Good Capitalism, Bad Capitalism & Economics of Growth & Prosperity | Robert Litan | Talks at Google

Thank you all for coming. It's my pleasure to introduce Robert Lydon. He's the Vice President of Research and Policy at the Kauffman Foundation. He's also affiliated with the Brookings institution for nearly 20 years, first as senior fellow and since 1996 as director of Economic Studies. During his time with Brookings, Bob authored or co authored more than 25 books and 200 articles for professional journals and magazines. He's had a distinguished career in public service. He served on the staff of the Council of economic advisers from 77 to 79, as deputy assistant attorney General and Antitrust Division of the Justice Department from 93 to 95, Associate Director of Office of Management of Budget from 95 to 96. He's been a consultant to the Treasury Department on financial policy issues, received his B.S. degree in economics from Wharton, his J.D. from Yale Law School, and a Master of Philosophy and PhD in Economics from Yale University. And he's here to talk about his new book, Good Capitalism, Bad Capitalism.

Bob thank you very much, Hal. I should also say by way of introduction, I've had the occasion in the past to actually work with Hal. You weren't formally consulting for Google then? I think he was. We both did a project for Cisco on the impact of the Internet, and it's going to be one of the subjects I'm going to address here in a minute, so let me plunge right into it. I'm going to briefly talk about the book, but also, as a segue, talk about my next book with one of my co authors, Carl Schramm, who's the president of our foundation. So I want to start with basically the fact that we're currently in a recession almost surely and probably going to experience the most significant downturn of probably your lifetime. And I'm just gauging, looking out at the audience, I see a lot of people here are 25 or below. You may not feel it, but I will tell you the rest of the country is feeling it. And certainly the further east you go, they're feeling it. This is probably going to be the worst economic downturn of the last 25 years. That's the bad news. The good news is that we're going to get out of this. We are going to recover. Economies always recover after recessions. And so the question I want to begin with is what kind of growth path are we going to return to? One thing you may not be aware of is that between 1973 and 1995, our economy grew at a very slow pace on a per capita basis. About one and a half percent a year. And then sometime around the middle 90s, we shot up to roughly a 3% growth rate per capita between middle 90s and about 2006. So in other words, we doubled our growth rate. And so the question or the challenge for the country is, when we do recover from the recession, are we going to go back to that old growth path or are we going to go to the one that we were on just before the recession? The 3% growth path, you may ask, what difference does it make? We'll just do some simple math calculations, compound interest, and I'll tell you exactly how much difference it makes. If you grow at 1.5% a year, your living standards double every 48 years. If you grow at 3%, they double every 24 years. Half the time over the course of a century. The difference between a 1.5% growth rate and a 3% growth rate is the difference between quadrupling per capita incomes and having incomes multiplied by 16 times. Extraordinary differences in levels of standard of living. Think about what happened, for example, between 1900 and 2000. Our economy then in that last century grew despite the ups and downs and obviously the depression. Notwithstanding all that, we grew at roughly 10 times. So that the average per capita income in the year 1900 was about $4,000 a person in $2,000. By the end of the century it was 40 some thousand dollars. 10 times. And that doesn't account for the fact that there are zillions of things that people had in 2000 that were not even known in 1900. Things like cars being routine, airplanes, Internet, computers, biotech, antibiotics, all kinds of medical treatment, lifespans being longer, all those things made life in 2000 so much easier than in 1900. So this makes a big difference how fast you grow on a long run basis. In fact, it's important in realizing now we're in the middle of a presidential debate where the candidates are talking about, well, how, how fast are we going to grow next year or the year following? What really matters is long term growth. And that's the issue that I want to address for you today. So how do we know, how can we tell whether we're going to go back to that high growth path or the low growth path? Well, implicit in the argument in our book is that the answer to that is to really delve more deeply into the structure of our economy, not into the econometrics. I don't know how many of you in the audience are economists.

Any.

