Stephen C. Freidheim Symposium on Global Economics

Wednesday, January 12, 2022
Stock market chart on a glowing particle world map with connection network

The 2022 Stephen C. Freidheim Symposium on Global Economics discusses building an inclusive U.S. economy and reforming capitalism to address inequality. The full agenda is available here.

This symposium is presented by the Maurice R. Greenberg Center for Geoeconomic Studies and is made possible through the generous support of Council Board member Stephen C. Freidheim.

Virtual Keynote Session: A Conversation With Cecilia Rouse

BESCHLOSS: Thank you very much, and good afternoon, and happy new year. I hope you all are well and keeping safe under these extraordinary circumstances.

Welcome to today’s Council on Foreign Relations Stephen C. Freidheim Virtual Symposium on Global Economics. This symposium, which is focused on reforming U.S. capitalism, is presented by Maurice R. Greenberg Center for Geoeconomic Studies and made possible through the generous support of Council Board member Stephen Freidheim.

I’m Afsaneh Beschloss, founder and CEO of RockCreek, and a member of the Board of Directors at CFR.

We are so pleased to welcome Chairwoman Cecilia Rouse, who’s currently serving as the thirtieth chair of the Council of Economic Advisers. Dr. Rouse leads the agency that is charged with providing the president with objective economic advice on the formulation of both domestic and international economic policy. Until last January, Dr. Rouse served for nearly a decade as dean of the Princeton School of Public and International Affairs. She previously served as a member of President Obama’s Council of Economic Advisers and she worked at the National Economic Council as a special assistant to President Clinton. A labor economist who focuses on the economics of education, Dr. Rouse joined the Princeton faculty in 1992 after earning her Ph.D. from Harvard University. And she’s a former board member of the Council on Foreign Relations.

Dr. Rouse, we are so fortunate to have you with your very busy schedule in your current position for many, many reasons, but especially because of your pioneering work also in the economics of labor and education, which are really important topics that we’ll get to later today. Thank you so much for being with us.

ROUSE: Oh, it’s an absolute pleasure.

BESCHLOSS: So on the theme that we are—we have today for this symposium, this year we are talking about reforming capitalism to address inequality. First of all, can capitalism be reformed?

ROUSE: (Laughs.) Well, that’s a—that’s a really important, you know, small question. (Laughs.) And just—you’ll tackle it in just a year.

So, look, capitalism as a—you know, as a concept is rather—you know, it’s rather immense. I’m going to approach it from just one perspective, which is a market economy, so a place where you have individual actors that are trading in a marketplace. As opposed to having a central planner that’s making allocations, you have a market by which you have, you know, goods allocated through trade. And in that sense, I do believe that we can make progress at improving our market economy so that capitalism can work better.

You know, it’s no secret to those who’ve been studying the U.S. economy that the U.S. economy has become more concentrated over the decades. So, you know, some of the clear examples that we like to use here in the White House, for example, is that in meat packing that there are four meat packers that control 80 percent of the market; that if we look at domestic air travel in the U.S., we’ve got four main carriers; and when we think about broadband, which we are relying on for this very symposium, in many markets consumers have access to just one—they just have one choice. And so I do believe, like, there are places where that kind of concentration is efficient and is—you know, arises naturally. You know, there are certain circumstances. But there are many circumstances—in the U.S. today we’ve got—concentration has increased in over 75 percent of industries since the late 1990s, and not all of that has been in efficiency-enhancing.

So what do I think can be done? Some of that—not all of it—some of it is down to technological change, increased globalization, and other—you know, winner-take-all markets, other forces that are kind of natural to and inherent to capitalism itself. But some of it is because as a—as a country—so, from the policy perspective, we have not been keeping our eye on that level of concentration. And so I do believe that improving the level of oversight—so that is putting—you know, scrutinizing potential mergers much more carefully, looking at places where we think that there should be greater competition and trying to find ways to ensure that there’s competition—that there are ways in which the public sector can be helpful at ensuring that there’s increased competition.

You know, it’s no secret this is a part—this is a focus of this administration. And it’s because we know that concentrated markets result in, you know, higher prices, lower innovation.

On the labor side—I’m a labor economist. On the labor side, we—you know, there’s been a growing appreciation of the fact that there can be concentration there, too, which generates—results in monopsony, which means that employment is lower than it would be under a more competitive market and wages are lower too.

So I do believe that by—you know, with a bit greater oversight, one can make progress there and improve capitalism writ large by improving our competitive—you know, the forces of competition in our—in our market economy.

BESCHLOSS: Absolutely. You used some—a lot of examples of concentration, and we hear also about shipping being particularly bad—and also global shipping, not just in the U.S., of course.

ROUSE: Exactly.

BESCHLOSS: But when you look at—so when—what do you think needs to be done to address inequality, as you see it today?

ROUSE: So, you know, one of the things about the CEA is we’re academics, and so I like to go to what are the—what are the causes. (Laughs.) You know, what are the sources of that inequality and what can we do about it?

So some of it, as I just alluded to, results from, you know, technological change/globalization and some of it is more structural. So let’s start with the part that may arise from other, you know, market forces.

I think economists are starting to recalibrate. So we—you know, we believe in globalization; we believe in, you know, automation—and I’m not trying to argue against them—but we believe that we’ve really focused on the efficiency-enhancing elements of that kind of change. I think there’s a growing recalibration to say, look, we have to be considering not just the efficiency gains, but the equity gains as well.

You know, I was just reading a recent paper by Daron Acemoglu which was making this point rather forcefully, which is that we need—you know, there are certain kinds of automation which really may help improve economic growth and other kinds of automation which is just kind of automation for automation’s sake. He went after one of my favorite examples, because I was here in Washington, D.C. when at CVS—I don’t mean to be taking after CVS because this is—will apply to other chains as well—I now had to be checking myself out. (Laughs.) And it is something every single time with my kids I will stand in line so that someone else has a job—it may not be a great job, but it is a job—and where I actually feel like I get better assistance. And actually, oftentimes when I’m having to try to check myself out, I need assistance anyway. So but he points to that as an example of the kind of automation that probably is not actually growth-enhancing, has displaced workers, and hasn’t been healthy in terms of equality. So I think we need to be examining and putting a more careful eye as we look at this kind of progress what is truly progress, which is improving growth, and which is progress which in the end is ultimately shifting rents from, you know, labor to capital or is not generating equality.

David Autor has also been thinking about this as we think about some of the changes with global—you know, global trade and how we’ve seen some increasing inequality by region in particular. You know, particular manufacturing sectors have been hit particularly hard. I think that if we look at—and I’m sure we’ll get to this—the impact of the pandemic and as we’ve been understanding the global supply chains that some of that resiliency and as we try to build some of that back into the system, that can be one way of reducing some of the inequality we have.

But there’s another form of inequality which is more structural, and that—here I’m referring to discrimination, for example, and the fact that, you know, not only just about, again, Blacks and Hispanics and a group which I think has really not gotten the same attention it should, which is Native Americans—and also for women, which we have—we’ve had, at least historically, out-and-out discrimination—but also that there’s a kind of challenges in our just—you know, how we organize our lives where especially caretakes, who are disproportionately women, have trouble finding access to affordable and high-quality childcare or pre-K. And so even if they want to work—some women or childcare workers don’t want to work, and that is—you know, that’s perfectly great and that’s important too. But for those who do want to work outside of the home, finding affordable care for their children is a challenge. And so, you know, I think we can be reducing inequality in that—in that respect as well.

And then finally I would just point out that our tax system—so, you know, redistribution is one way, at least, you know, after tax in which we can be sharing. If some of the fruits of these gains are going to be unequally distributed, you know, redistribution is the way that we all can benefit from whatever changes we’re making. And our tax system has not been living up to that. The 2017 tax changes in particular really mostly benefited the very wealthy. And so, you know, having a tax system which more evenly redistributes so that, you know, yes, we may be investing in some new technology; yes, we may be gaining on net; but we want to ensure that those gains are also shared because there are always winners and losers, and losers need to be compensated as well.

BESCHLOSS: I think—I think you—I think what you touched on is so, so important. If we just took women specifically—because, as you mentioned, there has been a dip, right, in the number of women in the workforce, partly because of the issues with caretakers but maybe others—do you see that coming back? How do you see that, you know, post the pandemic?

ROUSE: Well, I do. You know, our economy was, you know, functionally strong before the pandemic. I think functionally just because we know that there was some of that structural inequality that was there before, we knew that growth probably could have been higher, that there were long—let’s call it deferred maintenance on our economy. There were investments in physical infrastructure and human capital that we hadn’t been making for—making for decades, and that those kinds of investments lead to greater economic growth. So we think we could have had—you know, I’m not going to say 10 percent growth per year, but we could have had somewhat higher growth that was more equitably shared. And so I—that, in my mind, you know, I think there were improvements there, building back better. In my view, that was the better part of Building Back Better, is, you know, a better-functioning economic system.

But, you know, we had—unemployment was, what, 3.5 percent, something in that range, and we’d had growth. It wasn’t shooting the lights out, but we had a long, sustained period of a recovery and growth. And so, you know, the bones were there. And I don’t—I don’t see that there’s been a structural change from that perspective that would mean that women would be getting back into the labor force, for example. But that said, this pandemic really did highlight that in order for people to go to work there’s certain infrastructure that has to exist. Not just do I need a road to be able to drive on, but I need to know that someone can take care of my children, or if I have elderly parents my parents, and that we need to have those, you know, complementary kinds of investments at home so that people can work outside of the home. Because, you know, we all need to have our children taken care of, we need to have homes that are taken care of, and so we have to have that—those kinds of investments. So I think that with attention paid to that, I’m completely optimistic that we can—you know, we will—we will rebound and we will return.

BESCHLOSS: You did touch on human capital a number of times, and you and President Biden have spoken at length about the need to invest not just in physical infrastructure but also in human capital to maintain our competitiveness in the world. The infrastructure bill, of course, is already law, and funds are moving to improve our physical capital, hopefully faster than slower. How can we address, as you were saying, you know, in more practical ways some of this lack of investments in the human capital? Especially in Build Back Better does not pass or it passes in a smaller way, how are we going to do that and, you know, as you said, not just deal with the roads, but all the other things you mentioned?

ROUSE: Yeah. Well, so, you know, look, Build Back Better was a package. It was a way to put a bow around a lot of important investments. And I think if we take those investments, you know, the—you know, the president will still be looking for ways to make them happen. Maybe not in that particular bill, but he—these are important investments that we need to make if we’re going to continue growth, right? Economic growth needs capital, we need labor, we need innovation, right, in order to make that happen.

