David Henderson on Trumponomics, Deficits, and Immigration
2019-03-31 · Guest: David Henderson (Professor Emeritus Naval Postgraduate School) · 52:06
Economic policies and Federal Reserve nominations
Charlie Deist, filling in for Bob Zadek, interviews economist David Henderson about the economic policies of the Trump administration, the implications of tax cuts on federal revenue, and the controversial nomination of Stephen Moore to the Federal Reserve. They explore the history of the Laffer curve, the growing national debt, and the optimistic “gush-down” economics of Julian Simon regarding population growth and immigration.
Topics: Trumponomics, tax cuts, Laffer curve, federal deficits, national debt, monetary policy, Federal Reserve, Stephen Moore, immigration, population growth, Julian Simon
Speakers:
- Charlie Deist: Host
- David Henderson: Professor Emeritus at the Naval Postgraduate School and Hoover Institution Research Fellow
- John: Caller
Introduction [00:16]
Charlie Deist: Good morning and welcome to the Bob Zadek Show. It is the show of ideas, not attitude, and I’m Charlie Deist filling in once again for Bob with the Econ Hour. I have a few ideas that I want to share with you all this morning, all of our listeners in California, as well as those in Oregon and Colorado.
But first, a quick housekeeping item. If you want to get this show’s emails, weekly emails, go to BobZadek.com. If you’re already getting those emails, you might have been expecting to hear an encore presentation of Bob’s interview with economist Stephen Moore. We were planning to run that encore, but I had a last-minute idea to interview someone who I’ve been wanting to have on the show for a long time. But if you were wanting to hear that encore, you can still hear it at any time at the show archives at BobZadek.com or in iTunes in the podcast store.
As always, this morning, we welcome your emails and phone calls during the live show. You can reach me at producer@bobzadek.com or by phone at 424-BOB-SHOW. Now let’s get down into the ideas.
It was back in October that Bob spent an hour with Stephen Moore, a former president of the Club for Growth, and he had recently authored a new book called Trumponomics. Moore is a supply-side economist, meaning he thinks that tax cuts tend to pay for themselves. And he and Bob talked about why the cut in the corporate income tax rate was good news for average Americans, and Bob asked if it makes sense to drop it down to 20%, why not go even lower?
Moore’s co-author on the book Trumponomics was Arthur Laffer, probably best known for his Laffer curve, which is a famous idea that you can actually create more revenues, get more tax revenues if you lower taxes. And this led to the whole kind of voodoo economics, and we can ask my guest this morning what he thinks of that. But this theory behind the Laffer curve is sort of intuitively appealing to someone like Donald Trump, who would naturally want to both cut taxes and have more to spend.
So Trump has consulted Stephen Moore on a number of his key economic proposals, including, thankfully, free trade, because Moore has been pushing Trump to remove tariffs, and for the time being, we seem to be angling in that direction. Now this week, it came out that President Trump has nominated Stephen Moore to the Federal Reserve Board. And it looks from the outside like this maybe was kind of a politically motivated move because Moore had just written this op-ed in the Wall Street Journal which called the Fed and its recent hikes of the interest rate a threat to growth.
But is it really the Fed’s job to promote growth, and should they be focused on promoting growth under a particular president, or should they be focused more on things like price stability and a stable dollar or some sort of aggregate measure that we can use to say that the economy is neither overheating nor being artificially depressed? And that’s the question for this morning’s show. A lot of people say that this nomination threatens the Federal Reserve’s independence because Moore has been a partisan in favor of Donald Trump’s presidency. And it also has come out that Trump has accused Powell of throwing cold water on his economic recovery, and Moore even chimed in that maybe Jerome Powell should step down. So the fear is that the independence of the central bank could be at stake here and that a partisan economist like Moore might be at risk of further politicizing it.
So we have a lot to discuss this morning, and I’m lucky to have with me Professor Emeritus David Henderson of the Naval Postgraduate School in Monterey, California. David Henderson is a research fellow with the Hoover Institution, and his writings focus mainly on public policy. You might also know him from the popular economics blog EconLog, and he’s also the editor of the Concise Encyclopedia of Economics. So we’ve got a kind of a walking encyclopedia of economics here with us this morning. David, how are you?
David Henderson: Oh, I’m doing well. How about you, Charlie?
Charlie Deist: Doing well. And David, I just want to add that you’ve also been a good mentor to me when I was going through my economics undergraduate education at UC Berkeley. I often felt I needed to turn to a more free-market thought, and I met you, I believe it was maybe my sophomore or junior year, at a time when I was feeling a little bit depressed about the political landscape, and you many times kind of buoyed my spirits and kept me focused on the positive.
