get bigger from allowing trade; but particular people are going to be hurt. So we'll try to redistribute the net gains so that they are shared more widely.' For reasons I don't fully understand because I'm not an expert on that program, there's universal agreement that it has not helped very many people--for reasons I don't fully understand. But, that sort of textbook idea did not function as it might have, for whatever reason. So, I want to talk about a different approach and a different framework for thinking about this. It seems to me that a lot of what we're talking about, and this comes up a lot on EconTalk, is that, you know, creative destruction has 'creative' in it and it has 'destruction.' And, the destruction part is difficult. It has a human cost. It can not just mean lower incomes for people who are temporarily out of work; it can mean a loss of dignity, an increase in despair, an increase in drug addiction, political responses that are very costly, etc., etc. I would argue, and I'm curious to get your reaction, that the fundamental problem we have in the United States is not that we have too much market fundamentalism, or too little--this debate that we are implicitly having around your article. I would argue that the fundamental problems that make creative destruction less effective than it was in the past--so, part of it is, is that the speed has accelerated. The way I interpret your point about the 2000s to the present is that, it's one thing to allow the Japanese to bring in a lot of cars or poor countries to sell clothes here, but China as a rather, an enormous industrial juggernaut, had such a high impact on certain sectors that we needed a safety valve. We needed to slow that down. Instead we accelerated it, let it happen very quickly. The cost was very large. The adjustments didn't take place. So, one argument is that, 'Let's make it easier for the adjustments to take place.' And I would suggest that the single biggest challenge there is we have an education system--there's some cultural challenges that maybe we'll get to--but in terms of policy, we have an educational system that is a failure, for many, many people, in the K-12 [Kindergarten through 12th grade] time. And as a result, the ability of people to move and find new opportunities, given that their currents skills, very specialized skills, are, say, out of demand--say, you are a machinist or someone working in manufacturing. Without those other skills, you are going to have a hard time. And we're going to--and your view, your world, it seems to me, pushes toward a less dynamic economy. And it may be. I might concede that in a fast-changing world we might want to slow things down. But we don't have a knob that says, 'Let's go to 7/8ths speed.' We have very blunt instruments. And I'd rather see us try to fix things at a fundamental level that make it hard for people to rearrange, change the--I would list, the three obvious things are: better education system, better housing and zoning policies to make it more affordable to live in America's cities, and less licensing. Those are all--those are the opposite of market fundamentalism. They are all non-Neoliberal. They are all interventionist, progressive problems to me caused by too much government, not enough trust in markets. What's your reaction? Dani Rodrik: Well, I mean, I wouldn't argue against education. I think, you know, it's important. But I don't think it's going to be the full solution. I think the United States can do much better in education. Again, this is an area, that's not an area of my expertise, and to a relative outsider--you know, I've lived in the United States most of my life, but, I mean, I look at the United States in many ways with an outsider's set of lens. The failure of education in the United States is something that I still have a hard time understanding. Yes, by all means. But I think we'd be making a mistake to think that education is the solution to these problems, in the sense that education--you know, is always the answer; and it's always the answer for the future. It's rarely going to be the answer to your current labor market problems. You know, my colleague, Ricardo Hausmann, I like to quote him on this, always says that 'You need to create jobs for the labor force you have, not the labor force you wish you had.' And I think, let's, by all means try to soften this tradeoff in the future, through better education; but you need to grapple with the labor force you have currently. And education is of limited help for that. So, the other thing I would say is we need to think about not just education in the sense of learning in school. We need to think about a broader sort of human-capital/productivity nexus. And in that way, what I'm suggesting and what I was talking about earlier in terms of thinking about industrial policy for good jobs--it's not really about slowing change at all. It's really about increasing the pace of change, increasing the pace of technological innovation from the frontier firms and the high productivity firms to the rest. And that's also increasing human capital, it's increasing the on-the-job skills and performance of the labor force that you have. So, when you look at it in that broader perspective--part of this agenda of creating, you know, sort of increasing good jobs through this collaborative industrial policy practices, is precisely to increase productivity and its dissemination in a broader way. And that's going to show up in more productive workers, more productive jobs. So, in that sense it's entirely within that agenda. And let me say one thing about compensation and safety nets. Again, it's true that the United States does a very bad job there as well. I think the reason that Trade Adjustment Assistance doesn't work is not a big mystery. I think there is good economic and political reasons why they fail. I think compensation works well only when it is baked into the original social contract, if you will. So, I think where Trade Adjustment Assistance has worked well is in Europe, where in fact there is no separate Trade Adjustment Assistance. It's all baked into the social welfare policies, the extensive social welfare state there. So, there it doesn't matter where you are losing your job, whether it is for trade or some other reason. You have recourse traditionally to a very generous safety net. That's one reason why in Europe you have not had this political backlash against trade from low-cost countries. So, trade with China or trade with North Africa is not a politically salient issue there. I think, in part, I would argue, because the safety nets and compensation there is so much better than in the United States. And there, again, it's not--I don't think it's something that necessarily slows down change. I think it's--it often makes people more willing to take on risk, and in that way actually accelerates change. |
| 54:58 | Russ Roberts: Do you think Europe has as dynamic and innovative an economy as the United States? I don't think they do. I think part of the reason is it's very expensive to hire a worker, and hard to fire them. And, there's a high unemployment rate. And, we're headed in that direction--even faster, if you were in charge. Are you worried about that? And are you worried about that or do you think I'm misstating the reality of the European system? Dani Rodrik: Well, I think you are misstating what's a very, very, very differentiated picture. I think countries like Finland and Sweden have the best innovation systems in the world, that works for the population at large, compared to the United States. I'm not--you know, I don't want to be defending everything that happens in Europe against United States. But in certain ways Europe has done a much better jobs of dealing with trade-displaced workers than the United States. Which was my limited point. And, we can discuss other aspects of Europe. But I think we need to make, we need to be clear that Europe is a very, very differentiated place, where some places are indeed, you know, doing much, much better in terms of the overall sort of non--you know, hard-to-quantify measures of human dignity and self-worth that we were talking about before. Russ Roberts: Yeah. No, it's a big challenge, how to think about that carefully, obviously. Because, people on my side point out that Scandinavia has a large safety net, but government regulation perhaps is not as--well, it's certainly not--they're not Socialist in the industrial policy sense. And, they are small. And they are homogeneous. Is that relevant? We don't--I don't