Growth is good for everyone in an economy, but it is also inherently disruptive. Today on Political Economy, I talk to Glenn Hubbard about why fear of change can trap us in an economic zero-sum game, and how embracing the growing pains of innovation can free us from that scenario, making things better for everybody.

Hubbard is a nonresident senior fellow here at AEI, where he writes about a wide range of economic topics, from poverty to international finance. He is the former dean of Columbia Business School, and currently serves as the director of the Jerome A. Chazen Institute for Global Business.

What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: Glenn, welcome to the podcast.

Hubbard: Thanks. Thanks for having me.

One lesson, I suppose, from the Global Financial Crisis is that one should be cautious about declaring “the fundamentals of our economy are strong” during a period of market mayhem. There seems to be a bit of global financial market tumult right now, but are the fundamentals of the economy strong?

I think for the US economy, Jim, the fundamentals really are relatively strong. While the economy’s cooling, it’s cooling from a GDP print in the second quarter that was above potential. While the unemployment rate has risen, it’s to 4.3 percent, which, some time ago we might’ve thought sounded very low. If you look under the hood at bank lending, at retail sales, at transactions involving withholding tax payments, or TSA security, or restaurant bookings, almost anything you look at, the economy is relatively solid. We can still make mistakes here, there are policy possibilities, there’s geopolitics, but we seem to be on a glide path of a cooling economy. Personally, I think part of what happened in markets, is really twofold: The jitteriness of valuations so high in the tech sector that have bolstered the economy, the stock market, and the concerns that maybe with AI we’ve got a little over our skis in terms of its near-term effects.

I was going to ask you this at the end, but I might as well ask you now: Do you think, overall, the Powell Fed has done a good job, an okay job, a bad job at trying to transition us to a period of lower inflation without really crashing the economy?

I think the Federal Reserve under Chair Powell’s leadership has done a good job at trying to bring the economy back to normal with a lower rate of inflation, but, to be fair, this Fed aided and abetted the higher inflation in the first place, and it took its time actually to get serious. But, once it got serious, it’s done relatively well. My concern is that the Fed will declare victory before it happens. While inflation has fallen, the PCE (personal consumption expenditures) inflation rate is still at least a half a percentage point above the Fed’s target, and the quote “last mile” for inflation may be the hardest to get. So I’d hate to see the Fed declare victory before it’s actually time.

Is there a problem with having a higher inflation target, or is the problem that, if the target is two, you kind of have to get to two before you decide to change it, because if you change it before you get the two, it sounds like you’re just not taking these targets seriously.

I think that’s right. I wouldn’t have chosen a two percent inflation target, but the Fed did. And so with a two percent inflation target, and with the Fed unable to hit it—remember not too long ago it was unable to hit it from below, and now it’s unable to hit it from above—until we get back to anchoring at two percent, I don’t think that topic is going to be discussed, and I doubt very seriously that anyone in the Fed is thinking hard about it.

I really enjoyed your Wall Street Journal piece from not so long ago about putting growth back on the political agenda. Before we even get to how to do that, when I write about it, I detect considerable skepticism that people believe—maybe this is just social media people—that faster growth, and faster productivity growth, will actually benefit people. They worry that the benefits would only go to the rich, and therefore the sort of disruption that comes with growth—that must come with growth—isn’t going to be worth it because only the elites, or Silicon Valley, hedge funds, they’re the only ones who would benefit; that that linkage has been delinked.

I think you put your finger on the political worry about growth. After all, when economists talk about growth being good, it’s kind of like saying there’s lots of hundred-dollar bills on the floor, so why isn’t somebody picking them up? And the reason people aren’t picking them up has to do with what you said. I think part of it is, everything that leads to faster growth is also very disruptive. It’s not the case that we can grow faster in a neat, linear way. Every time we grow, some jobs are going to be destroyed, some industries will suffer, as well as many more booming, and that is a potential political problem. We also have to worry, as your question noted, that everybody should benefit from growth. We shouldn’t have a situation where only a handful benefit from growth. But make no mistake about it, if we don’t grow, we have a zero-sum society: You can only do better if I do worse. Growth breaks that link,  and that’s why it’s so important. And with better public policy, we can have both growth and more support for disruption.