Stephen Moore and the Federal Reserve [03:41]
Charlie Deist: So we’ll see where this conversation goes this morning, but I want to start off talking about a blog post that you put up this week about—it was linking to another economist who we recently had on the show, a monetary economist named George Selgin. And he had read Steve Moore’s op-ed and was left kind of scratching his head. So Moore was saying that the Fed was a threat to growth, and maybe Selgin wasn’t questioning that specifically, but what did Moore say in that op-ed, and where did Selgin think that he went astray?
David Henderson: Well, Moore made this point about how Paul Volcker, who was the person who broke the back of inflation—Moore claimed that Volcker was looking at commodity prices as his signal about what to do with monetary policy. And so what George did—George is a very careful economist, and he really digs into the weeds and tries to make sure to get it exactly right, and he usually succeeds. And so what he did was look back at how did Moore get that idea? And as he worked his way back, he found out that it was from something that Art Laffer, whom you mentioned, had said. And then when he looked into what Art Laffer had said and then went back into what Art Laffer wrote in the early ’80s, there was a pretty big contradiction. Art Laffer made—seemed to imply that he’d met with Volcker in the early ’80s, and he seemed to imply in this recent piece that Volcker—and he even seemed to imply that he persuaded Volcker to look at commodity prices as his signal. And then in something that Laffer wrote in 1983 in Reason magazine, he said something that was very different from that. So it seems like this kind of made-up history, to put it not mildly, but not extreme either, somewhere in the middle.
Charlie Deist: So he was arguing that in today’s economy, we should be paying closer attention to a measure of commodity prices and a bundle of them—things like oil, copper, other minerals, the sort of basic inputs of production. And he noted that we’ve had deflation in this bundle of goods over the last several months since the Federal Reserve began to tighten, or at least that’s been the conventional wisdom, is that they’ve started to kind of tighten monetary policy with these interest rate hikes. Help us wrap our head around what this commodity price targeting is all about and what the pros and cons of that kind of an idea might be, and why Moore might be suggesting that that was a measure that Volcker would have used for guiding his own monetary policy back in the ’80s.
David Henderson: I don’t know why he thought that. You know, so I just want to warn you, I am not Mr. Monetary Policy, and so we could talk—you could ask me a lot of questions where I’m going to say I don’t know. So I don’t know.
Reagonomics and the Laffer Curve [09:28]
Charlie Deist: Right. Well, it is one of these kind of head-scratchers, and the idea of Trumponomics, I think, is a little bit simpler, and so we can start there. And let’s go back to the precursor for Trumponomics, which would be Reaganomics. And most people remember Reagan as being someone who cut taxes. But I think in doing my research for the show, it kind of came out that this isn’t the full picture of even what Reaganomics ended up being all about. And we had, in addition to the tax cuts during the Reagan years, tax increases. So first of all, what do you think are the relative pros and cons of continuing to cut taxes in the current environment? And is it possible that we’re just kind of borrowing future demand, pulling it into the present, and postponing some future reckoning when we’re going to have to pay that back and it will be a bigger drag on the economy?
David Henderson: Yeah, we’ve got this huge deficit. And not only do we have a huge budget deficit, but also the budget deficit is growing. So to have any real call for—when people say they want tax cuts, what in this context what they really mean is they want higher taxes in the future. Because unless the government defaults—and I have written about that with my co-author Jeff Hummel, how we think there’s a reasonable probability the government will default on the debt. In that case, I’d be all in favor of further tax cuts now because I’d love to see a default. But unless that happens, you’re going to have higher taxes in the future.
And so what I would want with any tax cut now is to combine it with budget cuts. And those are easy to do—I don’t mean they’re easy politically, they’re extremely hard politically—but they’re easy conceptually. It’s not hard to find, you know, a trillion dollars or certainly half a trillion dollars of waste and programs the government shouldn’t be spending on. I would say it’s more like a few trillion that the government shouldn’t be spending on. But it’s not hard to find those in the budget. And so if you had—if you combined some modest tax cut with reining in the growth of government spending from around 4 to 5% a year to 2 to 3% a year, you’d have balance in 10 years. So those are the kinds of things you could do. And but people aren’t talking about that.
The Reality of Tax Cuts and Revenue [12:08]
Charlie Deist: But this idea of the Laffer curve and lowering rates in order to increase revenue, was that borne out by the Reagan years, or did we need to change course in the end when those tax cuts produced the promised revenues?
David Henderson: Oh, well, let me just clarify. The Laffer curve has to be correct, and the only question is where we are on it. And that’s the big question. And let me explain why. At a zero tax rate, the government will raise zero revenue. So there’s one end of the curve. At a 100% tax rate, perfectly enforced, the government will raise zero revenue. So there’s the other end. And so if you think, well, those are the two ends, there has to be this part in the middle where it goes up and then it comes down.
