EconTalk

I did an EconTalk Podcast with Russ Roberts. The general subject is economic growth, the reasons it seems to be slipping away from us and policies (or non-policies) that might help.

As in other recent projects (growth essay, testimony) I'm trying to synthesize, and also to find policies and ways to talk about them that avoid the stale left-right debate, where people just shout base-pleasing spin ever louder. "You're a tax and spend socialist" "You just want tax cuts for your rich buddies" is getting about as far as "You always leave your socks on the floor" "Well, you spend the whole day on the phone to your mother."

We did this as an interview before a live audience, at a Chicago Booth alumni event held at Hoover, so it's a bit lighter than the usual EconTalk. This kind of thought helps the synthesis process a lot for me.  Russ' pointed questions make me think, as did the audience in follow up Q&A (not recorded). Plus, it was fun.

I always leave any interview full of regrets about things I could have said better or differently. The top of the regret pile here was leaving a short joke in response to Russ' question about what the government should spend more on. Russ was kindly teeing up the section of the growth essay "there is good spending" and perhaps "spend more to spend less" ideas in several other recent writings. It would have been a good idea to go there and spend a lot more time on the question.


From the growth essay, I think the government could profitably spend a lot more money on the justice system. That so many of our fellow citizens rot in jail awaiting trials, that the vast majority never receive a trial anyway but a hasty plea-bargain, that their legal representation is so thin, is a disgrace -- and causing huge problems. If a wrongly accused young man spends two years in jail before charges are dropped, the consequences for him and his family are awful. Business relies on a speedy and efficient justice system to adjudicate commercial disputes, and that seems to be falling apart too, partly for lack of resources.  The cost here is peanuts compared to, say, peanut subsidies.

Our public infrastructure doesn't just consist of steel and asphalt. The public software needs investment as well, or more.

Public health is one of the most essential public goods. Of all the civilization-ending scenarios you can think of, nuclear war and a pandemics top my list. Many past pandemics followed a surge in globalization -- the plague of the 1350s, that wiped out half or more of the population; the smallpox that wiped out native America in the 1500s, the 1918 flu. (Larry Summers has a good article on this point.) We are ripe for antibiotics to stop working and new diseases to spread catastrophically, if not among humans among the plants and animals on which we depend. Don't count on the UN and the WHO.

The government can profitably fund basic research. "Yes, 95% of funded research is silly. Yes, the government allocates money inefficiently. Yes, research should also attract private donations. But the 5% that is not silly is often vital, and can produce big breakthroughs." (Basic research is not the same thing as subsidies for commercializing research.)

Yes, Martha, I should have said, there are public goods here and there.

Of course, more spending on things like these does not imply more spending overall. They're all remarkably cheap, and could easily be funded by spending a little less on some of the colossal waste. (Example: We spend $6 billion on the FBI and $13 billion on border control.) Of course, one must also spend wisely and use the results wisely. And one could add a lot to the list. But repeating a fun joke about spending is not the right answer.

Immigration, trade, and child care

Both Mr. Trump and Mrs. Clinton want to lower the cost and, presumably, increase the amount of child care. A quick economics quiz: What is the policy change that would have the greatest such effect?


I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care.  As the WSJ points out in a recent editorial,

... regulation drives up the cost of care. States set minimums on square feet per child; licensing requirements; ratios for staff-to-children; group sizes. Zoning laws prevent care centers in convenient places such as residential neighborhoods. Regulation also limits options like informal care at grandma’s house or families who share nannies.

On the latter, zoning, for example, forbids commercial activity in residential-zoned areas, like the ones where people live. And WSJ left out the full weight of American labor law and taxation. Anyone who has tried to legally hire a nanny has a good sense of that. (See also Ivanka Trump's oped  describing the plan.)

Needless to say, that is not the candidates' preferred approach, who were vying with each other to offer federal subsidies. Mr. Trump is, needless to say, simultaneously vowing to deport large number of child-care workers. Mrs Clinton is not making any noises about removing legal restrictions or taxes on low-skill part time employment. (The WJS offers that "Mr. Trump deserves credit for noting" the above comments on regulation, but did not offer a link. If anyone knows where this is, put it in a comment, as I had not heard about it.)

A lot of economics comes down to: Supply competition is the best answer to just about every economic problem. 

