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Featured Guests
- Glenn Hubbard ’79 – Economist; Chairman of the Board, MetLife Inc.
- John Solow – Kenneth White and James Xander Professor in Economics, UCF College of Business
- Sami Alpanda – Associate Professor, Economics, UCF College of Business
Episode Highlights
- 1:02 – Guest introductions
- 3:02 – Rising income inequality
- 7:24 -Technical disruption in the workplace
- 15:54 – Politcal response to a changing economy
- 21:00 – Trade wars
- 25:35 – Rising healthcare and pharmaceutical costs
- 29:46 – President Trump, politicians on the economy
- 33:41 – Questions from the audience
- 40:48 – Paul Jarley’s final thoughts
Episode Transcription
Paul Jarley: The economy is a thing. The national election is a thing. But, the stuff politicians talk about on the way to Election Day? Well, those aren’t always things. We’ve assembled a panel of experts. Listen up, people.
Paul Jarley: This year was all about separating hype from fundamental change. I’m Paul Jarley, dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? On to our show.
Paul Jarley: This podcast comes from an event where we were celebrating Glen Hubbard, and his gift to endow a professorship in economics. Listen in.
Paul Jarley: I didn’t want to resist the huge opportunity I had today to get together a panel to talk a little bit about the relationship between the economy and the political election that’s coming up. So we’re going to talk a little bit about whether a number of things are sort of a thing, or not in as non-political a way as we can here.
Paul Jarley: I have three panelists with me today to help me understand some things. Most of you know Glenn Hubbard. What you may not know is Glenn Hubbard is a graduate of our economics department at UCF. He studied here. He is currently the chairman of the board of MetLife and is the former dean of the Columbia Business School. He is still a professor there, and I like to joke with Glenn, after you’re a dean, the comment that you always make is you get to go back to be part of the problem, right, and then, the part of solution, and he’s enjoying that a great deal.
Glenn Hubbard: Totally. Totally.
Paul Jarley: Right now.
Paul Jarley: Next to Glenn is John Solow. John is new to the college this year. He spent many years at Iowa. In fact, John and I were assistant professors together many, many years ago. And, he sits in the White, Xander endowed Professorship in Economics that Glenn and Glenn’s wife, Constance, has funded.
Glenn Hubbard: [inaudible 00:02:01].
Paul Jarley: And, it’s not named after them. It’s named after the two faculty members, who were most influential to Glenn while he was here becoming an economist. That’s really awesome, and we’re really glad to have John with us today.
Paul Jarley: My last guest is Sami Alpanda. Sami is an associate professor in the Department of Economics and spent four years?
Sami Alpanda: [inaudible 00:02:22] there? Yes.
Paul Jarley: Four years at the central Bank of Canada. So I thought he would also bring kind of a really interesting perspective to what we’re going to talk about today.
Paul Jarley: And at the end we’ll give you a little time to ask questions. I hope I ask some things that are on your mind, but if not, we’ll give you a little bit of an opportunity to do that.
Paul Jarley: I’ve been watching the news, like all of you, and some of the debates and the things that are being brought up. So I’m going to do a little bit of a lightning round with the panel, where I’m going to bring up a particular issue that the politicians have been talking about. And I’m not so interested here in getting a political take on the issue. That’s not what I’m about. Instead, what I’d like that panel to talk about a little bit is, how important is this issue to the economy in the short-term, and the long-term.
Paul Jarley: Let’s start out with rising income inequality, particularly at the top. Is it a concern from an economy standpoint? Is it not a concern? What do you think?
Glenn Hubbard: To me, the concern in inequality is the bottom, not the top. So I’m extremely worried about the earnings prospects of millions of Americans, who don’t seem to be participating in an economy dominated increasingly by technological change, and globalization. I’m less worried about how many billionaires there are. The only reason that one would be worried about how many billionaires there are is, if you think there somehow monopolizing the political process. You told me there was one billionaire on the stage the other night at the Democratic Party debate, I don’t think he’s the most influential. So I’m more worried about the poor than I am the rich.
Paul Jarley: John?
John Solow: I think it’s a long-term problem. I agree with Glenn that I’m more concerned about, so what economists call absolute poverty, is the ability of the poor people to have a standard of living that they can … They can support a family, and they can enjoy, rather than the disparity. If everyone were richer so poor people could afford the necessities of life, that would be a good thing, even if there were rich people, people who are richer than that.
