Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Fiscal Policy, The CARES Act, and U.S. Public Debt

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Fiscal Policy, The CARES Act, and U.S. Public Debt · The Capitalism and Freedom in the Twenty-First Century Podcast

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>> John Hurley: This is the capitalism and freedmen, the 21st century podcast where
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we talk about economics, markets and public policy.
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I'm John Hurley, your host.
0:49
Today I'm joined by Josh Rao, who's the Ormond family professor of finance
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at the Stanford Graduate School of Business.
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He's a senior fellow at the Hoover Institution.
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He's also the co founder of the Global Liberty Institute and
1:00
the new Liberty Land Substac.
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Josh studies public economics, namely taxation, pensions, and many
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more essential topics, and has established himself as a leading expert in the field.
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Welcome.
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>> Josh Rao: Thank you, John, thanks for having me.
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>> John Hurley: Josh, I wanna get into your background.
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How did you first get interested in economics and where'd you grow up?
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>> Josh Rao: Well, it's a great question.
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I grew up in the Boston area.
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I went to a small private school in the Boston area
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called the Roxbury Latin School, a classically oriented school where students
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still learned and still learn Latin and ancient Greek.
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And I went to Yale.
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I initially started out as a natural sciences person,
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starting out maybe being premed or interested in molecular biology.
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But I took a freshman organic chemistry class that hit me like a ton of bricks and
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ended up exploring the social sciences because I was good at math.
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And also my fundamental kind of issue with the natural sciences was I just really
2:00
didn't like working in a lab.
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I just was not really a lab person.
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>> John Hurley: Were you a numbers person?
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>> Josh Rao: I was a numbers person and a data person, but not a lab person.
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And so when I took my first economics course,
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it was a revelation because I realized that mathematics and
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data science could be applied to topics that were important and
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current and that had public policy influence.
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>> John Hurley: Fantastic, and you worked at Goldman Sachs for
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a period of time before you did your PhD in economics at MIT.
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You studied public economics and were a Jim Perturba student
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who's advised many of today's leading public economists,
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I think Emmanuel Sayes, Sebi Sancheva and yourself.
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I'm curious, what was it like at MIT in the early 2000s?
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>> Josh Rao: Yeah, well, just backing up a little bit.
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Coming out of Yale,
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I wasn't really very organized about what it is that I wanted to do.
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I had the solid grades in the economics and
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math classes, but I was not particularly focused.
3:12
And I don't think I would ever have gotten into a PhD program today,
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because of course, today you need not only the undergraduate background.
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But a couple years of having been an RA for some professor,
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a set of glowing recommendations from very famous people.
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And I also, coming out of Yale,
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wasn't really sure that I wanted to get a PhD in economics.
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I was intrigued by some of the more practical applications of economics.
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But also wasn't organized enough or focused enough to go on the investment
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banking market that a lot of my kind of people in my cohort from Yale were doing.
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So I ended up, actually lived in Germany for a year and
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I did a couple internships that I just put together myself.
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One of which was with the German parliament, a political party
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in the German parliament called the FTP, which is sort of a libertarian party.
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And I was intrigued by the idea that there could be such a party because, of course,
4:04
in America we have a libertarian party, but it's not really a force.
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The FTP in Germany has traditionally, historically been sort of a kingmaker for
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some of the other bigger parties.
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Things have changed a bit now.
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>> John Hurley: Like the CDU or the SPD.
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>> Josh Rao: Exactly.
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CDU or SPD would sort of go back and forth during the 20th century between
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the control government having being under the control of one of those two bigger
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parties, depending on who the FTP was aligned with.
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And so that was a really fascinating experience.
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And I ended up in an internship at Deutsche bank in Frankfurt and
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working on some macroeconomic strategy stuff at Deutsche.
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So that all happened over the course of a year.
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And then I ended up at Goldman Sachs in London and their economics research team.
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And that was a terrific experience.
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I was there in London for two and a half years with those folks,
4:53
some really excellent PhD economists who were there applying
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their skills to really market oriented questions.
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A lot of what we were doing and a lot of what those groups still do involves
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macroeconomic forecasting and the interpretation of macroeconomic data for
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the firm's traders, currency traders and bond traders.
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This is like Jan Hattius's economics research, US economics,
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global economics research.
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>> John Hurley: And maybe at the time,
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I think Jim O'Neill in London was perhaps running some of this at the time.
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>> Josh Rao: Exactly, and Jan was a young economist as well, like me there.
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He was in the Frankfurt office, so I knew him back then.
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Of course, he's stayed with the firm and really.
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>> John Hurley: He's German.
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>> Josh Rao: He's German, yeah,
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he moved from Frankfurt to the US sometime around 2000.
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Around the time that I left Goldman he's really done amazing things at the firm.
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>> John Hurley: And you're fluent in German.
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>> Josh Rao: I am fluent in German, that is correct.
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>> John Hurley: Now, were you fluent in German before you went over to Germany or
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was that something you just picked up while you were there?
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>> Josh Rao: Learned it in college, was very interested in the politics and
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economics of the EU and just kind of picked it up while I was over there.
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>> John Hurley: Wow. >> Josh Rao: Yeah, so
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Goldman in London going to that time period, I was there in the late 1990s.
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It was the dotcom boom days and there were a lot of really very,
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very good people working there.
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After a couple years,
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I got the feeling that the market prediction game wasn't really for me.
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Actually, people were under tremendous pressure there to make
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predictions in markets on a pretty short time horizon.
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And people were punished if they were wrong.