We got one. How many majored in economics Undergrad, we've got a couple. The rest of you obviously are probably all techies, right? Well, the standard economist answer to why we went from one and a half to three is it that it became cheaper to make largely Moore's Law accelerated. That's one half the state story. And the other half of the story is that it became more user friendly. And you're in the user friendly business. Google obviously is one of the prime companies in the country that has made it so much more friendly to use. And in combination those two things, cheaper IT and easier to use has been argued, has led to this dramatic productivity improvement. It's what has flattened organizations, it's led to outsourcing all kinds of things that have saved money and have made our economy more productive. And that's what the Econometra show. And in fact, as I said, Hal and I contributed to that literature about seven years ago when we argued that the Internet by itself, abstracting from software and abstracting from hardware, the Internet by itself would increase growth somewhere between a quarter and a half a percent a year. But the thesis of our book, if you get around to reading, I think chapter, oh, I don't know, chapter eight, it's also implicit in chapter three. The thesis of our book is that you should look more deeply into the structure of the economy and not just stop with the standard explanation. That's it. Because if you think for one minute and ask yourself who was it? Who were all these companies that brought it to us that made it cheaper and also easier to use? Well, was IT IBM circa 1960? Answer no. Virtually all the companies that accomplished this IT revolution have been formed in the last 25 years. And you all know their names. Microsoft, Sun, Intel, Google, Oracle, the list goes on and on and on. So therefore that suggests to us that there is something about the nature of the firm generation, our economy, that is driving this productivity improvement. By the way, lights still on. I can't tell now it wasn't always this way. Again, you're too young to remember, but I sort of am because I grew up. I was born in 1950 at the end of World War II. Our economy did not look like the Microsofts and the Googles and the Intels of the world. Our economy was best characterized by John Galbraith's countervailing power. His thesis was, is that we had big firms coming out of World War II. We had big steel, big autos, they dominated the economy. Charlie Wilson was head of GM and uttered the famous phrase what's good for GM is what's good for the rest of the country. And Galbraith's whole theory in his book the New Industrial State and the Affluent Society, he argued that you needed big labor and big government to countervail the power of big firms. And that's what our economy grew on for roughly 25 years after World War II. And then we hit a bad patch in the middle 1970s. Some say it was the oil crisis. Other people said there were different things that may have caused us to slow down. But whatever it was, we hit a bad patch and we had that slow growth period. But the American economy morphed from the big firm managerial economy somewhere in the 1970s, 1980s, and morphed into the entrepreneurial capitalism we know today. And the thesis of our book is that what allowed the economy in the United States to grow much more rapidly was that transition, was that morphing and what other economies did not do. Economies that were predicted in the 1980s to surpass us, namely Western Europe and also Japan. Again, some of you are too young, but when in the 1980s the United States wasn't doing so well, there was a very famous book written by Ezra Vogel of the Harvard Business School, who said Japan was number one, and the people in America thought we had to copy Japan and become a planned economy. In 1992, the dean of the MIT Business School, Lester Thoreau, wrote a book called Head to Head, the thesis of which was that Europe was going to beat the United States, so we had to somehow copy Europe with its central planning in the eu. Thoreau was wrong. Vogel was wrong. The United States just zoomed ahead of both Europe and Japan starting in the mid-1990s. And. And we argued that the reason was, is that both of those economies were stuck in the managerial or big firm mentality that the United States used to have coming out of World War II. And what they did not do is they did not morph into the entrepreneurial capitalist economy that characterized the United States. And so the challenge for us going forward is how do we maintain the big Mo? All right. How do we maintain an entrepreneurial spirit that drove us into a higher growth path? Well, I'm going to suggest to you that there were a series of things that happened, and as I mentioned, each one, I want you to think about what it's like now in the current environment and whether or not things augur well or augur poorly for each of us, for each of these things as we move forward. First, number one, financing the rise of the venture capital industry. It helped make a lot of these companies. Possible. What was it that did it? In 1974, Congress passed a law called ERISA. Not many of you may know it. All right, It's a very important law because apart from setting standards for pensions, what it did is it allowed pension funds and insurance companies and other institutional investors to invest in venture capital. And what that did was enabled Sandhill Road to go to the big money places and have basically have big money dumped on them so that they could invest in new companies. That was a change in the law that changed the world. Now look ahead, let's think about financing in the United States today. We've had tremendous changes since the 1970s, but there have been a number of reports that have come out from Washington in the last year which have pointed out how the US capital markets are losing ground relative to Europe and specifically London. There are a lot of reasons for this, but I will put my finger on two of them. I think that Sarbanes Oxley has been excessively costly. Maybe it hasn't hurt Google, but it's hurt a lot of small and mid sized firms that want to go public. And the second thing that I argue that has had an effect is the existence of shareholder litigation. Typically what happens when stock prices fall is that not typically, but often what happens when prices fall and plaintiffs lawyers can figure out that maybe there was a failed disclosure. Lawsuits happen and we end up with shareholders claiming that they were somehow misled and that it's led to an incredible rise in shareholder litigation over the last 10 years. Now this doesn't necessarily deter entrepreneurs at the beginning when they start, but what I do think it does do is that it does affect the exit decision. So that imagine if you're Google six years before, before the IPO and you're doing it in this current environment. And the question is, do you go IPO or do you sell out to Microsoft or to any one of the other big companies, IBM or any of the companies that Google theoretically could have sold to Yahoo. Yeah, perfect example. Well, I would argue that that decision, IPO versus sellout would be a lot more difficult today than it was four or five years ago. And I think for the economy as a whole. Again, this is speculation. I can't prove it. But I worry that today the future Googles of the world are too. It's too tempting to sell out rather than go public. Because if you go public, not only do you have the cost of Sarbanes Oxley, but you then inherit the possibility that if things go wrong, you're going to suffer a shareholder lawsuit and it's just a lot easier to go ahead and sell out. I can't speculate, for example, why the people from YouTube sold out to you versus going public. But I'll bet you that was a factor in their minds. I'll bet you it was a factor in their minds why Skype sold out rather than went public. And there are probably many other, other examples of why companies that you either are acquiring now or whether it's Microsoft or any of the other companies, Intel, Cisco or whatever, why companies that they buy would rather exit by selling rather than going ipo. I think this is actually not good for the economy in the long run. I think you're likely to get less entrepreneurial growth by selling out than if you go public. That's just a speculation, but I will point that the environment is different than, let's say it was 30 years ago. Second, we strengthened intellectual property laws. Now that's good because it gives people incentives to innovate. But I have to argue that today IP is actually too strong that we have now patent trolls and other people that are suing people claiming patent infringement. And I argue that, and I'm not the only one. There are a number of other academics who have argued that patents are too easy to get. So that if you're a new company, you're facing a minefield of potential litigation of people stopping you from exploiting your invention. I think we have to do something about scaling back intellectual property protection so that we only grant patents and IP to truly useful and novel inventions. Number three, globalization. It has certainly helped in this world that we've had globalization. Outsourcing, not contrary to the political environment, is actually a good thing. If you're a new company, you're able to outsource a lot of your product development, your R and D to India. You're going to be able to go market a lot more quickly than in a world where you have to do everything here at home. And so I argue and I believe that globalization is actually a spur to entrepreneurial innovation. It makes it cheaper to start. It also offers you a bigger market. Yet look at the environment that we have today. Politically, globalization is a bad word. It's a lot of letters, but it's become a four letter word. Globalization has become sort of the whipping boy of campaigns in both parties, but especially in the Democratic Party, when in fact we know that the major reason for dislocation and change in our economy is the continued rise of technology and the accelerating pace of technology. Technological change, that's the reason, it's not nafta, it's not trade agreements, it's not globalization. So I worry that the environment for globalization is not what it was 20 or 30 years ago. Immigration. Here's an untold story. Kaufman did a study, or we actually financed a study by a researcher named Vivek Wadhwa. He's at Duke University and also at Harvard. And we asked him to go back and look at all the high tech companies that have been successful in the last 10 years and asked the following question. What share of them were founded or co founded by an immigrant? And