What's Wrong With The American Economy?

Full transcript below:

Peter Robinson: What's wrong with the American economy? On Uncommon Knowledge today, a man who actually knows. The grumpy economist, John Cochrane. Uncommon Knowledge, now.

(Intro)

Welcome to Uncommon Knowledge. I'm Peter Robinson. John Cochrane earned his bachelor's degree in physics from MIT and a doctorate in economics from the University of California at Berkeley. He has served on the faculties of the University of Chicago and UCLA. Now a fellow at the Hoover Institution at Stanford,  Cochrane publishes often in the Wall Street Journal and blogs as The Grumpy Economist. John, welcome.

Grump? There's nothing grumpy about you. Why do you call your blog The Grumpy Economist?

John Cochrane: My kids gave me that name after one more diatribe over morning coffee over the latest outrage in the newspaper.

All right. All right. Segment one : growth. John Cochrane in the Wall Street Journal: "From 1950 to 2000, the US economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate: 1.76%. America's foremost economic problem is sclerotic growth." Foremost problem is not the distribution of wealth. It's growth. Why is that?

What we care about is the well-being of the average American, and when you compound growth a couple of decades or if you don't, nothing adds up to the effects of long-run growth. Many people look back on the 1950s with some sort of nostalgia, but as a matter of fact the average American is at least three times better off now than back then. There are all sorts of problems in the American economy, but none of them add up to doubling or halving the welfare of the average American over the next generation. Yes, growth is the problem.

That's the difference between the growth we're experiencing now and the growth we used to experience. In one generation, you can double the standard of living, roughly?

Exactly, or not.

Or not. Or not.

That compounds all the other problems that you think of. For example, how are we going to pay for the national debt? If the economy doubles in size, it'll be easy. If it doesn't, it'll be much, much harder.

Got it. Now, simple question, I'm sure, John. Why has the economy slowed down? What happened in 2000?

Not just in 2000. I think the consensus of economists is this has been a gradual thing over the last couple of decades. I have to be honest: there are different views. One view is that we've run out of ideas. There's just nothing new to do anymore. Growth in the end comes from productivity. New ideas, new companies, new processes, new ways of doing things. Each worker producing more per hour. That's it. That's where growth comes from. Those new ideas have to get embodied into new companies. They have to become reality, not just sit in patent offices.

That's the process that slowed down, and there are three stories as to why. We ran out of new ideas; we don't have enough demand, we need more stimulus, the government needs to borrow more money and admittedly just wasted is fine so long as that money gets back; or, my favorite, that we have become middle-aged and overweight and out of shape. The regulatory apparatus in this country, the legal apparatus, just makes it harder and harder to get anything done in the United States, which is why companies are not investing, which is why new companies aren't coming in to make that kind of disruptive change that leads to growth.

If I may, as a layman, just ask a few questions. The notion that we ran out of ideas? You're presenting that because there are serious people who hold that in one way or another, and yet on the face of it, is that not pretty close to absurd? Here we live in Silicon Valley. Moore's Law, you may put it loosely, you may put it rigorously, but the overall notion that computing power is continuing to increase and get cheaper and cheaper and cheaper and that this is working its way out into the economy in all kinds of different ways, doesn't that suggest the idea that we've run out of ideas is just really kind of silly? Can you bat it away as easily as that?

No.

Oh, you can't.

An economist at Northwestern, Bob Gordon, who I hold in very high regard, is one of the guys who's written a book recently about this. It's a serious idea. As I think the joke version of it goes, they promised us jetpacks and all we got was Twitter. The idea is that the big growth innovations, the washing machine, the harnessing of fossil fuels, was a onetime event and all this other stuff is minor. I don't think it's right because as you look around Silicon Valley, yes, the computers are getting better and better. These things will cause, can cause if they're allowed to, great disruptive changes in all our lives. The driverless car, the driverless truck. Think of what that does for transportation.

Huge, isn't it? My general feeling is that that's happening much faster than people thought it would even eighteen months ago.