know. But that's a point that we would also want to keep in mind. Dani Rodrik: Yeah. I mean--that's why, these comparisons really don't get us anywhere, because I think there are so many things when you look at these societies that are part of an entirely different system that has complementary elements. So, the United States is never going to be a Sweden or a Denmark, and I think that comparison is really not very helpful, other than to score some rhetorical points. [?] Russ Roberts: Which both sides are capable of. Dani Rodrik: No, no, I meant exactly--I meant both sides. So, I think the question is always to think about thinking at the margin of where you are, and we are talking mostly about the United States and what you think is feasible at the margin, with the experience of other countries like Scandinavia or Asia, you know, sort of presenting a sort of opportunity, a mind-opening opportunity. They are existence proofs that there are different models that are available; that there is not a single path. And that it doesn't mean that you should just simply copy what's there. It should just mean that you should perhaps be a little bit bolder in thinking about sort of how much progress you can make in redesigning institutional arrangements. And there I would submit, I think, the big difference between a market fundamentalist and people like me, is really--in the end it boils down to a kind of, I think, a temperamental difference: That market fundamentalists believe that the chances that you could make government and public action a force for good is very limited; and the people like me believing that in fact the government can be a force for the good. Russ Roberts: Yeah; I'm not as optimistic about that as you are. I think that's one clear difference. I like your point about different institutional arrangements. I think the challenge is how to think about them: How do we judge them? How do we judge their viability in a different context? How do we judge their longer-term consequences? So, for example, you and I are both old enough to remember the 1980s. And, you were talking about the U.S.-Japan trade relationship. At that time, a lot of people who were not market fundamentalists argued that we should be emulating the Japanese institutional arrangement of government-business cooperation. The market fundamentalists said that's a bad idea. At the time, it looked like the interventionists--the cooperative, collaborative folks--had an argument on their side that Japan was thriving, doing very well with this much different relationship between business and government. You could debate whether it would work well in the United States, as well as it worked in Japan. But I think the more important point--or, not more important, but the one that's on my side, so I subjectively judge as more important; I apologize for that--but the other point was that that relationship didn't turn out to be as productive as it looked at the time from the outside. I think many would have now judged that as a very flawed system. So, I think some of the things that look they're working well in Europe, maybe won't be so sustainable. We saw that in Scandinavia. I think over a period of time they pulled back from their interventionist path and became more capitalist. At the time. That might not have been--their earlier policy might not have been sustainable. They're more nimble than we are. They try lots of different stuff, which I envy that at the governmental level. I wish we had the ability to put more stuff in place and get rid of it. We struggle with that, I think in the United States. But I do think that you have to be careful when you look at those, the variety of relationships--of institutional arrangements--because some of them turn out not to be sustainable. Dani Rodrik: I think the people who were arguing that the United States should emulate Japan were still here and there. As silly as the people who argue that the United States should emulate Chinese-style state capitalism today. But I also think that their silliness is matched by those who would argue that there's absolutely nothing you can learn by those other experiences. And that the United States is so [?] generous, that there's absolutely nothing to learn from those instances. |
| 1:02:06 | Russ Roberts: Fair enough. Let's close by by talking about the future a little bit. We've talked about China policy in the past. We've had a number guests on this program recently talking about concerns about Chinese technology and how it might be used in authoritarian ways. I'm thinking about Amy Webb's episode on her book The Big Nine. What should be our stance vis-a-vis China? How nuanced should we--how much should we deviate from trade, free trade, and issues related to national security? Do you have any thoughts on that? Dani Rodrik: Yes. In fact, I'm actually just working with a group of economists and lawyers, both from United States and China, to try to craft a middle path between two equally undesirable positions that dominate the conversation on U.S.-China today in Washington at least. One is the view that, essentially, China, is violating the rules of the game and not living by the commitments it made in the WTO. And therefore that the only feasible path forward is for China to go back and live by the rules of the international trade regime. And then, we are back on the deep integration path and everything else will be fine. The other view is one that is sort of dominated by people in the national security world, but which also finds resonance in people who want to argue for a trade war with China. And that's the view that China is a genuine threat for the United States and the only possible path forward is to seriously and critically disengage from China, in the hope that such a disengagement will not just protect the United States, but also push China down. So, I think we need a midway path between that sort of deep integration as viewed on the one hand, and the disengagement view on the other. I think that path would go something like the following. It would be--it's what I've called in different places a peaceful economic co-existence between the two countries. And, the analog is precisely the Cold War period, where once the Soviet Union and the United States understood that they could not dislodge each other, that the United States would never have a communist revolution and that the Soviet government was, therefore--would not be removed--then there was the acceptance that each regime had rights to its own system of government and that the systems would be different. And it produced--you know, it may not have been a pretty picture, but at least it prevented nuclear war, which is the most important thing. I think the analog for our day is for us to understand that China and the United States have different economic systems; that China will maintain this economic system which has paid off handsomely for its its citizens; and that this is not going to convert to a U.S.-type model. And that, China should be relatively free to employ its own trade and industrial policies to diversify and increase and upgrade its economy. And by the same token, that the United States has its own social contract, has its labor markets to worry about and has the integrity of its technological innovation system that it has to worry about; that it needs a similar policy space within which it operates. So, we limit the the international bargaining to those areas, where there are genuine begger-thy-neighbor concerns, or what are their genuine global commons concerns. But other than that, essentially it's a kind of accepting the co-existence of these two economic systems. I think that's the only way forward in terms of diminishing at least economic tension and ending the trade war between the two countries. Now, all of this is really just all about the economic domain. There is a perhaps bigger question as to whether the two countries can co-exist strategically and politically and militarily. But as I said, it's a separate question altogether. Russ Roberts: My guest today has been Dani Rodrik. Dani, thanks for being part of EconTalk. Dani Rodrik: Nice to talk to you Russ. Thanks for having me. |
READER COMMENTS
Cal Abel
Sep 23 2019 at 10:44am
I’m not sure that the definition of what is a market is very clear and as a result, puts the cart before the horse. Russ mentioned Adam Smith’s people’s “propensity to barter…”. This is fundamental. Markets emerge due to an uneven allocation of resources and even more importantly human experience, knowledge/information.
