Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Greg Mankiw (Harvard Econ Prof) on New Keynesian Macro, Growth and Econ Policy

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Greg Mankiw (Harvard Econ Prof) on New Keynesian Macro, Growth and Econ Policy · The Capitalism and Freedom in the Twenty-First Century Podcast

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[MUSIC]
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>> Jon Hartley: This is the capitalism and freedom in the 21st Century podcast,
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an official podcast of the Hoover Economic Policy Working Group,
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where we talk about economics, markets, and public policy.
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I'm Jon Hartley, your host, today, my guest is Greg Mankiw,
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who is the Robert Barron professor of economics at Harvard University.
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Greg is one of the leading macroeconomists of our time and
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one of the founders of New Keynesian economic modeling.
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Greg also served as the chair of the Council of Economic Advisors
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under President George W Bush, and
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is the author of the best selling textbook, Principles of Economics.
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Thanks so much for joining us today, Greg.
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>> Gregory Mankiw: Thank you, Jon, it's nice to be with you.
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>> Jon Hartley: Greg, I wanna start with talking a bit about your upbringing.
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You grew up in New Jersey, where you went to the Pingree school for high school.
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Then you attended Princeton for undergrad, and you saw economics there and
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your classmates with David Romer, one of your longtime co authors.
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And then you went on to do your PhD in economics at MIT.
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How did you first get interested in economics?
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>> Gregory Mankiw: Well, when I started at Princeton, I thought I was gonna
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be a math major because I kind of liked math, I thought I was good at it.
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And what I learned pretty quickly was that I was good in the sense of being the best
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math student in my high school.
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Once you sort of go to a top math department like Princeton,
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the level of talent there is far in math is far beyond what I had.
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And math became increasingly abstract.
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And even though it was my first declared major, I didn't stick with it and
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eventually switched economics.
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The thing that got me to economics was actually a friend in my freshman year.
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She was taking an economics course her first semester, freshman year.
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And I didn't really know very much what economics was, I knew sort of vaguely, but
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not very specifically.
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And she would come back and
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tell me what she was learning in her class was the principles of economics,
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microeconomics with Harvey Rosen, who's a great teacher.
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And I thought it was more interesting than anything I was learning.
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Sort of looked at her textbook, which was the Lipsey Steiner book, and
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I started reading it, it seemed really interesting.
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And so the next semester, I took both principles of macro and
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principles of micro, the principles of macro with Burton Malkiel,
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principles of micro with Harvey Rosen.
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>> Jon Hartley: Wow.
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>> Gregory Mankiw: And they were both great teachers.
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And I approached Harvey to see if I could get a summer job for it with him.
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I knew also economics, I'd only taken the principals course, but
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I did know some Fortran programming, and
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he needed somebody who could do Fortran programming for him.
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And so I basically spent a summer working for him, and
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he had to teach me all the economics I needed to know for the job.
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And so I learned a tremendous amount that summer.
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And he's really the one who sort of got me fundamentally interested in economics.
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It was a great pleasure that years later, I got to work with him on
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the council of Economic Advisors, where we were both members.
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But it really was Harvey who got me interested at the Princeton.
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I basically drifted toward macroeconomics as an interest,
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and I did my senior thesis with Alan Blinder.
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And he was the other sort of professor at Princeton that
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was extremely influential in my career development.
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You mentioned David Romer,
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it was actually an interesting group of future economics professors in my class.
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David Romer was one of them, Danny Kwa was another, Jim Rauch,
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who's now Uc San Diego, is another.
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Larry Ossebel was a friend of mine, we were the same eating club.
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He wasn't an economics major then, he was a math major, but I knew Larry.
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So all of us ended up going into economics, and so
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going to get a PhD in economics seemed like kind of a normal thing to do cuz I
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had a bunch of friends who were doing the same thing.
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I don't think it's as normal today among my Harvard students,
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I think it's much rarer.
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But at the time, it seemed like a very normal thing to do, and
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the great teachers I had at Princeton were a large part of that.
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>> Jon Hartley: That's Fascinating.
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And Princeton is known for being this really big hotspot for
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macro, certainly in the 90s, but I'm sure many of the precursors
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that were there were forming in the 1980s as well.
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A lot of those, like Paul Krugman, Mike Woodford, and others,
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who sort of started building a lot of the new Keynesian framework
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that you yourself have been a huge contributor, well, at Harvard.
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And I'm sure there's many interlinkages there.
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>> Gregory Mankiw: Those people were at Princeton later, actually,
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they weren't there when I was a student.
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I was a net student in the 70s, I graduated 1980.
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But the one person who was there was a grad student named Julio Rotenberg.
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And so Julio was sort of doing his early work,
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his dissertation of some of the early new Keynesian stuff.
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>> Jon Hartley: Fascinating, fascinating.
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So what was graduate school at MIT, Econ, like in the 1980s?
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Like your advisor there was Stan Fisher.
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You had, I mean, over the course of your career, you've had a many famous students.
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Sam Fisher has had many, many famous students over his career as well.
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You've also taught act ten for many years.
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I'm curious, what was that experience at MIT Econ like, and
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you're sort of interested in advising and mentoring students.
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Was that something that you kind of something that grew on
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you while you were being advised in grad school?
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>> Gregory Mankiw: Well, there were two people at MIT who were particularly
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influential for me and my cohort.
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One was Larry Summers, who was there before he is an assistant professor before
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he joined the Harvard faculty.
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Olivia Blanchard was not there at that point.
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Stan Fisher was the other person who was very influential in my cohort.
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My cohort had a lot of people became macroeconomists.
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Myself, there was Mike Woodford, Matthew Shapiro, Bob Barsky,
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Larry Ball, Steve Zeldas, and I'm sure I'm missing a couple others.