This is a small example of a spreading disease in American economic policy. The recipe: 1) introduce strong supply and competition restrictions, usually to politically favored groups. Soon, however, those groups start charging higher prices. So 2) give subsidies so people can pay the higher prices induced by 1). It's perfect: now both sides depend on politicians. See, most egregiously, health care and housing.

The trouble is, you can only make one thing (child care, now) cheaper by making everything else more expensive. A tax credit for child care means higher taxes on everything else. We're running out of everything elses fast!

This is a good moment for supply and demand, and a good illustration of how this basic economic tool gives insights that are not obvious.

(If you can't see the supply and demand graph, try here.)  Demand slopes down. The less child care costs, the more of it people buy.  Supply curve slopes up. If child care workers can charge more, more people take those jobs or set up child care businesses.

The red graph shows what happens if we allow lots of immigration, and also deregulate supply. The supply curve shifts to the right -- more child care offered at the same price. Moreover, if we allow immigration, the supply curve becomes flatter -- a smaller increase in price produces a larger increase in the amount of child care.

There is a very important distinction between domestic and international supply. In the end, the US workforce is limited. The more people who go in to child care, the fewer do something else. The upward slope of the child-care supply curve represents an inward shift of the supply curves of everything else, meaning higher prices and lower quantities. Immigration gives us a free upward slope.

This graph analyzes a federal subsidy for child care. If people get a $100 subsidy, they are willing to pay $100 more for the same amount of child care, so the demand curve goes up by $100, as shown. I drew the supply curves with more extreme slopes, to make a deeper point.

The "restricted" supply curve is nearly vertical. This is what happens in an industry with strong supply restrictions, like, say, epi-pens. The subsidy means people are willing to pay $100 more. With no more supply forthcoming, the result is simply that people pay $100 more and get the same quantity.

Subsidizing something with restricted supply does not benefit consumers. It just raises the price and benefits the producers. 

The consumers, unaware of what's going on, become dependent on the subsidy of course. See health care and education.

With lots of supply competition, and a flat supply curve, the subsidy instead raises the quantity of child care delivered, which is presumably what both Mrs. Clinton and Mr. Trump desire from the policy. A subsidy only increases quantities if there is lots of supply competition and easy entry. 

The journal gets this

Mrs. Clinton raises the Trump offer in every regard, from more Head Start funding to salary support for day-care workers. And if you think care is expensive now, wait until Mrs. Clinton wades in. She likes to say that child care can be more expensive than college tuition, which is false. The irony is that her day-care blowout would recreate what has made college notoriously expensive—large subsidies for the provider and buyer. Day-care centers and pre-Ks could raise prices, confident that government will cover the increase.

The graph offers a little more precision. Subsidies only raise college expenses because of restricted supply. The Administration's war on for profit colleges unambiguously pushes the supply curve to the left.

On the human side of our immigration restrictions, I recommend a beautiful New Yorker article by Rachel Aviv on the life of a woman who immigrated illegally from the Phillippines to care for the children of... well, people like the Trumps and Clintons. The US will not kick out illegal immigrants because deep down we know that without them the cost of child care will skyrocket. But the cost to a low-wage worker of illegal status -- never being able to see family again -- is worth remembering.

The New Yorker article makes clear also how much immigration to the US is driven by desperate conditions elsewhere. If you don't want immigration to the US, the best possible solution is to aggressively buy what other countries have to sell, so people can make a living there. Needless to say, neither Mr. Trump nor Mrs. Clinton seem at all aware of this obvious connection.

(Vaguely competent foreign policy is the second best possible solution. Refugees from Syria and Honduras would not be coming here if we had not let their country fall apart, or fueled a drug war.)

Most child care is not Mrs. Trump, handing off children to a loving nanny in Manhattan as she speeds off to her job as.. whatever it is she does. Tellingly, the Trump plan takes the form of a tax credit and a new addition to the bewildering number of tax sheltered savings vehicles. What, doesn't everyone have a tax lawyer? A lot of child care is done off the books, for people who also work off the books.  This is also a good moment to reflect on the wisdom of the new ban-cash movement plus e-verify so that every single transaction in the US is taxed and appropriately monitored for compliance with labor laws, licensing, OSHA, and so on...