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I mean,
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there was a currency crisis in Asia in mid 1998 that happened right after I joined.
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And the first thing that happened was about half of the people who I had said
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hello to during the first couple months that I was there were immediately fired
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for not having predicted the Asian currency crisis.
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That gave me a bit of a sense of what working there could potentially be like if
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you got stuff wrong.
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And so after a couple of years, I decided that I wanted to go back and
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get a PhD in economics and deepen my knowledge and contribute to research.
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And take some more time to do the more deep,
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longer form research that we do when we write papers in economics.
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>> John Hurley: Wow, well, fascinating.
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Forecasting is very difficult.
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And you have this whole recent inflationary episode in the early 2020s
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and the inability to forecast that on the part of professional forecasters.
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If that's any indication,
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I think you chose perhaps a field that might be somewhat less impossible.
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You're a very distinguished public economist.
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You study a number of things from taxes to pensions.
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Can you explain what your research agenda is and its main ideas?
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>> Josh Rao: Yeah well, let me tell you a little about how I got into it.
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I was always interested, even from the Goldman Sachs days,
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in financial markets as a vehicle for long term investments.
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And finance being about the ability of individuals to move resources and
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consumption across time and across different states of the world at different
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prices depending on what the conditions of financial markets were.
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So that was one set of issues I was very interested in also public
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policy issues like inequality, the measurement inequality and
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taxation, the optimal size of government,
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what's the right marginal tax rate that should be set?
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Those types of public health questions.
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So I went to MIT intending to work with Jim Ptrba,
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who I eventually did become my advisor.
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But not before a bit of a bumpy start, I think in the spirit of posting your
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losses, I'll tell you a little bit about the beginnings of my, my time at MIT.
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First of all, I was admitted, but not with funding, and
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I failed to get an NSF fellowship.
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But I went to the admitted students day and talked to Jim Paterba and
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other professors and was very impressed and
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looking forward to working there and to being a student there.
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But the director of graduate studies,
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when it came to the meeting that I had with him, he said, look,
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I'm sorry to tell you, but, you know, we took too many people this year.
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And he basically said, mistakes were made.
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And he didn't say you were one of them directly, but
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that was kind of the implication that I was getting.
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And he actually said, please don't come here because we have no money for you.
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And not only we're not giving you money this year,
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we're not gonna give you money ever.
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So this is tough medicine to take.
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And I thought about it, and because I had been working at Goldman,
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I didn't make a huge amount of money at Goldman.
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I was still lower level person, but I had some savings.
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And I actually said, you know what, screw it.
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Relative to my next best option, getting a PhD in economics at MIT is what I want to
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do, and I'm not gonna let myself be discouraged by this.
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So I had to fork over tuition when a lot of other, well,
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all my other classmates basically had their tuition paid for.
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And to make things even worse, after I had accepted,
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I came to learn that actually Jim Perturba, he decided after that
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that he was gonna take a year's leave and go be at the Hoover institution.
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Actually a place that I've spent a lot of time at in the last,
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most recent decade of my career.
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And so things were looking pretty rough at that time for me.
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And I guess in the spirit of stick with your plan,
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don't get knocked off your plan, I can say that it was good that I didn't,
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because what ended up happening was first year in a PhD program.
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As you know, John, you're bumping around a little bit.
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It can be hard to get your footing exactly.
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And you're gonna try out some stuff.
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I worked for a few different people, different professors, and
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did a few different things.
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I had to do ra work to actually pay the bills,
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and I think I got my footing.
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And then Jim came back and
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I started working with him on the topics that actually come to MIT to work on.
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>> John Hurley: Well, that's incredibly impressive.
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It's amazing to me that the best economics department in the world, it doesn't
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provide full funding for its students or has this expectation that many get nsfs.
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That sort of always been an interesting phenomenon to me.
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But the fact that you were able to persevere through that is really amazing.
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And also totally something I think, worth fighting for
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to be at MIT in the early two thousands, just sort of at the beginning of
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this wave of causal inference, credibility, revolution.
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What a great time to be in Cambridge at MIT, or Harvard for that matter.
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>> Josh Rao: Well, that's exactly right.
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I mean, I think what I got from being at MIT was, first of all,
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Jim Paterba is just a tremendously impressive advisor, wonderful advisor
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who invests a lot of time and energy in really growing his PhD students.
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We're having a celebration of him next year.
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Not that he's retiring, but
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there's just tradition developing now that when someone's in their mid 60s.
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You just kind of get a bunch of people together, a bunch of students together to
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celebrate the person at a time when they're still really at their prime and
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doing great things.
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And that's gonna be in March 2024, I'm looking forward to going and
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celebrating him.
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So he was a huge influence and was just a tremendous mentor for me.
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But also at the same time being exposed to the ideas of Josh Angrist and
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John Gruber and other people who are applying the techniques
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of identification to address causality and economics.
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So it was an exciting time to be there.
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I was known at the time by my classmates as MIT Econ's only Republican.
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I didn't necessarily totally embrace that, to be honest.
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I think I thought of myself more as sort of a swing voter, and
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especially because I focused kind of on economics.
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Coming out of the Clinton administration, things didn't look that bad.
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I mean, there was a surplus, at least on the books the way that they measure it.
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There have been some welfare reform, and George W Bush had the hallmarks of
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being and ultimately became a sort of, I guess we think of as being kind of
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a big spending Republican with not only the foreign policy.
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Things which you can debate their necessity, but also Medicare part D,
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their big government expansion.
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So I wasn't even sure what exactly that meant.