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So there's a lot of people went on to quite prominent careers in macroeconomics,
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and it was a natural to be interested in macroeconomics cuz the faculty was
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obviously fantastic.
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I mean, Stan was really a role model for a lot of us, but
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also the economy really demanded interest in macroeconomics.
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So this is like the heyday of high inflation, and Paul Volcker was
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just getting appointed and the whole Volcker experiment was going on.
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And so there was natural interest among my cohort and
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the questions of macroeconomics.
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And Stan was a great person to be academically rigorous, but
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also very focused on policy and current events as well.
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And I think that combination was really extremely compelling.
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And in that group, I developed co authorial relationships with a bunch of my
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colleagues have written papers with Matthew Shapiro and Bob Barsky and
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Larry Ball and Steve Zeldas.
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Oddly, ive never written a paper with Mike Whitford,
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even though he has a tremendous number of common interests.
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It's just never kind of, it's never worked out.
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But I remember spending many hours talking to Mike, and he's a close friend.
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And it was clear, by the way, that he was one of the stars of our class,
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even from, even from the beginning.
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He won his MacArthur Fellowship while he was a grad student,
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which is kind of extraordinary.
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>> Jon Hartley: That's unbelievable.
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>> Gregory Mankiw: It is, this is early in the MacArthur.
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I don't think the MacArthur has given the award to people quite that young
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now, I think.
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But early on,
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they were trying to get people who were at the early stages of their career.
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And my mike Quickly established himself as a star among the faculty.
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>> Jon Hartley: Well, that's amazing.
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Well, I wanna talk to you a little bit about how your
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ideas developed while maybe you're a grad student and
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as a professor at Harvard.
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I really just want to really get into the history of new Keynesian DSGE modeling,
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which I think some of your most well known work and
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major contributions lie.
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How did a lot of those early new Keynesian papers come about,
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the three-equation model?
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I know there was a lot of early work that was done on sticky prices and
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sticky wages, people like John Taylor and Ned Phelps,
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and you're a co-author with Ned Phelps on some of those early papers.
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You also wrote a number of the early papers as well, on menu costs and
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sticky prices.
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I'm just curious how that thinking came about,
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because I've talked to certain people in some of those early contributors.
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And some of them kind of say, well, we had this RBC revolution in the 1970s and
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80s, rational expectations revolution, full information, rational expectations.
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That was sort of a response to the static ISLM framework to
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incorporate micro foundations, micro-founded rational behavior,
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to also think about intertemporal decision making,
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that culminated in this RBC model.
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Think Sargent, think Prescott and others, but
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my understanding is that a lot of people weren't happy with that framework.
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It was also, some people argue, in response to the great inflation of
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the 70s and ISLM not being able to account for things like stagflation,
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inflation going up while unemployment going up at the same time.
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My understanding is, so that's RBCs, Real Business Cycle models.
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My understanding is that there were a lot of people who weren't happy with the fact
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that Real Business Cycle models didn't have room for policy.
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And so my understanding is that some people just said,
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well, what's great about some nominal rigidities is that,
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well, now you have room for policy, and that's why we threw it in there.
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I'm curious, was there an empirical basis for
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including wages and Sikhi prices, and Beaulieu later sort of,
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I think, tried to do some empirical work.
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But I'm curious what the history was there with why people felt
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it was important to include sticky wages or sticky prices, or
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sticky information, which is, I think, an amazing idea,
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and perhaps one that's not appreciated enough.
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But why was it important then to include those in our macroeconomic models?
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And did that lead to a better description of how business cycles work?
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And do you think that's still a relevant description?
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>> Gregory Mankiw: I remember at some point in graduate school Stan Fisher
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giving a lecture, and he said,
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why do we believe that money matters, that it has real effects?
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And he said, two reasons, Paul Volcker and Friedman and Schwartz.
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So, I always took it as established fact that monetary policy had real effects,
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I think very few economists today would doubt that.
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Very few economists say, money is completely neutral,
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what the Fed does doesn't have any impact on the real economy,
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even though we don't fully understand always the impact it's gonna have.
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So I always took some degree of stickiness as
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necessary to understand how the business cycle works.
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And I thought Real Business Cycle theory was really a turn in the wrong direction.
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My own personal interest in this literature dates back even before
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Real Business Cycle theory was around.
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But really it dates back to me writing my undergraduate thesis under Alan Blinder.
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I remember taking a graduate macro course from Alan, and
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he was explaining the standard Keynesian mechanism at the time.
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And at the time, the big emphasis was on sticky wages.
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The nominal wages were sticky.
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And that's the reason why monetary policy is not neutral.
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And the mechanism was basically, when aggregate demand increases,
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prices increase.
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If nominal wages are sticky, real wages have to go down, and
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it's lower real wages that increase employment.
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And that's pretty explicit in the Keynes general theory,
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the countercyclical real wage.
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And I remember talking to Blinder about that, and
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he sort of admitted to me that, that's, yeah, I know that's true in the model, but
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that's not really true of the data.
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The real wage is not countercyclical.
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And I said, wow, that's a pretty damning observation to me.
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And that's what I wrote a lot of my senior thesis about.
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Actually, that senior thesis became a, part of it became an article that I
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co-authored with Alan Blinder in the Journal of Monetary Economics.
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It's one of my earliest articles, not one of my most important, but
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one of the first things I published.
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But it was that idea that real wages weren't countercyclical,
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that said, you have to start thinking about not only sticky wages,
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I have to start thinking about sticky prices.
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And if I'm gonna start thinking about sticky prices, you have to have firms that
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are not competitive, that are price setters, not price takers.
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Because if you're going to think about the incentives that firms have to adjust
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prices, you can't have them being price takers.