So in terms of human capital, I like to start with the babies and the little kids. We know that one of the best investments we can make in people is in high-quality pre-K and childcare; that that’s a period of time when our children’s brains are growing very rapidly and, you know, there’s—there are numerous studies which suggest that dollars invested in our youngest children in terms of high-quality care settings pay for themselves multiple times—five, six, seven times over. And that’s in the form of they’re better ready for kindergarten. So that means—and as Jim Heckman, the Nobel laureate in economics, likes to say, learning begets learning. So when they’re ready for kindergarten, they do better in first grade, second grade. They learn to read. When kids learn to read and can do some math, they’re more likely to succeed. They don’t need to repeat grades. They’re more likely to graduate from high school. They’re less likely to become teen parents before they’re ready to be parents. They are less likely to be involved in the criminal justice system. They’re more likely to go to college and more likely to get a job. And with a good-paying job they’re less likely to need government assistance. So it pays for itself over time. You know, public entities are impatient, often, but honestly, you know it’s not necessarily going to pay for itself in a two-year cycle or in a four-year cycle or—(laughs)—even in the ten-year budget window, but it does pay for itself over time. So I would start with high-quality pre-K. I think that’s one of the best investments we can make.

We know that we need to do better on our K through twelve systems. The federal government is not the major investor there. You know, the federal government contributes, what, 7, 8 percent of funding for schools? That’s more in high-poverty schools, but it’s a state and local issue. But we know we need high-quality K through twelve schools. This pandemic is going to have—it has wreaked havoc, you know, with our—in, you know, our investment, shall we say, of K through twelve. So I think one of the most important things we can be doing there is finding ways to help compensate for the learning loss children have sustained through this pandemic. Tom Kane, Dan Goldhaber, and a coauthor from NWEA recently put out an estimate—an eye-popping estimate that $2 trillion over the lifetime of lost earnings because of the lost—of the learning losses that children have sustained over the past year and a half, two years, that that could amount to about $2 trillion and that it’s concentrated in the low-income and minority neighborhoods. So finding ways to compensate for that learning loss so that they catch up. And then there was improvement we needed to make on top of that, as well. We know that time on task makes a really big difference.

And then when we get to higher ed—so we got, you know, our young adults and adults—we know that making college more affordable through, you know, improvements in Pell Grants, that that can really be important for improving educational attainment at the upper end. We know that not—you know, some schools are challenged with having programs that are really effective. So, you know, providing especially our community colleges with resources to be providing more, you know, nimble and more effective offerings, as well as some of the support services that students need.

And then having really effective training programs, as well. We know where this is—we do have an economy that is going to be morphing. We are more reliant on technology, as we were just discussing. And so having training programs as we pivot even from, say, you know—you know, a fossil-fuel-based economy to a clean-energy economy, workers are going to need to be—receive some training. And we know that there are ways that are more effective than others for constructing those training programs, and so making investments in those kinds of programs.

So all of that helps people to become more productive and improves our economic growth.

BESCHLOSS: Well, these are areas you’ve done a lot of work on, right, previously at the NEC and in your academic work. So it’s really helpful to hear not just what government can do, but also that intersection with everything else, including the private sector.

And sort of moving on to the topic that is on everyone’s minds, especially today—(laughter)—the CPI numbers that were out this morning and they show prices rose 7 percent year over year, a forty-year high, and core inflation was slightly higher than people expected. The new COVID variant, of course, has also wreaked some havoc on the supply chain and is not going to probably help the January-February numbers when they come out. Recently, you said that supply constraints have been a primary driver of inflation and you predicated that inflation will have decreased by this time next year. A number of market polls also are saying inflation might be around 2 ½ (percent) to 3 ½ (percent) depending on what you look at by the end of the year. What do you expect today to be the case by the end of the year?

ROUSE: So one of the things that I have learned through this pandemic is it’s really hard to forecast. (Laughs.) And—

BESCHLOSS: Always was, but even more.

ROUSE: It always was, exactly, and now the prior relationships that one relies on to do forecasts are, you know—you know, they have been tossed up and upside down.

But you know, if we go back to what we believe are the primary drivers of the current inflation, right, inflation arises when there’s a mismatch between supply and demand. The U.S. and every other major economy took measures to support people through the pandemic when the prudent thing was for people to stay home, to pull back on that kind of interaction. So there was—there was a support of demand. If supply had been able to meet that demand, we wouldn’t have the inflation we’ve got. And so that’s why many of us are focused on the supply chain aspects and the ways in which supply chains have broken down, even though what we know in the U.S. is that actually our supply chains have sort of held up by traditional measures and that really throughputs at ports were higher than they’d been before the pandemic, et cetera. But just the levels were so much higher than the system couldn’t bear it.

You know, what people did with the support that they received is they shifted their consumption from services to goods. Services are riskier in a pandemic and, you know, having the goods is less so. And goods have to be—have to be built and have to be transported. So, you know, many of us believe, given that it is a supply-demand mismatch that really is a result of the pandemic, the reason why we, our forecasters and, you know, forecasters are expecting that inflation will ease is we do expect that this pandemic will moderate.

Look, it’s probably with us for some time, becoming endemic. I am not an infectious disease expert. I am not an epidemiologist. But listening, right, we are—it’s probably not going away wholesale. But hopefully it mutates in a way that it becomes more like the flu and we develop some immunity to it, which we did not have two years ago. And so we learn to live with it and go about our economic business, which means that the supply and demand mismatches will regulate.

So that’s the source of the optimism. It requires a crystal ball. You sort of alluded to Omicron, which I think is going to cause headwinds on the supply side. But it also—you know, I think we’re seeing some early signs that—you know, people are going to restaurants a little bit less, Broadway has fewer people sitting in its—you know, in its theaters. So we also may see a little pulling back in at least the services part of demand. I’m not sure what that’ll do to the goods side. So, you know, this is—it’s going to be a tricky supply-demand dance, as it always is. And we will have to see how it goes. But I think we’re—you know, we’re optimistic that we will work this through a we get to a different stage in the pandemic.

BESCHLOSS: And, you know, as you’re looking at inflation, what worries you in terms of this sort of trend of inflation going up? And what makes you think that—apart from, you know, what you just talked about, the pandemic, are there other structural things that are going on that might ease the inflation rate?

ROUSE: Well, so, you know, I’m going to come back to the supply side. I think one of the important parts is, you know, people need to get vaccinated here in the U.S. because that’s the way that, you know, the statistics about the severity of the disease, based on whether you’re vaccinated or not vaccinated, are just—are stunning, right? These vaccines, they may not prevent one from getting COVID, but they seem to be doing a very good job of keeping people out of the hospital and, even more importantly, preventing death. So it’s important here at home. And it’s also important that the rest of the world develop the immunity and get vaccinated as well. It’s part of the reason why the administration’s been focused on distributing vaccines worldwide as well. So that’s—that is one thing I think we need to be doing, and that I’ve got my eye on. I just believe so strongly that our economic outcomes are tied to the pandemic. That it’s about getting the pandemic under control.

You know, one thing we’re obviously concerned about is if this inflation takes hold because it’s built into expectations, then it will get built in and people will be increasing prices in anticipation of price increases. And so there’s not a lot of evidence that inflation expectations have become anchored, but that is something I know the Federal Reserve is keeping an eye on, and that we have to be mindful of and be somewhat concerned about. Notably—you cited the 7 percent increase year over year, but there was deceleration month on month. And so that is a—you know, that’s important. You know, will it persist? I don’t know. We just talked about my forecasting, my crystal ball not being perfect. But the deceleration is notable, and it just points at—like, it’s not been a straight line that prices have continued to increase. There’s been some moderation, and a lot of that was in gas prices and shelter, and there was a little deceleration in food at home. And so, you know, at least month on month there was a little bit of deceleration. But, you know, we’ll get through this when we get through this.

BESCHLOSS: And, you know, sort of similarly, the other side of this has been obviously employment, right? Two areas that you’ve been keeping your eyes on. And the question is, you know, obviously the last Friday numbers that came out were a little mixed. You had 199,000 jobs added. You had unemployment fall to 3.9 (percent). Which is, you know, not too far, as you said, from the 3.5 (percent) you mentioned earlier, and uncertainly under the 4 percent that the Fed sort of keeps an eye on. Wages are increasing and that hopefully is a good thing. (Laughter.) And you and your colleagues deserve an enormous amount of credit for the kind of recovery we’ve had over the last year.

But you talked recently about how these record job openings—more than 10.5 million in November—suggest that demand for labor isn’t just—isn’t the issue. And you talked earlier, of course, in our conversation about structural changes. Is there anything else going on? Because, you know, are people not going to go back to work? Are there other shifts happening in the economy that are going to impact these numbers as we continue to look at them?

ROUSE: Yeah, absolutely. This is why this is—this economic downturn is not like people—it’s not like 2008. It was not caused by a problem in the financial sector. It wasn’t caused by an economic problem. It’s at the—you know, the heels of a virus. So what we’ve got is, you know, this record high job openings. We see people coming back to work, right? So two hundred thousand jobs in a month is nothing to sneeze at—(laughs)—it’s just not as much as we would have liked. It’s not as much as we—if we’re going to fully recover, we’d like to see more. But it’s really, you know, pretty robust growth, even though we were not done with the Delta surge, and we were seeing the beginnings of the Omicron surge. So, you know, this economy is continuing to power on, at least at the moment. That’s what we saw in December.

What we do see, though—and, again, I think this is tied to the pandemic—one is part of the reason why labor force participation hasn’t fully rebounded is we saw early retirement. And so people retired a bit earlier. But even more important than the initial retirement is many people who retire end up back in the labor force. They retired from their main job, they take a different job. And we’re not seeing that return. I suspect that’s due to concerns about the virus. And during the past—you know, during the past year in particular the stock market has done very well. So those with assets have seen improvements in their—in their wealth through that—through that channel. So they can—you know, their wealth advisors are telling them they can afford to retire and retire comfortably. So that’s one headwind.

Two, just demographically the Baby Boom is retiring. So we are never—even had we had not had the pandemic, labor force participation, you know, looked at broadly would have been declining. If we constrict our vision to those 25 to 54, we see much bigger improvements in labor force participation and employment. So, again, that goes back to it being retirement. These are workers who are more vulnerable to the virus in the first place. But also maybe saying: You know, what? I was planning on retiring in another five years but, you know what, I’m just going to make—I’m just going to accelerate that decision.