Markets allow the aggregation of information through the price mechanism. People who desire to acquire access to this information and the associated products traded on the market, do so because they want to not because they are forced (although forced participation isn’t a possibility e.g. the Affordable Care Act.) This participation in turn allows the aggregation of these individuals’ knowledge in the market.
The market mechanism is not perfect and can be manipulated. Historically, we can see this with the emergence of common law as a result of trade. There were disputes that arose and needed adjudication and as a result a pattern of events started to emerge. From this pattern judges were able to discern the law and start to apply that as case history. This occurred entirely independently of the existing legal structure which served the nobility. Common law was used derogatorily as being the law for commoners. These Renaissance markets emerged entirely outside of the existing legal structure at the time and were, as such, grey.
Grey markets provide an example of how markets emerge outside of state regulation. To say as Dani said, that markets can’t exist without the intervention of the state is entire specious and is not proven in fact.
The other part that just strict me wrong was the claim was the implication that markets need to be regulated by social values. Markets are constructed from social values and as such are a manifestations of the values of the participants. To make the claim that social intervention is needed is unclear. Whose values are being applied? What additional information is being applied to the market other than those values which can be artificially imposed. This truly is the fatal concert of the presence of knowledge.
Jonah 1:3
Sep 24 2019 at 7:32am
Some insightful comments; thanks. I will try to follow up with some of my own along the same vein this evening if I can make the time. For now, with the understanding that you care about accuracy, I’d offer two references, both of which support your conclusions, I think. First, that the term of art “common law” derived not from its application to commoners, but to the aspiration that it be applied throughout England (I.e., that it be something the English held in common, as opposed to local customs that applied to dispute resolution in smaller areas, such as London or the Five Ports). You may be interested in a pair of articles by Gerald Postema—here’s a link to Part I of II on SSRN—https://papers.ssrn.com/sol3/papers.cfm?abstract_id=462941
The other reference is for rules of adjudication of property and contract, and their rationales, in Richard Epstein’s book entitled Simple Rules for a Complex World. Thinkers like Professor Rodrik fail to articulate such rules altogether, or if they do, they don’t explain why theirs are better than those articulated by the Romans and the English, from whom Epstein drew his ideas. Alternatively, thinkers like Professor Rodrik don’t articulate a principled basis for limiting the circumstances under which government uses force to prevent or reverse consensual transactions between competent adults.
Ryan
Sep 23 2019 at 12:54pm
Russ,
You’re normally great, but I wanted to write and say the way you structured this conversation was especially effective and artful.
Normally, whenever I hear the phrase ‘neoliberalism’ or, especially, ‘market fundamentalism,’ I turn my brain off because I assume the speaker is using an ad hominem (my spellchecker wanted to change this to ad Eminem). However, in this case, Dani was using this to draw a meaningful distinction.
I wish the discussion (the greater discussion, not this podcast) would use more constructive language. What Dani is talking about is, simply, the idea of embedded markets.
There is a lot of work being done by, e.g., George Mason folks, people like Deirdre McCloskey, on embedded markets who would nevertheless be turned off by the term ‘market fundamentalism.’ By using the ad hominem, Dani essentially excludes people who have a similar methodological orientation based on their policy orientation.
The result–I think–is a dichotomy of ‘Non-embedded markets/free-market politics’: ‘Embedded markets/left-wing politics.’ Russ, and a lot of other interesting thinkers, fall into the embedded markets/free-market politics camp that is excluded when the terms neoliberalism or market fundamentalism are thrown around.
Anyway, rant over. Great interview.
Kevin
Sep 23 2019 at 5:26pm
Towards the end of conversation the topic about relations with China are brought up. The question came to mind in response to Dani’s desire to separate economic issues from security issues: how could you decouple economic from security relations with China when Chinese security is underwritten by transfers of technology from the private sector to the public sector?
Sam B
Sep 23 2019 at 5:33pm
This is an opportunity lost to discuss the multiple failures of Neoliberal Economics – the starkest failures being the climate crisis and extreme income and wealth inequality. There is no such thing as a “free market.” All markets operate under certain rules and regulations. That is, political institutions structure the rules and regulations under which markets operate. One of the most important measure of a market is its distributional property. In other words, whom does the market favor? By this important measure, Neoliberal Economics has been a dreadful failure by creating extreme income and wealth inequality to the extent that the resultant concentration of political power of the super wealthy and huge corporations now threatens our democracy. None of these important topics were discussed in this podcast.