So the question is where are we on the Laffer curve? And in the Laffer curve original literature, what Art Laffer referred to was the prohibitive region, the region where any tax increase will reduce—any increase in tax rates will reduce tax revenues, any cut in tax rates will increase tax revenues. And by the way, Art was pretty careless most of the time. He was careful and said, “No, I’m not saying that. I’m saying that if you cut tax rates say 10%, revenues won’t fall 10%, they’ll fall by less than 10%.” And he was absolutely right.
And there really was a supply-side revolution in thinking in the mainstream. There’s a guy at MIT—and I’m not going to remember his name now—but he wrote a great piece back in the late ’70s, early ’80s, laying out that there was some reason to think this was true. I wrote a piece, I spoke at a conference, I was a commenter on Art’s article, on Art’s paper, and I was very skeptical. But when I did the actual, you know, just back-of-the-envelope analysis, I was kind of surprised how with some reasonable elasticity of labor supply, especially from married women, you would get a substantial increase in the number of people working and the number of hours worked.
And so the way I put it is supply-side economics, kind of mainstream supply-side economics, says that when you cut tax rates X percent, revenues will fall by substantially less than X percent. And that has been borne out. Moreover, when I was at the Council of Economic Advisers under President Reagan, the guy in the office next to me was Larry Lindsay, who did his dissertation under Larry Summers at Harvard a year or two later based on some evidence he found when he was sitting in that office. What he did was he looked at what were the revenues gained from—what was the change in revenue from the top 1%, because their rates were cut, their marginal tax rates were cut from 70% to 50%. Now it’s not hard to imagine that if you’re going to keep 50 cents on the dollar instead of 30 cents on the dollar, a two-thirds increase, you’re going to make more dollars. And what he found doing a fairly careful study, correcting for all the things you’d want to correct for, was that the federal government actually did get more revenue than otherwise from the highest income people, people making over 200,000 a year in those years’ dollars, which would be like half a million today, by cutting that top tax rate.
So the Laffer curve is correct. What is incorrect is to claim that given our current tax rates, a cut in the marginal tax rate would raise revenue. We’re almost positive—I’d say we’re really positive—that that won’t be true. You can find little tax cuts. So I’ll give you an example. In Canada, back about 20 or 30 years ago, the federal government in their anti-cigarette kick raised taxes, tax rates on cigarettes by about, I don’t know, three to five dollars a pack, I can’t remember the exact numbers. And they found their revenues from cigarette taxes actually fell. What was happening? I came from Canada, eh, and law-abiding Canadians, that’s how we thought of ourselves, but there were all kinds of Canadians shipping cigarettes across Lake Ontario and Lake Erie from the United States to avoid those taxes. And so and oh, by the way, across the St. Lawrence River, of course. And so it was, you know, it was—there’s reason to think there are tax rates we could cut in the economy where we’d increase revenue. So anyway, I just think it’s important to give Laffer his due, that the Laffer curve has to be correct. When you push other mainstream economists on this, they’ll finally admit that that’s true. And then what it really comes down to is where are we on the Laffer curve? And I think that the skeptics are right that we are not in the prohibitive region. A cut in tax rates will reduce revenue. But the supply-siders are right in saying a cut in tax rates won’t reduce revenue nearly as much as your static analysis would say.
Charlie Deist: Interesting. So the old slogan is broaden the base, lower the rates. You get a broader tax base because people are suddenly willing to admit their economic activity into the taxable realm in the case of cigarettes, or if they’re reporting income, they might report more of their income more honestly, or they’ll just decide maybe that they want to work more, as I think you were pointing out with married women choosing to enter the workforce.
Deficits and the National Debt [17:45]
Charlie Deist: So in this environment, it’s unclear kind of there might be arguments on both sides. But you do point out in another recent article that the budget deficit, which is part of this whole equation—taxes are just one side of it, the other side being spending—the budget deficit, it grew under Reagan. It reached a trillion dollars for the first time and then grew eventually, I think by the end of his term, to three trillion. Today it stands at over 20 trillion.
David Henderson: No, no, no, no, no, it never hit a trillion under Reagan. I think you might be talking about debt.
Charlie Deist: Oh, that’s right, that’s right, debt. So the deficit is the annual accumulation, and thank you. And so the national debt currently stands at 20 trillion. The deficit stands where—where are we now? Is it—the deficit is now above a trillion dollars, am I correct?
David Henderson: I think around 800 billion, something like that.