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And it was that that got me to write my small menu cost paper,
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which I think was my first very successful paper in the sense of garnering
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a significant number of citations and getting some notice.
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I wrote that actually after, I think after my first year of grad school.
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And so that was what did think.
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But then I think the motivation was largely conservative,
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not conservative in a political sense, but
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conservative in intellectual sense.
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Lucas and Prescott were all about, this Keynesian stuff's a failure,
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let's throw it out, let's start from scratch.
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They were very derogatory to much of the literature that had come before them.
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And I remember always thinking, that seems a little too radical for me.
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My temperament was always like, okay, not everything's right with these models,
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but there's some truth to the models too.
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And just throwing everything out and starting from scratch may seem like fun
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from the standpoint of intellectual revolution, but
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it seems a little too immersed.
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And what the new Keynesian literature tried to do is say, okay, there's some
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truth in this stuff that Tobin and Digliani and that generation was saying.
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But how can we take Luca seriously without throwing that
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previous generation's ideas out the window?
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And I think that was a large part of the motivation
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of the new Keynesian literature.
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>> Jon Hartley: That's fascinating, any thoughts on, I feel like now there's,
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you're absolutely right in a great observation that Keynes general
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theory was more focused on sicky wages than, say, sicky prices.
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And I feel I feel like now we're slowly maybe shifting back, or at least in terms
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of what papers are using, I think slightly less focus on sticky prices.
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When you have companies like Amazon that can adjust
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prices basically in matters of minutes or less or in seconds.
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Where you have dynamic surge of pricing in Uber and elsewhere,
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I guess prices are becoming less sticky.
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And there's work from folks like Alberto Cavallo and others that suggest
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that with a bigger online economy, prices, prices are becoming less sticky.
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So maybe wages matter more or wage stickiness matters more.
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Maybe in the housing market, rental contracts,
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those are renewable only once a year, and there's a lot of frictions there as well.
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I'm curious, your seeking information paper with Ricardo Rice is
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also one of your most high papers.
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I'm curious what your thoughts are on sort of the legacy of seeking information.
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I think it's such a great theory and informational frictions are so important.
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I mean, they're one of the reasons why, for example, the work done by Joe Stiglitz
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and others arguing why the first welfare theorem doesn't work so well.
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And similarly, you sort of apply that idea within business cycles.
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But I guess there's the problem, which is like, how do you measure information?
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And that's a very difficult thing to do, so I think it's a great theory, but
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a difficult empirical kind of thing.
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And Ricardo Rice has done more follow up work.
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I'm curious what you think about the legacy of that paper,
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I feel like is very early also behavioral economics, too.
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And a lot of people are sort of interested in behavioral macroeconomics.
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There was interest in behavioral macroeconomics, I think, 20 years ago.
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I think there even was a behavioral macroeconomics mbrtaina group of some form
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20 years ago.
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And now there sort of is like a summer camp now and a working group again, but
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I'm curious.
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I also feel like now there's a bit of retreat from behavioral economics,
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like we had sort of an apex in the mid-2010s.
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But there's some sort of questions about Dana, Ariely, and
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I guess some questions about replication and things like that.
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But I'm curious what you think about the legacy of that paper and
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informational frictions.
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>> Gregory Mankiw: Well, that particular paper was motivated by what I thought was
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a flaw in the prevailing paradigm.
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I mean, if you look at most of the work in New Keynesian economics.
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The model of price stickiness in the Phillips curve that people turn
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to is usually some version of what's called the new Keynesian Phillips curve or
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the Carville model.
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I mean, Holy Rosenberg had a version of this, too, slightly different.
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But the essence of the Calvo model is that prices
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are set in this forward looking way.
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And as a result,
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inflation depends on what people expect inflation in the future to be.
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And that was introduced one interpretation of Friedman's natural hypothesis.
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The problem with that is that in that model,
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inflation can jump in response to monetary policy.
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So because inflation depends on expected inflation, and
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that expectation can jump immediately.
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When there's a monetary shock,
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inflation can adjust literally instantaneously to the monetary shock.
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So the price level is sticky in that model, but
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the inflation rate is not the inflation rate is a jump variable.
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And it seemed to me that in the data, people didn't seem to think that
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was the case inflation was deemed as very inertial.
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So the question is, how can you get inertial inflation and
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have some sort of model of price adjustment the way people often do it?
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If you look at a lot of the applied work, they will often take the Calvo model.
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And then pend it with some ad hoc assumption,
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like indexation of some prices to past prices.
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So they basically built in an ad hoc way, inflation inertia.
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But that's nothing really in the model, that's just something they'd added on.
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So I was trying to think, okay, well, what might be generating this inflation
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inertia, other than just sort of putting it in an ad hoc way?
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And that was what motivated me to start thinking about sticky information.
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You're absolutely right about the connection, by the way,
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to the behavioral economics literature.
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This idea that information may be slow come in.
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I saw a paper by David Lisbon and
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Xavier Quebec that was applying that idea to the consumption problem.
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And I remember after seeing their present, their paper,
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I said, look, let's try to apply this to the price setting problem.
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That's what led to the sticky information model.
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In this model, expectations matter, but it's different expectations.
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In the Calvin model, what matters is current expectations of future inflation.
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And the sticky information model,
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what matters is past expectations of current inflation.
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And because past expectations are already given, that's gonna generate a certain
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degree of inertia that you're not gonna get in the capital model.
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It was that motivated the model.
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How influential has it been?
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It's widely cited, but I don't think it's become the go to workhorse for
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price adjustment in the literature in that sense, I failed.
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But I think I've sort of,
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I still believe basically the basic critique of the Calvin.
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>> Jon Hartley: Right, I'm going to talk just a bit about
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the legacy of new Keynesian DSG models, and
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I guess just macro as a field more broadly.