John Solow: I am concerned about the ability of the very wealthy and the very organized to influence policy. The impact of money on the political process, I think that is causing problems. I think, we’ve just seen a lot of it, and you can argue on both sides of the political spectrum, but there seems to be an awful lot of what we just think of as corruption, wealthy people using the political system to increase their incomes, not to do what’s best for the country as a whole.
John Solow: Yes, there’s only one billionaire, that we’re aware of, running during the debates, and there’s obviously a billionaire already running on the other side, but that’s not where I think the problem is. It’s not so much that they hold the offices, but that they pull the strings behind the scenes.
Paul Jarley: Sami?
Sami Alpanda: I do agree that, in principle, there shouldn’t be a worry that we have more billionaires, or anything like that, but as long as the pie is growing at an enough pace, and that, that pie is being evenly, or at all levels, that growth is being shared. But currently, that’s not the situation. So at the very top, at least in the last 30, 35 years, there has been an increase in the income share of the top 1%, from about 10% to 20% of total income.
Sami Alpanda: Now, most of this reflects capital income, especially entrepreneurial income, dividend income, but … And for the top 0.1%, actually, I think the income share of the 0.1% has increased from about 4% to 9%. So this type of economic gains are not being shared, especially in the middle-income categories, and that … In the long run, this is going to be worrisome because it will have political implications. It’s already started to have political implications.
Paul Jarley: Sure.
Sami Alpanda: And that is a worry.
Paul Jarley: Go ahead.
Glenn Hubbard: I think these things are all really important. I think your question’s probably one of the biggest long-run questions for our country. I don’t think we live in a world where the system is depriving people of gains from productivity, whoever those people are. I think, we have a lot of Americans, who do not have a marginal product that would lead to the wages that John is describing.
Glenn Hubbard: If we want to fix that, and I think it’s critical that we do, we have to use social insurance programs more aggressively than we’re doing today, and we have to decide on our nation’s priorities, is that what we want to do? We’re running a government that’s, principally, about old-age entitlements, things like that, and should we be investing more in working Americans. I think, we should. I think, it’s a huge question.
Glenn Hubbard: Who pays for that is a separate question. It could be the rich. It could be somebody else. But prioritizing those programs, I think, is critical.
Paul Jarley: Because here’s what I worry about. I graduate 2,000 students a year from the College of Business, and I’m trying to prepare them for a future where data says to me, there going to have maybe two, or three careers. And we’ve seen, and I think, we’ll continue to see a lot of technological disruption of a lot of those careers, and perhaps, a lot of structural unemployment. Biggest risk, you think?
Glenn Hubbard: I think, it’s a very big risk, and I think that there are two familiar ways to deal with it, and our country has done both in the past. One would be a sort of battering ram approach on opportunity, and I think there about Lincoln era policy. People associated the president with the Civil War, obviously, but remember the Transcontinental Railroad, the Homestead Act, the land-grant colleges, Lincoln had a almost maniacal focus on opportunity. The other in American softening of capitalism has been more Rooseveltian. It’s social insurance programs that keep everybody in the boat.
Glenn Hubbard: We know how to do this, and we need to. The structural unemployment is real, but our labor market policies were designed in an era where you lost your job for a temporary period of time, then you came back to the same job, like a layoff, or a strike. That is not the world we live in.
Paul Jarley: Because when they perfect those autonomous trucks driving, I’m going to drive [crosstalk 00:08:48] a job, so that …
Glenn Hubbard: Well, yeah. When the president said he was worried about Mexican truck drivers, I said, I was worried about no truck drivers. I think, that’s really the issue.
Paul Jarley: Yeah. John, what do you think?
John Solow: The question of automation in technology has been with us for a long time. About 55 years ago, President Johnson had a commission on automation and the economy. I still have a copy of that report. My father was one of the members of the commission. It was headed by Howard Bowman, who was the president of Indiana University at one point, and the people wanted included Edwin Land of Polaroid, and Thomas Watson of IBM. So these were serious people.
John Solow: This issue’s been around for a long time, and yet, we still have very, very low unemployment rates. I’m more concerned about, and I think Glenn probably is, too, about the wages. I think, what we’re talking about is the wages of the people, whose jobs are replaced by technology.