by the way, this is a question that all of you should know because Google's in that database. All right? Because of Sergey Brin, 25% of successful high tech companies were founded or co founded by an immigrant in the last 10 years. Far out of proportion to the share of immigrants that we have in our population. Is anybody paying any attention to this? No. The immigration debate we have today is all about low skilled labor. Meanwhile, we have a million workers right now on H1B visas and the clock is ticking with many of those workers having to go back. And if we have to force our H1B entrance back home rather than by choice. But if we have to send them, we are basically sending back the labor pool that disproportionately founds new companies and generates new jobs in the United States. This is crazy. This is crazy. But clearly the fact that we were so open to immigrants in the last 20 or 30 years was what helped fuel the rise of it. You've seen the statistics. Hal has colleague, for example, at Berkeley, a former colleague at Berkeley named Anneliese Saxenian, who's written about the tremendous contribution that immigrants from China and India have made here in California to the rise of new companies and yet the environment. And by the way, if you ask your typical immigrant, why did you come to the United States? I mean, I'm talking about the immigrants who founded these businesses. Why did you come? I mean, Sergei didn't come originally to come to the United States to found Google. He came here to study. Right? Well, in fact, we look at the data and well over half of the immigrants who founded these companies, that's the reason they came to study. Yet you look, post 9 11, immigration has become much more difficult. The smart kids in the world now increasingly are going to Europe or to Australia or to other countries and not coming to the United States. And so we, we actually are losing potential future Googles by having a more restrictive immigration policy. This is something that's not even on the political radar right now. And it's something, in my view that's very important. I will go on. I want to actually get to the Q and A. I'll just mention two others and then I'll go to some of the fixes that I want to. I want to address. I think the fact that we've had lower taxes over the last, I don't know, 30 years, the Reagan revolution, lowering marginal income tax rates and then successive reductions in marginal income tax rates, I think on balance, has encouraged entrepreneurship. There's not hard proof of this, but at least there's some indication in economic data. It also makes more sense. If you can keep more of what you earn, it's more likely that you'll innovate. Another factor which I think at least has been neutral to the rise of entrepreneurship, but I'm now more worried about the current environment is K through 12 education. If you think about the founders who've been so successful, people like Steve Jobs, Bill Gates, Michael Dell, every one of these individuals, by the way, they didn't complete college, but at least they went through an educational system that did not kill off their creative spirit. What I worry about today, in a world of no Child Left behind, where we're drilling and killing all these kids with just testing after one after the other, I'm worried that the curriculum in our schools is anti creativity. It's something we won't know probably for five or ten years, but it's something I worry about now. I'm not dismissing the fact that no Child Left behind has probably improved the test score performance of many kids in disadvantaged areas. And so I think the challenge for policy going ahead is finding a way we can tweak the law so that we don't drive out the creativity that actually spawns the future of Bill Gates and Steve Jobs and Michael Dell's of the world. Final point. It wasn't a big factor 25 years ago, but it is today. If I utter the words job lock, will people know what I mean? Probably not what job lock is, at least as we define it. It's a situation you find yourself in because of the health care insurance situation in the United States. Now, maybe you guys don't face it because you've done well here at Google. And if you were to leave Google, you wouldn't worry, for example, that you wouldn't be able to find health insurance. But you take your average employee at, let's say a non Google company. Take at IBM or GE or any other big company the individuals, let's say in the 40 to 45 year old age bracket. And by the way, one of the things we find at Kauffman is that some of the most successful entrepreneurs are not the kids. They're not the kids 20 or 25. They're people that are 40 or 45 who had enough industry experience to know that there's a market niche that they can fill. But if they are in an existing company on an employer provided health care plan, they know that if they leave, they're going to have to buy health insurance on their own. And I would assert that who over 40 does not have a preexisting condition somewhere in their health care background. And yet if you have a pre existing condition and you try to get insurance, good luck. Now it's great. If you're healthy, there is a healthy market out there for insurance on the individual market. But if you have a pre existing condition, you're in trouble. And so what I would argue is that the current environment, the current environment is not conducive to entrepreneurs coming from big companies where in fact we see that a lot of people coming from big companies could be very successful. So I've really shown you a number of areas that have been related to the rise of the entrepreneurial economy are now actually the arrows are pointing the other way. And I'm worried to the point where I am going to write with my co author Carl Schramm, one of the authors of this book. We're about to start another book focusing on the long run growth path of the United States over the next 10, 20, 50, 100 years. And we're going to talk about each of these areas and try to recommend public policies to get those arrows pointing the right way rather than the wrong way. And so I want to conclude with a few controversial ideas for what I would do to move the needle in the other direction. Just a few number one immigrants. Let's go back to those high skilled immigrants. We need more of them rather than less of them. The debate, for example, currently on high skilled is limited to H1B visas. Bill Gates testified before Congress this week, I think it was, and he basically said, please, whatever you do, lift the ceiling on H1B visas, which I think is now 65,000 people a year, which is really a small number. We should think much more boldly than that. Shouldn't stop at H1BS. H1BS are temporary visas. We ought to think about having permanent work visas for anyone who comes to this country and gets a science, technology, engineering, or math degree, they ought to be able to work here for the rest of their lives. They want to go back, that's fine. But it is crazy for us to be in a position where even we're going to say, you can only stay here for six years and then you have to go back. There ought to be an incentive to stay here to start new businesses, continue working here. This, to me, is one of the most important things we could do. Of all the policy measures that I could recommend, it's the first thing. Second thing, why are people so nervous and so anxious about trade right now? It's cause they're worried about losing their job. They're worried about losing their health insurance. And so I would argue that two of the things that we need to do is we do need to address the health care crisis in this country. I'm not going to get into the argument, at least in this prepared talk, about whether the McCain plan is better than the Obama plan or the Clinton plan. But certainly we need to do something to address this preexisting condition problem so that people will not feel so fearful about leaving companies. Plus, there's got to be a way for you to get health insurance if you lose your job so that people aren't so fearful. There's something else that can be done. Actually, McCain is talking about it a lot on the campaign trail. It's something called wage insurance. It's an idea that I've written about for probably 20 years. And the idea is very simple. If you lose your job and you have to go to a new job and you suffer a wage loss, why shouldn't the government compensate you for a limited period of time, a portion of the loss in income that you have? So, for example, let's say you were making 50, you go to work at a new job, you're making 40, you lose 10,000, the government could pay you half the difference, $5,000 a year for a couple of years, as soon as you get the new job. And that's the critical thing. So you'd have an incentive to go find a new job even if you had to take a pay cut. But in essence, the government would share your temporary downward mobility and would invest in affecting your training and as you get that new job. And so I think if the government did something to cushion the downward mobility on wages and they did something on health insurance, we'd see a lot of that anxiety that we see now in the workplace disappear. A lot of the forces for protection that would subside and we would return to the kind of open, outward, globalized economy which is most conducive for growth and most conducive for entrepreneurship. I think I've talked to you about health care. One final point on healthcare. If you go to one website, and I encourage all of you to do this, go to cbo.gov congressionalbudgetoffice.gov and there go look on that website under long term budget projections. And this is something that I'm going to tell you that is probably one of the greatest impediments to growth that this economy faces. And it's something that should scare a lot of you younger people in the audience. There's a chart there that shows the long run budget situation in the United States, assuming current law. I don't know how many of you have seen this chart. I call it the scary chart, all right, because it goes out 75 years. And by the way, think tanks on the right and the left, they all agree on the validity of this chart. So I don't think there's any question that this is depicting reality. And what the chart shows basically is that spending today is around 20% of GDP. Taxes today are about 18%, which is why we have a deficit of around 2%. But starting probably in the next couple of years and then going monotonically upward for the next 75 years, the spending graph starts rising and goes to almost 40% of GDP. In other words, doubles in the next 75 years. And you should ask, why should it do this? What's driving government spending? Answer one word, no.