And then we talk about the challenges in the care economy. You know, we fully expect schools to get back to being in person and more stable. Schools—I think it’s notable that 95 percent of schools are back in person. Many of them are finding ways to cope even with Omicron. You know, even the Chicago Public Schools—which is a complicated school system—has found a way to safely reopen. And so as we learn, you know, how to live side-by-side with the virus, I think those who are care workers who are on the side because of that will also get back to work. And finally, there are those workers who aren’t looking because of fear of the virus. And, again, you know, I urge everybody to get vaccinated—(laughs)—and boosted. And as we get to another stage in the pandemic, they will come back too. You know, I’m not saying every last one, but I fully expect to see recovery there as well.

BESCHLOSS: Chair Rouse, you talked about the limitations on forecasting. You talked about, you know, all these changes that are happening, and so much of it is caused by a virus not by traditional things that we’re used to. And a lot of the time, we use historical comparisons, right? We say, you know, how do we compare today to the Great Depression, or to aftermath of World War II. What do you think about these comparisons? Is there any sort of sense of making—of using these historical examples in 2022? Or are they less useful given where—you know, what we’ve experienced with COVID?

ROUSE: Well, I don’t want to go to the usefulness—(laughs)—because I think, you know, history will be the judge of that. But, you know, in recent history when we think about inflationary periods that were a real challenge, many people go to the periods of the early—the ’70s, when we had inflation that was largely due to oil shocks. About six months ago, back in July/July, we at the CEA did some thinking about the previous periods of high inflation. And we actually think a better analogy is to the end of World War II, because there had been price controls, demand had been suppressed for other reasons and, importantly, there were supply constraints.

And that we think that that’s a better analogy, given the supply constraints, given that once the war ended demand boomed because it had been artificially suppressed. And so we think that that kind of supply-demand mismatch, rather than the oil crises which sparked inflation of the ’70s, is a better analogy. And what that tells us is that we will get through this. Back in World War II, it took a little time because it can take some time for supply chains to work themselves out. I think we’re seeing that play out in real time here. And but that as the supply and demand moderates, we will get back to, you know, our healthy rates of inflation, which the Fed is targeting at 2 percent on average.

BESCHLOSS: I’m married to a historian, so I hope I don’t get into trouble when I get back home. (Laughter.) Before we get to tour Q&A section I just have one last quick question which is, you know, one of the largest shifts that is happening is a shift to a climate smart economy. And you’ve talked about that a lot. And the private sector, of course, is moving quite rapidly also towards EV, towards climate smart investments. These shifts away from fossil fuels, of course, are disrupting. And you need a transition. And you don’t want more disruption necessarily in a lot of the sectors at this time. What can the government do? You did allude to, you know, some of the job training potential in different areas. But specifically in the oil and gas and then coal, what should be the function of the government? And what should the private sector do more proactively?

ROUSE: Right. I mean, I think this is a really important question going forward. We know climate change is here, and we know that we’re going to have to make this adjustment and make this transition. So, you know, one way that we think about this is having a stable supply of energy is in the national security interest. We need—we’ve become an industrial economy. We need our electricity. We couldn’t be having this symposium without the electricity, our refrigerators. Just our lives are really reliant on reliable electricity and, in the U.S., we also need our forms of, you know, transportation—which are largely our cars, our automobiles. And so the U.S. has traditionally prioritized a stable source of gas and oil. You know, this goes to our complicated relationships in the Middle East. It goes to our—you know, the subsidies we provided to oil companies and drilling because we know how important that is for the national security of the—and economic security of the country.

So as we pivot and as we make the transition to clean energy, we’re going to have to make that kind of priority as well, that we’re going to need to know that we have—you know, if we’re going to be reliant on electrical energy—electricity generation, you know, battery powered electrical generation, we’re going to need to be not reliant on just one country for those batteries, which would be sent—you know, reliant on not only to supply chain disruption but diplomatic disruptions as well, that we know that we’re going to need to be creating and building some of those batteries here in the U.S. We know that we’re going to need to have that kind of reliable clean energy produced here. It doesn’t have to be all of it, but we need to have some of it produced here. And we’re going to have to diversify our sources for other components of it, again, to reduce our vulnerability to, one, supply chain issues, wars, and other kinds of, you know, natural disasters, whatever, disruptions in our supply chain so that we have a reliable source of energy.

So as the administration has—so, obviously the private sector can read this as well. But we know that when it comes to something that’s a public good, like national security or economic security, the private sector probably won’t make the investments quite to the level that a social planner would, going back to our sort of limited market economy. But so we know that there’s a role for government there. And so this administration is, you know, really focused on, you know, how do we both shore up supply chains, but how do we bring some of that investment here in the U.S.? We’re already seeing some private companies seeing that—those opportunities there too. And then I think also part of the role for the government is, you know, going back to this issue of inequality and winners and losers, so we know that these are investments we need to be making.

And we want to ensure that especially those who are coming from parts of the country where, you know, they really—the economic livelihood hinges on the oil and gas industry or mining, you know, are there ways to incentivize where some of these plants are built so that some of those workers in those areas can benefit? You know, it’s got to be—make economic sense, but to not just kind of go blindly and sort of randomly assign, but to think strategically about places where people are losers—or, losers—not losers, writ large—but losing in this transition, and can we be strategic there? And then as you also just pointed out, we discussed earlier, those workers who’ve got skills that may be more appropriate to a fossil fuel-based economy, can we help transition them so that they have the—you know, some of those skills are very analogous, right? They can transition and take advantage of the kind of clean energy investments we need to make.

I will finally add that innovation is something the private sector obviously does very well, but some of the basic science is really more—has more characteristics of, like, a public good, or there are a lot of spillovers. Whereas something that is discovered, the internet might be a perfect example of that, right, there are spillovers. It’s hard to exclude other people from benefiting. So the private sector doesn’t have quite the same incentive to invest. And so some of that basic technology, some of that basic research, that the federal government, I think, also is in a perfect position to be making those kinds of bets. Some of them are risky. Some of them will pay off. Some of them will not pay off. But we need to be swinging for the fences here, so that we can solve some of the technological challenges that we know face us as we make this transition.

BESCHLOSS: As you said, there have been a lot of historical examples of that, of government making investments that now are making our life a lot easier, but also really benefited the private sector.

ROUSE: Exactly.

BESCHLOSS: At this time, I’d like to invite members to join our conversation with their questions. A reminder that this meeting is on the record and the operator will remind you how to join the question queue. So I think we go to Kayla now.

OPERATOR: Thank you.

(Gives queuing instructions.)

We’ll take the first question from Tara Hariharan.

Q: Thank you so much. My name is Tara Hariharan. I work at a hedge fund in New York called NWI.

Dr. Rouse, thank you so much, especially for your comments about the need for skills training in the United States. And I wanted to delve down a little bit further into that topic, specifically on vocational training. This is something that Europe does pretty well, particularly the German model. And I wonder whether there’s read-through for the U.S. to be able to expand our vocational education, and what both the private sector and public sector can do for this. Because it seems like right now, especially if you ask the small businesses in the U.S., the biggest concern is the skills mismatch in labor. And increasing the labor supply through vocational training could also address issues like inequality. Thank you.

ROUSE: Terrific. That’s a really important question. And we know that not everybody is interested in a more academic kind of education, and that many people want to develop, you know, an occupation and they want to get that more occupational skills training. And so I think what we think in the U.S., a little bit—rather than vocational training, but occupational training or professional training has an important role. You know, in—the German model is often held up. I think there are challenges, at least in our K-12 system, for the U.S. to adopt that wholesale. The German model also involves a lot of tracking very early on. The U.S. has had, you know, kind of a—there’s been a lot of tension in our policies regarding tracking historically.

And I actually think that part of the strength of our higher education system is that people do have a second chance. Community colleges are a great example of that, where students may not have done very well in K-12, and then the fire gets lit underneath them and they can go to a community college and then maybe transfer and continue on and get a bachelor’s degree, or even more. I have colleagues who started in a community college. So I actually believe that kind of forgiveness in our system is a little less efficient, but I think it works given the heterogeneity in our system and in our population.

That said, we do know—that, like, there’s some very good evidence that when high schools combine some career exposure with academics and, like, career academies, that actually result in better labor market outcomes later on. Actually doesn’t even change where people end up in terms of higher education, but it make the academic training and their learning more real, and it helps them to see how—why it matters, the algebra, or the history, and why all that matters, because they can see how it’s used in the real world. So I think, you know, there are ways to infuse more real-world application in high schools that can be very effective, and that I think borrows a page, you know, a leaf out of the German system.

But I will also add that, you know, apprenticeships can be so important. And apprenticeships bring together employers and job trainers and educational institutions, sometimes unions as well, in order to train workers for specific, you know, vocations and trades. And that’s—you know, the Biden administration has put forth money to try to improve our apprenticeships, expand them, because we know that that can be a very important way for addressing some of these supply changes. For example, there’s a big effort right now between the Department of Labor and Department of Transportation to be expanding apprenticeships in our long-haul trucking to help address some of the trucking shortages.

And then finally, I will put in a plug for one of the most effective training program designs that we have in the U.S., it’s called sectoral training. And again, that’s when employers across a sector—so it’s not an individual employer but it’s employers that share and need certain kinds of skills—get together and, again, with an educational institution, sometimes with a union as well. And workers are getting that kind of occupationally oriented training. And the evidence suggests that can be quite effective for increasing employment and increasing wages. So I think there’s many, you know, things that we can do in our educational system that bear a lot of resemblance to the German model, that feature professional training, occupational training, and that fit better within our system.

BESCHLOSS: Chair Rouse, I was just reminded that you were speaking also about some of your other research on the impact of summer programs on minority students, because that has also been very powerful, I think, based on your studies. And I know Richard Haass has done a lot at the Council on programs that the Council can do in that area. But I think maybe we will go onto the next question.

OPERATOR: We’ll take our next question from Fred Hochberg.

Q: Hello. Fred Hochberg.

This was—has been a great conversation. Cecilia, I have a question, if I can. In the very beginning, you cited two things that I found puzzling, so I wanted to understand. But one you cited that we only have four U.S. airlines, and that is an anti-competitive, or monopoly sense to that. And how would you square that with just the global challenges? You know, Germany basically has one airline. And to compete globally, it sometimes means we may be a little more monopolistic internally. So that’s part one. And part two, you cited the example at CVS, which I’ve used many times in speeches when I was in the Obama administration. I mean, productivity is key to higher wages and capping inflation. So if retailers find ways to automate, and therefore deliver to customers, and it also gives them the ability to pay higher wages, I don’t know that we should be really opposed to that. So help me understand your point of view, because I don’t think I really get it.