Jacob Guzik
Sep 24 2019 at 9:06am
The way you describe “Neoliberal Economics” I think is better described as Cronyism, which is in direct conflict with neoliberal ideas. In a neoliberal market, companies favor individuals not political power. The less government involvement in the market the less power is available for large companies to exploit. I also fail to see the inherent problem with inequality of wealth. Why does it matter that the super wealthy exist, if people with much much less income still have opportunities to prosper? I invite you to watch these videos: https://www.policyed.org/numbers-game
Sam B
Sep 24 2019 at 5:12pm
Jacob,
Since you suggested some material for me, I would suggest that you read Acemoglu and Robinson to understand how political institution shape economic institutions and how it’s important to have inclusive vs extractive political and economic institutions. Here’s a quote for you to ponder and try to answer your own question about “why does it matter that super rich exist?”
“Inclusive economic and political institutions do not emerge by themselves. They are often the outcome of significant conflict between elites resisting economic growth and political change and those wishing to limit the economic and political power of existing elites”
Jacob Guzik
Sep 26 2019 at 11:59am
Sam,
Why do you assume that the super rich are inherently extractive? If someone becomes rich by simply providing goods and services at lower costs and greater benefits than their competitors, while at the same time improving the lives of its own workers, what is there to complain about? It’s not a zero sum game.
Sam B
Sep 26 2019 at 4:19pm
Jacob,
Are there examples of super rich who create inclusive institutions? Of course the answer is yes! But one has to look at the overall data and recognize that over the past four decades we have created extreme wealth and income inequality, which is not only immoral but also detrimental to economic growth. I will leave everyone with another quote to ponder.
“You need some inequality to grow… but extreme inequality is not only useless but can be harmful to growth because it reduces mobility and can lead to political capture of our democratic institutions.” Thomas Piketty
Ajit
Sep 24 2019 at 1:42pm
I am a bit perplexed by your comments in a number of ways.
Firstly, if the political power was truly wrapped in the hands of the wealthy – why is it that transfer payments are largely going in the hands of the middle class while the percentage of tax revenue contributed by the so called rich has only gone up over time. In other words, despite having all the political power, they seem to be allowing more of their money to be taxed while more of the spending to go to so called others.
I would add a further bullet point. Most studies have found that by and large, the media is pretty left wing, championing the so called worker and the rapacious capitalist. So their attempts to mass brainwash the public into subservience hasn’t gone according to plan either.
Its also fascinating to see who the founders and ceos of today’s mega corporations are. No, they aren’t the descendants of Rockefeller, Carnegie, or Vanderbilt. Bezos, Gates, Jobs, Brinn and Page all came from middle class households.
Income and wealth inequality seem to have risen over time(depending on how one defines income and other job compensations), but its not from this tidal wave of cronyism coming from a natural consequence of markets. Its coming from a massive skill disparity. Here I emphasize skill. I have a good friend who is a culinary school dropout from Baltimore. He happened to land an IT job because he knew a bit about how computers worked. That transitioned to him learning about web stacks and data infrastructure. He now is a staff engineer at Twitter making 300k, all without ever having stepped into a traditional college classroom. Obviously, he wasn’t just a lucky duck who happened to fall into a 300k salary. He presumably found the subject interesting and was willing to invest his efforts.
I feel like a lot of so called progressives feel like the game is rigged and rather help the lower skilled, it would be better to rig the market so that the lucky rich don’t get rich in the first place.
I ask you…would you prefer we all together stop innovation in the name of wealth inequality? I certainly would rather have 2019 medicine than 1960s medicine, even if there were fewer Jeff Bezoses in the world.
Sam B
Sep 24 2019 at 5:09pm
Ajit,
First on taxes, the top marginal tax rate in the US is at a historic low. The super rich pay a lot less in taxes than they used to in 1950s or 1960s. Second, if you don’t think that Amazon, Facebook, Microsoft, and Google behave as monopolies, you need to do more research. Third, I would suggest that you read Acemoglu and Robinson (Why Nations Fail) to understand how political institutions shape economic institutions. One example of your friend does not prove or disprove any general theory. Lastly, one can produce all the most innovative medicines in the world but if the masses increasingly cannot afford it, there is a problem.
Ajit
Sep 24 2019 at 6:11pm
Dear Sam,
Happy to have a civilized debate. This graph suggests that the rate of taxes the rich pay has increased over time. https://slate.com/business/2017/08/the-history-of-tax-rates-for-the-rich.html
The author concedes this point, but remarks that he believes they have not gone up commensurate with the rate of their earnings. That’s true, but beside the point. The claim that the rich have been paying less in taxes than in the past is not supported by the data.
As to Google, Facebook, etc being monopolies. I have read the research and its complicated. First off, you are naming tech sector companies. The claim, as I understood it, is that there is widespread monopoly across all industries and that is a natural consequence of free markets. Here, there’s a nice paper by Carl Shapiro suggesting the facts do not support this view. There was a paper and podcast by Rau and Caplan who looked at the earnings of ceos vs other high paid talent, along with work by Ed Lazier, that suggest the earnings premium is not coming from corrupt boards, but the skill premium. That’s why I brought up my friend.
