Understanding Our Changing World Through Economics: Conversation with Economist Timothy Taylor
By Stephen Dupont, APR, vice president, Pocket Hercules
While attending the high school graduation ceremony for my niece, one of the seniors chosen to address the class of 2017 shared her experience of attending Henry Sibley High School with her fellow classmates.
Within her speech, she managed to capture a reality that her generation – Generation Z – will remember for the rest of their lives – realizing that life will bring its fair share of ups and downs such as the Great Recession, which she and her high school classmates they experienced while growing up (this student would have been around 10 years old when the U.S. experienced one of its greatest economic meltdowns in in the past 100 years).
Change is inevitable. Doing our best to understand change is critical to preparing for the challenges and opportunities that await us. And with that, I asked economist Timothy Taylor, Managing Editor, Journal of Economic Perspectives, if he would share his insight about what’s driving current economic conditions, what keeps him up at night, and what the future may hold from an economics viewpoint. In the following Q&A, Tim, whom I’ve known for almost 20 years, generously shares a number of perspectives that I believe will help you make sense of where the U.S. and global economy is headed.
By the way, check out Tim’s blog, the Conversable Economist. It’s a stealthy, under-the-radar economics blog with an elite in-the-know following that will have your economics muscles pumping iron like Arnold Schwarzenegger in no time. Whether you’re a small business owner, a CEO, or a long-term investor, it offers a wealth of in-depth analysis of economic issues that will prove invaluable in your decision- making.
Here’s my conversation with Tim. Enjoy.
Stephen Dupont: How did you decide to become an economist?
Timothy Taylor: I was the kind of child who read Newsweek in elementary school, and who was interested in debate and speaking about current events through high school. I went to college already pretty certain that I would study economics and political science. But I was especially intrigued by economics because of its near-obsessive emphasis on spelling out theories, methods, data, and assumptions, in a way that clarified how conclusions were being reached.
Stephen Dupont: What do you love about your job? What do you love about researching, analyzing and communicating economics?
Timothy Taylor: It’s visceral for me. When I run across an economic data series with which I was unfamiliar, or when I see a new report or paper on a timely subject where my curiosity is high, my heart actually beats faster and I can feel my attention snap into focus. I have a grasshopper mind, so I like to hop from one topic to another. As someone who runs an academic journal of economics, I love the variety of methods and subjects.
Stephen Dupont: Do you affiliate yourself with any particular school of economic thought or philosophy?
Timothy Taylor: The great health care economist Victor Fuchs used to say that he was a “radical moderate.” He argues that moderates need to be radical, too, or else they will be drowned out by noise from radicals who are on the extremes. Of course, the problem with trying to be middle-of-the-road is that you get hit by ideological traffic going both directions.
Stephen Dupont: As the managing editor of the Journal of Economic Perspectives for more than 30 years, you’ve been a keen observer of economic trends, theories and policies. As you look back, is there anything that has surprised you over the past 30 years in the world of economics?
Timothy Taylor: For me, economics is an ongoing parade of surprises. I was surprised when the Berlin Wall came down, and a number of economists turned to the problem of “transition economies.” I am stunned that China has become the largest economy in the world. I was shocked that the countries of Europe—and Germany in particular—actually gave up their traditional currencies for the euro. I thought U.S. health care spending already sky-high back in 1980 at 9% of GDP, and now it’s approaching 18% of GDP. I did not suspect that the U.S. financial system and economy was as fragile as it turned out to be in the Great Recession of 2007-2009. I never would have thought that the Federal Reserve would take its policy interest rate down to near-zero, and hold it there for seven years. I flatter myself that my understanding of the economy is pretty good—except that I only learn to understand what has happened with a time lag of about two years.
Stephen Dupont: You also have been blogging about economics for five or six years at your Conversable Economist website. In your blog, you get into some pretty deep issues and topics. Is there one blog post that stands out for you as a great example of what’s right or wrong with economic thinking today?