Charlie Deist: Okay. But in this article, what are you getting at, I guess in terms of the current environment and again going back to the lessons from the Reagan years? It does seem like the recipe of cutting taxes without any simultaneous cut in spending is a dangerous game to play in a sense. And then I want to get back to—you dropped a bit of a bombshell with the idea of a strategic default by the United States. But first, just focusing on this question of deficits, what worries you about deficits right now?
David Henderson: Well, that they’re high and growing. And that you—you know, we will have—see, what we’ve done is we have kept—we, okay, the US government has kept revenues over the last really 65 years and maybe 70 years, something like that, at around 17 to 18% of GDP. It’s been as close to a constant as you’ll find in macroeconomics, I think. And so the odds that that’s going to go up much are very low. And what happens is when it starts hitting around 20%, as it did just at the end of the Carter administration, you get a tax cut like with Reagan. When it started hitting around close to 20% at the end of the Clinton administration, you got a tax cut from Bush. And so that’s a constant.
The only way I think that constant would be undercut would be if we went to a value-added tax. And I know a lot of economist friends who say we should have a value-added tax. I understand all the economic arguments for that—I shouldn’t use the word static, let me explain in a minute—but I understand all the arguments for that. What they don’t, I think, take account of is that the politics would change dramatically. That that would breach that 17 to 18% number, and we’d start getting moving towards European levels of taxation. And I think all we need to do is look at Europe in the mid-1960s, when as part of the European Union, as part of some agreements, they had to impose a value-added tax. Some countries did it with the idea of revenue neutrality, not having an increase overall revenues over what they would have been. Some did it to actually reduce government revenues as a percentage of GDP, some did it to increase revenues as a percent of GDP. The ones that did it to increase revenues as a percent of GDP succeeded. The ones who did it to hold revenues constant as a percent of GDP failed. And the one that I think, if I remember correctly, the one that did it to reduce revenues as a percent of GDP failed.
And so that’s when if you look at a chart on government revenues as a percent of GDP and have Western Europe all combined and United States, Western Europe is a little higher than the United States at the start and then it diverges like crazy after the mid-1960s. And that’s when we get very large government in Western Europe. And so yes, in a standard optimal analysis framework, you can show that a value-added tax is better, but that’s holding a key thing constant that we shouldn’t hold constant, and that is revenue raised. If you look at what I think will actually happen, that will be breached, and that’s why I don’t want a value-added tax.
The Case for Strategic Default [22:56]
David Henderson: So failing that, we will hit some kind of cliff at some point, and then the government will have a lot of tough choices: cutting defense spending substantially as a percentage of GDP, which I’d like to see; reining in the growth of Social Security and Medicare and Medicaid, which I’d like to see. But one of the options I think will be to renege somewhat on the debt, whether it be partial or total.
Now why do I say that would be good? Well, this is what my friend Jeff Hummel, who I co-authored the article with—he convinced me of this while we were writing the article, and I didn’t think this up front. I thought just as a factual statement it was reasonable to say that there’s a reasonable probability the government will default on the debt. What Jeff argued to me, that’s not in the article, was that the government should default on the debt. And here was his basic argument: You’re paying Social Security taxes, Charlie. You’re paying income taxes. You have no say about that. You are taxed whether you like it or not. Who has a say? People who buy federal debt, people who buy bonds. They have a say. They didn’t need to buy those bonds, and by the way, I’m one of them. They didn’t need to buy those bonds, but they did. So if we’re going to cut to someone, why go after the guy who has no say about taxes? Why not go after the guy who actually invested in the government taxing you in the future? And so that was kind of the moral argument for a default.
Charlie Deist: Morally, it sounds impeccable. But the question that I have is what happens then to the US government’s credibility in the bond markets? What happens to the interest rates that the taxpayer is then in a sense on the hook for, and would that strategic default actually result in more fiscal discipline from the federal government?
David Henderson: Well, those are really good questions. And now let me quote the line we had in there that Jeff got from David Friedman, economist David Friedman. You know, if you look at various people who’ve advocated the balanced budget amendment over the years to require within the Constitution that the government balance the budget, there’s something you need. You need an amendment with teeth. In other words, some way of actually enforcing it, and that’s very hard to do. Well, David Friedman said a government default would be a balanced budget amendment with teeth. Who would want to lend to the government after that? And so you would actually have more fiscal discipline with a budget default, with a debt default.
Charlie Deist: Very interesting. And I’ve said before, or I think I heard it somewhere and it stuck with me, it’s “If something is unsustainable, then by definition at some point it has to stop.” And that seems to be where we’re heading.
David Henderson: Well, that was my old boss. That was my old boss who said that. Herb Stein. You know, Ben Stein’s father, Herb Stein. He was the chairman of the Council of Economic Advisers under Nixon, and I was a summer intern under him in the summer of ‘73. And that was Herb who said that.