John Solow: Technology is complimentary to people like us. This is a tool that we get to use that makes us much more productive, but there are people for whom it is a substitute, and those people, who are losing their jobs, and yeah, I think its r- … We always talk about how education is the way to solve this problem. Exactly as Glenn said, there are people who don’t have much productivity, and we need to figure out ways to solve that. It’s not just, “Well, I need money so I can survive,” but what skills can we develop in you, where you can do something to help us.
John Solow: I’m not trying to blame the poor, but I do think that part of the game is finding ways to make less-skilled people more productive. I just came from the Midwest, where rural America is struggling very badly. The world has just changed dramatically. These little towns that used to support an agricultural community, and everyone knew everyone, and kids could ride their bikes after school on the streets, and idyllic ’50s, that is just going away. The world is changing, and we have to figure out some way, either for those people to, not so much the people, who live there now, but their kids, and their grandkids to do something different. They can’t look back to the way, and say, “I want it to be the way it was in 1955.” That’s just not going to happen.
Paul Jarley: Sami?
Sami Alpanda: Well, the unemployment rate is at a all-time low, 3.5%, so jobs are being created, but where are they being created? They are being created at the very high end, so high-income jobs are on the rise. So there’s a lot of job growth there, and there’s, also, a lot of job growth in the bottom end, but a lot of middle-income jobs are being hollowed out, essentially, most through a technological change, to some degree by trade, and off-shore.
Sami Alpanda: So this is an ongoing problem. This problem is, probably, not going to go away. If anything, it’s probably going to become more severe, so machine learning and artificial intelligence is with us. I’m not sure if self-driving trucks are around the corner. I think, we’ve been a little bit too optimistic about that, probably.
Paul Jarley: Marketing’s ahead of the reality there?
Sami Alpanda: I think that’s, probably, the case. We probably will need to wait another two, three decades, perhaps, for that to happen, and it’s not clear whether it’s going to happen as we envisage that it would happen.
Sami Alpanda: But, nevertheless, you see this type of automation even in the high-skill jobs now. A lot of finance jobs are being automated, and even healthcare jobs, so basically, machines diagnose, or making diagnoses, or reading X-rays on their own, and doing a better job from humans at that.
Sami Alpanda: I think, this is with us, and I agree with the panel that we’ll need to find remedies at some point, in terms of redistribution of some sort of the gains from all this type of technological advancements.
Paul Jarley: Is there a country in the world, currently, that we can use as an example there? Americans like to think that they’re exceptional, and different, and need different solutions, but is anybody doing that right? Or ahead of that game?
Glenn Hubbard: Well, Germany has for years had apprenticeship programs and training programs. To many Americans, they all look unusual because they are tracking children from quite a young age and to jobs, something we would, or wouldn’t want to do socially, but I think the U.S. could learn a lot from its own past, too. We used to have very strong vocational education in the country. We have outstanding institutions in community colleges that are doing a lot of the training that’s needed by local business, but are woefully underfunded. There’s just lots of things we could be learning from.
John Solow: So long as it’s a matter of choice, I don’t have a problem with that, all right. I remember being a schoolboy in England at the age of 10 for one year, and they have this exam called the eleven-plus, and if you do well on it, you get to go to the high school that leads you to college, and if you don’t, you get on the high school that leads you to baking. And I was petrified, as a 10-year-old, that if I screw up this exam, that’s my life.
John Solow: Of course, I was an American. I didn’t even have to take it. My mother had explained to me that, “Oh, it’s not for you,” but my classmates had this sense that at some age we’re going to track you, and part of what makes America a great place is this notion that you can be whatever you want to be, if you’re capable of doing it. You’ve got to do it. You can’t just say, “I’d love to be the starting shortstop for the Boston Red Sox, but I can’t hit as well as Xander Bogaerts. Or even a bad shortstop.
John Solow: But I think, we would like … I think, it is important that people have opportunities. But what I do worry about, well, it’s sounding the same, which is the middle is hollowing out. David Autor at MIT has done a bunch of work on this, and where the jobs seem to be being lost are in the middle, not the low end. We have lots of low-end, low-paying jobs, and we have good high-paying jobs, but the middle is hollowing out. And I think that, that’s very tough. But it used to be that you could move up the ladder, and now the leap goes from burger flipper to coder, or junior Wall Street executive, and that’s a huge leap.
Paul Jarley: Sami?