Exactly.

Is that correct?

Also growth isn't just about more stuff. It's about the quality of life, the length of life. One thing we are is much healthier than our grandparents and great- grandparents. Inventions in medicine, medical technology, we're learning about the microbiome. All this stuff I see as poised to make us much, much better off if we let it happen.

Okay. I want to go on to your prescriptions about how we get back to high growth, but if I may ask one more question about growth itself, there is this comparison between the United States and Western Europe from after the Second World War to about 1970. You get pretty rapid growth, and then the Europeans, once they achieve something like the standard of living they had before the war and then 25 percent or so, the striking fact about it, as I understand the story, is that their working hours begin to drop off. That's one of the reasons that growth in Europe begins to slow down. The argument would be, well, after a certain point, why not? Why do you need growth? Why not sit on the Champs-Elysees and sip your coffee? In other words, we simply become sated with material goods, or is that a sloppy way? You're going to answer, "No no, no, we factor quality of life into growth."

No, actually, these quality of life issues are not very well measured in official statistics. I would be happy with that French choice if it were a choice undistorted by French government policy, and if you were simply choosing not to spend that time working, great. Good for you. Leisure, appreciation of life, artistic endeavors, if that's what you want to do with your time, great. There are lots of people in France who live pretty miserable lives in the banlieues, not on the Champs-Elysees. In France, the tax rate . . .  if  I produce one euro for my employer, how much of that do I actually get to take home is remarkably small. There are laws forbidding people from working more than, used to be, thirty-five hours a week. If this were an undistorted choice, I would salute it as a wonder of the free market.

I do think in the future growth is going to go less in the direction of stuff and more in the direction of services. I think given the opportunity to earn more money, people generally take it, as opposed to just pure leisure, but that we won't be stamping out widgets. We will be providing services to each other, which actually, for our environmental friends who worry about growth meaning using resources, growth doesn't have to mean using resources. It can mean I consult for your business, you consult for my business, and we all live . . .

We're both measurably better off.

We're both measurably better off.

But we haven't used fossil . . .  All right. I want to come back to . . .

As with buying an iPhone. There are not a lot of resources in an iPhone. It's a lot different than a '55 Chevy.

Right, right. How to fix it. John Cochrane writing in the Wall Street Journal not long ago. "Parties argue over tax rates, but what's really . . . " The political parties, you're talking about. "Parties argue over tax rates, but what's really needed is deep tax reform." Deep tax reform. Explain that. What do you mean?

Let me back up a little. I do think our national conversation has gotten stuck, sort of like a married couple that's not getting along that well and is squabbling. She says, "You leave your socks around all the time." He says, "Well, you cluttered up the medicine cabinet" and just yelling that loud.

They both have a point, but it's not getting anywhere.

It's not getting anywhere. We've gotten stuck on a more taxes/less taxes, "Oh, you want tax cuts for the rich." "Oh, you want to destroy the economy." Both sides are now starting just to repeat their own talking points, and we're not getting anywhere. I think there is both an economic case (we're focusing on the wrong things) and a political marriage therapy conversational case that we need to think out of the box.

Yeah, let's talk about taxes. The political system talks about tax too much, tax too little. I think the fundamental economic problem is not the level of taxes but the distortions of the tax code. Not how much do I pay overall, but if I earn an extra dollar, how much of that do I get to keep? The ideal tax code raises a lot of money but doesn't distort too much, so that if I earn an extra dollar, I get to keep it. Our tax code kind of does the opposite. We don't raise all that much money, but if you earn an extra dollar . . .

We'll take it.

We'll take it. That's especially true in the United States of poor people. If they earn an extra dollar, they lose $1.10 in benefits and they get the message fast. The deeper problem, I think, with our tax code, is its structure, its unbelievable complexity. The lobbyists go down to Washington, DC, every year to get their special break and exclusion and all the rest of it. Even if the rates were quite high, if we could have a simple, non-distorting tax code, it would help the economy tremendously. This is a Hoover broadcast. I would also like the rates to be low, but I think we can make a lot of bipartisan or nonpartisan progress on cleaning up the massive useless complexity: the cronyism, the deductions, the whole business, and a simplified tax code.