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So while I think today new Keynesian DSGE are still being
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extended in some forms, like in the Hank literature,
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the heterogeneous agent in new Keynesian literature.
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There's several economists out there, Ben Moore,
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Adrian Eau Claire, their co-authors, and many others.
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And DSG models are being simulated by central banks or
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maintained by central banks.
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But I think there's a lot of questions out there about
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the validity of things like the Phillips curve.
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And really just whether these models are actually that useful,
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especially when they become more complicated.
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We have certain things like, I think the Taylor rule,
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which empirically fits the US data, for example, fairly well.
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And I think a lot of central banks around the world use Taylor rules in some way.
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I think that's actually one of the more successful components,
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if you will, of the sort of new Keynesian framework.
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But in general,
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I think most central bankers kind of have something more like an ISLM.
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Something even more simple like an ISLM kind of thing in the back of their head,
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rather than paying sort of attention to every read off a DSG model.
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Just having talked to a lot of central bankers in terms of,
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while the staff does crank out DSG models.
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They're producing forecasts from DSGE, but
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they're also producing forecasts from VARS, vector auto regressions.
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I think often the vector auto regressions produce better forecasts,
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and then central bankers use that to form their analyses.
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So I'm curious what you think about that.
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I mean, there's also this sort of general decline of macroeconomics in
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economics departments giving way to applied microeconomists who argue
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that macro doesn't really pass a good identification smell test.
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I'm curious, what do you think about the legacy of new DSG
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modeling today in academia and elsewhere.
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>> Gregory Mankiw: I mean, on the issue of micro versus macro,
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I have long thought that microeconomics has the better answers, but
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macroeconomists have the better questions.
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And so I don't think macroeconomics is ever gonna die because the questions
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that macroeconomists address are just too important, even if we're
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not gonna have the clean, natural experiments that micro people love.
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On the general shows of these big DSGE models.
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Let's flash back to when I was entering the economics profession at the time.
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There were these big models like the NPS model, the DRI model,
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these huge macro econometric models that were run by policy institutions and
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academics and some private firms.
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And a lot of macroeconomic research was of that sort.
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And at the time I remember being,
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at the time I remember being skeptical about a lot of that.
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And if you go back to the rise of Lucas and the Lucas critique of these models,
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part of the reception to Lucas critique was all the stagflation and
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the events of the 70s.
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Part of it was, I think people were getting a little tired
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of these big models because they were large, non intuitive.
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They seemed very black boxy, so you didn't really know what was happening in them.
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And so I think that people,
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I think they started losing credibility, in these big models.
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I think that a lot of the DSGE models are suffering from the same fate now,
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they're getting large and complicated and lots of equations and
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you don't know exactly what's driving what result.
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And I do think at some point people are going to get
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tired of them for that reason.
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I agree with you completely that if you're an actual practical central banker, you
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listen to your staff, present the results, but you don't take it as God's truth.
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And a good central banker takes a healthy dose of skepticism.
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When I was in Washington, I watched Alan Greenspan up close, and I think Alan, more
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than most, had a deep, healthy skepticism of the macro econometric models.
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I should note, by the way,
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in my own research I tend to focus not on big models that purport to be realistic.
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But rather smaller models that are more illustrating points than trying to say,
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this is a real replication of the whole economy.
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I never really want to go back to those huge models.
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We'll get better at these, but I think macroeconomics is so
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complicated that actually saying I have a model that really replicates the data,
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we can take it seriously for policy alternatives.
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I think that's, I think it's a very hard ask.
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>> Jon Hartley: Yeah, no, I'm totally with you.
27:23
I think simpler macro models that illustrate some sort of point,
27:28
maybe with some empirics.
27:30
And I do see a lot more identification being brought
27:35
in in different ways into macro papers.
27:38
Ricardo Rice has done some of this, say, for example,
27:42
his swap lines papers and thinking about those natural experiments and
27:47
then adding in a model, or think about the work of Nakamura and seism.
27:53
And thinking about various natural experiments,
27:56
things like unemployment trends or exchange rate devaluations or
28:01
things like that, where there's clear exogenous policy shocks.
28:06
Or thinking about what's a monetary policy shock, things like that.
28:11
I definitely see that as being a step forward, but
28:14
it's certainly on the empiric side.
28:16
Yeah, also, I definitely take a simple model,
28:20
over 100 plus page model that I think only maybe
28:24
the author can really claim to understand it, say the least.
28:29
But interesting just in general, and I think you're seeing fewer, and
28:33
fewer macroeconomists in economics departments.
28:36
And I think one thing thats happened,
28:38
though, is a lot of macroeconomists have moved to finance departments too.
28:42
And so I think thats an interesting shift.
28:44
I totally agree with you that the big questions that people,
28:49
the big macro questions that people in DC and elsewhere in policy circles and
28:54
just broadly the public, when recessions happen, people are wanting answers.
29:00
And I think really only macroeconomists or
29:03
people who study macro questions are able to come up with some answers.
29:08
So I don't think macroeconomics is going anywhere,
29:13
maybe it's shifting to finance departments, but
29:18
I think it's still gonna be around forever as long as we have recessions.
29:24
And not to mention, I think the other thing that I think is so important,
29:29
in which you've contributed quite a bit to, is the literature on growth.
29:34
And there's a famous Robert Lucas saying,
29:37
which is when you start thinking about growth,
29:42
you can't stop thinking about it, you can't really think about much else.
29:48
And so I want to talk a bit about growth.
29:51
And Manki Roman Weil is a huge contribution to the empirics of growth
29:56
literature, a very highly cited paper, one of your most cited papers.