Sami Alpanda: The worry is that, as these trends are happening to the middle class, there is a lot more pressure to, perhaps, limit immigration because the immigrants-
Paul Jarley: That’s my next point.
Sami Alpanda: The immigrants [crosstalk 00:16:07]-
Paul Jarley: But you’re not required to talk about it. Yeah, immigration is next.
Sami Alpanda: Or it’s about trade, so we should, essentially, close down our borders to trade, or not allow off-shoring. So that’s sort of the worry. So, if you want to get … I mean, there aren’t calls yet to sort of destroy the robots, but maybe, that might be the next thing, if actually robots take over.
Paul Jarley: That didn’t work out for the Luddites, too well.
Sami Alpanda: [crosstalk 00:16:33]. Exactly.
Paul Jarley: Yeah.
Sami Alpanda: So I mean, obviously, all these things are a net positive for the economy. We don’t, actually, want to get rid of either automation, or immigration, or trade, but if we still want to keep them and make this politically feasible, then we would need to find the solution as to how we keep the middle class, or the former middle class happy.
Sami Alpanda: We have to, perhaps, ensure them in some way, or it could be income, for example, in terms of healthcare, or educating … promising to educate their kids for the better jobs in the future. That’s not something we do, necessarily, a very good job, especially in poorer neighborhoods. I mean, rich neighborhoods have pretty good schools, but not necessarily poor neighborhoods.
Sami Alpanda: So we have to find, ultimately, a solution to that.
Paul Jarley: So what about immigration? How big of an impact is it on the economy in your estimation? Is this something we should be worrying about from a macroeconomic standpoint, whether we’ve limited, or-
Sami Alpanda: So I s-
Paul Jarley: … let it be open?
Sami Alpanda: Well-
Paul Jarley: I mean, from a … Go ahead. Yeah. We’ll come back this way.
Sami Alpanda: I think, the literature is pretty clear on this that immigration has been a net positive, both high-skilled immigration, especially high-skilled immigration, but also, low-skilled immigration, too. I mean, it has pushed production possibilities, and also, productivity.
Sami Alpanda: Now, a lot of the low-end jobs, actually, have been filled by foreign-born workers in the U.S., and ultimately, that has increased the welfare of native-born people, but there has been some wage impact. So there is some in the picture that looks at the wage of high school dropouts in particular, and there has been some negative wage impact in that particular part of the labor market.
Sami Alpanda: But again, this is to say, immigration of both kinds have been a net positive for the economy.
Paul Jarley: John?
John Solow: This is not a literature that I follow, so I’m going to defer to the person, who knows something about the literature, but everything that I’ve heard, read or heard, says pretty much the same thing. I mean, remember, we’re now down to, even the legal immigration, a limit of 18,000 people in a country of 300 million, right? This seems like … This is as close to zero as you can get. I find … I don’t think that this is an economic problem, but I think it’s a social problem. It points to a darker side of our society.
Glenn Hubbard: I completely agree with that. We have two immigration stories, and they’ve already been well told. One is about a high-skilled, one low-skilled. High-skilled, half of the students I have at Columbia in the business school are not Americans, and I would love it, if they all wanted to work in my country, and could. Not because I’m a nice guy, but because I’m fundamentally selfish. They’ll add to our productivity, and frankly, we should want all foreign-born grad students, maybe, maybe not lawyers, but everybody out here-
Paul Jarley: Well, I agree with you.
Glenn Hubbard: … who hadn’t … Apologies if there’s … We should work these people.
Glenn Hubbard: So low-end, there is an issue. There will be legitimate disagreement. The studies are, actually, mixed about the effects on the wages of native-born Americans, but if we care about this, we have to treat it as a social issue. I think, that’s absolutely right.
Glenn Hubbard: Our country isn’t going to have as bright a future, if we restrict immigration. We know that, and everything points that way, but we can’t just blithely say that as economists. We have to address the concerns of people, who feel left behind. They’re being told by some forces to point the finger at immigrants and the other, but instead, we need to help them. And if we don’t do that, the immigration discussion will get worse, and worse, and worse.
Glenn Hubbard: I recommend to everybody a book one of my teachers at another institution wrote, Ben Friedman, called The Moral Consequences of Economic Growth. Societies that are growing, and well distribute their gains are more placid societies, where you see racism, bigotry, anti-Semitism. That usually comes about in struggling, slow-growth societies. We don’t want to be that.