John, may I tell you a story of a younger me and then ask you what it means? Here's the story: 1986, when I was working in the Reagan White House, and Reagan enacted the 1986 tax reform, which although this thick, represented quite a simplification at the time: a broadening of the base and a simplification. Milton Friedman, whom you knew, wrote a piece in the Wall Street Journal saying fine and good, but, of course, Congress will immediately start poking holes in it. This is actually almost cyclical. Congress has to go back to resets. Re-simplify the tax code so that it can in effect start selling favors to special interest groups all over again. I thought to myself, "Milton, you cynic. You're a great man, but what a cynical view. This is so transparently in the national interest that this simplification is only the . . . Someone will come along in a few years and simplify it further where this tax code's going to get flatter and flatter."

Of course he wasn't cynical. I was naïve. We go from '86 to the current Swiss-cheese, unbelievably complex tax code. Are we simply due, I'm delighted to have you give us all the arguments for simplifying the tax code, but are we due for it? Is Congress going to figure out its got to reset the whole thing? Is there any way out of this cyclical . . .  Is there any way out of it? Is there any way out of a cycle?

First of all, at least if we could restart the cycle, it would be good.

That would be good. Okay, right.

What happened in '86 is what needs to happen-

We've got a cycle. Go back to the beginning. All right.

Politics is as you said. Each lobbyist meets with his or her member of Congressman or senator and says, "They're getting theirs, so make sure I get mine." True political leadership creates a different constituency where you make clear to everyone, "You're losing your, you're losing,  you're losing you're, we're all going to make it up on the volume because we're all going to end up better off, and furthermore I want to turn you from demanding your special privilege from me to your demanding, okay, if I'm losing mine, I'm going to make darn sure he loses his as well, so we all have a coalition to make sure that  . . . "

To strip the system of its . . .  the favors.

Because every bipartisan commission says lower the rates, broaden the base. That will simplify the code.

That's not a controversial position.

It's not a controversial position, but the politics have got to do it. Now, how do you do it? Let me give you an example. If you take a hundred economists and put them in a room and say, "Stop campaigning for a job with the next administration. Tell me what the best tax code is to raise revenue for the government and do the minimum damage," they would probably say zero corporate tax, fairly flat consumption tax. The problem is with the corporate tax, why should it be zero? For every dollar of corporate tax, corporations don't pay taxes. They get it by raising prices or lowering wages to Americans, and in fact, typically those come from Americans of lesser means rather than greater means.

Why is that?

Because everybody buys stuff. Stockholders tend to be wealthier.

Got it.

If corporations simply passed through their profits and we taxed people, you'd actually have a more progressive tax code. And the existence of the corporate tax leads to the demand for all the stuff you read in the newspaper. "Oh, we're going to move the money to Ireland and the intellectual property here and we're going to have a special deduction because we wear purple ties," and so on and so forth. If you just lower the corporate tax rate, you remove some of those distortions, but it's there. Lowering a rate says this is renegotiable. If you just say, "We're going to lower the tax rate . . .  "

You're resetting the cycle.

That means the next administration, that means, come back. Let's keep talking about this. If you eliminate the corporate tax from the tax code, then it's zero. It does not exist anymore. This is like a zombie movie. It's not enough to just punch them in the face. You have to . . .

Stake through the heart.

Stick the stake through the heart. There's a big difference between zero and 2 percent. Zero doesn't come back. I think where we have to go to, that's an example of a way you can set it up so it doesn't immediately come back. If you just reduce the rates and make it look good and so forth, then you're saying this is all up for renegotiation next year. If you truly simplify the code and set things to zero and eliminate them from the tax code, then I think that's a pre-commitment to we're not going back to where we were. Let's start with the simple stuff.