Entitlement.

Entitlement. But what? Entitlement? Social Security. Social Security is a minor part of the problem. Medicare and Medicaid. Medicare and Medicaid are driving the cost trends to the point where we will be in a non sustainable economic situation. If we want to continue providing these benefits, we're going to have to double our taxes, which is politically a non starter. Conversely, if we want to avoid raising taxes, we're going to have to eviscerate these programs. Also a non starter third approach, of course, is to accept it and just have a deficit of 15, 20% of GDP and we can look like Argentina. And the run from the dollar that you now see is like a cakewalk compared to what you would see if we run a deficit of that magnitude. Another approach is do a half and half, raise taxes, somewhat cut future benefits. And by the way, when I say future benefits, I mean the benefits for most of you in this room because you're all under 50 and so you would not have the Kind of Medicare benefits that some of us over 50 or 55 would have. By the way, you laugh. This is exactly what we're headed toward. There's only one other way out of this disaster, fiscal disaster, and that is to find a way to reduce the cost escalation in health care. Because the thing that's driving that number up, only about 30% of that cost increase is demographic. The rest is the fact that health care rises at roughly 4 percentage points faster than inflation has been for the last 20 years and is projected to continue to do that. And so the key, I would argue, is to find a public policy environment that will be conducive to lowering that health care escalation. And by the way, just having price controls is not going to do it. If you just simply start saying, I'm not going to pay doctors and I'm going to slam down on their wages, all right, you'll find that in five or ten years we won't have people being doctors. This is not a long run solution. The ultimate solution. I go back to the thesis of our book. The ultimate solution is we need an entrepreneurial fix. We need the equivalent of a Costco or a Target or heaven forsake the word, a Walmart. We need a Walmart of health care. I'm serious. We need entrepreneurial companies to come in and find a way to save us money. Now, you guys here at Google and also at Microsoft are working on one small piece of this puzzle. That's the solving the healthcare records problem, all right, which is contributing to costs. It's a hassle for patients. I was talking to several people here before. I can't wait till this goes online because I actually think this will be a tremendous public service, all right, as people begin to trust this particular site. But electronifying all the healthcare records is only going to be a small piece of the cost puzzle. Ultimately, you're going to have to find a way to deliver health care more cheaply. Now, I don't have any magic answers to this, but I will tell you a couple components to it and then we can go to Q and A, all right? Number one, 80% of all healthcare costs in this country are for chronic disease. So that these are continuing disease, whether it's cancer infusions or regular monitoring for heart patients, diabetes, all this money is for chronic disease. And by the way, a small drop of that is for diagnosis. You go to the doctor, they run a bunch of tests, and then you know what you've got. The rest of all the money is spent Just on a routine basis. If you think about it, it's a factory. And so the factory part of delivering health care has got to be what is susceptible to a Walmart, Target or Costco in principle? All right? Because it's regular, it's routine. And the question you should ask is, well, why don't we have any Walmart, Costcos or Targets to deliver this kind of service? Answer, because we have health insurance. We have health insurance that covers almost everything except your copay of 15 bucks. People don't have any incentive to shop. Plus, we have inadequate information about prices. We have inadequate information about quality. So even if you were on the hook for, let's say, the first five or ten thousand dollars of your health care costs, you wouldn't know who to trust and where to go. And so until we can fix these problems of making health care markets look like every other market in America, where people can go to Consumer Reports and they can check what the quality is and they know what the price is so that there's a sticker. I mean, how many of you go to a doctor and have ever seen a sticker of prices on the wall? All right, you don't see that. But if health care were like every other market where at least some of the costs were born out of pocket and we had price and quality information, it's conceivable we can get an entrepreneurial solution to this health care cost escalation. Because I will tell you, if we don't, this is the greatest long run economic challenge that confronts this society and this economy, bar none. It's greater than anything you've heard about in the campaign. It swamps everything. If we cannot solve the long term fiscal situation, the rest is irrelevant. So I will close on at least a semi optimistic note. And that is, we've surmounted these challenges before. We have hundreds of years of history. We've defeated all kinds of enemies. We have prevailed. But these kinds of challenges were going to have to prevail. And if we want the entrepreneurial economy of the future to continue to deliver the improvements in living standards that we've enjoyed in the past. And I'd be happy to take your questions. Thank you. Yes. Yeah, I'll repeat the question. If you can't do it, I'll admit.