ROUSE: Right, no, thank you. So, look, I don’t—I don’t—I haven’t studied the German airline industry. So I don’t know whether—maybe the one airline in Germany, which probably gets a lot of subsidies from the German government, but I don’t want to go there because I’ll be over my skis. So I don’t want to speak to that. And obviously there’s places where concentration can be effective. I believe in our airline, though, in our own airspace, many people believe that that’s been the source of prices—ticket prices that are a little higher than they should be, you know, in terms of not only the ticket prices but also other aspects of what people are having to pay for their trips. Not clear that the service has been up to snuff.

And so I don’t want to go too far—I don’t want to make the comparison to Germany. What we’re really focused on is places where concentration has not been necessarily so beneficial to the American consumer. And the reality is that our—like, the Federal Trade Commission used to traditionally, there’s—the merger guidelines was developed in 1968. And they used to look much more carefully at potential mergers, which a much lower standard than they are now. So, again, some mergers should go through, but our—we have not even been providing much oversight over the last three or four decades.

In terms of—wait, what was your second question? It was—Fed?

Q: Can I talk? Can you hear me? OK, oh, it was about retail, for example. You cite the example of CVS. We need to encouraging efficiency wherever. And, yes, we need to have a tax system that makes it so consumers benefit. But I’m concerned about being opposed to those kind of innovations.

ROUSE: Yeah. Yeah, no, no. So I encourage you to read the work of Daron Acemoglu, who’s been very thoughtful about this. And his point is that not all of these innovations have been as efficiency approving as you just characterized, that they have generated higher wages for the workers who exist there, that they have—that has actually benefited the American consumer. And so I think his point is that, yes, automation has—you know, in certain places—has been efficiency enhancing, has been growth enhancing. But not all kinds of automation has been in that category. And so that’s the distinction he’s trying to draw. So I’m not trying to be discouraging. I think his point is that we need to be more discerning.

BESCHLOSS: Kayla, I think we can go to the next question.

OPERATOR: We’ll take our next question from Paul Sheard.

Q: Thank you very much. Paul Sheard from Harvard Kennedy School. Thank you, Professor Rouse.

During this pandemic, for obviously reasons, the advice given by public health officials and the decisions made by them or influenced by them have had a tremendous impact on the economy, not just, you know, as we’re experiencing it but I think as some of your remarks have showed even having longer-term implications, you know, hysteresis effects, et cetera. My impression, just looking at this as an economist, is that often those decisions or advice have been very, very narrow, even looked at from a public health lens let alone the general equilibrium of the economy. Can you say a little bit about how economists such as yourself and your group and other economists in the administration have been, you know, communicating with the public health officials and perhaps, you know, influencing and having input into their very critical decisions?

ROUSE: Right. I said—I said from the outset, I think our economic challenges stem from the pandemic. And here at the Council of Economic Advisers, I’ve made it a priority for us to try to understand what the best of science has to tell us about the pandemic. We get a monthly briefing from the COVID team, particularly as we—you know, as we try to understand and anticipate where we may be headed, and also to try to understand some of the data we’re seeing, how that might be related to the pandemic. But that said, you know, this pandemic, this virus, has been a challenge. And so I think it’s no secret that the scientific community has been learning as it goes, and that, you know, if epidemiologists even look at the charts that we receive every month—you know, for example, when they’re expecting a particularly—you know, a particular wave to peak, the error bands around those predictions are really quite wide. So I think we’ve all been trying to learn. And every variant is proving to be a little bit different than the last.

You know, as an example—so, two years ago, in order to—remember we talked about flattening the curve. But remember, two years ago we had no immunity. And in order to keep people safe, because we had this new virus which could land people in the hospital and death, we needed to power down the economy. So that was two years ago. We developed in rapid speed, in record speed, new vaccines, which turned out to be much more effective than I think I anticipated now a year ago. And so that allowed us to start to reopen. And so I think that’s been important. I do think we need to be trying to understand what it means to continue our economic activity while the virus is endemic, and while we have a virus that we don’t fully understand how it’s going to mutate, right?

The flu that we get every—this is my understanding—the flu that we get every year is actually a distant relative of the flu of the pandemic from 1918. So that has mutated in a way that—it’s not that we anticipate it well every year. Every year—every year—you know, some years the flu shot is more effective than it is the next year. But it’s in a way that we can somewhat have manageable. There’s much that happens every year. We have, what, fifty thousand deaths every year with the annual flu. So it’s not inconsequential. But we have learned to live with it. I don’t know when we can anticipate this virus getting to have that kind of a character. My, you know, armchair interpretation is Omicron is going to speed us—may speed that, but I don’t know. You know, I’ve also been told that mutations mutate, and you just don’t exactly know what it’s going to do.

So we are trying to stay close to them. We have—the Office of Science and Technology Policy is convening—separate from the COVID team—is convening another group of experts to try to think about how we should be managing towards the virus and thinking about this endemic phase, and also planning for the next pandemic. My team is sitting in on those meetings as well. So we are trying to stay lashed up so that we can best understand. But I think the reality is this has been so new and it’s been changing so rapidly that we’re all learning as we go.

BESCHLOSS: Chair Rouse, on this point, given, for example, disruptions right now in hospitals, sometimes—you know, in some cases about 30 percent of the staff are out because they’re sick. There’s sort of that exhaustion that has set in, like you said, I think, early, in childcare, in education, in the medical area and sector. Do you see that being more disruptive? Is there a scenario that that could be more disruptive and reduce economic growth a lot more than we think in terms of one of the scenarios to look at?

ROUSE: Well, it could be. And I think if you look at outside forecasters, they’ve reduced their forecast for GDP growth in the first quarter of 2022 as a result of Omicron. I will say that Omicron in particular, because—so, again, going to the fact that we’re in a different phase now. So we’re two years in. In the U.S., we’ve got about 70 percent of adults have gotten—either are fully—I think 70 percent are fully vaccinated. Again, being fully vaccinated doesn’t mean you’re not going to get sick, but what we’re seeing right now with this variant, which turns out to be less severe but highly transmissible, is absences. So businesses are still seeing demand for their products or their services. Some of that may be tapering off a little bit as we—as we get to the mature part of the wave.

But what—the bigger challenge, at least what we’re seeing this moment—this could change next week—is absences. And that really highlights in U.S. the fact that—so what we need economically is paid leave, right? We need for workers to be able to stay home for three to five days, because they’re transmissible then. But, you know, for many of those workers who are vaccinated—and everybody should get vaccinated—have I said that many times today? So for those that are vaccinated, right, after three, five days or so, they could be back at work. And they were no longer contagious. But they needed to be able to stay home and not worry about paying the rent and getting food on the table.

So paid leave, which is part of the president’s economic agenda, I think is exactly the economic remedy for right now. We need to have economic policies that allow for the kind of flexibility that we’re going to need. That doesn’t mean that we need to come in and rescue the economy every time, because I don’t think that’s what it’s going to be calling for, but it doesn’t mean that there’s not going to be impacts on workers and businesses. So we need the kinds of policies that can allow for that—you know, that kind of a safety net, if you will. I don’t want to call paid leave a safety net because workers really have jobs, but they need to be able to stay home and take care of themselves, and not infect their coworkers while they—while they get past this. So that’s the kind of forward-looking thinking I think we need to have.

BESCHLOSS: Absolutely. Kayla, I think we can go to the next question.

OPERATOR: We’ll take the next question from Anne Romatowski.

Q: Hi. Chair Rouse, thank you so much for being here today.

My question is also about COVID and the economy, specifically about the impact of long COVID on the labor market and the economy now and in the future. Experts started warning two years ago that COVID-19 could be the largest mass disabling event in U.S. history. And unfortunately, it seems that those predictions are playing out now. And just yesterday Katie Bach at Brookings put out a piece estimating that thirty-one million working-age Americans have suffered from the long-term effects of COVID-19, and that 1.6 million Americans are likely out of work because of long COVID. And since, you know, so-called mild cases of COVID-19 can have severe long-term effects, and even for those fortunate enough to avoid those long-term effects during an initial infection, they’re then more likely to have a preexisting condition from that that would cause long-term impacts upon reinfection. So my question for you is how will this affect the labor market, and what additional data need to be gathered and made available to inform policies, and hopefully curb this mass disabling event

ROUSE: Well, so this is a great example of a—you know, of an aspect of COVID that I feel like we don’t—we don’t fully understand. So, you know, if you want to go to data—and I think, you know, at the CEA this is part of what we’re trying to empathize and trying to build up within—an advocate for within the administration is better data collection along a variety of dimensions, but especially in terms of public health—you know, what are—what are—you know, what are the—how do we understand how many people have been affected by long COVID. And, by the way, I made a note, I need to look up that paper.

But importantly, like, what exactly does it look like to have long COVID? So what kind of support do these workers and these individuals need? Can they work? Can they work part time? Can they do certain kinds of occupations but not others? I think we’re going to need to understand really what that looks like. So, you know, we have a disability system. Is that how we want to think about it? Or, you know, currently our disability system is rather of a one-way street. Once you qualify, you know, most people don’t want to lose that qualification and take part-time employment or work. But do we need something that’s more flexible than that to accommodate?

I think we need to know much more, but obviously it’s just the sheer numbers of people, many people who are in their prime age, who may have been affected, will generate some headwinds for our labor supply, and that will generate additional headwinds on economic growth going forward. No question about it.

BESCHLOSS: Should we go onto the next question?

OPERATOR: Sure. We’ll take our next question from Daniel Rosen.

Q: Hi. Thank you very much. Dan Rosen from Rhodium Group.

I want to turn to the international side for one question. Growth as we have known it in China arguably is over. Even if they’re able to pull out a pretty good forward-looking outlook, the drivers—real estate, et cetera—that they’ve sort of overextended, over-depended on are pretty much spent. There is a nontrivial possibility that that could spill over to their banking sector, and we could have a really first-order international financial disruption flow from that. Is that something that you and the team have considered, are looking at on the international side as a major 2022 eventuality to prepare for and think about what we would be looking at and how we’d deal with it? Thank you so much.

ROUSE: So, you know, that’s a really good question. So I will confess that it is not something that is my anxiety closet at the moment, but I think you just put it there. This is not to say that other members of the economic team haven’t been thinking about it. It just hasn’t bubbled up to me, as we have many other things in the anxiety closet. But I’ve taken a note and I’m happy to circle back. But, you know, there’s no—at the moment, the challenges of Evergrande—you know, our estimates are that that is not likely to spillover to the U.S. economy through our financial systems.