Do we still live in the age, politically, of the China trade shock? I feel like whatever the severity of that disruption, and there’s been a lot of back-and-forth on that original paper by David Autor, but whatever the severity, have we sort of over-learned the lesson politically? Because now it seems like we are, in our politics, quite allergic to the notion of disruption. It’s almost as if what you just said that, “Hey, with growth, jobs will be lost, some companies will rise, some will fall,” that that is intolerable, that somehow we have learned the lesson that it’s just not worth it.

Well, it is definitely worth it, because, again, we can’t have the growth without that disruption. To your question about China, I do think we’ve overlearned some lessons from the past. Whatever the China shock did to the US job market, that genie is really out of the bottle. The current concerns about China are principally about two things: One, national security issues with some technologies, which may be legitimate; and the other is over-subsidy of things like batteries for electric vehicles.

Those are separate issues, and they needn’t lead to a general discussion of protectionism. My fear about the discussion of protectionism is, it’s telling people, “Let’s make it 1955 again!” Well, why would you want to live in 1955? The modern economy is actually a very good economy, and I worry that we have a kind of hopelessness—and it’s bipartisan. Both parties are trying to live in the past. We need to move beyond that and get back to growth.

You mentioned 1955 and that notion—maybe we have to go back further, because it seemed as if some politicians and some activists almost seemed to be saying that we should make everything! Like, “Why don’t we make everything?” It’s almost as though, “Why do we import anything to this country?” And I worry that that kind of extreme position is slowly inching its way into our more mainstream policy discussion.

I agree with that, and one of the things I say to people who say that “manufacturing jobs are the great jobs,” I remind people that, for my students, most of the jobs that they want didn’t exist when I was their age. And so, why would I believe that some politician or group of mandarins in Washington is going to define, “this is a good job, and this is not a good job.” We shouldn’t have barriers to doing things in this country. We shouldn’t it hard to manufacture. We shouldn’t make it hard to generate services, either. But I don’t know that we need an industrial policy that tries to micromanage the economy beyond very targeted areas related to national security.

One of my concerns is this sort of newfound sensitivity to disruption, which has manifested, I think, as trade protectionism, that if we’re indeed entering a period of change due to technology, artificial intelligence, that that same sensitivity will be transferred to disruption, not from trade, but from technology. Now, I’m not sure exactly how that manifests itself, if we demand that next to every McDonald’s kiosk there’s an employee punching the buttons for us, but I do worry that, in our current society, that you’ll see these kinds of the kinds protectionist impulses that we see with trade will also be applied to automation shock, whether it’s from AI or robots.

I agree, and it’s worth reminding everybody that most of the disruption that gets blamed on trade is actually about technology. So if you take the major shifts in the steel industry that are politically very salient in the US, most of those came from technology, that US firms were using an outmoded way of producing steel relative to some foreign competitors. I don’t think we want to ban new and great technologies, and when you think about what are the possible sources of great productivity growth going forward, they are things like generative artificial intelligence, machine learning, robotics. We shouldn’t be throwing sand in those gears. Rather, we should be trying to help more people succeed and use those technologies. So I worry that the more we let fear guide public policy—and currently it’s doing so in both major political parties—the more we’re going to confuse the American people that growth is bad, and, in fact, growth is the only way we improve our living standards.

The populists on the right, I think maybe you can give them credit for focusing attention on the costs of growth, the costs of disruption. But as far as policy, have they offered anything of value on policy, itself, or is it just more on these focused kinds of issues?