To a certain reflexive libertarianism that I approach these things with. But wouldn't one of the ways to more remake the health care economy in the United States, similar to other markets, wouldn't it be to just eliminate the tax deductibility of insurance for health insurance by corporations.

The question, you all heard it, but I think I'm supposed to repeat it for the camera. Wouldn't be, wouldn't. The obvious thing to do on the health care front is to eliminate the tax deductibility of health care insurance. There is no question that we're in this fix where everyone depends on employer provided health care because employers have a tax deduction. And by the way, most of you know how this came about. Do you know? You know, It's World War II and wage and price controls. And during World War II, companies found that one way to get around wage controls was to offer some of their workers health insurance. And they got a ruling from the IRS in the 1940s that said that when they do that they could get a tax deduction for it. And then after the end of World War II, labor unions started pressing demands for employer provided health insurance. And the rest is history. And that's how we have the system. So your question is, why don't we get rid of the tax deduction and that would solve the problem. In principle we could do that and then use some of the savings to give to lower income people so that we would basically have health insurance for everyone. All right. In principle. And I have to admit I am intellectually attracted to it. The problem is there's too much water over the dam. I think political. It would be impossible to take away the current deduction. That is why the President and actually McCain support a variation of your idea which is to keep the tax deduction that we have now, but then give the equivalent of it to self employed people. And that proposal is now in Congress. It's probably not going to go anywhere because we're in election cycle. But I will tell you, while that's a very encouraging idea or an interesting idea, it still leaves out lower income people who are not self employed. And so you still have the problem of what you're going to do with the residual people who are not insured. But clearly in my view, that plan would be an improvement over what we've got now and also would help address the disincentives that entrepreneurs have because they can't deduct health insurance when they form their own business. Yes.

I just wanted to point out, by the way, that there are some of us here who are over 50 years old. You don't look that I'm well preserved, you know, too much drinking or something. I don't know. Yeah, yeah. Mike, I think you alluded to it somewhat. I'm actually, I'm a research scientist here and I'm working on something involving inequality in advertising markets. And I've tried to read a lot of the economics literature about the impact of inequality upon growth. And it seems to be a very mixed bag. And I wonder if you have any opinion on whether more inequality would be harmful to growth and in particular, what do you think will happen to the tax rates and how will that affect growth?