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MIT is only Republicans, but MIT is only Republican.
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But maybe even my classmates saw something that I didn't know.
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Over time, I've come to embrace that.
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>> John Hurley: Wonderful.
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I mean, it's so fascinating.
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You have to think how much, certainly the policy and
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political stands have changed since then, just over more than 20 years, and
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how the field has changed over that period of time.
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So I wanna get into your research agenda.
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So you spend since then, it's been almost,
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I think 20 years since you graduated in 2004.
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What do you think have been your most impactful research accomplishments
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thus far?
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>> Josh Rao: Thanks, well, a few things.
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So I think the area that I kind of got known for
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in the field of financial economics is this topic of pensions,
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of government liabilities and pensions in particular.
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And it's interesting, it was an area that's always interesting to me because
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it's a topic where all of public policy seemed to be making some fundamental basic
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mistakes in their applications of the principles of finance.
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And it was an issue that brought together financial markets and
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government budgeting.
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The big challenge, I think that goes on in this area is that state and
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local governments, they always have an incentive to sort of
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delay costs in ways that future politicians will have to bear.
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And there is no easier way to do that and
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actually no more widely accepted way of doing it.
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Than telling your employees instead of paying you in current compensation as much
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as you otherwise would get, I'm gonna pay you in pensions.
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I'm gonna promise you a pension, really nice pension years down the line.
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You got to stay here for 20 or 25 or 30 years if you want to get it,
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if you want it to be any good.
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And what was fascinating to me is in grad school,
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my fields were public economics and corporate finance.
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And I think just seeing the tension between those two things,
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the way that we know from financial economics, the way that liability is
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supposed to be measured and the way that we model the evolution of assets.
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As looking across states of the world and over time.
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And then looking at the way that the government budgeting was done,
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which is a way that government budgeting essentially just treats these
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forecasts of financial markets.
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Let's say the stock market's gonna crank out a return of 10% a year as being
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a sure thing.
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They don't adjust that for risk at all.
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And so what you end up having is situations where state and local
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governments are basically doing budgeting on completely flawed assumptions.
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So I think some of the empirical work I got known for was remeasuring state and
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local government liabilities using the principles of finance,
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and applying the principles of finance to state and
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local government budgeting on that topic.
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And sort of, by extension, on other things,
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like the retiree healthcare that they offer, and
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trying to move the conception of public budgeting more in a direction
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that aligns with the way that we think about it in finance.
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So that was kind of one of the big things.
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>> John Hurley: And does that include, unfunded pension liabilities,
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which are sort of an increasing issue in certainly our
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fiscal policy discussions, cuz that includes entitlements?
17:23
We'll talk a little bit more about the US federal debt situation later.
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But in your research, that's encompassing that?
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>> Josh Rao: Yeah, right. I mean, that was motivated initially by
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how, say, a city like the city of Chicago budgets for
17:37
the pensions that it promises to public safety officials or to teachers.
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And those are, when we say the words unfunded pension liabilities.
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Which another great mentor of mine, Professor Ed Glaser, said that his
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wife told him those were the least sexy three words in the English language,
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unfunded pension liabilities.
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But nonetheless, to me, I find it a very fascinating
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topic of study, and indeed, it's that.
18:07
And then you can also extend these types of considerations to other government
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programs, like social security.
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>> John Hurley: Perhaps increasingly, the three most important words in fiscal and
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debt policy.
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>> Josh Rao: Yes, I like it, yeah.
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The three most important words, who cares if they're sexy?
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The point is they're important.
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>> John Hurley: Exactly, now, you spent about 15 years as a distinguished
18:26
professor, and then you decided that you wanted to serve in government.
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You joined the Trump administration Council of Economic Advisors in
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the autumn of 2019, soon before the Covid-19 pandemic hit the US.
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Tell us about what that experience was like.
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>> Josh Rao: Well, when I was called by acting CEA chair Tom Phillipson in
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fall 2019 to join the CEA, it was a great honor for
18:52
me, something I had always wanted to do, and
18:55
it was a time in my life where it was possible for me to go do it.
19:00
And it was something that I didn't say no to.
19:05
And I actually would advise anybody who gets called on for
19:08
government service to try to do it and make it happen.
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I also would advise them to do something that I did, which was to set down for
19:16
myself in advance the limits of what I would be willing to tolerate as being part
19:21
of that position.
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And this was inspired to me by someone who was a mentor of my mentors,
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a man named Martin Feldstein, a great professor of economics at
19:32
Harvard University, who had quit the Reagan administration.
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He was the chair of the CEA.
19:38
He quit the Reagan administration over the issue of budget deficits.
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And over the fact that Congress was proposing, was passing a budget
19:48
that would have, at the time, had a $100 billion deficit,
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which is, of course, nothing compared to where we are today.
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>> John Hurley: Martin Feldstein was one of the famously, I think,
20:00
one of the few deficit hawks in the Reagan administration.
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>> Josh Rao: Exactly, exactly.
20:05
And so when I went to the Trump administration,
20:08
I was worried about what had been going on with the deficit, because it wasn't good.
20:14
And especially in a situation where, at least for
20:17
the first part of that administration, you had both the presidency and
20:21
both houses of Congress controlled by the Republicans.
20:25
Well, I liked the Tax Cut and Jobs Act and
20:27
some of the improved incentives in that act.
20:30
I was not happy.
20:30
>> John Hurley: Which brought down the corporate tax rate to 21% and
20:34
changed up the expensing rules.
20:37
And I guess it was very much a pro-growth kind of tax reform.