Charlie Deist: This is well before Ben Stein’s Money.
David Henderson: Right. Yeah, this is his father.
Caller: Political Ambition to Increase Taxes [26:00]
Charlie Deist: So that might be a story in and of itself. But I notice that we have a caller on the line who I want to get to here. Let’s hear from John. John, you’re on the Bob Zadek Show. What’s your question for David?
Caller (John): Yes, I’m wondering what the best explanation is for the persistent political ambition to increase taxes well into the realm of declining revenues.
David Henderson: Okay, so I think there we have to look at people like Emmanuel Saez, who teaches at Berkeley where Charlie got his degree, and his co-author Gabriel Zucman, who argue explicitly that they don’t want these high marginal tax rates of 70-80% because they want the government to raise revenue. They actually admit that it might not, and maybe they even admit it probably won’t, I can’t remember their exact wording. But they say it’s to go after an oligarchy. They say it’s to actually bring down a lot of these wealthy people who will then have less wealth and therefore less influence in the political system. So I’m not—obviously, I’m not agreeing that that’s a good idea, but that’s their argument.
Caller (John): So this is in flies in the face of the social justice warriors who are sincerely looking for revenues to solve problems. Meanwhile, this other category of social justice engineer is designing things to defeat the sincere social justice warriors.
David Henderson: I think you put it well because you said “the” at the start, but then you made a distinction between various groups of social justice warriors, and I think that’s a correct distinction. In other words, there’ll be some who really do want the revenue to do these things, and they kind of are very ignorant of the fact that people will do fewer of the activities being taxed if they’re taxed higher. And then there are people who are clear on that, and they tend to be economists like Saez and Zucman who want that.
Charlie Deist: Thanks, John, for your call. And if you stay on the line, we’re going to go to break here quickly for a minute. But you’re welcome to stay on the line and continue with David into the second half of the show here. I want to bring it back in a second. We’re going to come back to Trumponomics and look a little bit more at monetary policy and what it means for the Federal Reserve to remain independent. And also talk about just more about the economy itself. We’ve had this big run-up in the stock market. The old mantra of supply-side economics was “trickle down.” We’ll talk about whether or not this prosperity is making its way through the economy, whether it’s the proverbial rising tide that lifts all boats, or whether it might be more indicative of some kind of a bubble phenomenon. And Donald Trump, for better or for worse, has decided to—he’s rolling with it and maybe even hoping that the Federal Reserve will continue to buoy it if it is indeed some kind of unsustainable bubble, at least for as long as he’s president. And this seems to be the perennial temptation for sitting presidents to get the Federal Reserve to pump more money into the economy. So we’ll shift a little bit into—I want to get David’s take on the Austrian perspective, which might be a little bit more bearish on the current economy. But we’re going to go to break, and we will be back in just one short minute.
[029:41 - 030:41 Sponsor break omitted]
Stephen Moore’s Qualifications for the Fed [030:42]
Charlie Deist: And welcome back to the Bob Zadek Show. I am Charlie Deist, filling in for Bob, and I have the privilege of speaking with David Henderson this morning. He is Professor Emeritus at the Naval Postgraduate School and a research fellow at the Hoover Institution. And we’re talking about Trumponomics, and it was spurred by the recent appointment of Stephen Moore, a supply-side economist who has been involved in making these arguments for lower taxes for many decades. And he is an economist in the sense that he has studied economics, he has a master’s degree. But within the economics profession, the people with PhDs, people who are more kind of entrenched in the establishment of the people who are more typically considered for a position on the Federal Reserve Board, are maybe a little bit feeling a little bit left out or feeling a little bit—perhaps there’s even a hint of jealousy in their criticisms in saying that Stephen Moore might not be the best man for the job. However, I think, you know, David, I want to get your take on why it is that Moore might actually not be the best candidate, the best person for this job. And you suggested when we talked earlier preparing for the show that there might be another job in DC that he might be better suited for. What were your thoughts there?
David Henderson: Right. So first of all, I should point out that although Steve Moore and I are not friends, we’re friendly. So I think if he heard that I think he shouldn’t be appointed to the Fed, his feelings would be hurt. You know, so I just want to point that out because he probably thinks, “Hey, because I like him, that therefore he should get this job.” But as I said to you when we talked in the pre-interview yesterday, I loved my sister who died recently, but that doesn’t mean I think she should be on the Federal Reserve Board.
And I just don’t think he knows enough about monetary policy. I would like to see someone—like let’s say you brought in someone who’s really, really critical of the Fed but really knows Fed policy. Someone like Larry White at George Mason University. Oh my god, like I would be totally supportive of that. One thing is Larry wants to end the Fed. Now whether he could do that internally, I’m doubtful, but at least there would be some very interesting conversations.
