Thursday, February 17, 2011

Tyler Cowen On The Great Stagnation - EconTalk

"Let's talk about health. Medicare: what would you do practically? Depends on how practical I have to be. I think ideally Medicare should be for catastrophic expenses and not for the elderly, per se. I think the best health care system in the world is Singapore, where you have health savings accounts for smaller expenditures; single payer accounts for catastrophic; and a savings mandate integrated with the retirement system. Now, is that practical for this country at this point? No. We voted for something else; it's passed into law. So, in that sense, I'm not sure there is any practical solution. The current system is not sustainable, in any case, even pre-ACA. People say such and such is not viable politically; there are going to be a lot of things that are not viable politically that are not here now. They are going to have to be. Education? We live under Federalism. So, there is not a single stroke educationally that we can have or even should have. I think we are seeing a lot of green shoots, a lot of experimentation at the state and local levels. We are seeing better ideas spread. Charter schools are good. School choice. Mostly I think we need more experimentation, more interest in being able to fire bad teachers. The Obama Administration is very unpopular with Teachers' Unions. I take that to be a very good sign. Not sure they have succeeded that much yet. But the fact that a Democratic President would be willing to be extremely unpopular with teachers and teachers' unions I think shows the political equilibrium on that issue has shifted and we will see continued experimentation and improvement. Interesting to see whether that unpopularity persists in 2012. What about government itself? Some of these changes would naturally lead to smaller government. Piecemeal approach. I would decriminalize. Most are all drugs. I would cut defense spending. I would eliminate all foreign subsidies. Long list of ideas; I think none would come as a surprise to you. What would be the consequence? I think when you improve policy there is always going to be the question: Is this improvement a one-off change--which is fine, I'm all for a one-off change--or will it improve the long-term rate of growth? You'll find economists from all points of view pretend to know: this will be a one-off change or will improve growth. In most cases, we don't actually know. We should institute as many policy improvements as we can. We won't know in advance which ones will improve the growth rate and which ones will just give us one-off improvements; and do them all, and let it all kick in and see how good it's going to be. That's my basic attitude."

And going to the fundamental--maybe a natural argument at the heart of this book, which is that innovation is a trial and error process, not smooth; and we have this illusion of 3% a year, that that's the growth rate of the U.S. economy, and that's a bad bird's-eye view. And that's become a dangerous view. Why is it dangerous? For fiscal reasons. Our combination of spending and taxing decisions is leading us off the precipice. It was not as dangerous to have that illusion in 1985 as it is today. It's partly why the illusion has persisted. You could believe it at very low social cost, certainly no private cost. But I think we are finally reaching the time fiscally, some time in the next 20 years, well before then given bond markets, something will have to give. We'll need to reorganize. So are you an optimist, pessimist--where would you put yourself right now? Well, compared to whom is always the question. Some people are calling the book pessimistic, but I don't see it that way. Obviously it's pessimistic compared to someone who completely doesn't see any problem of the growth slowdown. But I think we'll get out of the growth slowdown. I think we're already doing a lot of things right, especially with the Internet. We are starting a bit with education. I'd like to see a bit higher status given to science and the science enterprise. But the Progressive story is in my view the pessimistic one. It's like: the rich have taken over the government and we need to seize it back and institute 90% marginal tax rates and 50% unionized economy to get it all back. And that, in my view, is never going to happen, not even possible it's going to happen. Those people ought to be pessimistic. My view is that the economy is deeply uneven. We're in a slow patch. It will come back; I don't pretend to know when. I see a lot of positive developments. I think the time between productivity bursts is smaller than it used to be. In large part because of science and capitalism in the modern world, and decentralization of governance and the Internet. That makes me pretty optimistic."

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