20:40
Didn't do too much on the personal side of things.
20:43
A number of those things are coming up in 2025.
20:46
Certainly, a big tax discussion is brewing.
20:49
But you came in after that.
20:50
>> Josh Rao: Came in after that, right, right.
20:51
And first few months were good.
20:56
We were working on, during that cycle of the end of the year and the beginning of
21:01
the next year, you're basically working on the economic rapport of the president.
21:06
And you are preparing the president for
21:08
any economics that are gonna go into the State of the Union address.
21:12
And we did a number of things,
21:14
including taking stock of where the US was on inequality,
21:18
on income growth at different parts of the income distribution, which is a big topic.
21:25
Another topic I could talk about all day, because I think that fundamentally,
21:28
the narrative in the press about inequality is based on some research by
21:32
some other economists out there that I think is wrong.
21:35
This is the narrative of Emmanuel Sieyes and Thoma Piketty.
21:42
And I think that the other economists have worked on it like Autin and Splinter and
21:46
others have basically figured out that there are some real statistical
21:49
problems with the Piketty Sieyes.
21:51
>> John Hurley: They're at the Joint Committee on Taxation, or one of the-
21:53
>> Josh Rao: One's at JCT,
21:54
the other is the treasury, exactly.
21:58
So some of that made its way into the state of the union address.
22:00
So that was kind of neat.
22:01
And we're also doing a lot of.
22:03
A lot of what you do when you're at CEA is trying to make sure that when sort of bad
22:08
ideas bubble up from various parts of the government.
22:12
That you're shedding some solid economic light on what those ideas
22:16
might actually entail or do.
22:18
And so there were a lot of little things like that.
22:21
But things really changed when Covid happened.
22:25
And I think the policy response to Covid, of course,
22:30
really divided the country in some ways, really divided the world.
22:36
And initially, I think President Trump's instincts were not to overreact,
22:44
to make sure not to overreact initially.
22:48
And this was also the case with UK Prime Minister Boris Johnson,
22:52
also initially were saying, we're not gonna overreact on lockdowns.
22:56
We're not gonna change, try to change our entire society or
23:01
economic structure here just to combat COVID.
23:07
But things turned pretty quickly in terms of who
23:11
the president was listening to on health policy.
23:16
He was obviously listening strongly to Fauci and Birx.
23:19
And on economic policy when this crisis happened, suddenly, my feeling was that
23:24
the economists within the administration, at least the ones who I knew,
23:28
weren't really being consulted about the economic policy response.
23:33
And economic policy response In March 2020,
23:37
if we sort of rewind and think back to the history of this and
23:41
what was going on then was the run up to what was called the CARES Act.
23:46
CARES act, at the end of March 2020, introduced some of these
23:51
really big new government programs, stimulus checks for people,
23:56
big business bailouts, including targeted bailouts to airlines.
24:01
Small business bailouts with the PPP, the Paycheck Protection Program,
24:07
which was a program that turned out to be rife with fraud.
24:11
Flat dollar bonuses for unemployment insurance.
24:13
Unemployment insurance is a program, it's already a stabilizer.
24:16
By doing additional legislation on top of it, it expanded in such a way that made
24:22
it so that nobody would have an incentive to work for a very long time.
24:27
One of the aspects of it was these flat $600 bonus amounts.
24:33
That made for a lot of people the replacement rate of UI for
24:38
their job, 150% or more.
24:41
I mean, there are bunch of studies that showed this, and
24:44
it was immediately apparent.
24:46
Plus hundreds of billions of dollars to state and
24:49
local governments that ultimately they did not need.
24:53
Now, I could be nice and say, well,
24:56
there was a lot of uncertainty, we didn't know, but
25:01
this was a program of government expansion that I just did not want to be part of.
25:08
And in particular, I also, as I said, I think if I felt that,
25:13
not necessarily me, but that other economists at the CEA or
25:18
in the administration generally were making that point.
25:22
Or were around to make that point, that would have been one thing.
25:28
But as it was, I didnt feel that point was getting made.
25:31
And I, to this day, very much strongly disagree with that policy response.
25:39
And so even though this was about five months into my time there,
25:43
when I resigned, and I planned to stay for at least a year.
25:47
I had arranged a year's leave from Stanford and hoped maybe to stay for
25:50
longer.
25:51
I ended up returning, coming back to Stanford because they basically
25:55
crossed the limit that I had set for myself going into it.
25:58
>> John Hurley: Fascinating and certainly commendable to sort of see
26:04
this coming into standby, your own principles and ideas.
26:10
I'm curious just to take stock on the legacy of the CARES Act.
26:15
It's fascinating to think, over three years later, where we are now.
26:19
We had the CARES Act, stimulus checks, PPP grants,
26:24
it had massive unemployment insurance.
26:28
There were expansions and so forth and subsequent bills.
26:31
And then we had the additional Trump bill, I think,
26:36
in the end of 2020, I believe.
26:39
And then we had the Biden ARP.
26:43
We had, more recently, the so-called Inflation Reduction Act.
26:47
I think there's been, over that period of time, an increase in the debt
26:53
to GDP on the order of 20% just from those sets of initiatives alone.
26:59
First and foremost, one, do you think that the inflation
27:03
that we're seeing today, that started to uptick in 2021.
27:08
That has peaked at around 8% headline and
27:12
a little bit less than that on the core side.
27:15
Do you think that that uptick in inflation is related to that increase in
27:20
government spending?
27:21
>> Josh Rao: I think, absolutely,
27:22
it's related to that increase in government spending.