The Fed, by the way, is very, very snobby about these things. So let me give an example. I was invited to speak at the annual meetings of the San Francisco Federal Reserve Bank a few years ago. They told me in advance that the talk I gave on this panel, along with the other panelists, all of it would be recorded and online. Guess what? They made an exception the year I gave it. And I think it was over one slide I had in which I said, “If the government isn’t really good at figuring out the right amount of steel in the economy—you know, central planning’s a bad idea—why would you think it’s good at figuring out the amount of money in the economy?” And man, that did not go over well.
So they’re very snobby, and that’s part of the reaction. But I’d rather they be reacting to someone who can really bring a lot of intellectual weight to bear in these discussions, someone like Larry White, someone like George Selgin. So what I said was I think Steve Moore just doesn’t have that. He doesn’t know that much about monetary policy. He’s a very nice guy, but he’s a very careless guy. And we see that in a lot of his writing. What I think he’d be good at is, say, Assistant Secretary for Economic Policy, because he’d be pushing like crazy for, say, capital gains tax cuts. And there’s one area where if you reduce the capital gains tax rate somewhat, the government probably would make more revenue. And Steve laid that out, by the way, in his article on capital gains in my Concise Encyclopedia of Economics, which you can find online. And that’s something he’d be very good at. But no, I just don’t think he’d be good at monetary policy, and I think it’s kind of a wasted slot to put him there.
The Fed’s Control Over Interest Rates [037:13]
Charlie Deist: The question about the Federal Reserve in the abstract is an interesting one, and we won’t dwell on it for too much longer. But I did want to bring up something that’s been kind of nestled in my consciousness that I haven’t quite been able to articulate until I had the occasion to think about what I wanted to say today. And it’s this idea that maybe the—we are in a sense riding some other, you know, another kind of financial bubble here, and that all of the money that was put into the economy during the quantitative easing, that this is in some sense buoying the economy and that the growth that we have right now is at least partly unsustainable. But that’s not to say that every policy that Trump has passed has been detrimental, and I think that classical liberals can find a lot in what he’s done to praise, including the cutting of the corporate income tax, etc. So what do you think is the—and without forcing you to make any predictions—what do you think we’re likely to see in the coming years? Do you think that this is some sort of a sustainable boom, or do you think that it still has this element of funny money that we’ve seen in so many booms in the past?
David Henderson: No, I don’t think it’s a funny money thing. I think it’s sustainable, which doesn’t mean it would be sustained, but I think there’s nothing that says this is some kind of a bubble.
Charlie Deist: In that case, do you think—well, and this is getting back into the weeds of monetary policy—do you think that there is some sort of threat to the current growth from a Federal Reserve that might want to stifle it?
David Henderson: Oh yeah, because—and Scott Sumner points this out—because the Fed has in its mind what the correct growth rate is. That’s like kind of the central planning mentality. So if it sees real GDP growing too fast, which means, you know, Scott Sumner points out nominal GDP growing too fast, it might try to lean against that by—well, people talk about interest rates as a tool of monetary policy, so I think I can’t go on without addressing that elephant in the room. The Fed has very little control over interest rates. The thing they target is the federal funds rate, which is the shortest-term interest rate you can imagine. It’s the rate on money lent overnight. Moreover, it doesn’t target it by being in that market. It neither lends nor borrows at the federal funds rate. It instead buys bonds or sells bonds to put more or less liquidity in the economy in order to indirectly affect the federal funds rate.
So I still think it’s a bad idea just to look at interest rates when you’re looking at Fed policy. And Scott Sumner will sometimes talk about interest rates, but he is always quick to point out that—and he’s my colleague at EconLog and he’s a strong advocate of what’s called nominal GDP targeting—Scott will always point out you can’t use interest rates as a measure because interest rates—there’s something called the Fisher effect, the effect of expected inflation. And so in the Great Depression, interest rates were really low, and people said, “Oh, well, the Fed must be having a very loose monetary policy.” No, it was a very tight monetary policy. The people in the economy expected deflation, got deflation, and therefore, of course, nominal interest rates were lower because of that expected deflation.
Charlie Deist: That’s a great description. And I think for people who are wanting to go a little bit deeper in this, you just explained why interest rates are not a good indicator of the stance of monetary policy, I think as succinctly as can be done. And again, when we look at the current environment and this whole interest rate targeting, you know, sometimes communicating the intention—for example, back in during the recession when the Federal Reserve signaled that they intended to keep interest rates low for a long time—that can kind of have this self-defeating impact where it’s signaling that they are not committed to generating the historical average for inflation. So I’d direct people to both the EconLog blog where both you and Scott Sumner, who is more of a monetary economist, blog about these things, as well as the Library of Economic Thought that you have on that same site and the Encyclopedia of Economics. I’ll also just slip in a plug for a book that I recently put out based on interviews that I’ve done on this show with economists of different perspectives on macroeconomics and monetary policy. That’s called The ABCs of Austrian Business Cycle Theory, but it really looks more broadly at all of the dominant ideas that economists have about what drives these fluctuations in real output and the nominal factors like inflation.