30:01
And was really the first paper to do a comprehensive
30:07
growth decomposition where you have output and
30:12
you're trying to explain that with labor l K and human capital is h.
30:19
And thousands of researchers have followed this and repeated similar exercises.
30:24
And in a sense, it's trying to come up with empirical coefficients for
30:32
what something like a solo model would look like.
30:38
But then along came endogenous growth theory, and
30:42
in the time period that you measured, I think it worked quite well.
30:48
But then along came endogenous growth theory.
30:52
And I think a lot of further criticism from the applied micro crowd and
30:57
the applied crowds,
30:59
criticizing aggregate production functions as being misspecified.
31:04
That is, maybe aggregate economic output
31:08
doesn't follow something like a Cobb Douglas
31:13
production function where output y is equal to
31:18
alpha times k to beta times l to the one minus beta.
31:24
I'm curious, any thoughts on the evolution of the growth literature and
31:27
where it is today.
31:28
I think growth is so
31:29
much more, so essential when you think about one recession.
31:33
Maybe a big recession is maybe four or 5% of GDP.
31:40
But when we're talking about growth differentials, say,
31:45
across countries, you've got countries, many countries in the world,
31:51
say China's, say an 8th or a 6th of the GDP of the US.
31:56
Increasingly, the US is starting to grow much faster than, say, Say, Western Europe
32:02
or Canada, a lot of advanced economies are starting to fall behind, and
32:06
they've been falling behind for at least since the great Recession now.
32:12
And there's a huge divergence there.
32:14
But there's been tons of research done over the years about
32:18
unconditional convergence, which models predict should happen.
32:23
That is why is it that poor countries aren't catching up with
32:28
richer countries or poor countries growing much faster than rich
32:33
countries to catch up to an advanced economy, economic level?
32:37
We think that ideas and technology are things that can spread easily.
32:43
That's something that should be happening, but empirically,
32:46
we didn't really observe that for a long time.
32:48
The past couple of decades, 2000s, 2010s were maybe a time where we did see some
32:54
convergence, but I think since actually, since COVID and the 2020s inflation,
32:59
I think we've actually seen a reversion back to diversion.
33:03
So I'm curious what you think about sort of just growth in general growth theory,
33:09
where it's at today, and
33:11
what you think people should be thinking about on that topic.
33:16
>> Gregory Mankiw: Sure, that particular paper which you write is my most cited in
33:20
some sense, is a little bit like the new Keynesian
33:23
papers of being intellectually conservative.
33:26
Just as the new Keynesian stuff was sort of responding to the people like Lucas and
33:30
Prescott who were saying throughout all this Keynesian stuff.
33:34
This paper was in some sense responding to the early endogenous growth theory by
33:38
Paul Romer and which had the tone of this solo model and
33:41
this neoclassical growth theory.
33:44
That's useless.
33:45
And our point was, no, no, there's some truth to the basic solo model,
33:49
especially if you extend it to include human capital.
33:52
You can do a reasonable job of explaining some of the cross country variation in
33:57
growth experiences that we see.
33:59
So in some sense, that it was meant to bring Solow back
34:03
from the dead in some sense, and to say, no, we really.
34:08
That's why the first line is, this paper takes Robert Solo seriously,
34:11
because it's like, no, we actually think this model is still very useful.
34:14
I was actually, I wrote that paper sort of the same time I was writing my
34:18
intermediate macro textbook, the first 1st edition.
34:21
And as I was writing the chapter on growth,
34:24
I was writing the solo model, and I was thinking to myself,
34:29
am I wasting students time by teaching them the solo model?
34:33
And I started thinking hard about the empirical implications of the solo model.
34:38
That's one of the things that led me in this direction.
34:41
I think now we're in a situation where endogenous growth
34:45
theory has made a big contribution, and
34:48
I think it coexists happily with sort of more neoclassical models, and
34:53
both provide insights for different questions, and I think they can coexist.
34:59
I don't think we need to sort of throw out one or the other.
35:03
My most recent publication, which came out last year, and restart,
35:07
was basically putting market power into neoclassical growth models.
35:12
So I take that as some indication that you can still make progress and
35:16
get some insights, even with neoclassical growth frameworks.
35:20
The sad thing is, I don't think either set of models give easy policy
35:24
prescriptions for what poor countries can do.
35:27
I mean, if you look at Sub Saharan Africa, you can point to
35:31
a variety of elements they have that prevent them from growing.
35:36
But saying, this model of endogenous growth,
35:39
of this model of neoclassical growth, gives me an easy recipe for
35:42
what Sub Saharan Africa can do to join the developed world.
35:46
It doesn't.
35:47
It brought you maybe a framework for thinking about those issues, but
35:52
there's no easy answers.
35:54
Or similarly, why is productivity been slower since 1972 than it was before 72?
36:00
We don't think we have any easy answers to that.
36:02
You can say sort of general things about the importance of institutions,
36:06
importance of savings and investment.
36:08
>> Jon Hartley: Running out of ideas.
36:10
>> Gregory Mankiw: Running out of ideas.
36:10
Yes, right? So I think we can say, we can say things,
36:14
but I'm not sure the mathematical models give tremendous
36:19
additional insight beyond what is sort of obvious.
36:24
>> Jon Hartley: Do you, I guess,
36:25
have any sort of stance on sort of the fundamental cause of growth?
36:30
This is, I think, been a big debate in the growth
36:34
literature in the past, say, 30 years or so.
36:39
Is it institutions, is it culture, is it geography?
36:44
A lot of people having very strong opinions on that.
36:49
>> Gregory Mankiw: I don't think there's one thing,
36:51
I think it's a combination of things.
36:52
It's always nice to say, everything's due to this, have a causal explanation,
36:59
but I think it's multiple things in my principles text.