27:24
And I mean, some people who I respect and have worked with draw
27:29
a line between the spending that happened in 2020 and
27:34
the spending that happened in 2021.
27:37
And they say, well, in 2020, it was necessary, we had to do this.
27:41
But then ARPA 2021, that was unadvised.
27:46
I don't agree with that at all.
27:48
I think that the lockdowns of Covid and
27:52
the spending increases were really kinda two sides of the same coin.
27:57
And in fact, I would go so far as to say that all of that spending was a way for
28:02
the government to essentially tranquilize the American people into accepting
28:07
these destructive lockdowns.
28:09
A lot of people say, well, this isn't so bad.
28:14
I'm still getting my stimulus check, and I'm getting my PPP loan,
28:19
I'm getting my UI, and accepting something that ultimately,
28:24
I think, is gonna be extremely destructive.
28:27
Not only because of the new baseline that it sort of reset on the economic
28:31
spending side.
28:32
But also, of course, what we've done to our younger people, who we essentially
28:35
locked in their homes for a year and a half and thought, this will be fine.
28:39
At least in some states, we did that.
28:41
And of course, it's not at all fine.
28:44
And so in terms of inflation, I think some of the evidence of this is that
28:49
savings rates spiked up to over 30% during this time.
28:52
By definition, that almost means you're sending out money,
28:54
the federal government sending out money that people didn't need.
28:56
Why do you have to boost people's savings rates to that level?
29:01
And of course,
29:02
then when all that money came flooding back into the economy on the demand side,
29:06
the supply side, particularly labor supply, was still very, very limited.
29:10
So I absolutely, I trace a pretty continuous line.
29:13
I'll agree that ARPA and the March 2021 legislation
29:18
was perhaps the least necessary of all of it.
29:22
But I also blame the people in charge during 2020 in both Congress and
29:27
the administration for going in that direction.
29:31
You point out debt to GDP.
29:34
I mean, another figure that I just think is worth bearing in mind is just what is
29:38
government spending to GDP?
29:40
I like to ask my students before telling them anything or giving them any readings,
29:44
what do you think the ratio of government spending is to GDP in this country?
29:48
And I explain what that means, for every dollar of spending in the US economy,
29:53
what percentage of that is spent by the government?
29:56
And during 2020, in the United States of America, which people usually think
30:02
of as this bastion of free market capitalism, that number went up to 48%.
30:07
And it subsided back a little bit to around 44% the following year.
30:12
And I think it settled into about 42% this year.
30:15
But this is the United States of America.
30:17
Do people feel that they are getting the government the services,
30:22
the quality of services that amount of money would buy, should buy?
30:27
And by the way, this is federal, state, and
30:31
local combined, the numbers that I'm giving you here.
30:35
I think the inflation is one of the symptoms of what it is that we've done.
30:42
But I really think that we need to step back and ask,
30:47
is this the appropriate size of government?
30:51
>> John Hurley: Let's rewind it to March 2020.
30:55
You are secretary of the Treasury, and let's go piece by piece here.
31:01
How the response with obviously the benefit of hindsight
31:06
could have been a better one.
31:08
And obviously, at the time, it wasn't totally known how bad the pandemic was,
31:12
how lethal it was, and so forth.
31:14
And that was something that was sort of learned over time.
31:17
But looking back with 2020 hindsight,
31:20
I think it's fair to say that the lockdowns certainly didn't really
31:25
prevent transmission and perhaps cause further economic losses.
31:30
I'm curious, in terms of fiscal policy response, we don't need to get too much
31:35
into the Fed policy response in the lender last resort stuff.
31:39
But on the fiscal policy side of things, obviously, there was a lot of QE as well.
31:44
And this was in part a joint effort on the fiscal policy side things.
31:48
Okay, so we think unemployment insurance fair to say that maybe we should
31:54
have done a percentage of wage replacement instead of $400 a week.
31:59
That doesn't play with the marginal tax rate.
32:01
It creates the kind of distortions that having over 100% marginal tax rates
32:06
can create.
32:07
But I'm curious, how would you rethink something like the stimulus checks or
32:12
something like that?
32:13
The PPP, there was so much government infrastructure that was sort of used.
32:19
They were using the small business Administration to work with the banking
32:23
system and a lot of smaller banks.
32:25
And there was certainly a lot of uproar when certain businesses,
32:30
hedge funds, were taking out PPP grants.
32:33
I mean, they weren't loans given as a loan, but it was pretty different and
32:37
turned into a grant.
32:38
And it was basically just money to largely small businesses.
32:41
But there's been a lot of controversy about certainly how much waste,
32:46
how much fraud was there.
32:47
And I'm curious like do you think that maybe the seamless checks alone would have
32:51
been enough?
32:52
What should we have done for small businesses?
32:54
And going forward, say we have a pandemic in the future, how do you think
32:59
we should handle such a fiscal policy response, that kind of recession?
33:05
>> Josh Rao: Well, let's take each of these insurance.
33:06
So first of all, on the unemployment insurance,
33:09
any expansion of the unemployment insurance program, whether it would be
33:12
with a flat dollar amount which creates really perverse incentives.
33:15
Or more preferably with some kind of percentage of wage bonus on top,
33:20
if that was even necessary, because again, the UI program is already in place.
33:26
It's not clear there was a need to expand UI.
33:29
But if there was gonna be an expansion of UI, the point that I always make
33:34
is this is an opportunity also to try to fix UI for the long term future.