The other answer to your question, our tax code, let's play marriage therapist. How do you solve this problem of our couple is squabbling? You say, "Look, let's stop talking about everything at once." Our last tax simplification and reduction, the Bowles Simpson Commission, fell apart because they achieved a bipartisan let's lower the rates, broaden the base . . .

Bowles Simpson takes place during the Clinton years. Give me the date on that roughly.

I don't know the date. Most recent one.

Okay. The most recent one was some time ago already, right?

John Cochrane: No, it was . . .

Early Obama.

Early Obama.

Okay, okay, okay, single-digit number of years ago. Sorry.

It almost came through, and then the administration said, "Nope, we want more overall revenue out of this"; and the Republicans said no, and that was the end of that. This is a problem of putting too many things together because you agree to have the structure of the tax code and then you fail on what the level of tax is. When you think about it, we mix in our tax code raising revenue for the government, so what's the structure of the best way to raise revenue, how big should the government be? That's a separate question, but it's always in there together. How progressive? How much goes to our government  . . .

Redistribution.

Redistribution. And how do we subsidize all sorts of activities like mortgage interest deduction, electric cars? The whole range of subsidies. We're doing four things at once. There's a structure of the tax code, the level of government spending in taxes, redistribution, and subsidy. I think the other part of the answer to your question is let's separate these. Let's have one commission, if you will, talk about the right structure for the tax code and leave the rates blanks. We're going to tax this, that, and the other thing, but we don't get to fill in what the rate is going to be. Second, we talk about what the rates are going to be, but don't get to play with the structure of the tax code, because we don't get to say, "We're going to sneak lower rates in by giving deductions to people with purple ties."

Third, you have a subsidy code, which is separate from the tax code. If you start thinking about a good tax code, you would not allow a mortgage interest deduction. Mortgage interest deduction is a present from taxpayers to rich people who borrow money to buy big houses, but there's a whole industry that wants to have subsidies for homes. How do we do that? Okay, fine. We will have separately from the tax code, tax code raises money, we'll have a subsidy code and we'll talk about it. You and I may not like subsidies, but we'll have an honest discussion. We'll put it on budget and we'll discuss how the government . . .  In some sense, you spend more to spend less. We try to say we're not spending a lot by saying, "Well, you can just take it off your taxes," but that's the same as taxing and spending. We'll talk about your electric cars and your mortgage interest deduction and all the other stuff. Fine. We'll do that.

And redistribution. That's an important thing our government wants to do. We will separately have a redistribution code. I think in politics, sometimes you want to put things together so that you can get a constituency to get it passed. Sometimes you put too much together and just sit there yelling at each other. We're at the point, I think, where we've put too much together; by separating those four items, we could all agree on those four items or at least agree to keep talking about one without dragging the other one into it. We could say, "Higher tax rates, lower tax rates," and not screw up the structure of the tax code at the same time.

John Cochrane on the candidates. I stipulate I'm going to ask you how to think about Donald Trump and his economic plan and Hillary Clinton and hers. I stipulate, I know you well enough, John, that it is important to you to remain nonpartisan. Not even bipartisan but nonpartisan. Your view is you're going to give the best economic advice and you'll give it to anybody who asks. Correct? That's a fair stipulation upfront?

That is correct and thank you.

All right. Donald Trump. I'd like to know where you're with him and where you're against him. He's called for a lower corporate tax rate, scaling back regulations, and so forth. Broadly speaking, moves in the right direction?

By your preface, you knew I was going to try to weasel out of this question. I'm going to do that right now. I think America puts way too much attention on our presidential candidates and on their pronouncements on the campaign trail on what they say they want to do, as opposed to the structure of government, as opposed to the rules of the game, because that's what's going wrong right now. I think we should spend more attention on Congress. I think we should spend more attention on local policies gone wrong as opposed to these once every four years bag load of promises that don't really make much sense, that are not designed as plans for governance. They're designed, what the candidates are saying, is designed to attract voters. It's not a program for governing, so don't take it that seriously.