The question is, what's the impact relation between inequality and growth? And in fact, can inequality hamper growth? I'm worrying a lot about that issue. Let me say several things. Number one, we've had periods in the post war period where actually we've grown very rapidly and we have not had worsening inequality. Example 1948-73, we grew around 2.5% a year. All income groups shared in the growth in the 90s, roughly between 93 and 2000, we had rapid growth and we did not get worsening income inequality. Now, it is true that since then inequality appears to have worsened. We've maintained rapid growth. And people, some people say, look, if you have an entrepreneurial economy, it means that the really successful entrepreneurs are going to get super rich, right? They may drive growth for the rest of the economy, but they may get all the benefit. And the question then arises, does that somehow hurt growth? Well, it can hurt growth. I would argue, if politically there's a backlash against the system that fostered the entrepreneurs, so that if we get excessive regulation or we get excessive taxation at the top, you can actually hamper growth by reducing incentives for entrepreneurial success. So yes, I worry that excessive inequality can do that. However, what I think personally and Carl and I are going to argue this in our next book, I think most Americans, more than inequality, what they care about more than inequality is mobility. All right? So if you ask the average person, do they care that Larry Page and Sergey Brin made a lot of money, all right, or do they care that their own circumstances improve or that at least their kids be able to do better than them? I think most people will not begrudge the fact that Larry and Sergey have done very well or that Bill Gates or Steve Jobs have done very well because people see the tangible benefit of what they've delivered to the rest of the economy. What will bother people is if they feel they can't improve their station of life or their kids will be worse off than them. And if you look at public opinion polls right now, what you see is a lot of pessimism around the country of people feeling their kids will not do as well as them. And that's what's driving, I think, a lot of the populist backlash that we see in the country. So in that sense, it's the lack of mobility more than the inequality that I think could be a threat to growth. And it's not just the upper mobility, it's the fear of downward mobility because that's what really scares people. And if you feel that you're going to fall down the ladder, that's what lead people to embrace protectionism because they falsely believe that somehow if you're going to stop goods coming in from X country, that you'll be able to prevent that downward liability. I would prefer that politicians. This just happens to be a soapbox of mine. Bill Clinton, when he campaigned For President in 92, he went to some of the hard hit parts of the country and he said to them, he said, look, the government can't protect you against losing your job. What's the job of the government to do is make that transition easier in case you do lose the job. And what he was pointing out is the technology is going to cause you to lose your job. Or if your plant moves, it could move to Texas. Forget Mexico, if we can move to Georgia, it doesn't matter. Trade is fundamentally not a major factor in job mobility or in downward mobility. It's the changing dynamics of the economy. And it's the job of the government to grease the skids and to make it easier for people to transition from one place to another. Unfortunately, we don't see that kind of rhetoric today. And I think one of the reasons, perhaps why is that maybe there are more people that are fearful of going downward than there were in 92. And that's why we see the, you know, the populism that's a little bit.

More on the subject of trade.

Actually.

You notice that even though all the Democratic candidates are bashing NAFTA and free trade agreements, at least Clinton and Obama are pretty careful not to say I'm going to withdraw from nafta. They're real careful to say, well, we're going to have better labor protections and better environmental protections. And my question for you is, do you think that even with a Democratic president, nothing will change very much except we'll have slightly more labor and environmental provisions in the free trade agreements that get negotiated anyway.

Well, actually, I'm a pessimist on trade. No matter who wins the election. I think the age of having trade deals with lots more countries is coming to a stop. I mean, even Senator Clinton has talked about having a timeout on trade. And I think that more trade deals are in trouble. Certainly the grand multilateral trade deals that we used to have, they're grinding to a halt. Politicians in both parties, it's not just Democrats, it's Republicans too, are nervous about trade. And so even if McCain, let's say, becomes president, and McCain is clearly a free trader, he's going to face a Congress, most likely, that is Democratic, and they're not going to be enthusiastic about giving him trade authority. And so I think the best we can hope for on the trade front is that we don't go backwards the next four years. And what I'm hopeful for is that if we can shore up the safety net in the meantime, if we can get health insurance somehow fixed or stabilized, if we could provide a program that would insulate people against having their wages fall, maybe people will feel more comfortable, less anxious, and maybe four or six years from now we can resume the more forward looking trade agenda. But I think we're into time outland for the foreseeable future. Yeah.

Toward the beginning of your talk, you said that the increased GDP growth between 95 and now was due to entrepreneurial capitalism. But you also dated that, that from about the early 1970s when growth slowed down. How did those hold together?

Well, what I was arguing, I think the morphing process actually started in the 70s, continued in the 80s, and it didn't really manifest itself until the 90s. In other words, there are lags. If you think about it, I mean, Apple started in the late 70s. All right, Microsoft started in late 70s, early 80s. They didn't begin to have really major impacts on the workplace until late 80s, early 90s. And you know, in 19, what was it, 87 or 88? The famous economist Robert Sola from MIT said you can see the effects of the computer revolution everywhere except the productivity statistics. And he made that statement, I believe, in the 1980s, late 1980s. And his statement was really uttered probably four or five years before all hell broke loose. And then corporate America changed radically. And, and what it did, I argue the reason why it did change is that at that point we got easy to use word, Easy to use PowerPoint, Excel, and then Google came along later and you're able to do things even without relying on Microsoft, I'm sure, to great applause. And the point is that there are lags in the system. And once all this stuff happened, it was sort of like electricity too. When electricity was, was invented, there was a lag for probably 10 or 20 years. And then once a lot of the plants got electrified, we got tremendous productivity improvement. It's the same story.

Hi, going back to trade for a moment. Obama, Clinton, they all talk about these stronger environmental protections, stronger labor protections. What's the impact economically with trading with a country that doesn't have any labor protections, doesn't have any protections for anything? There are, from my view, some negative externalities on their end. But on our end, is there any benefit to not trading with countries until they get these environmental and labor protections?