33:39
The unemployment insurance system, I don't wanna get too much into details, but
33:43
every state is supposed to keep,
33:45
maintain a balance at the treasury that's sort of like a precautionary balance.
33:49
It's supposed to be sort of the equivalent of three really bad years.
33:53
They're supposed to have that in precautionary holdings at the treasury.
33:56
And about half of the states comply and the other half don't comply.
34:01
And there's no teeth to it, there's no punishment for not complying.
34:05
And what ends up happening is, and this is going on now, is that, well,
34:09
California and other states that were not complying,
34:12
they had to take big loans from the federal government.
34:15
To pay the UI during COVID.
34:18
And now they're supposed to be paying those loans back, but
34:21
they don't have the money to pay them back cuz now there's a deficit.
34:24
And so they're passing those costs on to businesses in the higher state UI taxes.
34:27
Okay, that was a bit of a detour, but
34:29
the point is that the entire UI system had a very flawed architecture.
34:34
And so the way to get a compromise in place is to say, yeah, all right, maybe we
34:38
need to expand UI a little bit for this crisis, but let's also fix the future.
34:42
To say that if states wanna have generous UI,
34:45
they actually have to have those precautionary savings on hand.
34:48
They actually have to have a fiscally sound system.
34:53
So the general philosophy is if you're gonna do an expansion today for a crisis,
34:58
let's make sure we do something to sort of fix the future.
35:01
And so that's what I wish would happen with that and with a lot of government
35:06
programs and other things and other sort of bailout type things.
35:11
Any system where you're gonna pump in money, you should be thinking, okay,
35:14
in exchange for this, what kind of reform are we gonna ask for the long term.
35:18
For something like the big business bailouts, I mean,
35:21
bailing out airlines was something that was just,
35:24
I guess it was ended up costing about 25 billion, which I don't know.
35:28
I suppose now we're supposed to think that's small, I didn't think it's small.
35:30
But you've flown on any of the three major airlines in the last couple decades.
35:39
I mean, you've flown on an airline that was in chapter 11 bankruptcy.
35:43
We have structures in place.
35:44
So that when companies can't pay all their debts,
35:47
that the creditors who bought bonds in the company end up,
35:51
they take over ownership from the stockholders, stockholders get wiped out.
35:55
And so one of the things I think also about the policy response that really
35:59
bothered me is that it bailed out shareholders, equity holders.
36:02
Most of whom voluntarily, all of them voluntarily took risk to buy
36:07
equities in these companies, buy stock in these companies.
36:10
The idea being that if the company had a bad realization,
36:13
they get wiped out and then the creditors get to take over the company.
36:16
And by stepping in and removing that entire mechanism,
36:21
we took the entire system of shareholder capitalism and
36:26
risk based capitalism and we said, we're not gonna let anybody lose a dollar.
36:32
The irony of all of this is that shareholders,
36:36
equity holders came out of COVID doing great.
36:39
Look at what the stock market did in the year from there was a dip in 2020.
36:43
People started getting scared, roaring back quickly and
36:47
then way surpassed its initial level.
36:50
So I think making use, I think my general principle is, number one,
36:55
make use of existing structures and programs that we know work.
36:59
And if you have to, some colleagues of mine at the GSB and I, after I came back,
37:03
proposed something that we thought would be more useful than a lot of
37:07
the other facilities.
37:08
And programs that are being proposed, which is a sort of support for debtor and
37:12
possession financing,
37:13
which is the kind of bridge finance you need to have a bankruptcy process.
37:17
A financial restructuring process that would have kept airlines and
37:20
other companies operating.
37:22
But that would have not just bailed out shareholders and
37:27
that would have let the normal course of financial markets do their job.
37:34
I'll give you one other example, is also the money
37:37
that was directed unconditionally to state and local governments.
37:41
CARES Act, I think 500 billion to state and local governments.
37:46
And there were some attempts to try to place restrictions on what they could do
37:50
with that money.
37:51
>> John Hurley: More recently also been the bailouts and public sector unions.
37:54
>> Josh Rao: Yeah, union pension plan is also a big thing with the state and
38:00
local governments.
38:02
State, local governments, they borrow from the public, they issue municipal bonds,
38:06
that's a $4 trillion market.
38:08
Municipal bonds are mostly owned by households,
38:12
actually by high income households, and
38:15
they have historically had higher yields than, say, treasury bonds.
38:20
So better savings vehicles for households, because those households,
38:23
you're taking on some risk.
38:24
You're taking on some risk that the city might run into financial trouble or
38:30
the state might run into financial trouble,
38:33
you get a tax break that tends to lower the yield relative to other types of debt.
38:39
But because of that default risk and maybe some liquidity, there may be a little less
38:44
liquid in treasury bonds, they end up getting higher yields.
38:47
Why was it that no municipal bondholder lost
38:51
a single centennial during this episode, but
38:55
the taxpayers came in and just bailed out?
38:59
Every state and local government just threw money at these municipal bonds,
39:03
these are owned by, again, largely high income households.
39:07
It's not like something that has a huge amount of systemic risk.
39:10
So I wrote an op Ed during 2020 where I said, if there's gonna be any more,
39:13
I mean, I wish they had done this initially, but
39:15
any more bailout funding state or local governments.
39:18
They should have to haircut their municipal bonds outstanding, meaning that
39:21
if an investor owned a municipal bond and that bond was worth $1,000.
39:25
Maybe they have to haircut that thing down to say, okay,
39:28
now that's only gonna be worth 900.