Blueprint for America

"Blueprint for America" is a collection of essays, organized, edited and inspired by George P. Shultz. You can get an overview and chapter by chapter pdfs here. The hardcover will be available from Amazon or Hoover Press October 1.

Some of the inspiration for this project came from the remarkable 1980 memo (here) to President-elect Ronald Reagan from his Coordinating Committee on Economic Policy.

Like that memo, this is a book about governance, not politics.  It's not partisan -- copies are being sent to both campaigns. It's not about choosing or spinning policies to attract voters or win elections.

The book is about long-term policies and policy frameworks -- how policy is made, return to rule of law, is as important as what the policy is --  that can fix America's problems. It focuses on what we think are the important issues as well as policies to address those issues -- it does not address every passion of the latest two-week news cycle.

The book comprises the answers we would give to an incoming Administration of any party, or incoming Congress, if they asked us for a policy package that is best for the long-term welfare of the country.

The chapters, to whet your appetite:

INTRODUCTION
CHAPTER 1: The Domestic Landscape by Michael J. Boskin
IN BRIEF: Spending by George P. Shultz
CHAPTER 2: Entitlements and the Budget by John F. Cogan
CHAPTER 3: A Blueprint for Tax Reform by Michael J. Boskin
CHAPTER 4: Transformational Health Care Reform by Scott W. Atlas
CHAPTER 5: Reforming Regulation by Michael J. Boskin
CHAPTER 6: National and International Monetary Reform by John B. Taylor
CHAPTER 7: A Blueprint for Effective Financial Reform by John H. Cochrane
IN BRIEF: National Human Resources by George P. Shultz
CHAPTER 8: Education and the Nation’s Future by Eric A. Hanushek
CHAPTER 9: Trade and Immigration by John H. Cochrane
IN BRIEF: A World Awash in Change
CHAPTER 10: Restoring Our National Security by James O. Ellis Jr., James N. Mattis, and Kori Schake
CHAPTER 11: Redefining Energy Security by James O. Ellis Jr.
CHAPTER 12: Diplomacy in a Time of Transition by James E. Goodby
CLOSING NOTE: The Art and Practice of Governance by George P. Shultz

My chapter on a Blueprint for Effective Financial Reform is a better version of the talk on Equity Financed banking which I posted here. (The talk was based on the paper. Now you have the paper.)

My chapter on Trade and Immigration is new, and an uncompromising red-meat free-market view. I don't think one should compromise centuries old economic understanding just because it's not politically popular at the moment.
 
If you got this far, you might also be interested in my Economic Growth essay written for a parallel but similar project.

Blinder on Trade

Alan Blinder has an excellent op-ed in the WSJ on trade. It's hard to excerpt as every bit is good.

1. Most job losses are not due to international trade. Every month roughly five million new jobs are created in the U.S. and almost that many are destroyed, leaving a small net increment. International trade accounts for only a minor share of that staggering job churn. ...

2. Trade is more about efficiency—and hence wages—than about the number of jobs. You probably don’t sew your own clothes or grow your own food. Instead, you buy these things from others, using the wages you earn doing something you do better.  ...

3. Bilateral trade imbalances are inevitable and mostly uninteresting. Each month I run a trade deficit with Public Service Electric & Gas. They sell me gas and electricity; I sell them nothing....

4. Running an overall trade deficit does not make us “losers.”...

5. Trade agreements barely affect a nation’s trade balance. ..a nation’s overall trade balance is determined by its domestic decisions, not by trade deals... America’s chronic trade deficits stem from the dollar’s international role and from Americans’ decisions not to save much, not from trade deals. Trade deficits are not a major cause of either job losses or job gains. ...trade makes American workers more productive and, presumably, better paid.

One could say much more. Trade is not a "competition," for example. But,  having done this sort of thing, I'm sure lots of other good bits are on the cutting room floor.

Alan is more sympathetic to government "help" to trade losers, which I agree sounds nice if it were run by the benevolent and omniscient transfer payment planner, but I think works out poorly in practice when we look at the success or failure of actual trade adjustment programs. But that is a small nitpick.

Alan closes by wishing that Bernie Sanders and Donald Trump understood these simple facts a bit better. I think his list of politicians needing enlightenment could be a little longer. But he's courageous enough for speaking the kind of heretical truth that will come back to haunt him should he ever want a government job.