Not really. It’s like a physician that does a great job in diagnosing what’s wrong with you and then grossly mistreats it, and you’re worse off. I think President Trump, when he was in office, did a very good job at identifying some problems in trade, in the global economic order. That said, the answer to that would be, “What can we do in the United States to prepare ourselves and American people for success?” Not, “What can we do to bash some other part of the world?” So, I just think we need an agenda that focuses on bringing people here up, rather than trying to protect them in a kind of safety view of the world.

When we think about trade, should we think about China differently than the rest of the world? That different rules—even if you love free trade, you love openness—that China needs to be thought differently than Western Europe?

I think that’s right, and I might not have said that several years ago, but I think that now, and the reason is, I kept thinking that China would modify its policies, not to please Americans or Europeans, but to raise Chinese living standards. That is not happening, and China does not want to follow the same rules of the World Trade Organization that other trading blocs do. So I do think we have to decide that maybe, as opposed to a World Trade Organization that’s not working well, anyway, maybe we need groups of countries sharing the idea and basic principles of what trade and openness is, and have them trade with each other. China’s massive state interventions and subsidies make it very hard to imagine it a legitimate player in the world economic order.

Obviously there’s a lot of skepticism now about trade, and people say, “Well, we’ve made all these mistakes at 2000.” But I find it hard to imagine a world where we forever keep over a billion people out of the global labor market. If that’s the case then what should we have done differently 20 years ago?

Well, I don’t think we will do that. The important thing is to figure out where we can cooperate and where we can’t. So there are some elements of trade that I don’t know that we really should care, particularly, who makes sneakers or certain items of clothing. There are others where we should care a lot: national security. And then there’s the hard part in the middle. So I do think there has to be a more nuanced discussion.

We also can’t forget China in thinking about global public goods and global public bads. So if you think about problems ranging from climate change to pandemics, those aren’t American problems, or Chinese problems, or European problems—they’re global problems. And we kid ourselves if we can’t have China, the current Chinese leadership doesn’t seem to want to engage, but I think we have to keep trying to find ways in which they could.

During the Biden administration, we had a big infrastructure bill, a chips bill, a science bill, the Inflation Reduction Act [IRA], which was full of clean energy subsidies, a lot of spending. Any of those elements in those bills do you consider pro-growth?

Very few, actually. If your goal with an industrial policy was to put energy back in sectors of the American economy you wanted to do so, I would’ve thought, for example, that massive subsidies for basic research would do more for the chips industry than handing a bunch of money to companies that were already very, very profitable. I would’ve thought that identifying very narrow areas of national security and using public support there would be better than using a blunderbuss. And I would’ve thought, if I wanted to emphasize industrial policy, that I wouldn’t be putting childcare protections and other things in pieces of legislation. So frankly, it looks largely unserious.

Does that mean we shouldn’t have done anything? Well, no, I think we have learned something, which is, we need to really rebuild the research capacity of the country, the ability to translate changes in knowledge throughout the economy, and prepare people to take advantage of it. But those are fairly general ideas. They’re not the kind of things that we saw in the IRA, for example.

How far beyond pure, blue-sky, basic research do you think government should be involved in. Just that, because then it can creep into different kinds of applied research? Should you help startups fund demonstration projects of their new geothermal technology or something? Where do you draw that line in public policy?

I would draw clearly a “no” on the startups, but in the middle with applied research, I don’t see why we couldn’t have federally funded applied research centers around the country, much as we once had the initial funding of the land-grant colleges. So you could imagine, while basic research may be concentrated in a handful of very elite universities, you could imagine partnerships among several local universities in different areas with applied research centers there. That’s very different than the government saying which technologies are better. Who knows? But they could emerge, and that kind of support, I think, could be useful, because, remember, the land-grant colleges in their early days were very good at disseminating best practices in both manufacturing and agriculture, and I think we could be doing that in the contemporary economy, not with basic research, but with applied research centers.