Optimism and Human Potential [040:41]
Charlie Deist: But getting back to the positive side of Steve Moore as an economist and also sort of as a human being who seems, at least in his general outlook, to be relentlessly optimistic. And there seems to be this kind of self-fulfilling prophecy in a way where when people have optimism and when they channel that optimism about human potential into giving people the freedom to actually pursue that potential, then it does come about. And I wanted to talk about the book that you mentioned off the air that Moore co-authored with the economist Julian Simon, who was also a noted optimistic—the exception to the rule of the dismal science. So what was that book and what else would you say about Moore’s tendencies to have this optimistic outlook?
David Henderson: Right. Two things I want to say about that book and another book. But also, I just want to say before we went to the break, you mentioned this whole idea of trickle-down economics. And I think trickle-down economics, that’s a really bad term. What it should be called is “gush-down” economics. And that was what—the way we got growth in the 19th century and the 20th century was as people invested in more capital, there was more capital per labor, and therefore the marginal product of labor went up and therefore real wages went up. And that’s the way it works. And by the way, Steve has a nice section on that in his article on capital gains in my encyclopedia. And my co-blogger Brian Caplan, who you didn’t mention, but I know you did mention with regard to the book of Bob Zadek, he calls it “Niagara Falls economics,” so it’s kind of making the same point.
Julian Simon and the Ultimate Resource [042:08]
David Henderson: So Steve, 30 years ago, was the research assistant for Julian Simon for Julian’s book on immigration. And let me just give you the thumbnail on Julian Simon. Julian Simon was someone who believed early in his career that population growth would really, really be bad for an economy. But he was an empiricist, so he started actually looking at the data. And he’s one of the rare people in economics who after the age 30 changes his mind. And he decided that, you know what, population growth is great for the world. And in fact, he wrote a book and then a second book called The Ultimate Resource, and the ultimate resource is people. The more people you have, the more people you have solving the problems.
And in fact, there was this show that people of my generation watched in the ’70s called The Mary Tyler Moore Show. And there was this guy on it, Ted Baxter, who’s supposed to be the designated idiot. And he says one day he wants to have six kids so one of them will solve the population explosion problem. And of course, that’s supposed to be funny, right? And Julian Simon points out, “You know what, Ted Baxter had a really good insight there because the more people there are, the more minds there are working on things.” So that’s the little thumbnail. And then, of course, Julian won the famous bet about what would happen to commodity prices with that guy at Stanford, Paul Ehrlich, who wrote The Population Bomb. According to Ehrlich, we should all be starving by now. That’s a little bit of an exaggeration, but only a little. Anyway.
Immigration and Economic Growth [044:03]
Charlie Deist: There is a riff on this same theme. Tyler Cowen, writing in Bloomberg, had an article a couple weeks ago titled “Want to Help Fight Climate Change? Have More Children,” basically reprising Julian Simon’s argument that we need more people who have an incentive to solve complex problems. And there are many complex problems, so the more people the better. How does this tie into immigration?
David Henderson: Okay, so Steve points out on his—one of his sites I was just doing the background information this morning—that he was the research assistant for Julian’s book on immigration. And Julian wrote his book after he had changed his mind about population, so it’s kind of not a big leap from that to the idea that immigration is good for us. And it is good for us. And so anyway, Steve worked on that book. So Steve has always had a kind of a pro-immigration view, which is very different from that of Donald Trump. And so he wrote a piece just a year ago, a column just a year ago, saying, “You know, we gain a lot from immigration,” pointing out some of the arguments that Brian Caplan and I make—not that he quoted us, he didn’t need to—but just that we gain from having more people who are working. Immigrants tend to be younger, and so they don’t drain the welfare system the way a lot of people think they do. Brian always points out that the welfare system in the United States is aimed at the old, not the poor mainly—people like me, actually, Social Security, Medicare. And so anyway, that’s a piece of Steve Moore. And by the way, you gave me credit at the start of the show for talking to you and kind of helping you with thinking about economics when you were at Berkeley. I never told you this, Charlie, but you helped me because we were talking one day about Brad DeLong. I don’t know if you remember this. And I was pretty much dumping on Brad DeLong, and you were saying, “No, you know, there’s a lot of good stuff I’m learning in his class.” Tell me if I remember correctly, but that’s what I think I remember.