You know, there’s also a question of whether China will really try to curtail the potential spillovers, especially, you know, maybe let them default on some of what the—some of their borrowing. I think the bigger concern is the promises that they’ve made for people giving up their life savings in order to have houses built and then not actually getting the houses, which becomes a much bigger domestic problem for China. But so far, you know, in that, in the housing sector, at least as it responds to Evergrande, we don’t tend to think that may have spillover. But I feel like your question was much broader than that, and sort of thinking writ large about the challenges of the Chinese economy? Not yet. But I think now I’m going to have to look into that.

BESCHLOSS: And housing sector, of course, in China is, what, more than 30 percent of the economy. So much larger than us.

ROUSE: Yeah. But that also goes to why the Chinese government may not want to see it fail, right? So.

BESCHLOSS: Right, right. Well, I know we have a number of other questions but we’re coming close to the 2:00 time. And I wanted to thank you, Chair Rouse, for joining us today and for your incredibly insightful comments. And thank you all for joining today’s virtual keynote session of the Stephen C. Freidheim Symposium on Global Economics. Please note that the video and transcript of today’s meeting will be posted on CFR’s website. And we hope you can join us for the second session of the virtual Freidheim Symposium, “Reforming U.S. Capitalism,” directly following this meeting, from 2:15 to 3:15. Thank you, again, Chair Rouse.

ROUSE: You’re very welcome. This was delightful.


Virtual Session Two: Reforming U.S. Capitalism

MALLABY: Thanks so much, and welcome, everyone, to the second session of the Stephen C. Freidheim Symposium on Global Economics. As you know, the symposium is presented by the Maurice Greenberg Center for Geoeconomic Studies and it’s made possible through the support of the Council Board member Stephen C. Freidheim.

The title of this session is “Reforming U.S. Capitalism.” I’m Sebastian Mallaby, for those of you who don’t know me, and I’ll be presiding over today’s discussion. I’m a fellow here at CFR, and encouraged by my supportive colleagues and allies in the CFR meetings department, I’m going to overcome my shyness and mention that I’m also the author of a new book that will be out in a couple of weeks about venture capital. It’s called The Power Law. And with me to discuss the reforming of U.S. capitalism I have people who have written their own books or are about to come out with them on the topic under discussion, which is more than I can claim. Steve Pearlstein is a professor at George Mason University and the author of the provocatively titled Can American Capitalism Survive? Megan Greene is a senior fellow at Harvard Kennedy School and a columnist at the FT, and her book on the subject under discussion is yet to appear but she says it’s almost done. And Thomas Philippon is a professor at New York University and the author of The Great Reversal: How America Gave Up on Free Markets.

So the starting point for this panel obviously links to some of what was discussed in the first section with Chair Rouse is that there has been a sea change in attitudes towards capitalism over, I guess, the past quarter of a century. In the 1990s, against the background of the fall of communism and the loss of momentum in Europe and Japan, U.S. capitalism was riding high, but today confidence in the U.S. system has been shaken and polls sometimes report that a majority of millennials would rather live in a, quote, “socialist system” than a capitalist one.

So the questions are, what’s gone wrong with capitalism? Why has it lost people’s confidence? And what, if anything, can be done about it?

So to get things started, I’m going to turn first to Steve. This is because when people in my chair are called the moderator, that’s obviously a total lie; we’re actually, you know, into provocation, not moderation, half the time. So Steve with his provocative title—we’ll go to him first and simply ask, what is the one thing, the main thing, that ails U.S. capitalism today?

PEARLSTEIN: Well, thank you, Sebastian. It’s good to see you again. We used to work together at the Washington Post. It seems many years ago now.

And it’s nice to be with you all and in such distinguished company.

I’d say, Sebastian, in order to talk about this twenty-five-year gap, you have to go back a little bit farther to the late 1970s and ’80s when those of us who were around can remember there was a lot of urgent hand-wringing over U.S. competitiveness and whether the U.S. economy could remain competitive against Japan and Germany. And so American business and finance responded in a number of ways that were designed to make companies leaner and meaner. And they were aided by a parallel effort by the government to pull back on regulation that, some argued, were hamstringing that competitiveness. And whatever else you want to say about those efforts, they worked, and by 1995 the U.S. was back on top. But as often happens, the pendulum swung too far and the relentless push for higher profits and lower prices and less regulation eventually led to unacceptable levels of economic inequality and insecurity and, in particular, general deterioration of trust in our institutions and in each other, what economists call social capital. And we see that erosion of social capital today in the frayed relationships and declining loyalty between companies and their employees, between companies and their suppliers, between companies and their customers, and in that declining support for capitalism and globalization. And we surely see this erosion of trust in government in the polarization of our politics and in government dysfunction. So that’s where it comes from. There was a good reason for it, but we overdid it. And I think there are some signs that the pendulum is beginning to swing back, happily.

MALLABY: So, Megan, you’re up next. Social trust, in Steve’s view, is—sort of social capital is the thing that’s been eroded and needs to be rebuilt. How would you frame the answer to this question? What’s the one main thing that ails capitalism today?

GREENE: Yeah, so, Sebastian, that poll that you cited at the beginning, showing that a majority of millennials support socialism to capitalism, also reveals that when asked what socialism means that the plurality of respondents said it meant equality for all, which, of course, isn’t at all what socialism means, but it does suggest what was really behind the answer to that question, which I think is a rise in inequality that’s really taken off in the U.S.

You mentioned I’m writing a book about inequality. I’m trying desperately not to write a book about the U.S., but it’s just impossible because the U.S. is turbocharged on most of the drivers.

So if I had to identify one of the drivers—partly to distinguish myself from Thomas, who—I know what Thomas is going to say—I’m going to highlight a different driver. I imagine Thomas is going to talk about decreased competition and monopsonies. I’m going to suggest that actually there’s another driver that might be the real culprits driving inequality higher in the U.S., and that’s a decrease in worker power and that that explains the falls in average unemployment and the lack of inflation that we’ve seen, up until the pandemic, at least. There are a lot of things behind this decrease in worker power. One is unionization. So at the peak, in the 1950s, around a third of private sector workers were unionized. Now only 6 percent are in the U.S. This has been a trend in all developed economies but much more so in the U.S. than anywhere else. We’ve got increasingly demanding shareholders who, in part, are demanding outsourcing to maximize profits, which they view should be returned to themselves. Decreasing real minimum wages has sapped the power of workers. And also, post-employment restrictions—things like NDAs for McDonald’s employees that are more widespread than you imagine. There are doggy daycare places that have non-compete clauses in their contracts that are unlikely to be upheld, and yet most people who are working in doggy daycare can’t afford the lawyers to prove that if they should have to.

So all of these things are sapping worker power. And I think if this idea is right, that actually lower worker power is one of the main drivers of inequality in the U.S., then we have to ask whether corporations should really be operated to maximize the profit for shareholders rather than stakeholders. There’s been a lot of lip service made around this, but when it comes to practical action, there’s been very little.

So I’ll leave my comments there. I think that’s the main driver of inequality.

MALLABY: Thomas, what’s your pick for the single most important thing that ails capitalism?


MALLABY: In the U.S., yeah.

PHILIPPON: Yes. So I think—I don’t know if it’s a single one but my book was focused on competition because what I found striking—the title The Great Reversal comes from the fact that I always thought of the U.S. as the, you know, the kingdom of free markets, and by that I just mean really simply that consumers get a good deal. Whatever you want to buy in the U.S., whoever you are, you’re going to have a good deal because producers of services or goods are going to compete for you. So that’s how I view the U.S. And the book argues that longstanding advantage quality of the U.S. has deteriorated over the past twenty years and that the U.S. is not the land of free market for its own consumers anymore. So that was the—that’s the thing that I found most striking.

In terms of numbers, I’m not going to argue it explains all of inequality, far from it, but I think it’s very significant. So I listened to Cecilia’s—Cecilia Rouse give the keynote discussion before, and then she talked about some of the issues I examine in my book, like broadband access, internet. She mentioned meat packing, of course, as a typical consumer product. But so what I do in the book is I try to adapt all of these markets that I believe have become less competitive, and it adds to something like $200 per month per household. So, given that we know many households in the U.S. would have a hard time with an unexpected expense of a few hundred dollars, the fact that they are paying $200 of taxes to monopolies expansions is a significant amount for them.

But of course, the lack of competition, it’s not just for consumers. The virtue of competition includes low prices for consumers. It does not stop there. It also includes higher wages and higher productivity. So if you wrap up everything, I find that the decrease in quality, the decrease in competition in U.S. markets has cost probably something like a trillion dollar of GDP. And because of the fact that it’s good for workers and consumers, it actually costs more than a trillion dollar in the low income, something like a trillion and a quarter or a trillion and a half. So that’s missing labor income that would be a boon for the middle class, if we could regain competitive markets.

I think it’s feasible because the U.S. did it in the past, so I would argue that’s an important agenda, item for the agenda.

MALLABY: And Thomas, sticking with you for a minute, I’m interested in how we got from there to here, because, you know—


MALLABY: —you begin your book with sort of your experience of arriving from France as a graduate student in the U.S. in the ’90s, as I remember, and finding this thing that, you know, things were attractively cheap and your money went further. So the 1990s felt great, but is it that they were genuinely great and then something went wrong, or is that we sort of thought they were great but we were kidding ourselves in some way?

PHILIPPON: I think it’s more the former, with one caveat. So I arrived in ’99, which is kind of the peak. So that’s where, according to all my metrics, you get really the ratio—your real purchasing power, like how much you earn relative to how much stuff cost was really the best in U.S., and the striking comparison with—I was coming from London at the time and then from Paris before. It was strikingly better to be a student here than back at home.

And I think it was generally great. The one caveat is it’s possible that some of the seeds of what would happen later were sown around that time, so the—maybe we were not—we were too confident that things would remain good and we didn’t have to worry.

So the short answer, the one thing I would blame the 1990s for is hubris. I think they were great. The big mistake was to think that they were great by themself and, therefore, they would remain great, even if you didn’t do anything. I think that was the mistake.


Megan, what about you? How do you see this, sort of the reasons for the transition from the ’90s to now? Were the seeds of the trouble there? Presumably, if you’re looking at the loss of labor power, they were.

GREENE: Yeah, absolutely. I think the seeds were mostly sown before the 1990s. I guess the one thing that wasn’t was, you know, including China in the WTO and the huge explosion in globalization that may have also increased inequality and certainly created winners and losers. But beyond that, I think most of the seeds already were there; they just weren’t impacting enough people enough by the 1990s for it to be a significant problem. But I think it’s a bit like boiling a frog; you know, if the frog’s already in the hot water and the water’s getting hotter and hotter, they don’t really notice until it’s too late, till it’s too hot. And I think the water was already pretty hot in the 1990s; we just didn’t really notice.