We’ve had a bit of a productivity surge over the past year or so. We had a nice productivity surge in 2019. I don’t know if any of this has to do with generative AI, probably not yet, but do you think this is the start of something? How optimistic are you about productivity going forward?

I’m optimistic, but not just for the reasons you mentioned. The surge from first to second quarter this year was pretty extraordinary. I don’t think you can take something like that to the bank, but I think, going forward, the changes that could be possible from generative AI, and machine learning, and robotics are very, very robust for almost all kinds of firms. The trick will be to make sure that as many people as possible participate in those gains, otherwise they simply won’t be politically salient.

The kinds of policies that you recommend to help people to deal with a dynamic labor market, do you have confidence that we know how to do that? Do we know how to train people for new jobs? Do we know how to help people who maybe found a new job but it doesn’t pay them as much as what their old job did? That new kind of pro- work safety net—does more research need to be done with that, or do we know how to do that? Do we know how to train displaced workers, and we just need to implement those policies?

I think it depends on who the “we” is. So if you’re asking me, “Can the federal government set up one-size-fits-all programs to do that?” Absolutely not. And we do know those don’t work, but that doesn’t mean we have to stop. We could use individual support, old ideas like personal reemployment accounts that devolve to fund individuals. We could make sure that, in local communities, we support partnerships from community colleges and local businesses. There’s a lot that we could be doing.

At the level of the individual, in order to make people believe that change is okay, I do think we have to support their education, their training, and probably support work more. That is, a larger earned-income tax credit for low-wage workers. So we do know how to do these things, and let’s remember, in the American economy, the two big experiments, one which I already mentioned, the land-grant colleges, the other was the GI Bill after the Second World War. We do know how to do big things, and both of those were very general, they didn’t try to pick winners, they didn’t try to have government do everything. We can do this, we just have to want to.

And finally, deficits and debts: What is the risk to growth from very big and growing deficits?

I think there are a couple of risks: One obvious, and the other one maybe a little less obvious. The one that’s obvious is, we are going to have to pay for this. If we don’t pay it today, we’ll pay it tomorrow, so high levels of deficits mean higher future taxes or lower spending on things that we currently value. So in that sense, they’re very painful. Higher deficits can also be associated with government doing too much. Going back to the discussion we were talking about, deficit-funded industrial policy and things like that, very unclear that that’s going to pay for itself or pay for even part of it with potential productivity gains, so I think we have to be very careful.

And going forward, it’s not just the high deficits that we’re running right now. At least two things are going to come up in the next year or two: One is the extension, or not, of the Tax Cuts and Jobs Act, much of which is going to expire in the next year. And then, the need the country has for higher spending on national defense. Are we simply going to borrow to pay for all of that or do something else? I think at that point, markets may decide, “Huh, maybe I should take a closer look.”

I lied, I did have one more question: I think a lot of the long-term economic forecasts I see, whether it’s Wall Street or the Fed, say the US can grow long-term, maybe two percent, maybe a touch slower. How fast can we grow if everything goes right? AI is as big a deal as many people think it is, if we make sure talented people can still come here, if we don’t decide to put a protectionist wall around the entire country, can we grow as fast in the future as we have in the past?

I think we can grow much faster, and it requires doing the things you just mentioned. We are lucky that, even in a world where demographic challenges are globally a problem, they don’t have to be here. Many people want to live in the United States. Why should we be building a wall around the country when so many highly skilled and talented people want to work in this country? So that’s Point 1, that’s on the input side

And the second is productivity, the other piece of what you mentioned. I think that these new technologies will enable productivity growth to be faster. The question, as I said, is not so much about science or about economics, even, it’s about politics. Will we let them happen? If we will let wise immigration happen and let wise new technologies happen, yes, we can grow much faster.

The post A Pro-Growth Policy Agenda: My Long-Read Q&A with Glenn Hubbard appeared first on American Enterprise Institute – AEI.