In fact, the areas of horrible monopolistic behavior are one’s with heavy government involvement – see health care and finance. As for the tech firms – I can somewhat buy the argument, but consider that the products they provide are free. I mean, hard to see how they are gouging the public when the cost is virtually nothing. Ok, so they are not entirely free – they come at the expense of our data, but even here, it seems like a voluntary transaction. If you don’t want to use them, you don’t have to and its not like you are cut off from the internet if you don’t. Use Duck duck go.
I have read Why Nations Fail. I believe every word they have written. I never claimed that political institutions do not affect market institutions. I simply questioned your take – that the political climate is currently captured by the uber rich and they have influenced market outcomes. The data does not support this view.
Finally – I don’t accept the other view that healthcare is only going to the rich. Medicare and Medicaid are the biggest parts of government spending and they are direct subsidies to the middle class. Right now, hospitals cannot refuse a patient no matter what and health insurance companies cannot discriminate based on prior outcomes. Life expectancy for a US citizen has grown for almost everyone but individuals who are face depression or addictions(sad, but at least somewhat of a voluntary decision). It is naive to suggest that only the rich have had greater life expectancy in the last 50 years. The data does not support this claim either.
Dallas
Sep 26 2019 at 1:41pm
People in the 50’s and 60’s didn’t pay the book level taxes. Fortunes were made avoiding those insane tax rates but it limited innovation to accounting, oil/gas, charity games, and real estate. All that money was buried in accounting games including corporations owned by individuals that also “owned” the airplanes and yachts. None of it showed up on income tax records for individuals making for more equality.
When we eliminated many of the loopholes and created pass-through tax organization (S corp, etc.), much of that money became visible on individual tax forms at lower tax rates. This accounting change of lower taxes in the ’80s also “created” more accounting inequality.
Remember, real wealth is “control over the disposition of assets” so having control of the corporate yacht is the same as owning it. Trump effectively owns Airforce 1 and in the politician’s case, he doesn’t even have to pay the fuel and crew bill.
The type of whining over the “good old days” of high taxes doesn’t fit reality.
Simon Cranshaw
Sep 24 2019 at 8:35am
I have a question about the framing of this discussion and indeed the framing of many other policy discussions on this podcast. Why is it acceptable to evaluate policies as to their effects on the US, rather than on their global impact?
I understand why a politician speaks to the concerns of his constituents, but surely academic economists should be addressing a global view. Isn’t to do otherwise to assume some greater importance to American citizens than to the rest of the world? Why should that be so?
For example Rodrik seems to have sympathy for the imposition of tariffs but thinking globally can tariffs ever be really beneficial? At another point he advocates protecting some US workers with seemingly zero regard for the likely poorer workers in other countries. This is a strange attitude for someone who professes to be concerned by income inequality.
I think if economists were asked to evaluate the impact of a policy on, say, white people only, they would dismiss that as not really a relevant question and I think refuse to discuss it. I would like to see the same attitude taken to questions which only address the impact on a particular nation.
Many of the listeners of econtalk are unrelated to the US. Why should we care about economic effects on this one particular relatively wealthy group of people? Although it is very normal to frame discussions in a nationalist way, that seems like politics and I don’t see how it belongs in economic discussion.
Am I missing something? It seems so strange to me.
Marilyne Tolle
Sep 24 2019 at 1:20pm
Hi Simon,
I agree with you, but the fact is that macroeconomics takes the nation-state as its unit of analysis. The concept of the “nation-state” is relatively recent, dating back to 19th-century Europe. The term “macroeconomics” (literally “large-scale household management”) is even more recent – it was coined in 1973 by a Norwegian economist called Ragnar Frisch.
The preoccupation with measuring the aggregate performance and structure of whole economies emerged at the start of the 20th century and was amplified by the Great Depression and WWII, as politicians and civil servants (like Keynes) tried to measure the extent of the economic problems in their countries (high unemployment etc…) in order to address the social and economic fallout.
Gross Domestic Product as a measure of aggregate economic activity was championed by Keynes, who argued in “How to Pay for the War” (1940) that military spending should be included in GDP as a way to mask the fall of consumption required by the war effort, and thus support the message that war doesn’t hurt the economy.
Wartime imperatives meant that by the 1950s, Keynes had won the argument against Kuznets, who wanted to measure economic welfare, not activity (and famously said in 1934: “The welfare of a nation can scarcely be inferred from a measurement of national income” – this is usually quoted by people who want Gross National Happiness (GNH) to replace GDP). As an aside, in the 1950s, GDP’s “production boundary” was also defined: government spending was included even though it’s not measured at market prices, while “home production” (housework) was left out because it’s too hard to measure.
One noteworthy fact is that originally, there was interest in the level of GDP and its components to assess how much was left after the “war effort”, consistent with Keynes’s interest in the level of employment. The switch to growth rates, which is still a hallmark of today’s economic reporting, was entirely politically motivated: when Khrushchev said that “growth is the battering ram with which we shall smash the capitalist system”, JFK and his advisers started to set growth targets for the US economy. Growth as a target was then called into question in the early 1970s when environmentalists expressed their concerns about “The Limits to Growth” – the negative externalities (pollution etc…) associated with growth but excluded from measured GDP.
Anyway, the bottom line is that the focus on metrics of national economic performance (GDP, national income, unemployment, productivity, inflation and now within-country inequality) stemmed from politicians’ interest in managing the economy, whether via fiscal or monetary policy. In that sense the 20th century really marked the triumph of demand management.
Simon Cranshaw
Sep 24 2019 at 7:38pm
Thank you for the detailed and informative response. What you say all makes sense as an explanation as to why economics discusses these issues in the way it does.