MALLABY: And there could be a lag, Megan, between the shift in the rules around, you know, whether there are NDAs in contracts and that kind of stuff, and the effect on behavior. Behavior might take a while to catch up? Is that part of the story here?

GREENE: Yeah, that’s right. And also, you know, outsourcing wasn’t as common then, but the motivation to outsource was already present. So I think a lot of the causes already existed in the 1990s; we just didn’t respond to all of them immediately.

MALLABY: And Steve, what’s your take on this in terms of the seeds were there, I guess, in your account in terms of the—

PEARLSTEIN: No, the seeds were there, but, you know, by the 1990s—as again, the model that I sort of asked you to think about is that some of this stuff was necessary to be done. It may be that unions had too much power in the 1970s. It may be that shareholders got too little of the profits in the 1970s. The 1970s, for example, investors made nothing, on average, on their investments for the entire decade. So some of this was corrective, and it was a good thing, but, you know, it’s a yin and yang thing, you know. In these corrective actions that were driven too far were the seeds of, you know, our discontent. Growth and innovation had not yet migrated so thoroughly to the coasts. Industries were, back then, nowhere near as consolidated as they are today, although some of us were complaining that they were, you know. (Laughs.) We didn’t even have a clue how consolidated they would become. There was still a credible threat to unionization, which restrained companies, to some extent. Certainly the income and wealth gaps, particularly the wealth gaps, were not as big. And at that time, the majority of young people were still doing better—and when I say young people, I mean people in their thirties and forties—were still doing as well or better than their parents. And all of those things have changed in the last twenty years.

MALLABY: And Steve, sort of moving on to a different question, and sticking with you for a moment: You know, Megan said earlier that behind that polling question about preferring socialism was essentially a concern with inequality. But there are many ways in which one can describe the problems in U.S. capitalism, and some are about, you know, prices for consumers, some are about the failure of productivity to grow faster, and some are, frankly, ethical, and I wonder if you could talk a little bit about that part of it, the extent to which you think the failures may be more than merely some metric of what prices are, what productivity does, and actually get to something about kind of how we live together.

PEARLSTEIN: Well, I think that’s—you know, a lot of people try to analyze this in terms of, you know, quantifying things, which is not my specialty, or pointing to this law or that decision that did it. And for me, the biggest thing has always been a change in the norms of business behavior, which go back to what Megan talks about in terms of maximizing shareholder value, as being the sort of central organizing principle around which you—that people ran companies. And there’s a sort of selfishness that’s built into that, selfishness on the part of shareholders and the world of finance, and by the CEOs. And we—I think it is, as much as anything, our moral repugnance at stories we hear. There’s this one recent one the other day about some CEO of some company—I should remember it but I don’t—who fired everybody, you know, on a Zoom call or something, and these sorts of things really outrage us. And people have a tendency to draw generalizations from these kinds of stories. And, you know, back twenty years ago there was the stories of the workers who were told they were going to be laid off but they were given severance only if they trained their Indian replacements. Those sorts of things, the CEO pay stuff—CEO pay doesn’t describe anywhere near what’s going on in terms of inequality, but people focus on that. And these are the things that erode the sort of moral support for a system that’s based on inequality. And we’re willing to accept a system that is based on inequality, based on performance and how hard you work and how talented you are. We’re willing to accept that. Americans are more willing than most people, in fact. But there’s a point at which people say they’re not willing to accept it, and a lot of that has to do with a sort of moral repugnance at the selfishness and insensitivity shown by the people who run the economy.

MALLABY: Megan, so making a slight segue there, I mean, the part of what I want to ask you is whether you share Steve’s perception that some of the problems here are not really quantifiable; they’re qualitative. They’re about a sort of gut sense of unfairness. But if that is that is the case, and this is to be part two of my question to you, to what extent could the problems in capitalism, or the perceived problems, be attributable to things like social media, changes in the way that we communicate with each other, changes in the political culture, just the decline of trust broadly in the society? Is that part of the trouble here?

GREENE: Yeah, so as an economist, I hate to confess that there are unquantifiable aspects of this that are—you know, exist purely in the ethical realm. I think that’s absolutely correct. But I also think a lot of those things also exist in a quantifiable realm. So if you think about the purpose of a corporation is to maximize profits for shareholders—you know, I think there’s a school of thought that thinks, actually, it should be to maximize profits for all stakeholders. There’s another school of thought that I fall into, which is actually those are the same thing. So, you know, you should pay workers more, not just out of the kindness of your hearts but because of efficiency wage theory; they tend to be more productive and more loyal if you pay them more. It goes all the way back to Alfred Marshall.

So I in my book have tried to come up with ways for companies to play a bigger role in addressing inequality, and all of the solutions I come up with companies should actually be doing anyhow, even if inequality weren’t such a huge issue, and those things are more quantifiable.

I will say that very few people ever actually read Milton Friedman’s op-ed in the New York Times saying that the purpose of a corporation should be to maximize profits for shareholders, but if you do, it’s really clear that he also stipulates the idea that actually it’s the government that sets up the rules of the game and then corporations operate within that. That assumes that we have perfect competition, and as Thomas has written about, that’s clearly not true. The markets are rigged and, you know, the rules of the game are significantly established by very powerful and very rich firms that have a lot of money to pay lobbyists to help set up the rules. And so I do think that, you know—I said worker power is the biggest driver. I also think that decreasing competition is a huge contributor as well.

And if you look at those companies at the Business Roundtable that went ahead and signed a letter saying that it’s stakeholder benefits that matter the most—Ravi Ranjan has cited a study that showed that actually they have offered the smallest wage gains of all companies. They actually haven’t upheld that at all in practice. So I do think this is something that’s increasingly hitting headlines but actually, in practice, isn’t really being implemented.

To your question about social media: It is absolutely sowing distrust, and not just social media; I think the media has also sown a lot of distrust as well, and that’s just driving polarization writ large, of all different kinds, but that certainly exacerbates the inequality issue that we face in this country.

And then just one last comment, because we’re talking about capitalism, but I just thought I’d highlight that there are lots of different forms of capitalism. So in Germany, for example, it’s pretty normal to have a member of union leadership on the board of a company so that workers are actually represented at the table where decisions are being made. That doesn’t happen in the U.S. at all. I think it’s mostly our Anglo-Saxon version of capitalism that’s problematic, not all capitalism writ large.

PHILIPPON: So Cecilia mentioned one thing—

MALLABY: Go on, yeah.

PHILIPPON: —just before we move—I maybe have a slightly different take on the socialism issue.

So, OK, so young people in the U.S. find socialism attractive. So, first, of course, as Megan said at the very beginning, they have no idea what they’re talking about. They don’t know what it means. What they really mean is this—look at Denmark. Denmark looks pretty good. OK. And then if you dig down, I would venture the following hypothesis: I think it’s 100 percent—(inaudible). In other words, if the U.S. didn’t have the most expensive and dysfunctional health care system in the world, I think the idea that you need socialism would quickly disappear. I think most of what we’re seeing is the fact that health care costs are through the roof. They put—it’s a huge amount of risk on families, and it feels like a never-ending story and extremely, you know, anxiety-inducing, for real reasons. I think that is the real disaster. And I think that maybe not 100 percent—let’s say 90 percent of what you see when you ask people about their appeal to socialism, first of all, it’s actually about dealing with social democracy, and the key feature of these social democracies is they have a good health care system. Everybody’s covered and nobody has to worry about it. If you just remove that, do the thought experiment in your head. How much support for socialism would there be if, you know, the U.S. could provide the kind of health care system that all of the other rich nations provide? I think the answer would be vastly different.

MALLABY: Well, I mean, sticking with you, Thomas, I mean, I think that might be right, but there’s also the sort of—Steve’s argument, which goes a bit broader and says it’s not merely about health care, it’s also about a perception that bosses treat workers with no respect, they fire them on Zoom, they force them to train their Indian replacements, and that there’s a sense that we’re not all in it together and it’s a slightly squishy idea, this kind of story, but it might actually be how human beings think and function and feel, in which case it wouldn’t just be about health care. How do you respond to Steve’s perspective?

PHILIPPON: I think it might—I think it’s probably important, but I just think health care is so much like the elephant in the room for that particular issue of why people are anxious about economic life. If you lose your job, you lose your health care. All of these ideas make absolutely no sense in other countries. Like, why would your health care be tied to your employer, for instance? Think about something that doesn’t make any sense. So I think that would also increase the bargaining power of people. They would be less worried about losing their job. They would be more willing, maybe, to bargain more toughly.

Now, the one thing that I do find super interesting in what Steven was saying earlier is, if you look historically, actually, management has always been pretty good in the U.S. So, in fact, labor relations were relatively good, especially—maybe late nineteenth there was a—late nineteenth century you could argue, but very quickly, after the 1920s, any kind of survey we have, any data we have about the quality of relations within firms between management and worker, the U.S. is on top. Now, that might be changing in recent years. That would be another worrying sign of something the U.S. used to do very well and that maybe not doing as well as before. But traditionally—I mean, we have great—you know, after the Marshall Plan, Europe sent teams to the U.S. to study the economy, and I’ve read the transcript—actually written notes from union members from France going and visiting factories in the U.S. and they were amazed by the quality of life of the workers. Like, there were windows in factories and people could breathe normal air. That was not what they were used to in France. So this is—that’s the situation in the U.S. Also, the management was much less hierarchical than in Europe. So that might be changing, though, if that’s Steve’s point, and that would be an issue, I think.

MALLABY: Yeah, on the other hand, one could also argue—(laughs)—that the French lack of windows in the workplace maybe was correlated with the fact that anti-capitalism became a lot more pronounced in France than in the U.S., a lot earlier. Right? I mean, France has been politically to the left of the U.S. for a long time and that could be correlated with what you were describing.

PHILIPPON: Yeah, but in France I always feel like some of the anti-capitalist sentiment is a bit more political than the U.S. It’s slightly less about economics and a bit more about politics. I think that’s a slightly different tradition. But for sure, yeah, I mean, part of the bad labor relations we’ve had was based on conflict within firms, and the U.S. on that front used to do actually pretty well.

MALLABY: I want to go to Steve for a quick question, which is, to what extent do you think reducing lobbying would put capitalism in better shape?