37:03
I have a case study in recent editions about why is Sub Saharan Africa poor?
37:08
And I go through a whole bunch of hypotheses and you read through these
37:11
different hypotheses and you realize all these things could be true.
37:14
And maybe it's not one cause of ailments.
37:16
It's not like if only you had a better health system or if only so
37:19
many countries weren't landlocked.
37:21
I mean, so it's not going to be.
37:22
It's probably not just one thing, it's probably a combination of things.
37:28
>> Jon Hartley: I want to talk just shift gears a little bit to policy.
37:32
So you served as chair of the Council of Economic Advisors
37:36
in the George W Bush administration.
37:39
But I think some people may not know that you interned at
37:43
the Congressional Budget Office while in grad school.
37:47
You also worked in the Reagan CEA.
37:50
There were a lot of very interesting economists that worked at the Reagan CEA
37:55
along with yourself.
37:57
John Cochrane was there, Paul Krugman was there,
38:00
Larry Summers was there, and many others.
38:04
The list is actually pretty unbelievable.
38:06
I'm curious, like,
38:07
what were the highlights of your various experiences in Washington?
38:12
>> Gregory Mankiw: Sure, give you one small correction to your chronology.
38:17
I was actually a summer intern at the Congressional Budget Office while I was
38:22
an undergraduate, and I actually took off a year of grad school to work at the CEA.
38:27
So I worked at the CEA in the middle of grad school, and
38:30
that's in the Reagan administration.
38:32
And what happened there, this is 1982.
38:36
Reagan had appointed Marty Feldstein to be chair of the Council of Economic advisors.
38:42
Marty Felstein hired one of his star students,
38:45
Larry Summers, to be on the senior staff, and Larry Summers,
38:49
who knew me in grad school as a student, hired me to be on the junior staff.
38:55
So I easily came and spent a year, 82, 83, being Larry's assistant.
39:02
And so I learned a lot.
39:04
That was just a fantastic year because Larry is such a great economist.
39:08
I was very generous with his time.
39:09
And you're right, there were other people there at the time.
39:11
I mean, John Cochrane was there that year, Paul Krugman was there that year.
39:15
But Valerie was mainly the person who I worked closely with.
39:22
I've myself primarily as an academic, but I have sort of spent probably three and
39:27
a half years of my life in Washington, various policy jobs.
39:31
And one thing I'll say is they're fascinating jobs.
39:35
They provide useful perspective.
39:37
So I think academics benefit from taking some time off.
39:42
And they view, when they come back, they probably view a lot of academic squabbles
39:47
and a lot of intellectual battles and a lot of research lines is less interesting
39:53
than they would after seeing economics from a more practical perspective.
39:58
One thing I'll say about being chair of the council,
40:01
which I did from 2003 to 2005.
40:02
And I worked harder those two years than any two years of my life,
40:08
by far, because the days are long.
40:11
In the Bush administration,
40:13
every day started with the 7:30 AM staff meeting in the Roosevelt room,
40:18
which is the conference room right next to the Oval office.
40:21
In all my years at Harvard, I've been in Harvard almost 40 years,
40:24
nobody's ever called a 07:30 AM meeting.
40:26
[LAUGH] While I was at the White House, every day it was at 7:30 AM meeting.
40:30
It's not like you take off early at the end of the day,
40:32
you work long hours at the end of the day too.
40:34
So they're are very, very long days.
40:40
I left my family behind in Boston, my wife was a saint and
40:43
took care of my three small kids.
40:45
And I basically moved into a hotel just a few blocks from
40:50
the White House because I knew I was gonna have much time to travel,
40:55
basically, it was extremely long days.
40:59
And by the end of two years, when I was required to come back to Harvard or
41:04
give up my chair, it was not a difficult choice, I was exhausted after two years.
41:09
So I was happy to come back to academia, where life is much more relaxed.
41:15
In terms of particular policies, let me just mention a couple of policies that I
41:19
was involved with when I were there that people might not be aware of.
41:23
I'll mention one that was a small policy that we won that I think basically was
41:27
completely under the radar screen.
41:30
Sometime in the middle of my tenure there, the Financial Standards Accounting Board,
41:36
FASB, was going to pass a regulation that required companies to
41:41
deduct options as expenses for purposes of computing earnings.
41:46
Many Silicon Valley companies were unhappy about this,
41:51
because what looked like profitable companies become unprofitable and just
41:57
started subtracting out all the options they were giving to their executives.
42:03
Their solution to this was to have Congress pass a law preventing FASB from
42:08
making this accounting change.
42:10
And so there were a variety of congressmen, mainly from Silicon Valley,
42:14
who are pushing this legislation.
42:16
During the campaign, George Bush, when they asked about this,
42:20
had actually expressed some sympathy for the Silicon Valley view.
42:25
So they were hoping that George Bush would help this law get passed.
42:33
The economic team got together, we said, this is a terrible idea for two reasons.
42:38
One, we don't think Congress should get involved with accounting standards.
42:41
And secondly, we actually thought FASB was right, options were expenses, and
42:46
not calling them expenses was just misleading.
42:48
So we basically had to convince the president to change
42:53
his mind on that issue.
42:55
So I remember the meeting vividly, and at the end,
42:58
I'm not sure we actually convinced him to change his mind, but
43:02
we convinced him to basically not support the bill.
43:05
So basically, his silence on the bill was enough to kill it,
43:08
and he didn't have to come out publicly against it, he just had to not support it,
43:12
and that was enough to kill him.
43:13
So that was one case under the radar screen,
43:15
I don't think anybody was aware of this at the time, other than, of course,
43:19
the few members of Congress who were trying to pass this bill.
43:22
That was a win for the economic team.
43:25
Let me tell you another big issue that we faced, that we lost.