My question remains though as to whether it is really moral that it does it in this way. I can understand if a Chinese politician and a US politician say different things about US trade policies, since they are speaking for different constituencies. It seems strange to me though if a Chinese economist and a US economist say different things about US policies because they are in different countries. If this happens then in what sense is it really an academic discipline?
Marilyne Tolle
Sep 25 2019 at 8:46pm
I guess what I’m saying is that academic economists do not live in an ivory tower, detached from the world. Some might strive to be “impartial” in their research, but these are not the ones whose views are relayed by the media. “Successful” academic economists are usually ideologically motivated and are enlisted by politicians to serve as social engineers. The role that is demanded of them, and which they have gratefully accepted, is not to describe the world, but to make prescriptions for it.
In this excellent series, Pete Boettke argues that this should not be the role of economists. I really recommend it.
The Role of the Economist in a Free Society: Mises to Knight
The Role of the Economist in a Free Society: Friedman to Coase
The Role of the Economist in a Free Society: The Art of Political Economy
Simon Cranshaw
Sep 30 2019 at 1:19am
Thank you again for your detailed reply. As I understand it, you say people have nationalistic prejudice. Politicians address voter concerns and so make nationalistic arguments. Economists need to address what politicians say and so argue within a nationalistic framework. That does make sense. I suppose I hoped econtalk would rise above prejudiced arguments.
I wonder why it’s unacceptable to make arguments which ignore people because of skin color or sex but to ignore them because of country of birth is entirely normal.
Ajit
Sep 24 2019 at 1:45pm
I 100 percent agree with this. Its as if the tarrifs and quotas had no effect on the workers in the other countries. Ok, maybe its ok for Japan because those workers are already rich( I don’t buy that, but whatever), surely the textile workers in Bangladesh view it as a godsend to escape the rural areas. I can verify that a tremendous amount of violence in India happens in the rural country sides.
This has been a longstanding hypocrisy with the so called progressive left. If you care about inequality, why do you stop at native workers. By most measurements, native workers – even one’s living in housing projects in violent neighborhoods are miles ahead of poor people in India or Africa. We should be taxing minimum wage workers here and sending to Bangladesh.
Ajit
Sep 24 2019 at 1:59pm
I approached this podcast with the determination to put my skepticism to the side and try to find some middle ground with Dani Rodrik. I mostly failed.
I agreed with one point he made. For things that purportedly have a positive externality(climate change research, medical care research, or mass transit infrastructure in otherwise congested cities* Bay Area ), it makes some sense. I’m skeptical it will target the low skilled, but whatever, on net its probably a good thing.
He mentioned that he supports trade restrictions only in the sense that they are an imperfect solution to a world with an inadequate safety net. If that’s his argument, fine I can live with that. But then he seems to be all for European safety net. When Russ pressed him on how replicable Finland’s safety net might be with American style culture, he bristled and said…let’s not try and make facile comparisons. Ok…??? I agree, such comparisons are hard, but then why propose a policy that mirrors another country and then refuse to consider the implications?
Three other things that annoy me to know end came up in this podcast.
One – that somehow the US has pursued pro business policies for some untouched period of time. He didn’t mention when, but the left usually selects the Reagan period(favorite whipping boy). Um….that is just factually not true. And far from the right having achieved their stated agenda, government transfers have only exploded in this period. Also, see zoning laws. I am in an office with self proclaimed die hard liberals who own houses in the Bay Area and staunchly vote down new construction.
Second – Europe. Whenever people point to the so called success of Europe’s socialist state, they seem to always forget three things.
1) Europe is a pretty huge place. There is no Europe, there are countries of Europe and it seems to be a matter of convenience to pick the places that fit the narrative.
2) The successful countries are all small and homogenous. It must be a stupendous coincidence that the countries in Europe that are larger/more heterogenous have high youth unemployment, terrible debt, and use a ton of rationing on social services.
3) Europe is comparatively much more hostile to immigration than the US. I suppose this is quite understandable – you spend a lot for your safety net, you sure as hell don’t want some foreigner taking it.
Third – why is it taken as a given that the current welfare system has literally no correlation for today’s economic malaise for the downtrodden. I invite anyone in the comments who disagrees with me, but its shocking its not even up for discussion and those who believe otherwise are accused of heartlessness.
Jonah 1:3
Sep 25 2019 at 7:27am
IMO, the most important aspects of the interview are the epistemic problem and the resulting problem of justifying the use of force by government to promote and prohibit various opportunities. This interview would have been more informative and consequential if it had focused on the epistemic problems of centralized planning that Hayek identified in his essay, The Use of Knowledge in Society, and with Bastiat’s observations in his essay What is Seen and What is Not Seen, about the failure of advocates of centralized planning, like Professor Rodrik, to consider the lost opportunity costs of such plans. For example, between approximately 19:00 and 23:00, Professor Rodrik advocates some sort of joint fact-finding effort among governmental and private actors to determine how best to allocate tax revenue to programs that will, they hope, improve circumstances for persons harmed by changes in the economy. Professor Rodrik never explains how and why such a joint fact-finding effort would discover more valuable information than the decentralized fact-finding efforts that private individuals are always engaged in.
In the absence of a persuasive explanation that it would, one cannot justify deviation from the fundamental rules we learn as children: keep your hands off other people, and keep your hands off their stuff. Having listened to EconTalk for over a decade now, I remain astonished at how infrequently the guests and host of this podcast consider the topic of justification, but perhaps that’s because most economists, like most other people today, simply take for granted that government is, and ought to be, vested with plenary power over the economy. Perhaps that’s because they overlook the fact that the economy is only an abstract concept of individuals exercising their inherent liberty to enter into consensual transactions from which both (or all) parties justifiably expect to benefit. As Ronald Reagan quipped when addressing the topic of centralized planning in his 1963 speech, A Time for Choosing, “governments don’t control things—they control human beings!”