All right, I'm going to say something very non PC maybe we'll have to edit it out of the, out of the YouTube presentation. I think if you were to ask most economists about the labor environmental protection business, I think they would tell you it's there for political convenience and nothing else. All right. The fact is, is that the demand for labor and environmental protection is what economists would call a luxury good. In other words, the richer you get, the more you want of it. But at low levels of subsistence, people care about living, about just making enough ends meet. And at some point, and there's some suggestion that maybe whether it's $6,000 or $8,000 per capita income, people start caring about the air that they breathe and they start caring more about labor rights and so forth. And so at some point, people do care about these things. But what we in the United States are doing and other countries that may be doing it too, by insisting that other countries have labor environmental conditions, or at least standards that are somewhat like ours, although it's never clear when they talk about these standards. Are they First World standards, are they Third World standards? It's sort of, it's very vague. But by our insisting on this, what in essence we're doing is that we're saying we're not going to do a trade deal with you until you become richer. And in effect, we're cutting off our noses by our face. We are basically denying ourselves the opportunity to bring in cheaper stuff, which of course, is the whole point of it. The, the whole idea of labor and environmental standards, at least to my mind, was introduced by the labor movement, and the labor movement has become hostile to trade. Labor movement, by the way, historically was not. Labor was very pro trade. In the 1960s, as our economy had more difficulty, or at least found it more import sensitive, over the next several decades, labor turned against trade. And labor has found a very politically easy thing to do. Rather than say we're opposed to all trade, they say, no, we're only going to negotiate with people that have labor and environmental conditions. Now, as a practical matter, that does mean telling the poorer countries of the world, we're not going to trade with you or we're not going to make deals with them. Make no mistake about it, we are hurting other countries of the world when we tell this, when we tell them this. All right, but it doesn't sound politically bad to say, well, they ought to have standards just like ours, whereas it would if labor just came out and said, no, we just want to be protectionist. All right, so this is, I think, a marriage of political convenience. It is not economically justified. We're limiting our opportunities for bringing in cheaper materials. And that's just the way it's worked out. And I think now it's become conventional wisdom.

The graphic on the Congressional Budget Office for the long term outlook noted that the analysis was independent of costs of servicing the debt. How does the rising debt stack up as a threat compared to the others?

Well, actually, I think one of the graphs that I've seen and one of the scenarios actually factors in debt service. And there may be another chart that doesn't, but there are charts there that do. And that contributes to the escalation of the cost. Obviously, because you're having to borrow the money every year, it just makes it worse, that's all. Yeah.

Speaking of conventional wisdom, you know, your comment about how you get to keep more of your money is likely to create an incentive for entrepreneurism. But I've always wondered if the opposite argument can't be made as well. If, you know, if there's a social safety net, there's more likely to be risk taking behavior. If I'm in a society where the only alternative to a failed corporation is debtor's prison, I'd be far less likely to strike out on my own.

Yeah. So the question is, does a safety net foster entrepreneurship just like lower tax rates? And the answer is yes, they can both be true. All right. In a world where your marginal tax rate is 90%, I would argue that's not a conducive to entrepreneurship. All right. The government's taken 90 cents out of every dollar that you're making. You're probably not going to get as much entrepreneurship. I also agree with you, though, that if there is a floor that you can't fall below, you're going to more likely be able to. You're going to be more willing to take risks. And so, yes, I think we need both. They're not inconsistent with each other.

Yes.

Hi. You spoke about intellectual property laws and how basically they've become incredibly deficient or inefficient and also very costly, I would imagine, as a result. And you proposed, like, truly novel inventions. Would you care to elaborate? Thank you.

Yeah. Well, actually, the standard for getting a patent is something has to be really new. It can't be obvious. Now, the Supreme Court last year issued a decision which basically says that the test for determining obviousness is now much tougher. So legally, it's not as easy to get a patent as it used to be. But actually, I think one of the more innovative solutions to this obviousness business is there's an experiment called peer to peer patenting. I don't know. Does anybody know about this experiment? I know Hal does. There are a couple of other people. And the idea of it is very simple and they've tried it. I think IBM is one of the funders and there are a number of other companies who are doing it. It's a very clever idea. The idea is that when you make a patent application, the patent examiner, who may not be familiar with your application, what they can do is establish a wiki for people from anyone, can then look at the patent application and they can get input from knowledgeable people, not just at the patent office, about whether or not this invention is truly novel. So it's harnessing the power and the knowledge of the world rather than just what's in the patent examiner's head. And I think this may be a technological solution to solving the obviousness problem, because one of the great problems that we have now in the patent office is these people cannot know everything, no matter how much they can search. Even if they can Google everything, they may not be able to have the facility to know how really new something is. And so the incentive in the patent office too often is just to simply grant the patent. And whereas if you had a wiki and you had bombardment of a lot of information and people said, look, this stuff isn't new, it's already been done. The examiner would have a stiffer spine in turning down a patent and therefore screen out a lot of unworthy patents. So this is an example of how technology actually may be better than the law in fixing a particular problem.

Yes, that'd actually be Google sites, not wiki.

Oh, yeah, I guess I'm not supposed to use that word. Well, that's life. Okay.

School vouchers.