Paul Jarley: Lack of hope is a bad thing.
Glenn Hubbard: It is.
Paul Jarley: Really bad thing.
Paul Jarley: You touched on this a little bit, Glenn, but the next one on the list, of course is trade wars. Talk about that a little bit and the impact it’s having.
Glenn Hubbard: Well, it’s interesting because I, actually, would start off by giving the president a little bit of credit. China has been a bad actor in the global trading system for a long time. As one of the people, who tried to push President Bush toward WTO accession for China, I always thought, and I think other people thought that China would ineluctably reform because it would see it in its own interests. That is wrong. China’s still massively subsidizing credit, [inaudible 00:21:37], so the real question about whether China should be in the WTO, as it’s currently structured.
Glenn Hubbard: Having said that, everything we’re doing in the trade wars is, from an economic perspective, bizarrely wrong. Why wouldn’t you unite your friends against the common enemy, rather than picking fights with everybody at the same time. If there’s any hope for WTO action in China, it would have to be multilateral. So right diagnosis, but the treatment seems odd.
Paul Jarley: John?
John Solow: I think, Adam Smith is rolling in his grave at a very fast [inaudible 00:22:15]. So I absolutely agree. Yeah. China has misbehaved in a lot of ways, but I do think that the focus … We were not going to get to political, I hope, but I don’t think our president understands trade. I think, he’s focused on two things. He’s focused on bilateral trade balances. So what we sell to China, and what China sells to us.
John Solow: And we’ll just leave the rest of it aside and focus on that, those numbers. And that’s a pretty meaningless number in a very interconnected multi-country economy. If we buy things from China, and China spends that … This a loose example, but if we buy things from China, and they spend that money on things from Brazil, and then Brazil spends that money on things from us, we gain. Everyone has specialized what they do best, but our bilateral trade relationship with China looks like we send them millions of dollars, and their stealing our wealth. And this is just a meaningless thing.
John Solow: The other thing is that the determinants of trade are not result of deals between presidents. They’re the result of economic forces. We import a lot because we don’t save very much, and we’re a good place to invest, and so people, rather than buying things, they invest in American companies, and American assets, and stocks, and bonds, and things like that. So I don’t think he understands it very well. That’s not to excuse China for being bad about intellectual property, for being bad about selling substandard products, and cheating on dog food that poisons dogs, and fluorine that poisons people, and things like that. But I don’t think that getting into trade wars all over the world, with our allies as well as the Chinese, makes the world a better place.
John Solow: If you ask … And people have done this. If you poll economists, the one thing … Look at all these jokes about economists not agreeing with each other. Right?
Paul Jarley: This is one.
John Solow: But one of the Roosevelts said something … I think it was a Roosevelt, who said that, “I want a one-armed economist,” so he wouldn’t say, “on the one hand, and on the other.” It’s an old, old joke. The one thing we all agree on is that trade is a good thing, that free trade … 99% of th- … I think, the 1% that doesn’t is somebody named Navarro.
John Solow: We’re not going at this very well. This is, again, in the Midwest, this is … In Iowa, where I used to live, this is hurting the agricultural economy badly. Yeah. So we give them money to prop them up, but that’s not really the solution. We cause the problem, and then we throw taxpayer revenue at them to help mitigate the problems. It’s not a good thing to be doing.
Paul Jarley: Some of you want to beat that dead horse just a little more. Go ahead.
Sami Alpanda: I, probably, agree with everything that has been said.
Paul Jarley: How about rising healthcare and pharmaceutical costs? Concerned about that as a headwind on the economy?
Glenn Hubbard: Definitely. And it’s related to some of the other discussion we had, too. If you look at pay and compensation, which are two different things, pay is your wages, compensation’s your total package, a lot of what is happening to a middle, lower wage workers is higher healthcare costs are taking a lot of that. So a lot of the labor market discussion we had, it’s actually linked … It’s actually part of the healthcare discussion.
Glenn Hubbard: We, also, know that we’re paying way too much, that if we look at outcomes in the United States versus outcomes in our peers, and then compare that with the spending as a shared GDP, we’re paying too much. The causes are many. There’s no silver bullet. They have to do with the huge importance of third party pay. When economists use the words like insurance, we mean something specific. We mean catastrophes. What’s called insurance in the United States is tax-subsidized prepaid healthcare. It’s not surprising that, that would lead to over-consumption, public programs that have poor incentives. There’s a lot that we could do there.