I find this common failure to consider the justification of the use of force by government to prohibit consensual transactions between competent adults, and to coerce adults to enter into transactions that are not mutually beneficial, to be highly distressing. Perhaps that’s because I’m not an economist, but a lawyer who works for the government. Everything I do is backed by men bearing badges and guns, and if you don’t obey, you will be seized bodily and held in detention. If monetary sanctions are in order, the men with badges and guns will find out which banks hold your assets, and they will go there and demand your money in an amount to satisfy the the judgment. If the person in charge doesn’t obey, he or she will be bodily seized and held in detention. I wish economists would think about these things, for maybe then they wouldn’t so casually advocate what they euphemistically call “centralized planning of the economy.”
Ben Riechers
Sep 25 2019 at 10:33am
Some great comments. I especially liked the comments / conversation between Cal and Jonah.
In general, free market advocates stress the importance of property rights, rule of law and the law of contracts for a society to realize the benefits of free market capitalism. No country is has all three of these elements working in perfect order. As a result, we have a form of free trade with countries around the world that is distorted by these many imperfections. It seems that free trade practiced poorly continues to outperform most if not all other economic models.
When do those of us who are disciples of free trade say to countries that their failure to even remotely honor and uphold these foundational principles gets you booted from the market? Or if you don’t fix your practices, we will apply tariffs to your goods and services.
This is where we seem to wander away pure economic theory into a narrative that suggests that it is better to trade with countries that routinely and intentionally cheat other members of the market than to go to war with them. And we also wrestle with the possibility that the benefits of free trade are not finding their way to their people, but to their military and/or funding a totalitarian government.
It seems to me that proponents of free trade should be asked to think hard about how economics relate to these political questions because the free market economic model, with all its imperfections, is easily defendable. Instead of thinking hard about the issues we have China and have had for decades, most disciples are simply parroting the basic truths of free trade. I’m hoping for more than that.
Erik Norlander
Sep 26 2019 at 7:09am
As a Swede, I just want to set the record straight on somes issues regarding public spending and the social safety net.
Public Spending
Sweden spends approx 44% of its GDP, and while it is not as bad as our neighbor Denmark at 46%, we were spending about the same as them 20 years ago. Of our public spending cake, 2% goes to defence, 14% to education, 14% to healthcare and a whopping 41% to “social protection”. About half of the social protection is attributable to pensions, a quarter to sick leave and another quarter to parental leave. One stunning fact about this is that there’s a post in that 41% that in fact is higher than our entire defence budget that is simply called “other social vulnerability”. Very little information is available on what exactly goes in to that, but likely, it’s attributed to immigration-related hand-outs as such a post does not appear anywhere else in the data. Source: https://www.ekonomifakta.se/Fakta/Offentlig-ekonomi/Offentlig-sektor/Offentliga-sektorns-utgifter/
In order to pay for the pensions, the retirement age has been increased by 2 years from 65 to 67 and will likely be increased to 69 next year. This trend is expected to continue as the population ages.
Taxes
A swedish worker can expect to pay 30-33% of their income in taxes to their local government. If they earn more than approx 50k USD in a year, they’ll start paying 50% of every dollar above that number to the national government. If they earn 70k USD per year, they’ll pay 55% of every dollar they earn above that.
What is not shown here though is the employement fees, which are very high. So if I earn 50k USD a year, my employer actually pays 62k USD a year for me employement. That 12k difference, goes straight to the national government.
We also have a very high consumption tax at 25% on all goods except for transporation and some other areas. This puts the main tax-burden on the middle class. This is where a lot of the income for the Swedish government comes from. So after all consumption is included, an even larger share of your income is paid in taxes.
We actually have lower capital gains tax and corporate tax than the US, making it very lucruative to start a business instead of being employed, as long as you as a business owner does not take out too much of the profits as taxable income. This is by design, as the deals that set up the swedish system was done between the Social Democratic Party and big industry leaders in the 1940’s. To its core, a very corporatist system.
Sallaries
One interesting, rarely mentioned topic is the actual sallaries in Sweden as compared with the rest of the world. I’m a Data Scientist, so let’s compare the average wage for this position between the US and Sweden:
USA:
NYC, NY: 92-149k USD, average 116k USD
SF, CA: 114-180k USD, average 142k USD
AU, TX: 81-132k USD, average 102USD
Source: glassdoor.com
SWE:
Stockholm: 36-90k USD, average 54k USD
Source: lönestatistik.se
Yeah… High skilled workers earn a lot less here. That, in combination with the high consumption taxes makes Sweden quite expensive to live in.
Housing
The biggest cost to any Swede is the cost of her house, the same I assume is applicable in San Francisco. Let’s compare! Source: https://www.numbeo.com/cost-of-living/city_price_rankings?itemId=100
SF: 12,680 USD/sqm
Stockholm: 9,400 USD/sqm
Summary
While cost of living is exremly high in Sweden as a share of your salary, we do get healthcare and education for free. That being said, the quality is debatable. Very long wait to get cancer treatments etc.
As far as I understand, for most high skilled jobs in the US healthcare is included in the salary. So it seems that the only part where Sweden has an edge is in the education system from a cost-perspective. I encourage Americans to enlighten me on this issue.
Where would you rather live as a Data Scientist?
Ajit
Sep 26 2019 at 11:02am
HI Eric,
Thank you so much for posting this. I was extremely curious to see a Nordic European perspective on this.