Where would you locate? You talked a moment ago about commissions, but commissions have no proper standing in the Constitution. The commission depends on a president or some powerful committee chairman up on the Hill. Commissions are always going to be . . .   I don't know whether they'd be subservient once they're set up, but they all have to be . . .  Where do you locate? Here we have the political process. Presidential candidates, John just said, "Eh, forget it."

We'll come back. That was a preface.

Where do you locate the . . .  We have no group of impartial wise men here. Wise men and women, of course. Wise persons set up in the Constitution. How do you do this?

We have a Congress. I would like to see and I'm encouraged to see signs of more initiative moving to Congress outside the increasingly imperial presidency. I think our issues are not so much what the president wants to do, but how the president does it. Bringing back a rule of law structure to the regulatory state. Bringing back a little more congressional oversight as to how things are done. Those are bigger issues than just the promises made on the campaign trail. When I look at a politician, I think being a politician is a noble profession. Most people look down on it. I saw that wonderful movie about Lincoln and all the things he did to get the bill through. That ability to get people together, to call in favors, to tell stories when necessary, and to get stuff through, that's what  politicians do. And to what the oath of office says. Obey the Constitution, administer the laws of the land. Just basic competence as opposed to a campaign speech with all sorts of big promises that really aren't backed up in anything.

I've read carefully some of the Clinton plan. To the extent there is a Trump plan, it's sort of a vague wish list of things we'd like to do, but certainly not something you send somebody with to the grocery store.

John Cochrane on Hillary Clinton's economic program. We'll come back to Trump, John, I will drag you back to Trump, but first Clinton, because you've written about her. You can't dodge this one as easily. You're on the record on Hillary Clinton. Quoting you in the Wall Street Journal: "How does Mrs. Clinton suggest curing the country's economic stagnation? With infrastructure spending, 275 billion over five years, financed in part by some sharply higher taxes. How does this fix the growth problem?" You mean it doesn't? 275 billion. That's Kaine on steroids, isn't it?

No, actually.

Too small?

Too small. I don't think there is a multiplier, but we just tried several trillions of dollars worth of this trick, which didn't do much good. Two hundred and seventy-five billion is actually quite small, and the interesting thing about that plan was there's a headline number, 275, which as far as I can tell is simply picked out of a hat because I read the fine detail and it says, "We're going to give America a first-class high-speed train network and intermodal junctions will be upgraded and broadband Internet in everybody's household." None of this has a price tag associated with it or a time line that adds up to 275. Let's be honest with it. It's not a plan. It's an aspiration.

Is it a worthy aspiration? If she got what she wanted, would it do any good?

Fixing infrastructure is a problem in America, but it's not a problem of lack of money. Let's take, we're in California, our own Governor Brown has decided to build a high-speed train. You and I might not think it's a good idea. I worked ou that it's several multiples of the cost of an extra lane down I-5.

Is it really?

Oh yes. We're talking $60 billion estimated cost, which is $200 million a mile. Freeways cost a lot less than that. Be that as it may, this was a stimulus project in 2009. It's our governor's number thing he wants to do. Here we are nearly a decade later and they have barely laid a mile of track. It's just nearly impossible to get it done.

There are some pylons in virtually deserted areas. I saw this the other day. They erected pylons to hold the track across some farmland in the Central Valley. It is astounding.

It is astounding. In twice the amount of time it took America to fight and win the Second World War, we have not gotten through the permits and legal challenges of the governor's and the administration's pet infrastructure project.

In California, which used to be a place that got things done.

In California, right. This tells you the problem is not money. The problem is the legal and regulatory sclerosis that makes it so hard to get stuff done in America these days. I would welcome an infrastructure program that rather than just said, "We need more money," said, "Let's look at why it is the money we so desperately try to spend can't get spent. Let's fix the process. Let's fix the endless reviews, the endless delays, the stuff that makes it impossible to do." You mentioned earlier Bob Gordon; he held up the Golden Gate Bridge as a great example of infrastructure that our grandparents were able to put together. Can you imagine trying to build the Golden Gate Bridge today? The environmental protests, the planning . . .