PEARLSTEIN: I don’t think that’s a big—I don’t think that would make a big dent in things, frankly. I mean, I—

MALLABY: Does anybody disagree? Megan—

PHILIPPON: Maybe a little bit but I’m very curious to see what Steve is going to say.

MALLABY: OK, sorry, Steve. Go on. Go on.

PEARLSTEIN: You know, could you change the labor laws so that workers had more power? Could you change the antitrust laws so that there’s less concentration? Yes. Yes. And we could probably go through immigration, social safety nets, health care. I mean, we could go through all of those things and you could say, yeah, well, if we did all those, American capitalism would be better. I agree with that. The question of whether corporate lobbying is the reason that those things are the way they are, I think you want to be careful about that. You know, the reason legislators behave the way they do is not necessarily because they’ve been lobbied or even because they got campaign contributions. They’re getting them from a lot of people with conflicting interests.

And I say, you know, it used to be true that our democracy worked pretty well in that it reflected the policy preferences of people, particularly on big issues. On small issues, lobbying is very effective. You can get a little—a provision stuck into a bill that no one will ever notice. Yeah, lobbying and that sort of thing is very effective in that. But on big issues, you know, unions—(laughs)—you can talk about unions. Unions were not very popular in the 1970s among a large portion of the population. And so when Ronald Reagan fired all the air-traffic controllers and got away with it, that really did change the norms of behavior. But the public accepted those norms of behavior. They could have—they had many opportunities to say we don’t like that, and they didn’t. And it was not just because of lobbying.

So I wouldn’t—I don’t think this—I don’t think the machine or the model is as simple as that.

MALLABY: We’ll come back to some of this stuff, but I want to open up for members to join the conversation with questions. I’m going to remind everybody that this is on the record. And I’d now ask Laura, the operator, to remind you how to join the question queue.

OPERATOR: (Gives queueing instructions.)

We’ll take the first question from Joseph Bower.

Q: Thank you. This has been quite interesting.

I want to ask you to think back. In work that I did looking at the restructuring of industries in the ‘80s and dealing with the problem, what was dramatic was the impact of the oil crises, starting in ’73 and then on to ’82. And, just on a very macro level, the importance of labor versus energy and materials in value added flipped, and that roughly labor and other forms was two thirds of value added and it became one third.

Wages have stayed—real wages have been more or less flat since then. And at the same time, the producers of energy, the sovereign-wealth funds, had huge sums of money that they brought into the U.S. markets, which was associated with the financialization we saw in the ‘80s.

Part of what you call increased competitiveness, Steve, is basically the buyouts and the hollowing out of the Midwest of the United States. What Wall Street did was buy those firms, essentially reorganized them and moved the manufacturing out to Asia. And, yes, all of a sudden U.S. firms were much more competitive. Wages were down. Real wages have stayed down. And that really continued.

The ’90s, Thomas, were wonderful if you had money. But an increasing portion of the United States—(inaudible)—that bottom half, bottom 60 percent, with no savings and no ability to. And if you look at the income map of the United States, it corresponds—

MALLABY: Can we get to the question? Sorry.

Q: So all I’m saying is the question is it’s the financialization of capitalism in the United States is really what happened. And, by the way, the winner of the Council’s book award this year was Zachary Carter’s book on Keynes, which deals with Joan Robinson in perfect competition, and then Galbraith. Galbraith talked about countervailing power in the ‘50s and ‘60s. That’s where the balance of labor, corporations, and government—

MALLABY: OK, let’s put the question to Megan. To what extent is the financialization of the U.S. economy at the core of what we’re discussing now?

GREENE: I think it’s a huge piece. It’s also one of the drivers of lower worker power, right. If workers are less able to share in the profits because capital is more able, then companies are more incentivized to hire lots of workers who they don’t have to pay any kind of premium or even benefits these days. They can hire them as contractors. So unemployment is kept pretty low and so are wages. And that’s exactly what we’ve seen up until the pandemic. And now we’re finally seeing wages grow. I have big questions about whether that will be sustained. I doubt it will be.

So, you know, I agree this is a huge underpinning of why the pendulum has swung so far away from labor towards capital.

PEARLSTEIN: Well, financialization has two components, I think. One is the sort of finance being the tail that wags the dog of the real economy. That was true. But financialization, as Thomas has taught us all, is also that finance is basically, you know, creaming off an extra 2 or 3 percent of GDP right off the top for themselves, which unnecessarily, because we don’t have to pay them that much to intermediate, but we do.

And their ability to grab that extra percentage or two of GDP just for themselves, just for finance, is an interesting question why we allow that, whether that’s a lack of competition or some other rigging of the game. But I think the financialization has two components. One is the way companies are run and the other is the finance sector just grabbing a couple of percentages of GDP for itself.

PHILIPPON: Yeah, two quick points on that.

MALLABY: Yeah, go ahead.

PHILIPPON: Sorry. Sorry.

MALLABY: Let me just sort of set you up with an additional provocation here, because I guess I’m more sympathetic to the financial sector than the rest of you. It seems to me that finance, first of all, at times has created one kind of business structure. So J.P. Morgan drove a bunch of monopolies in the early 20th century, around the turn of the century. Other times it’s created, you know, mass unbundling, as in the invention of the junk bond and the rise of buyouts, and then went in the opposite direction to where Morgan had pushed the system.

And you could argue that with the rise of the intangible economy, you know, venture capital and private equity are coming into their own in a different way. So at different points in the story, finance is important but it has different outcomes and creates different social relationships. So that’s one thought.

But the other is simply I know a little bit about Thomas’ work on, you know, the excess rents extracted by finance and the way that people in finance appear to be paid huge amounts. But I’ve never really understood, you know, if we think about the social value of fashion designers in Milan designing different kinds of buttons, how do we argue that that’s more socially productive in some ways than people arguing about prices in financial markets? I mean, it seems to be pretty difficult to make an objective judgment about what’s valuable to society more than the other one.

PHILIPPON: Yes. So that’s why economists are not too good at that for—usually, we think about if people want to buy something, don’t question their motives. But you can still ask whether the thing they are buying is too expensive.

And so I think when we say financialization, we mean two things. It means we pay the bankers too much; that’s point one. And point two is usually what we call short-termism, which is the fact that excessive, I don’t know, influence of the finance industry leads to a short-termist bias in society.

On the first one, yes, I think we used to pay bankers a lot too much because I think some of what they do is—(inaudible)—and it could be cheaper if the market was more competitive. And talking about an industry that’s very good at lobbying against competition, finance is one of them.

On that, though, I am cautiously optimistic. I think it is changing in the right direction. I think fees are going down in many subsectors of the finance industry. And then in—and in many of them you see rising competition from internet—(inaudible)—finance and—(inaudible). So I think there is hope there.

On the second one, it’s—I just want to put—(inaudible)—for one second. It is surprisingly difficult to find strong evidence of short-termism linked to finance. For every example you can find of, you know, some kind of leveraged buyout that looked like they were squeezing with nothing else in mind, you find another example of, like, Tesla or Amazon where the markets have been willing to finance these companies at a loss for twenty years and then eventually they make it big. So it is very hard to argue that there’s systematic evidence of short-termism.

I think we are much safer arguing that finance is too unstable. We get too excited sometime and too cold another time. That is—that is (probably ?) true in the data. But systematic short-termism, just to be clear, I don’t think it’s really there.

MALLABY: Laura, let’s have another question.

OPERATOR: We’ll take the next question from Steve Freidheim.

Q: Hi, Sebastian. Steve Freidheim, Cyrus Capital.

So whenever we talk about inequality, I always like to define, you know, the inequality that concerns you most. So if we just take three general categories, income inequality—that is, how much you make per year versus how much somebody else makes every year; wealth inequality is it’s the accumulated assets; and inequality of opportunity—that is, depending on what socioeconomic quartile I’m born in, how determinative that is to where I am in the future.

So in terms of capitalism today, maybe we stick just to U.S. Which—and to be clear, depending on which inequality you’re going after, there are tradeoffs. If you want to solve inequality of income, it may have knock-on effects to opportunity, and vice versa.

Where do you think the issue is for the United States? Is it income wealth or opportunity? And if you had one to resolve, which one would it be?

Thank you.

MALLABY: Great question. OK. I remember that—I think I’m right—in Steve’s book there’s a passage where you talk about surveying economists on which kind of inequality matters. Perhaps you could talk about that.

PEARLSTEIN: Well, I surveyed them. I tried to get them to tell me which level of income inequality would they be willing to accept? How much—you know, if they think it’s too much, how much would you be willing to accept? And I couldn’t actually get a very definitive answer from very many of them. People who spend a lot of time complaining about it, they couldn’t tell me how much—where they would draw the line.

But I’d like—I think that the way Steve has put that is exactly right. When I teach about this, I break it up into those three things. But I would say, Steve, that it starts with income inequality, because it’s income inequality—you know, before you become wealthy, you have to earn the money. And the people who have runaway wealth have tended to earn the money somehow. And it’s that inequality that leads to wealth inequality. And furthermore, we now—we know that inequality of income and wealth have a lot to do with inequality of opportunity.

And so, you know, if you wanted to ask where the original sin is—or another way to push it is where do you want to start focusing to solve all three inequalities, because they’ve all gone up—it would be with income. And it would be with income particularly having to do with the very top and the very bottom, which is not, incidentally, where the stickiness is in opportunity.

The Brookings Institution had a project years ago, and they looked at this pretty carefully. And the equality of opportunity for the three quintiles—we used quintiles, not quartiles, for some reason—but the three quintiles in the middle, the movement among those from one generation to the other is pretty good. The real stickiness is at the very top and at the very bottom. And that’s—particularly the top is where you see income inequality. And at the bottom you would have seen it more, but for—much more but for government subsidies, which, by the way—


PEARLSTEIN: —which, by the way, are overstated, because most of them are health care, and that health care is mostly at inflated costs, which Thomas mentioned.

MALLABY: Megan, do you want to comment on this?

GREENE: Yeah. So actually I would say that wealth inequality is by far the biggest problem in the U.S. It’s just our data on wealth is less great and we have much more data on income. So we tend to—you tend to see a lot more about income inequality. They’re related, of course. Wealth is the stock and income is the flow.

There’s really only one thing you can do about the stock, which is a wealth tax, which is problematic for many reasons, in my view. There are many things you can do about the flow, though. So again, that’s why you tend to see a focus on income inequality. But if you look at kind of the depth of inequality for income versus wealth, wealth is by far greater. And they both underpin—

MALLABY: What about an estate tax as a stock tax on wealth?