I am a data scientist working in the SF bay area with a salary very much in line with your numbers.
I would rather live in the bay area. The salary figure has a lot to do with it, but so does the fact that my parents also live here and its the prime region for my industry.
I will turn it on you, why are you still living in Sweden? Why haven’t you left? And given the high marginal taxes, why did you become a data scientist in the first place? And finally, do you see these taxes as prohibitive to Sweden’s economic growth?
Erik
Oct 24 2019 at 2:50am
Hello, sorry for the slow response.
The reason I stay in Sweden (for now) are many:
1. The principle of “dig where you stand”. If I’m one the best Data Scientist in Stockholm, I’ll be able to get all the best positions. In a few years, I’d have the contacts and momentum to start a successful start up or take a senior position at one of the large firms. If I move to Palo Alto, there’s gonna be plenty of people that can do my job.
2. I work in consulting, meaning that the value that I provide is based on the projects I can bring in. That in turn is a product of my business contacts, which are hard-earned and wouldn’t follow me to the US.
3. Friends and family etc.
That all being said, there’s a better option in Europe to make the big money, and that’s going to Switzerland. I have some background in the financial industry, so I’m confident that I’d be able to find employment there. However, for now, I’m gonna dig my hole here in Sweden and see where it leads.
Dallas Weaver Ph.D.
Sep 26 2019 at 3:58pm
When Dr. Rodrik was referring to the “good old days” of easy tariffs to protect the country from the disruptive competition went on to use the steel and auto industries of the ’60s and 70’s as examples, I was shocked at how he was “rewriting history” to support his biases.
Perhaps it is just his lack of living through those times makes it easy to visualize all the “good” of the tariffs when he sees the same tariffs today are causing great harm to many downstream steel users and automobile consumers (the seen vs the unseen problem). I lived through that era and my defacto thesis advisor was a metallurgist who played poker with the top technology people (VP level) in both the steel and automotive industry. I just had dinner with a friend (86 yr old) who still works in the steel industry (now doing import/export) from the early ’60s who is a radical liberal progressive where we disagree about everything except the history of steel and automotive industries in the “the good old days”.
Our steel industry in the ’60s and ’70s were killing their R&D departments while buying into the industrial fad of “conglomerates” using their balance sheets and stock to buy other companies in unrelated businesses. Meanwhile, the USW and UAW both supported the minimizing of innovation while maximizing pay and employment numbers. The political power of the companies combined with the unions allowed the companies to use tariffs and other games to protect their poor business decisions with tariffs utilizing a rent-seeking strategy. The ultimate in crony capitalism.
Much like the damaging effects of some welfare systems, which create an increasing dependency on the beneficiaries to whine “poor me” as they demand more money, the automobile companies and steel industries increased their whining dependence and lost any innovation or competitive spirit. The solution to all problems was more whining and government “support”. Like government institutions, they never have enough “resources” and focuses their attention on obtaining more benefits from the tax players not by using innovation to bypass a problem. Meanwhile, some non-union mini-mills were innovating and they ultimately took market share from the primary producers who still claimed it was imported steel that was eating their lunch.
Notice that in antique car shows, you see a lot of 50’s cars like 57 chevies, etc. and a few early 60’s cars but almost no 70’s cars (they qualify as antiques). The automobile companies discovered by the late 60’s that if they make the cars fail by 50,000 miles they sold more cars. You had books like “Rividhead” by the end of 70’s “crapy car” innovation era of the auto industry and UAW where the engineers were designing the cars to work with only a fraction of the bolts in place.
It wasn’t until the Japanese car invasion of the ’80s when people discovered a car can go more that 100,000 miles before falling apart did our car companies respond with political whining and slowly with innovation. Meanwhile, my old “steel” friend recounted visiting a rolling mill (supplying sheet steel to the auto companies) in Ohio in the 70’s that had 100 workers and 3 reheating steps starting from a cold bloom of steel, then visited a mill with 3 times the capacity in Japan that was a mile long with 4 workers going from molten steel with continuous casting to final sheet with only a minor temperature adjusting station on the continuously cast billets. Japanese quality control was also much tighter resulting in better cars that didn’t fail.
It is funny how history I lived through is being rewritten to favor governmental interests. Everyone (at least most of the talking heads) now believes that DARPA created the internet when all they created was a link-up between some super-computers of the era. Zero vision of today’s internet. My friends with some of the DARPA contracts creating the Standford hub had no clue how important the packet switching networks and the protocols would become (if they did, it would have been designed with better security built-in). As far as the government and military driving the semi-conductor revolution, my cousin working in military electronic was envious of the chip set in my original Mac computer that outperformed anything he could include in his designs. Meanwhile, our military was having huge discussions and funding on the superior vacuum tube technology used in the Russian planes that were immune to some of the EMP issues.
Bashar H. Malkawi
Nov 7 2019 at 11:32pm
For a long period of time, the U.S. enjoy sound and sophisticated industrial base second to none. Manufacturing provided better and more stable employment for U.S. workers. Market economy and maximizing shareholder value in corporate structure can lead to results that are inconsistent with a policy to provide for strong families and decent wages for average workers. Bashar H. Malkawi
Shawn Eng
Nov 16 2019 at 7:14pm
My goodness, such an enlightening final thought on China. What a shame it wasn’t included in the highlights. I have taken the liberty of transcribing it myself and posting it here.
[Hi, Shawn. It was done, but I think I forgot to save it. Thanks for letting me know. It’s posted now. Next time, consider emailing me. 🙂 —Econlib Ed.]
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