So there was a Commonwealth Club forum in San Francisco in the last month or two, Brad DeLong versus Steve Moore. And I meant to blog on it, I didn’t get around to it, but it’s really worth watching because actually Brad makes a lot of good points and Steve makes a lot of good points. Brad reins Steve in when he talks about the great ’80s and this booming government revenues by pointing out you’ve got to correct for inflation. And Steve kind of makes some good points about how tax cuts do help economic growth. And so anyway, it’s a very interesting debate to watch.
So that’s the first point. Second point, there have been a lot of books in the last few years. Johan Norberg wrote a book, that guy Steven Pinker wrote this great book called Enlightenment Now, just pointing to all of the ways the world has got better. And it’s absolutely true. Well, Steve and Julian Simon back in around sometime 20 years ago roughly wrote a book about 100 ways in which the world has gotten better. And I wanted to go—I went to my downtown office yesterday to find my copy. I don’t know if you remember me ever telling you this, but I had a fire in 2007 that burned almost all my stuff, so I kind of started from scratch, and that book burned. But I don’t really need to look at that book again. Pinker has done it probably more carefully, Johan Norberg has done it. And so there are just all these ways the world is getting better. Poverty worldwide has fallen—not that economic inequality is bad per se, but if you do worry about it, you should note that economic inequality, income inequality has fallen if you look across the world and not just at the United States. And it’s not because the rich have gotten poorer, it’s because the poor have gotten richer. And disease has fallen, mortality has risen—I’m sorry, mortality has fallen, life expectancy has risen dramatically in Asia, even somewhat in Africa. And it’s just tremendous information. And Steve is aware of that. So he would have never—can I use the S-H-I word on your show? I don’t know if the FCC…
Charlie Deist: Well, we might want to substitute one just to be on the safe side.
David Henderson: I’ll substitute a word. When Trump talked about the “sinkhole” that immigrants come from, Steve would have probably agreed with that and said, “Let them come.” I think he would have done that.
Conclusion [049:28]
Charlie Deist: So we have a compassionate individual in Steve Moore and an optimist at that. And your optimism and—I always thought of you as sort of the happy warrior for freedom in the tradition of the Milton Friedmans of the world. And you do remember correctly that I had some kind of words for Brad DeLong, who’s by no stretch a libertarian, although I think my crowning intellectual achievement to date is getting him to sing the praises of Friedrich Hayek on this show last year. And that interview also went into the ABCs of the Austrian business cycle. And he was mostly praising Hayek’s social science methodology, not all of the economic conclusions that he reached. But I do think that there’s something very important about having these dialogues across the aisle. And I didn’t actually know about his Commonwealth Club forum with Steve Moore, and that’ll be at the top of my to-do list.
We’re getting to the end of the hour here, but it’s been a pleasure spending this time with Professor Emeritus David Henderson, who taught at the Naval Postgraduate School in Monterey and blogs at EconLog. Where else can people find your work, David?
David Henderson: So I do—I’m affiliated with the Hoover Institution as you mentioned, and there’s an online publication they have called Defining Ideas, and I write a piece fortnightly, every two weeks for it, that started in December. And so you can always look up Defining Ideas at Hoover. And in fact, after I get off this call and have breakfast, I’m going to start working on my article that will appear this week. And anyway, so that’s a place to go. When the Nobel Prize comes out, usually almost always now on Columbus Day, I write the piece typically that morning that gets published the next day on who won it and why. And so the Wall Street Journal’s the place that day and some couple times during the year besides that. So those are, besides the blog, those are the main things.
Charlie Deist: There you have it. David Henderson, a walking encyclopedia of economics. David, thank you so much for joining us this morning. Just a few more notes for those listening out there. If you want to listen to the show or missed any part of it, you can get the archived show at BobZadek.com. And this week only, we will be giving away the free PDF of Bob’s latest book, The Bubble: How Higher Education Became America’s Most Overrated Product. And that features interviews with David’s co-blogger Brian Caplan and Jonathan Haidt, the author of The Coddling of the American Mind. He co-authored that with Greg Lukianoff, who is president of the Foundation for Individual Rights and Expression. And it links this idea of financial bubbles in student loan debt with the brewing atmosphere of silencing of free speech on college campuses. And I think that people will really enjoy that book, so sign up for the emails and don’t miss your weekly dose of optimism and freedom every morning here on the show of ideas, not attitude. This is Charlie Deist, filling in for Bob Zadek, who will be back next week interviewing David Kaplan on a new book about the judiciary. You won’t want to miss it. It’s been great spending this hour with you this morning, David, and I hope you have a great rest of your weekend.
David Henderson: Thanks, Charlie. You too.