It went up quickly, as I recall. Two years or something like that?

Yes, exactly. What I've faulted in that plan was it took the view that nobody has thought that we need to build this stuff and we just need the vision of the president to do it and some money. Our last president had a vision of let's build some infrastructure fast and discovered there weren't any shovel-ready projects. We need to fix that process. Serious cost/benefit analysis, expedited review. How do we get stuff done in America?

This brings me back to Trump. I'm going to take one more stab at this, John, because really you're making an argument that is implicit, frankly, and also explicit from time to time, but it's implicit in a certain sense even in Donald Trump's bearing, impatience, the whole system has become encrusted with complexity, this favor to that interest group, that favor to that interest group. I, Donald Trump, am actually not that ideological a person. I lean in favor of free markets, but what I am is somebody who can get things done. I'm a businessman. Look, folks, if you want somebody who can blast through your bureaucracy and get things done, ask somebody who's gotten buildings constructed on the island of Manhattan. Pretty tricky job. I've got to buy the concrete and the girders and get union contracts and put it all together with the glaziers. I've done it. Are you not impressed? Does your impulse not match up with his?

You're putting me on shaking ground . . .

Handle that any way you want to.

I made myself a promise while reading a certain columnist in the New York Times a long time ago that I would not comment on the moral character of politicians because my expertise as an economist doesn't let me do that. I will bend a little bit in your direction by saying, do you see in there the character and actually the record of someone who can get something like that done? In particular, I like America's long campaigns, because we get to see whether a politician can actually run a competent campaign, which is the number one . . .  We've seen quite a few politicians.

Surprising number. Jeb Bush, you'd have supposed, would have been able to do better.

In Bush, I didn't see any failure of his campaign organization, but in other candidates I have seen campaign organizations where everybody's fighting with each other and messages. You see just getting the trains to run on time in a campaign, and I'm not really seeing a disciplined campaign in the Trump organization. Trump, in fact, does not build stuff. He licenses his name to other people who build stuff.

He's been out of the building business for fifteen years or so, I guess. Okay. All right.

Yeah. The joke version I would say is here's a guy who knows how to default on the national debt. Let's leave that. We are looking for administrative competence, and we're looking for experience but experience that seems to have taught the person the appropriate lessons that experience should have taught him or her. I bring that up because this is an important moment in American politics. Once every couple of generations, our parties blow up and reform. Our parties, they're just like European parties. They merge together a whole bunch of people who really have no point in being together, and they once a generation blow up and reform. I think we're in the process of doing that. The Republicans are doing that now. I think the Democrats are going to do that quite soon.

The important question for this fall is which set of ideas comes forward in the Republican Party, starting November 7? Is it going to be the party of free people, free markets, competent government? Is it going to be a party of nationalism, xenophobia, and trade war? That set of ideas is really quite independent of the presidential candidates. That's worth paying attention to, which is why I highlight there's a third option on the ballot.

All right. Fair enough. Want to come to some final questions. This is interesting. I believe the polls indicate that disconcerted as Americans may be, they have an even lower regard for Congress. You testify before Congress from time to time. I know that you know a number of members of Congress who ring you up and ask your advice and so forth. I think what I am hearing you say is we're likely to have an intellectually disappointing administration no matter who . . .  Unless Gary Johnson wins, perhaps. You're an intellectual, and you find the House, the Speaker, and those around him, and possibly the Senate, some of the new blood, you actually think the intellectual action may shift to the Hill, and you're pleased by that. Is that correct?

Paul Ryan's plan is an example of intellectual leadership coming out from Capitol Hill, so it's in front of us.

It happened. Proof.