43:32
This was before the financial crisis,
43:33
it was probably four years before the financial crisis.
43:35
So we didn't see the financial crisis coming, but
43:39
we kinda knew that Fannie Mae and Freddie Mac were not ideal institutions,
43:43
this sort of uncomfortable public private view of them.
43:47
They said they weren't backed by the government, but
43:49
everybody knew they would be backed by the government.
43:50
And so we thought, given that they were these basically
43:55
publicly funded institutions in some ways,
43:58
they should be better regulated and not take on as much risk as they did.
44:04
And in that, we were joined with Alan Greenspan,
44:07
who was very much in favor of better regulation of Fannie and Freddie.
44:11
So we put forward some proposed changes in legislation to regulate them better,
44:17
and that we failed.
44:18
The people who were lined up against this were basically the left,
44:22
particular congressman was Barney Frank at the time, because I lived in Wellesley.
44:27
Barney Frank, who was a chair of a House Financial Services Committee, I believe,
44:32
he basically came out opposed to this and his view that, no, no,
44:36
you guys just don't appreciate poor people getting houses.
44:40
So he was afraid that better regulation would mean poor people would
44:45
have more trouble getting mortgages, and that'd be a bad thing.
44:50
Fast forward four years, in the financial crisis, if some poor people hadn't
44:54
gotten mortgages, they might have been better off if they had state renters.
44:58
But that was one thing we had failed.
45:01
We didn't see the financial crisis coming, but it would have been a less severe
45:05
financial crisis if we had succeeded in getting better regulation of Fannie and
45:08
Freddie, and we didn't.
45:10
Those are sort of the kind of things we worked on.
45:12
And for me, it's a new perspective on economics, there's a lot of economists
45:17
who work in Washington, it's nice as an academic to see that world.
45:22
And also got to meet lots of people who weren't economists.
45:27
I mean, the White House is filled with people who are usually hardworking and
45:33
successful, and they're normally not trained in economics.
45:38
So I got to meet lots of absolutely brilliant and
45:41
fascinating people when I was there.
45:43
So, a person, for example, who I really came to love when I was there was
45:47
Karl Rove, who was obviously in a very different job than I was, but
45:52
he was very numbers-oriented.
45:54
Really wanted to hear about the numbers and
45:56
was just fascinating to get to know and see his perspective on the world.
46:00
>> Jon Hartley: That's fascinating,
46:01
I actually just saw Karl Rove a couple days ago.
46:04
>> Gregory Mankiw: Very nice guy.
46:06
>> Jon Hartley: Very nice guy.
46:07
Very, very nice guy.
46:09
I guess I'm curious if you have any just broad thoughts on CEA and,
46:15
I guess economist influence in Washington in general.
46:20
I think what's interesting about how economists in Washington,
46:26
or how, I feel like their influence has changed a little bit.
46:32
If you look Historically,
46:34
most CEA chairs used to be all tenured professors like yourself,
46:40
going back to James Tobin and many others, going back to largely,
46:46
I think, the creation of CEA, the Full Employment Act.
46:51
And I think that was in maybe 1946.
46:56
I guess what's interesting now is, I think there's been a massive change,
47:00
which is the rise of think tanks.
47:02
And think tanks employ a lot of economists or
47:05
policy analysts who are very focused on just understanding
47:11
policy rather than trying to maybe discover something about
47:16
truth in the world, something related to economics.
47:21
And I think that's the general mandate of economics departments and
47:26
finance departments as well.
47:28
But I'm curious, do you think the CEA has kind of changed in terms of its role?
47:34
When you're giving these stories of having policy influence,
47:40
wow, those are amazing stories.
47:43
I feel like CEA has become much more of
47:48
a political machine now to build charts and
47:54
graphs and things to sort of support
47:59
already drawn up Policy desires or policy ideas.
48:06
And this doesn't apply to CEA exclusively, but I think, and this is
48:11
something that Steve Lovett mentioned on the podcast a while ago, which is.
48:17
What often happens in DC is, or in these sort of policy settings,
48:22
is that policymakers or congressman or
48:26
whoever have you will have a policy that they want.
48:30
And that they decide for whatever political reason they want it.
48:35
Maybe without thinking too much about all the benefits and the costs,
48:41
and then they will try and find academic research that just supports
48:47
whatever that previously drawn up policy conclusion is.
48:52
And so, I guess at some level, if you sort of believe that that's often,
48:57
or, I don't want to say often, but when that's the case,
49:02
that's not a real example of economists kind of having influence per se.
49:08
Because, I think you can kind of almost always find a paper somewhere,
49:12
maybe not in the top journals, that will support almost any policy.
49:17
I'm curious what you think about that, and
49:21
what the influence of economists have been in Washington,
49:26
and has it become more political cheerleader-type
49:31
role than a real type of policy role?
49:34
Well, I know there's many exceptions to this,
49:38
folks like Kevin Hassett have been very influential in things
49:43
like the Taxation Jobs Act and I also, I think the CARES Act.
49:48
But I'm just curious what your take is on the role of the economists in DC and
49:53
how it's changed.
49:54
>> Gregory Mankiw: Well, there's always been some truth to what you're saying.
49:58
I think Paul Samuelson many, many years ago used to tell the story that when he
50:02
was raising his children in Belmont, there was two pediatricians.
50:06
One, whenever they brought him there, he just said,
50:10
recommended bed rest, the other that always prescribed antibiotics.
50:16
And so Paul Samuelson would decide what he thought his child needed and
50:20
take them to the appropriate pediatrician.
50:23
That's a little bit like what politicians do, is they choose the economist that
50:27
are gonna give them the kind of advice they want, and
50:29
therefore they're consistent with their views.
50:32
So I think that's true.