Timothy Taylor: I’ve found myself thinking back to a post I wrote in 2012, which summarized a study about the effects of President Obama imposing tariffs in imported tires from China in 2009. In the next two years, imported tires from China fell by two-thirds, and jobs in the United States tire industry rose by 1,200. But there were other effects. Less competition from China meant higher prices for U.S. consumers. While tire imports from China fell, tire imports from Mexico, Indonesia, and Thailand rose. The bottom line: U.S. consumers paid $1.1 billion more for tires. About $48 million of that covered the wages of the 1,200 tire workers whose jobs were “saved.” Of the rest, about $250 million was higher profits for US tire companies and $800 million was higher profits for foreign tire producers. And then China retaliated by cutting of most U.S. exports of chicken parts, causing offsetting U.S. job losses in that sector. Protectionism is such an easy and wrong-headed answer to America’s economic issues.
Stephen Dupont: When you think about our world’s current economic condition, what’s the one question that keeps you up at night?
Timothy Taylor: In September 2009, during the worst weeks of the financial crisis, worrying about the U.S. and world economy did actually keep me up at night. The current economic problems are real, but at least for me, they don’t rise to the level of insomnia.
Stephen Dupont: What is your medium-term forecast for the U.S. economy?
Timothy Taylor: Since around 2005 we have been going through a period of slow productivity growth, sometimes called “secular stagnation,” which seems unlikely to change in the next few years. Also, it’s now almost eight years since the official end of the Great Recession in June 2009. It’s not unprecedented to go this long without a recession; for example, it happened in the 1960s and the 1990s. But it’s rare. I don’t know when the next recession is coming, or what will bring it on, but it’s lurking out there somewhere. So my medium-term forecast is “slow growth, with ongoing chance of recession.”
Stephen Dupont: What factors do you believe will drive the U.S. economy over the next few years? For example, will the innovations coming out of the likes of Apple, Google, Facebook, Amazon, and other high-tech companies still be the driving forces of our economy? Or should we be looking at something more close to home, such as the start of new small businesses in our communities?
Timothy Taylor: This is just a guess, but I think we may be on the verge of seeing the spread of information technology into parts of the economy beyond the standard well-known high-tech companies. For example, a recent report from the McKinsey Global Institute argues that while we have seen heavy use of information technology in a few technological leaders in a few industries, large sectors of the economy like health care and education are not yet making innovative or widespread use of what such technology can do.
Stephen Dupont: Many stock prognosticators look to the transportation industry as an indicator of future economic growth and activity. What indicators do you consider?
Timothy Taylor: It’s a tough, full-time job to focus on short-run economic predictions, and I don’t do much of it. There’s an old saying attributed to everyone from Mark Twain to Yogi Berra: “Don’t make predictions, especially about the future.” In practical terms, my suspicion is that it can be more useful to spend time on a bunch of contingency plans for a range of scenarios that might happen, rather than spending time trying to nail down a single best guess of what will happen.
Stephen Dupont: With the changes proposed by President Trump and the Republican-controlled Congress, including tax reform/tax cuts, healthcare repeal/reform, and regulatory reform do you believe that the U.S. will be more or less competitive – from an economic perspective — with other world powers, such as China, Russia, India and Europe?
Timothy Taylor: I’m the wrong one to ask here. I have been gobsmacked by the Trump phenomenon, and my predictions about whether he would be elected, what he would say, and what he would do have been consistently wrong. President Trump does a good job of articulating discontent, but his actual vision for moving into the 21st century economy is not clear to me. But maybe it doesn’t matter much as much as people sometimes think. The president is not the CEO of the U.S. economy. The actual economy is what happens when 150 million Americans head off for work each day. The 30 million or so U.S. companies, of all sizes, have a lot of experience in adjusting to whatever comes out of Washington, DC.