39:29
You took risk, and you're gonna have to bear the downside,
39:33
some of the downside, when that downside happens.
39:37
That's what in the European Union, when Greece was defaulted on its debt,
39:42
European commission negotiated a bailout package for Greece.
39:47
Bondholders had to take some kind of loss on that.
39:52
They weren't bailed out 100% in their entirety,
39:54
they weren't sent all the way to zero.
39:56
But to me, a lot of these things really just violated the principles
39:59
of capitalism that I feel that our country and our economy are built on.
40:03
And so as we think about what's the right way to deal with crises, sure, if you feel
40:07
that there are some vulnerable parts of the economy that need support, go do it.
40:11
But use this use crisis as an opportunity to reform
40:16
systems like the UI system that was broken to begin with.
40:23
And secondly, don't do bailouts when you don't need to do bailouts,
40:27
why should taxpayers have to always support big corporations,
40:31
it just makes no sense to me.
40:33
>> John Hurley: Absolutely, and certainly some of that,
40:35
I think violates Basher House dictum, which is having some penalty in
40:40
these sorts of emergency lending or bailout type events.
40:43
I'm curious, do you have any thoughts on just the Biden administration?
40:48
House Republicans, they just came to an agreement on the debt ceiling,
40:53
suspending it until January 1, 2025, exchange for
40:57
about $1.5 trillion in reduced spending according to CBO.
41:02
Any thoughts on the long term prospects for the us debt and government spending?
41:08
>> Josh Rao: Yeah, so this deal recently has gotten some criticism from
41:13
some of the more fiscally conservative corners of
41:17
the Republicans in Congress for not somehow not doing enough.
41:22
For not going far enough, that Speaker McCarthy, didn't get enough concessions,
41:27
enough spending cuts in exchange for the authorization of raising the debt ceiling.
41:33
And while I understand where that is coming from, because if we're saving,
41:38
and CBO's estimate we're going to save 1.5 trillion over the next ten years,
41:44
that's nice.
41:45
But that's pretty small as a percentage of total debt or
41:49
the total deficits that we expect to have over the next ten years.
41:54
So I understand where it's coming from politically I don't
41:59
think that we could have expected much more.
42:02
And the reason I say that is that the Democrats have the Senate, Democrats have
42:07
the presidency, and the Republicans have a razor thin margin in the House.
42:12
And what really has to happen if the long run picture for
42:17
the US fiscal situation is gonna improve is that there has to be a party
42:23
in power where there is agreement among the different branches of government.
42:29
So alignment of the parties,
42:30
I'm thinking it's probably gonna be the Republican Party, but
42:33
maybe there'll be a new party, I don't know.
42:36
And where voters have been convinced that they need to actually vote for the party
42:40
that's gonna be fiscally responsible and try to fix the debt and deficit mess.
42:45
I just think when you have such a razor thin margin of people,
42:49
the mandate is just not strongly enough there.
42:53
I wish it were, if I were a benevolent dictator, I would say we need
42:58
to do this for the future, we need to put the future on a solid footing.
43:04
But the votes just otherwise weren't there and so
43:06
I think probably we did as well as we could have.
43:08
>> John Hurley: Yeah, I mean, it's such a strange thing, I think that that ceiling.
43:12
It's this weird thing where the US possibility of default being
43:16
sort of part of the negotiation, obviously not ideal, I mean,
43:20
creates all this excess volatility in financial markets.
43:23
But I mean, on the flip side, it's like the one tool as bad as it is,
43:28
that actually seems to bring about some conversations about government
43:32
spending and debt.
43:34
I remember back over ten years ago in 2011 when there was the debt
43:38
ceiling standoff then and the S&P downgrading US debt.
43:41
And that caused big sell off and risk markets, ironically,
43:45
it actually caused treasuries to rally.
43:47
But also that series of events created the Bowl Simpsons Commission,
43:51
which seemed to be simulating some public dialogue about fiscal policy and
43:54
budget reform, but didn't seem to really go anywhere.
43:57
Looking 12 years later, in fact, things maybe have gotten worse in recent years.
44:03
I just finish on talking to you about these new endeavors that you have started.
44:08
You recently have founded the Global Liberty Institute and
44:12
your Substack Liberty lens, what are they about?
44:17
>> Josh Rao: We started this, so
44:18
the Global Liberty Institute is a joint effort between myself and Scott Atlas.
44:24
Someone who's well known from his work during 2020 and during COVID
44:30
to try to shed some actual rational light on the health policy responses.
44:36
And we started this organization, I think for two purposes,
44:41
first is that it's an international organization, sort of in
44:45
the spirit of the World Economic Forum and the World Economic Forum.
44:51
And a lot of the other international organizations have been doing,
44:56
pushing really, really hard on the research front on a lot of
45:01
what I think of as being sort of rationales for big government.
45:06
Combined with sort of a cooperation between corporations and
45:11
government, which is just gonna kind of feed even bigger government.
45:17
Some of these topics are things like addressing inequality,
45:21
we were talking about this before.
45:23
If you listen to these international organizations,
45:26
you would think that we're having this explosion in inequality that requires
45:31
some kind of new massive redistribution of money.
45:34
But when you look at the actual statistics that a lot of this stuff is based on,
45:38
a lot of their claims are based on, they're very,
45:40
very flimsy, they don't actually hold up.
45:42
And really, these organizations are feeding the public a line and a narrative
45:47
that makes them wanna believe that we need all this additional redistribution.
45:53
And so one of the sets of things we're trying to do is just have an organization
45:58
that brings together researchers across different countries to try to put
46:03
some of the stuff in a more rational lens, things like inequality or climate.