50:34
I think some contribution is really in the details of policy,
50:38
because even if the, even if the president is setting the broad scope policy,
50:44
there'll be lots of details that he or she's not focused on.
50:48
And that's the stuff that the staff works on.
50:54
And the CEA and CEA staff work closely together with the rest of
50:57
the White House staff, the Treasury Department staff, and
51:01
Commerce Department, Labor Department or whatever, depending what the issue is.
51:06
So I think you can get good economics in the details that
51:10
are flying below the radar screen of the politicians.
51:14
The politicians probably come in with some set of ideas of what they wanna do.
51:17
And certainly, what we can do is point out unintended consequences and
51:23
say, maybe you think this is a good idea, but have you thought about this?
51:28
The CEA has no authority over anything other than giving advice.
51:33
That makes it very different from, say, the Treasury Department or
51:37
the Commerce department, we don't run any programs, we just give advice.
51:42
And so as an advice giver, you're only as influential
51:46
as the person listening to the advice wants you to be.
51:51
And that's gonna vary over time.
51:53
And right now, we have someone who's not been an academic,
51:58
Jared Bernstein, who's the head of the CGA.
52:01
I know Jared reasonably well, and he's a very good guy, but
52:04
he's a Washington economist, he's not an academic.
52:07
Was that a good thing or a bad thing?
52:08
I think it's a mixed bag.
52:10
He probably comes to it a little more politically because he's been very closely
52:16
aligned with Joe Biden, he was Joe Biden's economist when he was Vice President.
52:22
But on the other hand, I think because of that, Joe Biden has more trust in
52:28
Kevin Jared than he would if he had some stranger coming flying in from Harvard.
52:33
So I see pros and cons of the changes, and
52:37
it will vary over time as new presidents come in and
52:43
decide to set their own relationship with the CEA.
52:48
>> Jon Hartley: And maybe there's something we said about gains
52:52
specialization, that maybe it's right that
52:55
academics really should be focusing on doing research.
53:00
And you have think tankers to fill policy slots when they're parties in power.
53:08
>> Gregory Mankiw: Absolutely,
53:08
there's very good work in a lot of the think tanks.
53:11
Not all of them, I mean, some of them are not very good, but
53:14
I think some of the work of think tanks are very good.
53:16
And they're focused on the kind of questions that politicians want answered
53:21
more than the kind of questions that the academic literature once answered.
53:25
>> Jon Hartley: Absolutely, one last quick question for you, Greg,
53:27
you've been a long time defender of Pigouvian taxation,
53:30
carbon taxes as a policy response to climate change.
53:33
How do you see the carbon tax policy battles going on today and
53:38
the climate issue more broadly?
53:40
>> Gregory Mankiw: I think it's a sad state of play right now,
53:43
because the Republicans seem to deny climate change.
53:47
And I've been told by people who worked for Donald Trump,
53:49
that Donald Trump does not believe in climate change.
53:52
And the Democrats who believe in climate change but
53:54
don't believe in taxing anybody making less than 400,000 a year.
53:58
So basically, there's no constituency for carbon taxes.
54:02
You can make a carbon tax system progressive, but
54:05
saying you're not gonna raise taxes on anybody making less than 400,000 a year,
54:10
that's probably impossible.
54:12
So the carbon tax, which most economists think is the first best approach to
54:16
climate change, is probably not on the table.
54:19
And this is partly a reflection of a variety of
54:23
dysfunction in Washington right now.
54:26
Tariffs are popular in both parties right now, that's kind of sad.
54:30
No party is really worried about long-term fiscal sustainability, that's kind of sad.
54:34
So we don't have, state of economic policy in
54:38
Washington is not terrific in both parties right now.
54:42
In my mind, that makes teaching economics all the more important, because I think in
54:47
the long run, educating the electorate is the way to go to get better public policy.
54:52
>> Jon Hartley: Its interesting, too, just because internationally, carbon taxes,
54:56
I think, have been a failure as well.
54:59
If you think about, in Canada, they're very unpopular.
55:03
Justin Trudeau has introduced carbon taxes and the top policy,
55:09
a concern that's being highlighted by his opponent, Pierre Poilievre,
55:15
who's very likely to come into office in about a year or so from now.
55:22
And then in France, you think about the Yellow Vest revolution.
55:24
And so it's, I think I agree, like the whole policy substitute idea,
55:29
There's a great argument that, I think, you made on the,
55:34
I think it was a National Geographic documentary that Leo DiCaprio,
55:39
I think, was doing about policy substitutes.
55:42
If you have a carbon tax, you can reduce people's income taxes.
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And I think the challenge is, it's one of those things
55:50
where it's an interesting economic kind of idea.
55:55
Of course, we want lower income taxes and
55:58
it sounds like a great idea, who doesn't want less income taxes?
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There's this weird political economy problem of passing policy substitutes,
56:09
which is just a very difficult thing to do, I guess.
56:12
>> Gregory Mankiw: Yes, yes, Milfree used to talk about status quo bias,
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the people seem to like the status quo.
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So it's a hard sell, even though economists,
56:23
both the right and the left, are in favor of carbon taxes.
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>> Jon Hartley: Exactly, well, it's been a real honor to have you on, Greg, and
56:29
hear about your amazing career.
56:30
Thank you so much for joining us.
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>> Gregory Mankiw: Thank you, Jon, it's great seeing you.
56:35
>> Jon Hartley: This is the Capitalism and Freedom, the 21st Century podcast,
56:38
an official podcast of the Hoover Economic Policy working group where we talk about
56:42
economics, markets, and public policy.
56:44
Our guest today was Gregory Mankiw,
56:46
who is a professor of economics at Harvard University.
56:49
I'm Jon Hartley, your host, thanks so much for joining us.
56:52
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