Stephen Dupont: Under the Trump administration, emphasis is being placed on the use of fossil fuels (oil and gas, coal), while at the same time, China has announced the closing of 103 coal-fueled power plants and major investments in clean energy. Do you believe the U.S. is throwing away a major opportunity to be the world’s clean energy leader?
Timothy Taylor: Government subsidies for clean energy have a checkered history, from the “synfuels” program back in the Carter administration to Solyndra in the Obama administration. A recent study found that China has 75% more capacity for wind power than the US, but actually produces 14% less power, because the turbines were often not integrated into the electrical grid. Germany’s movement to renewables has come at extremely high cost. For me, the big question about clean energy is not which government can subsidize it most, but rather, how to make it cost-effective. Along those lines, I support ongoing R&D efforts, and a tax on greenhouse gases, with the belief that a push and pull from those factors will provide the incentives for private-sector actors to reach for an economically sustainable clean energy future.
Stephen Dupont: What do you believe will be the long-term impact on the economy if the U.S. government reduces the number of highly skilled workers seeking employment in the U.S. through the H-1B VISA program?
Timothy Taylor: Economies are better off when they have more skilled workers, so I’m generally supportive of making true high-skilled immigration easier. However, the specific ways the H-1B visa program works in practice can be troubling. I’m no expert on this topic, but it does appear that many firms use the program not for top-level talent, but just to bring in temporary lower-level tech workers on the cheap.
Stephen Dupont: What’s your prediction for where the Dow Jones Industrial Average will be in January 2021?
Timothy Taylor: There’s an old line that those who can predict the stock market depart for private industry, and in their spare time worry about where best to moor their yachts. Those who can’t predict the stock market remain in academia, and worry about whether Aristotelian or Lockean conceptions of the moral value of work are more relevant for the modern world. I’m a lifelong denizen of academia. But I can point out is that common measures of stock market values, like the Shiller price/earnings ratio, are near their highest levels in U.S. history, comparable to the levels of Black Tuesday in 1929, if not yet at the all-time highs reached before the meltdown of the dot-com boom in 2000. So my guess is that the big stock market run-up that started in spring 2009 is closer to the end of its run than its beginning.
Stephen Dupont: What do you think will be the impact on the global economy as more jobs are replaced in the years to come due to software automation, artificial intelligence, robotics, driverless vehicles, etc.?
Timothy Taylor: I’m very much in favor of the replacement of jobs. Most of the time, this will mean that the nature of existing jobs shifts gradually over time, so that someone who was first hired as, say, a bank teller or a nurse or a construction worker a couple of decades ago needs to develop a new set of skills over time. Sometimes, it means an industry contracts and workers need to adjust. I favor a number of steps to help such transitions, but trying to freeze the economic status quo in place is not a useful option. The rest of the world keeps right on going. As Paul Romer, the current chief economist at the World Bank, likes to say: “Everyone wants progress. Nobody wants change.”
Stephen Dupont: What do you think will be the impact of blockchain technology on the global economy as more people use digital currencies such as bitcoin, ether, and litecoin, and as more assets are traded without the use of a middleman (banks, credit card companies, etc.)?
Timothy Taylor: Much of what I’ve seen recently tends to argue that the main applications of blockchain technology are unlikely to be digital currencies. The reason is that when payments made through digital currencies get large, or if they finance illegal activities, governments are going to find ways to break through the cloak of anonymity with old-fashioned search warrants and police work—and if these currencies aren’t anonymous, they lose much of their rationale. However, the use of blockchain technology is growing quickly in a number of other areas, including systems for publicly verifiable ownership, contracts, and even identity.
Stephen Dupont: Besides technology, what are major dynamics do you think will drive change within the U.S. and global economy over the next 20 years?
Timothy Taylor: Globalization is a force interrelated with technology, but not quite the same. It will increasingly shape the market for American products (as a visible example, think about all the movies that now have a China scene or connection). It will shift the line between what is produced in the U.S. and what is purchased from abroad. It will offer enormous job opportunities to Americans and businesses willing to venture abroad.