Glenn Hubbard: And you are starting to see action on drug costs, too, where we’ve seen patents pushed too far. We’ve seen other areas, and I think the, both the right and the left, from different mechanisms and different perspectives, are trying to come at that. So this is an issue I expect to be a big one.
Paul Jarley: John?
John Solow: I agree. I think that all the polls suggest that healthcare is the single most important thing on voters’ minds, of the five things that were on our list. What voters are really s- … What’s impacting people in their daily lives is healthc- … They’re not thinking about automation, and … I mean, they may at some level, but what really matters to people is healthcare. And I agree with everything that Glenn said about that.
Sami Alpanda: John, I completely agree, too. Healthcare is a very, very important part of the welfare of people, and obviously, high costs are of a major concern, and that should be a politician’s priority, I guess, to try to fix that in some way.
Sami Alpanda: I would add though, I think we should rethink the fact that we have a system of employers … So we expect, essentially, employers to give healthcare. I mean, we don’t expect them to give, I don’t know, to pay for our rent, or pay for our cars, or anything like that, but we do expect them to pay for our healthcare. I think, we probably have to move away from that system. That system, probably, has been a negative, in terms of labor market mobility, too. I mean, you have to think about what’s going to happen to your healthcare, if you decide to change jobs, or geographic locations.
Sami Alpanda: And then, maybe, start from that point, whether you go on the one hand to single-pay, or whether you go to a much, much more private-based, but perhaps, with some insurance about catastrophic healthcare expenses, for example, is going to be a political concern. But I think, we have to, probably, move away from this employer-based healthcare.
Glenn Hubbard: It’s interesting. On that point, the system we have was an artifact of wartime wage and price controls. So what the dead hand of policy that most Americans don’t even understand what it was, it was so long ago, has really shaped the healthcare system in odd ways.
Glenn Hubbard: It’s striking that the political discussion is just completely unrelated to what we’re talking about. So one side would say, “Medicare for all,” a $30 trillion spending expansion over 10 years. The other side says, “That’s socialist. We want nothing.” Where are all the ideas, the actual economic ideas. There somewhere in between all of that. There’s no reason we couldn’t have universal catastrophic health insurance. There’s no reason we couldn’t help low-income people through the funds that we currently put in Medicaid.
Glenn Hubbard: There’s solutions here. They’re just not being talked about.
Paul Jarley: Last question. So with respect to the economy, what aren’t politicians talking about that they should be talking about?
Glenn Hubbard: To me, the biggest is an undercurrent in several of your questions that the anxiety, the economic anxiety that many Americans feel, that their futures are in peril, particularly for low and middle-skilled people, no politician is talking about this. We’re hearing a discussion on one side about universal basic income, or throwing money at it. On the other side, we’re hearing nothing. This is unsettling, as this problem’s not going away, and it’s going to get bigger. That would be my suggestion.
Paul Jarley: John?
John Solow: I agree with Glenn. I might put it a little bit differently, but I think, you mentioned earlier on sort of American exceptionalism, and I think this is a problem. I think, we think that we deserve to be the wealthiest people on earth because we are the wealthiest people. We’re America, darn it, and we just deserve it. You earn it. It’s not written in stone anywhere that we’re going to be the most successful country on earth. Other countries want to succeed, as well, and they put effort into it.
John Solow: I’m going to plug something that … It sounds self-serving, and of course it is, but China has said at different times they want to build 20 MITs by the year 2050. Our state governments are cutting education budgets. That doesn’t sound like a very smart policy. Well, we just deserve it. You got to work for it. We’re not entitled to it. We have to earn it.
John Solow: That’s something that worries me, that our … A hundred years ago, I sometimes put this up for students, a hundred years ago the country that was the world super power, whose currency was the world standard, that was the most innovative and creative on the planet, and the list goes on, and on, in 1900, that was England. The hundred years later, 120 years later, you wouldn’t put England in that category. It’s a nice place to live. Don’t get me wrong, but it’s not the world leader.
John Solow: Things change, and we can’t expect just to coast on our laurels, and say, “Well, but we’re the greatest country that the world has ever seen.” You got to earn that every day.
Paul Jarley: Sami?