46:08
What's the rational response to climate change?
46:14
The idea that we're gonna go to net zero and
46:17
that it's gonna cost over $100 trillion to do that.
46:23
This is something that's being pushed very, very hard by a sort of
46:28
cooperation between large companies that are gonna profit from it and
46:33
governments that enjoy increasing their power.
46:36
And I think the evidence of that is that one of the last COP meetings and
46:41
the COP meeting in Glasgow, Scotland.
46:44
>> John Hurley: That's the big environmental.
46:46
>> Josh Rao: Big environmental conference, [CROSSTALK] conference, right.
46:49
The financial institutions,
46:51
the banks were lining up to provide this $130 trillion of financing.
46:55
Well, of course they were, I mean, if you tell everybody, hey, okay,
47:00
we need to destroy all of this capital that we have,
47:03
this dirty energy producing capital, need to replace it with this green capital.
47:08
And we're gonna have to finance it somehow.
47:11
So the companies that are gonna build that new stuff, they're gonna have to borrow or
47:15
raise $130 trillion, well, who benefits and who loses from that?
47:18
I mean, clearly, the financiers who are gonna get to be the intermediaries and
47:23
loan the money or provide the equity capital, they're huge beneficiaries
47:28
of that, I like to compare that to the broken window fallacy.
47:32
The broken window fallacy of Bastiat.
47:34
Which is this idea that there's this fallacy that, hey,
47:37
maybe we should go around breaking windows and then hiring repair people to repair
47:40
them because we could generate all this economic activity.
47:43
Well, the person who would benefit from that would be the glass repair man,
47:47
and in this case, the entities are gonna benefit from it are the companies
47:51
are gonna build all this new green energy and the financiers are gonna finance it.
47:55
So I'm getting a little off topic, but you asked about GLI, so
47:59
GLI is trying to be a voice of reason on those times.
48:02
Second role of GLI is that organizations like the World Economic Forum have done
48:08
really well at organizing young people on their economic policy objectives,
48:13
and young people who then end up going into public policy.
48:18
So the chairman of the World Economic Forum, Klaus Schwab, is fond of actually
48:23
boasting that graduates of his program include people like Justin Trudeau.
48:29
I mean, he's proud of that fact, but
48:32
I don't think necessarily he should be proud of it, but he is.
48:36
And the government of Argentina, which is an economic basket case,
48:40
what you have to hand them,
48:42
though, is that they have been incredibly effective at mentoring these people.
48:46
And so what we are doing with the Global Liberty Institute, and
48:50
I know you were able to attend our first rising leaders summit-
48:53
>> John Hurley: Which was fantastic.
48:54
>> Josh Rao: In Palm Beach in February,
48:56
is to try to do a better job of organizing and mentoring rising policy
49:01
leaders who are gonna be facing the economic problems of the day.
49:07
The critical and pressing and really dramatic economic problems of the day,
49:13
using the rational principles of economics.
49:17
And I hope that we're gonna be able to do that.
49:20
>> John Hurley: Fantastic, and your new Liberty Lens Substack?
49:23
>> Josh Rao: Yeah, so
49:24
the Liberty Lens Substack is an attempt to write some pieces, get some pieces out
49:29
there in a sort of short-to-medium form that's a little longer than an op-ed.
49:34
Has some more facts and
49:36
figures you can put into an op-ed in the Wall Street Journal,
49:39
addresses some of these topics, the ones that I've been mentioning.
49:44
So our first post up is about inequality.
49:47
And I've been saying in this podcast a few times why it is that I think that
49:52
the inequality statistics are misstated, that there hasn't been an explosion
49:57
in inequality the way that a lot of these news reports would have you believe.
50:01
Go check out libertylensecon.substack.com if you wanna see more,
50:06
and we'll be taking on a bunch of the other topics as we go forward.
50:11
So we just launched it last week and that's our first post, and
50:14
looking forward to more.
50:16
>> John Hurley: Well, this has all been fantastic, Josh, talking about everything
50:21
in your career, starting from learning German as an undergrad at Yale and
50:26
going to work in Germany and working in finance.
50:29
I think you're one of the few undergrads I know that's really sort of applied and
50:36
maintained their language skills in another language.
50:41
And your distinguished career as a public economist and
50:46
careers as a professor here at Stanford and at the Hoover Institution.
50:52
And your time in government at such a historic time when really
50:57
these issues around spending and debt, I think, really became pivotal.
51:03
And of course, there's I think great arguments as well that there was a great
51:07
need for a response then as well.
51:09
And really wonderful to hear about these new initiatives,
51:12
the Global Liberty Institute and Liberty Lens.
51:15
Fantastic that there's more public engagement going on and
51:19
that you're working with young individuals and
51:23
fantastic that you're also engaging in longer-form data journalism as well.
51:29
Really, really wonderful to hear.
51:30
Thank you so much, Josh, for joining us.
51:32
>> Josh Rao: Thank you, John.
51:33
>> John Hurley: Today, my guest was Josh Rauh, who is the Ormond Family Professor
51:37
of Finance at the Stanford Graduate School of Business and
51:40
is a senior fellow at the Hoover Institution.
51:43
He is also the co-founder of the Global Liberty Institute and
51:45
the Liberty Lens Substack.
51:47
This is the Capitalism and Freedom in the 21st Century podcast,
51:50
where we talk about economics, markets, and public policy.
51:52
I'm Jon Hartley, your host, thanks so much for joining us.
51:55
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