Yeah, school vouchers. What's my view on school vouchers? Okay, so in an ideal world, I'd be all four. School vouchers. All right. I think it's a tragedy that we tell poor kids in a particular neighborhood you have to go to a local school. It's terrible. All right. I think it's outrageous. Politically, though, vouchers, when they've been put to votes in jurisdiction after jurisdiction, lose. They do, they do. They just do. I mean, I would like to see that they would win, but when they've been on the ballot, they've lost. Now, there is a second cousin to vouchers, charter schools. All right? And so it's entrepreneurship and education, which is providing choice. And we at Coffman, and I'm personally, we're all four charter schools. We think that's great. And the only problem is, is that in a lot of states and localities, you know, charter schools are public schools. But what the local school bureaucracy does, it does not compensate those schools the same dollar value as other public schools. And so charter schools do face financial disadvantages in many places relative to other schools. So I think charter schools are a good, second best solution to giving people choice. Yes.

You've mentioned a little bit about how regulation can dampen down the drive for innovation. Do you have any thoughts on kind of maybe the Bill Joyous scenarios? Like we're at a particular point in the technology curve where it's getting quite dangerous and if you don't have any regulations, then you can create something that we don't really have a good sense of how to control and how to use, and we could really do a lot of damage to ourselves.

So do I worry about Bill Joy's scenario that we get the mad scientists that create something and we don't have regulation and the invention can actually do damage to us?

Yeah. Like something in biotech would be very.

Easy to imagine that it's the Frankenstein scenario. Right.

It's far from sci fi now, especially for biotech.

Right. And the short answer is I don't know enough to give you a good answer to it. But the problem is, is that on an ex ante basis or prophylactically, it's hard to regulate against something that you don't know is going to do something good or bad. Now, in Europe, they have something called a precautionary principle, which is you do try to anticipate all the bad things. And so what you do is basically you have such tough regulation that you prevent a lot of stuff from coming to the market. In the United States, we have a different attitude. We wait generally to see what the consequences of things are if they turn out to have bad things. Like in the case of automobiles, we Find out that, you know, they can kill people and so forth. We do it after the fact. Now, we don't do it with drugs. With drugs. We do clinical trials, and if we see that something is bad, we stop it. My view, though, on drug regulation is that we regulate both for efficacy and for safety. And in order for a drug to hit the market, we have to say at least the FDA has to be satisfied that it's both efficacious and it's safe and it's relaxed. Those, in the case of AIDS drugs, because people are so desperate for the drug, they want to see if it's going to work. And I argue that if we're doing it for AIDS drugs, we ought to do it for all other kind of drugs as long as we're satisfied that the thing is relatively safe by the current conventional standards. Let's let the market figure out whether or not things are efficacious or not, and let's let it happen. But that's not the way we do things right now. Yes.

On the topic of health care, you mentioned that it's been rising at 4% over inflation for the last several decades.

Yeah, yeah.

Why? And you mentioned that people don't have incentive to shop around. But wouldn't insurance companies have a big incentive in driving down their costs and trying to get the best, cheapest drugs and market plays out that way?

Yeah. Well, okay. So he's asked the $64,000 question. Why does health care costs go up so rapidly? Most health care economists will tell you one word, technology. All right? If you marry technology with insurance, then what you get is that it becomes very, very easily. If the doctor, if you're in the office and you have something wrong with you, the doctor, knowing that they're going to get reimbursed, will run an MRI. 20 years ago, he didn't have an MRI. Today has an MRI. Very simple. He knows he gets it reimbursed. When there's MRI 2 or the next fanciest technology, he'll do the same thing, or she'll do the same thing. It's because of the marriage of the technology with the insurance. And so I'm not saying that we shouldn't have technological advance, but it's just an inherent feature of our system. Now, would you say, would the insurance companies, do they care about cost? Yes, they do. But then they tried a solution to this and they found through public backlash that people don't like it. It's HMOs, right. Standard plans. They thought that HMOs would control costs. And yet what we found is that HMOs that deny coverage or that tell people, no, you can't have the MRI or the operation or whatever, the concern save your life. That leads to movies where HMOs become bad guys. All right? And people don't like HMOs. So now the economy is shifting away from HMOs toward preferred provider organizations or PPOs, where people have more choice. But when you have more choice, you have less cost control. So we haven't found the right institutional answer to this. This is one of the hardest problems that I know of in economics. Yes.

So this will be the last question.

The MRI is a diagnostic tool, which you said was a very small amount of the total cost.

Yes.

So how does technology mean that the other 80%, you said, how does technology cause that to increase as fast as it increases?

Well, it's not only in diagnosis but also in treatment. So you get new drugs and you get devices and procedures and so forth that are, that are compensated. And all I'm saying is one of the things that we don't know, for example, and it comes out, there are studies all the time that show that we do certain procedures that cost lots and lots of money, yet they may not have the kind of impact that we expect. Perfect example are heart bypass operations. Alright, Studies come out, they're very, very expensive. And yet studies come out and show that in a lot of patients they don't make that much difference. So you can multiply that example over and over again. The key point being back on treatment is that right now there is no real incentive for a company to go into the business and become a Costco of healthcare because people are not going to shop around and there is a lack of information of price and quality. And until that situation has changed, you're not going to get the entrepreneurial solution. So we're facing that kind of draconian future that I'm talking to you and that all a lot of you in the room are going to face. Let's hope that we do better. And thanks a lot for having me here.