GREENE: Yeah, an estate tax is a form of a wealth tax. We already have that. So it is one form of—

MALLABY: Not much.


MALLABY: Relative to Europe. I mean, the estate tax is striking for its absence.

GREENE: Well, yeah. I mean, that’s what I was going to say. It’s a drop in the bucket. And also it’s difficult to administer. I mean, it takes years to administer an estate tax. But the time you’ve valued everybody’s horses, and wine collections, and jewelry, and art the resources that you have to pay for to administer it suggest that it might not be worth the revenues that we’re raising in the U.S. on the estate tax. Of course, the same argument goes against a wealth tax as well. You know, it takes years to administer this. You’re supposed to do it every year for a wealth tax. Lots of assets have market values. That’s easy. It’s the stuff that doesn’t. We have to hire a bunch of people to administer that. So I think it’s problematic.

MALLABY: Thomas, you want to comment on this?

PHILIPPON: Just two quick points. I think that the low-hanging fruit in terms of making progress on that is probably on the income side because the income taxes in the U.S. are both too complicated and too full of loopholes. And I think there there is definitely a lot of room for improvement, including better enforcement by auditing more of the high-income earners. So I think that is actually something which is very uncontroversial now among economists, I would argue.

I would still argue that the opportunity part of the question is something to worry about, because I think one thing maybe we’ve learned also from Europe is that there is a limit to distribution in terms of happiness.

So, you know, you could—in theory, economists like to think, well, you can always compensate someone by giving them money. But it’s not so easy, actually. So people do value the idea that they have their own job, and their own independence. And it is just not true that the government can compensate for everything by just make a transfer payment to people. So that’s why I think it is very important to also have a policy that addresses opportunity, so that people can earn by themselves a decent living.

MALLABY: Great. So, Laura, let’s have another question.

OPERATOR: We’ll take the next question from Lee Cullum.

Q: Thank you very much. I’m a journalist in Dallas named Lee Cullum.

I have found this absolutely superb. It won’t surprise you to know that where I live I don’t meet many people who think there’s even a teeny problem with capitalism, and who also believe that the imminent danger is socialism. So this has been really wonderful, to see the issues faced so squarely. Steve, my question is for you. I was intrigued by what you were saying about Reagan and the air traffic controllers, and the perfect willingness of an awful lot of Americans to go along with all kinds of policies that may not be in their interest. And this can’t all be laid at the foot, or the feet, at the lobbyists. What is the reason, then, do you think for this acquiescence?

PEARLSTEIN: Well, what’s the—you know, someone wrote a book about that called What’s the Matter With Kansas?

Q: That’s right.

PEARLSTEIN: And, you know, we’re not purely economic animals, as Thomas reminded. We value security, for example, very highly. So, you know, in other countries there is a lot more economic security, both because of the safety net that the government provides but also because it’s hard to be fired and, you know, retirement starts, you know, at age sixty for many people, and things like that. So I would say that, you know, we’re as—politically, we’re driven increasingly by tribe and by ideology, and by our sort of storybook notions of independence and pulling us up, you know, by the bootstraps, and stuff like that. You know, we don’t—we don’t, as voters, vote purely on self-interest.

The irony, of course, is since Tom—since that book was written about Kansas, the Democratic Party is the party of the rich and successful coasts. (Laughs.) And we’re the ones who are worrying about inequality and poor people. And people in the South and the Midwest increasingly are not worried about those things, and yet they’re the ones who would most benefit from all the policies that the socialists on the two coasts would want to have. So we really do have a huge disconnect in our—in our politics from our economic self-interest. And I can’t explain it to you. But you could probably win a Nobel Prize if you could explain it.

MALLABY: We have several more hands up, I think, so I’d like to get another question, please, Laura.

OPERATOR: We’ll take the next question from Glen Fukushima.

Q: Thank you. Can you hear me?


Q: Thank you. I’m Glen Fukushima at the Center for American Progress.

I very much appreciated Steve’s historical sketch, because I worked at USTR in the 1980s on trade negotiations with Japan. And I worked in American business for the next twenty-five years. So I’ve kind of lived through this period that you’re discussing. And I agree very much with Megan that the central issue really in capitalism is inequality. And the way to get Millennials and others to support capitalism is to address this issue of inequality. So I’m very interested in asking the panelists, what is the most effective way to address this issue of inequality?

Now, there is obviously health care costs. There’s competition policies. There’s trade policy, automation policy, CEO compensation. There’s lots of issues. But I think fundamentally—and this is something you mentioned just recently—is tax policy. Tax policy with regard to both the income and the wealth side. If we address this issue of tax policy in a more—in a fair way to produce fairer results as well as a fairer perception of the ethical and moral obligations of a more society? I think we can go a long way in addressing the criticisms and the distrust of capitalism. So I’d like to hear your views on this.

And one small footnote to Steve, the question that was posed previously, the paradox of the coasts and the center, I think fundamentally has to do with the American electoral system and the unrepresentativeness, the need to address the Electoral College, gerrymandering, voter suppression, as well as lobbying. (Laughs.) But anyway, that’s just a footnote. Thank you.

MALLABY: Well, let’s focus on this question of the tax code and what could be done through the tax code to reduce inequality? Thomas made a comment that that’s low-hanging fruit, there are these distortions. And I guess you might be talking about the ability to deduct mortgages up to a very high amount, which tends to wind up being a subsidy for well-to-do Americans. Or what do you have in mind?

PHILIPPON: Well, the first is enforcement. I think the estimates we have that, you know, collection of taxes has been limited by the fact that they don’t have enough resources to audit the large accounts. So that’s the first thing to do. I think many economists have made that point over the past few years. So that is—that would be item number one. Item number two is, yeah, the fact that it’s way too complicated and there’s way too many loopholes. And, you know, the loopholes range from—but the thing, though, to be honest, is that’s the part where it seems a bit depressing because take the most obvious one, or one of the most obvious ones, linked to finance, which is the carried interest loophole, where some investment funds wanted to claim that their annual income is like a capital gain. That’s kind of obviously a scam, but we haven’t been able to do anything about it. And so if you can’t even deal with that, which is pretty straightforward, makes you not very optimistic about our ability to deal with the rest.

MALLABY: Megan is nodding.

PEARLSTEIN: Sebastian?


PEARLSTEIN: I would say that we could—we could—

MALLABY: Sorry, we’ll come back to Megan. Go ahead.

PEARLSTEIN: I would say we could go a fair way toward making income more equal with some distribution. We’d go some way. But fundamentally, I think you have to deal with the way the market economy distributes income, because the more that the government redistributes, you start—you start to have disincentives for all the good things in capitalism. My suggestion actually is a little combination of yours, which is to say—is to say that we need to enforce profit sharing in companies. And the way to do that, I think, is to make that part of the deal that we have with corporations. If you want to be a corporation and you want to get the protection of the government to the corporate form, then there are ought to be a minimum amount of profit sharing with frontline workers. And it seems to me we could work with that in a way that—you know, roughly about 3 percentage points of GDP has been shifted from capital to labor. And it seems to me that’s also low-hanging fruit.


GREENE: Yeah. I was just going to say there are two ways to look at this. One is just to raise more in taxes so we can distribute the money in a progressive manner. And I agree with Thomas that beefing up our IRS so that we can go ahead and enforce is a better use of money than, for example, hiring people to administer a wealth tax. A bunch of European countries have scrapped wealth taxes and cited that it was expensive to do and it didn’t actually raise that much. So I agree with Thomas on that point. The other way to view it is to make the tax system more progressive. And if you look at the U.S. relative to other OECD countries, we have the least progressive tax system. The effective tax rate for the top 5 percent of the income distribution and the bottom 10 percent is roughly the same. That’s problematic. So we could also just make our tax system more progressive as well.

MALLABY: Great. Let’s got to another question, please, Laura.

OPERATOR: We’ll take the next question from Michael Peterson.

Q: Thank you.

Pivoting off that, I want to ask about the role of fiscal policy. So clearly the budget can play an important role in addressing inequality, from redistribution, to the safety net, to health-care coverage, education, et cetera. On the other hand, our current federal fiscal path is totally unsustainable. We have debt to GDP that’s gone up 25 percentage points in COVID. It’s now at 100 percent. Worse yet, we are looking a trillion-dollar deficits basically forever. By 2050, 50 percent of federal revenues will go to interest alone. So my question is, doesn’t this unsustainable fiscal path threaten inequality because it will diminish the resources we have available to address it? And if so, doesn’t a more sustainable budget become an important part of addressing inequality over the long run?

MALLABY: That’s a great question to wrap up on, since we’re coming up against the limit. Megan, do you want to have a crack at that?

GREENE: Yeah, sure. I actually wouldn’t agree necessarily that we’re on an unsustainable path, even having looked at the numbers. The U.S. has the global reserve currency and the biggest, most liquid asset class in the world, the treasury market. So we don’t run into investor strikes in the same way a lot of other countries do. That being said, I think one important thing to do going forward is to depoliticize support for lower-income deciles with automatic stabilizers. This seems to me an absolute no-brainer. A lot of economists have fought for this for a while, but not much has happened on it. We have far fewer automatic stabilizers in the U.S. than, for example, in most European countries.

Part of the catch is figuring out what the trigger is to turn the automatic stabilizers on and off. But it could make our response in the face of a shock much quicker and more effective, because it depoliticizes the whole—the whole process. So I think that would be a good way to make sure that our spending is more effective.

PHILIPPON: The U.S. could be a lot more efficient in dealing with inequality, to the point that Megan raised. I mean, if you look at the amount of money the U.S. spent during COVID to prevent—to protect people most effected, the U.S. spent a lot more than most countries in Europe per capita to deal with COVID, and the outcome is about the same. Which means that the U.S. tends to be not very efficient. And part of the reason I think is because it has not been willing to create the efficient social safety net. And so what happens is that you don’t have efficient social safety net. And so then you have to scramble up some—a plan. And when you do that, of course, you end up with a plan which is too big—like, I would argue, the last one was too big. But that’s partly because—it’s partly in response to the inefficiency of the social safety net. So in fact, I would argue that an efficient social safety net would actually reduce the deficit in the U.S.

MALLABY: Well, CFR runs timely, with more discipline than the government runs its budget. So I’m going to, with apologies to Steve—

PHILIPPON: Which is a low bar. (Laughter.)

MALLABY: —cut it off there. Ignore that grip. (Laughs.) That barb from Dr. Philippon. And say thank you to all of you for participating. Thanks to the members for dialing in. And, everybody, have a great day. Bye-bye.

PEARLSTEIN: Thank you.

GREENE: Thanks.


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