Stephen Dupont: What is it about economics that most people (the average American) don’t understand?
Timothy Taylor: Economics at its heart is not cheerleading for markets, or for a cause or a political party. It’s about analysis, and being willing to spell out and examine reasons behind conclusions. Some years back, an economist named Alan Blinder wrote a nice book called Hard Heads, Soft Hearts. A lot of non-economists seem to view public policy as a choice between hard-headed or soft-hearted, but economists are cynical sentimentalists all at the same time.
Stephen Dupont: You’ve traveled throughout the world giving speeches on economics. In the process, you’ve met business leaders, CEOs, and multimillionaires. How do the 1% think about economics differently from the elementary school teacher, the plumber down the street, or my dental hygienist?
Timothy Taylor: I’ve observed a “curse of expertise,” where those who have a high level of achievement in one area have a tendency to assume that they are experts in other areas, too. For example, a lot of professional athletes in one sport, like football, seem to believe they could also be professionals in another sport, like basketball, or that they could be rappers or movie stars. A number of very skilled business people seem convinced that they are equally knowledgeable about politics or governance, but they are not. The person down the street doesn’t necessarily have better or worse intuition about economics than people in positions of authority, but at least the person down the street knows what they don’t know.
Stephen Dupont: What do you believe needs to occur to revive the economies of specific regions of the U.S. that have been left behind in comparison to other parts of the country? Areas such as Eastern Kentucky, Ohio, Western Pennsylvania, etc.?
Timothy Taylor: The idea of “place-based” economic policies is an active research area, but I don’t think we yet have solid policy lessons. I do know that hoping for large manufacturing plants to return is not going to work for most places. Manufacturing jobs that use low-wage labor are often going to be outside U.S. borders. Manufacturing jobs that use high-wage labor are typically intertwined with heavy use of robots and technology, and aren’t going to be numerous. The long-term challenge for these places to discern what traits they have, or can build, that provide alternative source of competitive advantage in a service- and information-based economy.
Stephen Dupont: Are you concerned about the growing amount of debt that is being incurred by students to pay for college? What’s the long-term impact of these loans on the U.S. economy? On the ability of young people to buy homes, buy cars, start families, etc.?
Timothy Taylor: The economic gains associated with completing college have been rising for several decades, and so students are more willing to borrow. Colleges compete for students by offering costly facilities and support, along with their academic classes. For the average student with the average amount of student debt and average earnings after graduation, it’s still a good deal. But for a student who doesn’t finish college, or who majors in a low-paying subject, or who can’t get a job after graduation, student loans can become a lifelong millstone around their neck. Both students and the institutions receiving the loans should probably start being more selective about who borrows and how much.
Stephen Dupont: While drought conditions are improving throughout the U.S., at the same time, concerns are growing about the availability of clean water for human consumption, agriculture, pleasure, etc. As populations continue to rise, what role will clean water play in future economic development?
Timothy Taylor: Water is a peculiar economic market, because it never gets used up. The quantity of fresh water on planet earth doesn’t change from year to year. The economics of water is about how to use and reuse water, how to store it for a time, how to assure that water supplies are appropriately clean (that is, drinking water doesn’t need the exact same cleanliness as water for agricultural purposes). There are lots of examples from dry places—the American southwest, parts of Australia, the Middle East—for how to handle water more cost-effectively. In the medium-term, water scarcity is an issue that typically has economic, technological, and institutional solutions.
Stephen Dupont: You have teenage children who are heading to college and then entering the work world. What type of economic conditions do you foresee for Generation Z (those born in 2000 or after) as this generation hits their economic prime in 15 to 20 years?