Sami Alpanda: Perhaps income mobility across generations could be more a bigger type of conversation. I think, one of the biggest worries that middle-income people now have is not only that they are falling behind, but they’re seeing, also, their children falling behind, so I think we have to preserve and sustain equal opportunity at least.
Sami Alpanda: We don’t, necessarily, we don’t want equality of outcomes. We’re all capitalists, I think, here, but we do want to preserve human capital formation at the highest possible level, and also, make sure that every strata of the community actually have resources to get a good education, especially the Pre-K to 12 level. I mean, there’s a lot of emphasis at the college level, but I mean, for some of these kids, it’s actually too late by the time they get there.
Sami Alpanda: There’s a lot of effort. I’m not trying undermine the effort, but we are ranked, I believe, like 25th out of 35 OECD countries, I think, in terms of math scores, science scores, reading, and that’s a shame in the richest country in the world. So we have to do something about that.
Paul Jarley: Take a walk through any college of engineering and see where the bulk of the students are from. That’s all you really have to do. Yeah.
Paul Jarley: So I know Tiffany wants to give time to mingle, but I promise I’m going to take two questions from the audience.
Paul Jarley: Carrie?
Paul Jarley: The mic failed to pick up a question from Carrie, but it was about the deficit and monetary policy.
Glenn Hubbard: Thank you. No one talks about that. Right?
Audience: Yes.
Glenn Hubbard: Then no one talks about the deficit. You had two really big questions. I’m not sure we have a new monetary policy. I think, the Fed had gone a little too far in its rate increases. I think the president hectoring them doesn’t help matters, at all. I think, the Fed is in a fine-tuning mode. I’m more worried, the subject may be for another time, that the Fed is not clear enough with the public about where True North lies for its balance sheet, or its policy. I think, the communication’s just very poor. So I would give the Fed pretty poor marks at the moment.
Glenn Hubbard: On the deficit, we’re running a trillion dollar budget deficit in, essentially, a good time. We’re at, or above our potential growth rate. That strikes me as odd. More to the point, we have massive accrued liabilities in our entitlement programs, so we really are on a fiscally unsustainable path. Politicians say, “Well, look at the 10-year interest rate. It’s under 2%, so what’s the problem.” There will be a problem one day.
Glenn Hubbard: Unfortunately, our political system can’t really cope with this outside of a crisis. The major fiscal adjustments we’ve had have been in manufactured, or real crises, so I think of the Greenspan Commission in the early 80s. We’re about to have another manufactured crisis because the Medicare trust funds are going to run out of money.
Glenn Hubbard: So I think, it’s a huge problem, and no one is talking about it. And that’s bipartisan. No one on either side is talking about it.
John Solow: Yeah, I’ll add to that a little. So when I was in graduate school, oh, so long ago, we read a book called The Social Security Crisis by … And that was what? 50, 42 years ago? This has been coming for a long time, and we all know, there is no magic bullet. The answers are either you cut benefits, you increase taxes, or some combination of the two, and the longer we wait, the worse it’s going to be when things really get tough. If you had made choices, modest choices earlier, then people have time to adjust their behavior. They have 30 years to save a little bit more because you know that you can’t count on quite as much in the way of Social Security, and so forth. But we don’t want to do it.
John Solow: I think, the answer to a lot of this is just politics. Neither side … I think, both sides know what the right answers are. They may differ about the balance a little bit, but nobody wants to let the other side win by solving the problem, so we just don’t do anything, and we have this sort of paralysis.
John Solow: I think, the same thing is true about the budget deficit. You either raise taxes, or cut spending, but neither side wants to let the other side win, so we go on, and on, and on.
Sami Alpanda: If another country was running these types of deficits, we would, probably, think that this is definitely on a unsustainable path, and there’s going to be an imminent crisis, and the currency will depreciate by so-and-so percent. Now, we’ve seen this many, many times in Argentina, Turkey, other emerging market economies.
Sami Alpanda: Our luck, or benefit is that we, actually, own the reserve currency in the world. So the U.S. dollar is the reserve currency of the world. We run deficits, we finance them by issuing treasuries, and the world gobbles it up, and at very, very low rates. They are, basically, renting us free cash.
Paul Jarley: [crosstalk 00:37:36] we could pay our debt in our own currency. Correct? That we print. Yeah.
Sami Alpanda: So as long as that continues, there doesn’t seem to be a problem, but there will … I mean, if you do continue this for- … You cannot continue this forever and ever. And given, as Glenn mentioned, that we have this unsustainable debt path, and obviously at some point, there has to be some correction to it. I guess, the markets do believe that we will, eventually, wake up to the point where politicians will, “Well, we’ll fix this.” So there are adults in the room, but if that doesn’t occur, then I think, we are probably going to crash hard. And we might even lose the reserve currency status, which would be sort of the big tail event that we probably don’t expect it will happen, but it’s possible that it could.
Paul Jarley: Okay. Last question. Merrell.
Merrell: So I’m a CPA and I’m, also, a lawyer.
Glenn Hubbard: Sorry.
Merrell: I deal-
Merrell: So I deal with taxes all the time, but I also deal with the elderly, and my estimates for my clients is that they don’t recognize that they’re going to get old. They think they’re going to be healthy forever. They’ve saved nothing, and they don’t think that things are going to cost a lot.
Merrell: And so, when you take that and look at the budget of so much in entitlements, and then you look at, well, how many people are, actually, paying for taxes, yeah, we got to cut spending, or we have to raise taxes, but I don’t know on whom. Because we can’t cut the benefits for the old people, and we can’t really squeeze that much more out of the 50% that are paying taxes because it’s, generally, the middle-class because low-income, in like what I see, low-end aren’t paying taxes, and the high-end have all the wisdom of the lawyers that bring it down. So it’s the middle-class that’s getting hit more and more, and may end up keeping their elderly in their home with ruining their lives, and their economics paying for it. And I don’t know how to fix it.
Glenn Hubbard: I, actually, think Social Security is fixable. It just requires political courage. And there are a couple of fixes that would go a long way. One would be to take up retirement ages because the ability of most Americans that we already discussed, the service sector’s the dominant thing, not manufacturing, or heavily physical work, so that’s part one.
Glenn Hubbard: Part two would be something more akin to what economists would call progressive indexation of benefits. So currently, everybody gets their benefit growth at the same growth of real wages. That could be slower for more affluent people, or an even more sensible system might be to raise the minimum benefit, but then flatten it, so that it’s much less generous for middle and upper income seniors.
Glenn Hubbard: We’re going to have to make these choices because when you say we can’t old people’s benefits, the law is that we will. So in 2034, the secretary of the treasury, whoever he, or she happens to be then, is going to have to start cutting Social Security benefits, unless we do something, and that may sound like it’s a long way away, and I suppose it is, but it strikes me as one we ought to think about.
Paul Jarley: Well, thank you all for the panel, and thank you all for your attention.
Paul Jarley: We’ve covered a lot of ground, so what’s the thing, and what isn’t. Or in these cases may be, what’s a good thing, and what’s a bad thing. From a purely macroeconomic standpoint, growing income inequality at the top isn’t really a thing. It’s the bottom that’s the real issue.
Paul Jarley: People not having a productive skillset that allows them to share in the fruits of our economy is a bad thing. Technological disruption and changing economic forces are hollowing out the middle. Trade wars and immigration limits aren’t going to solve this problem and are net drags on the economy. They are decidedly not good things.
Paul Jarley: Don’t get me wrong. Losing your job hurts, and the playing field needs to be fair. China has been a bad actor, but the solution involves investment in human capital that will help people compete, not putting up barriers to trade, or mobility.
Paul Jarley: Rising healthcare costs are most certainly a thing. Our employer-provided healthcare system is a historical artifact of a bygone era, hurts labor market mobility, and has shaped the healthcare system in odd ways. It is especially a thing for lower-income groups where it is taking up a larger and larger share of their total compensation, and from an international perspective, the results of our system, well, it just hasn’t been very great. Politicians need to talk more about creative solutions here.
Paul Jarley: More generally, the economic anxiety of the electorate is real. People are concerned about their long-run future. We need to invest in our people to bridge the income and equality gap and improve the future of our children, especially for those at the bottom of the income distribution.
Paul Jarley: And while interest rates are low and financing the debt is not an issue now, those IOUs will come due. We are mortgaging our future, while limiting our ability to use fiscal and monetary policy to help us cope with the recession when it comes, and it will come. That is most certainly going to be a thing. What do you think?
Paul Jarley: Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from this show. Special thanks to my producer, Josh Miranda, and the whole team at the Office of Outreach & Engagement here at the UCF College of Business.
Paul Jarley: And thank you for listening. Until next time, charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.