Timothy Taylor: The great opportunity for Generation Z is that the “baby boom” generation is retiring and birth rates have been relatively low, so U.S. employers a decade or two in the future should be hungry for labor. The great work-related challenge is that U.S. patterns of production and consumption are becoming globalized, so Generation Z needs to think about their skills and interests in a different way than previous generations. In many cases, even those who provide a local good or service in the local economy will need an increased awareness of global factors. Also, I expect that some members of Generation Z will look around the world economy, want to head where the action is, and end up spending a substantial part of their work-life outside of U.S. borders.
Stephen Dupont: How important is creativity within a culture to economic vitality?
Timothy Taylor: It’s difficult to get hard evidence on this question, and it’s necessary to use the term “culture” in a way that is much broader than opera and oil paintings. But places with healthy and growing economies typically also have a fuller menu of music, arts, food, and fashion choices. The willingness to shift patterns and try new things is, in a work setting, the essence of innovation and economic growth.
Stephen Dupont: What would you change within our education system to help people become more savvy about economics?
Timothy Taylor: In recent years, many states have established requirements for high school economics courses, as well as standards for economics content in early grades. While I broadly favor this development, I’d like to see much more emphasis on the K-12 level on basic financial literacy: personal budgeting, bank accounts, insurance, loans, credit cards, saving, taxes, the revenues and costs of running a small business or a fund-raiser, and so on. Younger students often do best with practical examples, and you can develop a lot of economic intuition by focusing on basic topics like these.
Stephen Dupont: Do you think we need to change anything in our education system to help people prepare for future changes within our economy?
Timothy Taylor: The U.S. education system works well for a lot of children, and especially for those already going on to college. My two big changes would be:
- Find ways for a major expansion of tutoring services for K-12 students who are falling behind, perhaps in part by mobilizing groups like retirees and college and high school students; and
- Find ways for a major expansion of community colleges and their training programs, with a particular focus on making them an attractive option for many of those who now can end up with big debts from taking courses at for-profit colleges.
Stephen Dupont: What questions should I and other everyday Americans be asking ourselves about our economy and about economic conditions that we will be facing over the next 20 years?
Timothy Taylor: Here are three issues on my mind:
- A tsunami of aging is coming as the baby boomers retire, which will affect labor markets, demand for housing, health care and long-term care, transportation, the supply of volunteers, public and private pensions, and more. We seem largely unaware of the changes this will bring.
- For high-income countries, the 21st century economy is likely to be focused on information and technology. But when looking at levels of U.S. research and development spending, or corporate investment in plant and equipment, or the performance of K-12 education, it’s hard to avoid the feeling that we are not mobilizing our resources for the challenge
- We learned in the Great Recession from 2007-2009 that the U.S. and global financial system was much more fragile than I would have believed. There has been some focus on trying to prevent future bailouts of banks, but banks are a shrinking part of the overall financial system. I am not persuaded that we have found the sweet-spot balancing point of a financial system that does a strong job of helping people and firms to raise capital and manage risk, but without creating the potential for a future crisis down the road.
Stephen Dupont: In baseball, we judge the health and performance of a team, like our local the Minnesota Twins, by more than just their wins and losses. We look at RBI, ERA, and OBP. As you think about the economic dynamics of the U.S. and global economies, what stats do you put the most weight upon in thinking about the health and performance of an economy?
Timothy Taylor: The great economist Robert Solow once wrote, “If you have to be obsessed by something, maximizing real National Income is not a bad choice.” His point was that a growing economy is typically associated with many good things for average people: not just work and income, but also rising levels of education, health, and autonomy for life choices. But of course, there’s no need to be obsessed by a single variable, and looking at averages can mislead. As the statisticians sometimes say, “On average, the Great Lakes never freeze.” In the long run, a health economy is built on skilled and educated workers, working with a high level of capital investment and new technology, in a market-oriented environment that offers incentives for work and innovation. I try to look at a range of statistics reflecting each of these factors.
Stephen Dupont: Thank you for sharing your insights with my readers, Tim.
Timothy Taylor: You’re very welcome.