You're right that most Americans don't like Congress in general, but they all like their own particular member of Congress and keep reelecting them. I think it's an institution that obviously needs to function better, but certainly can do so. I don't want to be pessimistic about either a Trump or a Clinton administration, but let's hope it goes well. Let's hope serious governance, reforming the structure of government, comes into play. It's also something Americans have to demand. We are a democracy. We can't blame our politicians. We're the voters, and I would hope we demand of them not, here's what needs to happen, make it happen by any means, legal, extralegal, constitutional or not, but let's look at this machinery and see that the machinery is broken. That we want more rule of law, not more of my answer now.

John, if we could name you president or we could make you dictator for a month or something of that nature . . .

No no, we don't do that. The whole point of America, we don't do that.

Let's set aside the political question, who wins, whether they're going to pull themselves together?. If the right policies were set in place, how quickly could we see an economic rebound? What I had in mind is, second half of the 1970s, the economy gets ill. Reagan comes in and things turn around pretty quickly. There are a couple of explanations. One explanation is things would have turned around anyway because the economy is fundamentally self-correcting and he just got lucky. The other explanation, of course, is he cut taxes, he rolled back regulations. Paul Volcker in the Fed stated that it was the result of good policy. That's what interests me because if one believes it was the result of good policy, the economy began to recover really quite quickly. A couple of years and things start. Then we get growth in place that continues, with a few setbacks, but it continues for almost a quarter of a century. In other words, that's the hopeful explanation. Get things right and the economy can turn around pretty quickly.

My answer to your question was going to be, I'm not sure if it's twenty-four hours or forty-eight hours.

Oh really? Really? Policy is that important?

Number one, the economy is not self-correcting. Recessions, business cycles, financial crises, those are supposed to be self-correcting. Long-run growth problems, if regulations come in and keep people out of a business, that's bad for life. Countries that aren't working well around the third world, they have corrupt governments and a regulatory nightmare and that's just permanent. Nobody's building a Silicon Valley in . . .

Uganda.

I don't want to name a country to insult, but that's just not happening. On the other hand, modern economics thinks very much about people's expectations of the future. Right now, just in a macro sense, the proximate cause of low growth is not that Americans don't want to spend, it's that businesses aren't investing. They're not investing in plant equipment, new technology, new people. There aren't new businesses coming in now.

Even though the banking system is trying hard, or at least the Fed is trying to shove money in their direction? They still are not investing?

The regulatory half of the Fed doesn't want them to lend money to anyone who might need it, and companies are not investing because even if you can borrow it at minuscule interest rates, why do so if you can't get the permits for the plant? Or the FDA won't approve the new device you have.

Policy's really schizophrenic. I mean seriously schizophrenic. They're trying to shove money out, and at the same time the regulatory overhang is so enormous that nobody wants to touch it anyway. Is that right?

That's the heart of American policy. All Americans know energy policy. We subsidize gas to keep the price down, but then we regulate that you have to have high-mileage cars to try to make you not use it. Seriously, I think if you had a president and a Congress working with that president who said, "Here's the policy plan, here's how we are going to fix things, here's how you're not going to have to come begging for approval for something and then we'll maybe tell you or not, but here's how we're going to have a rule of law. You don't have to have given campaign contributions to the right person. Your permits will come." If we even say, "Here's our plan for fixing that stuff," companies start investing the next day.

Okay. You can get economic growth quite quickly. More quickly than I can get the words out, apparently. Productivity, underlying productivity growth is a separate problem. Is that correct?

No.

It is not.

Productivity is the underlying engine of economic growth. Nothing else matters.

That can change quite quickly as well?

No, but the investments needed to make higher productivity in the future need to happen right away.

Right away. I see, I see.

The research and development that lead to new ideas that result in new productivity. The minute you say, "Oh, we're going to be able to make money on it," the economy will start humming and producing the new higher productivity things, and then productivity rises and then you get the long-run growth. You get both the stimulus, if you will, in the short run, let's all get to work on those productivity-raising ideas, then the productivity goes up and you get the long run as well.

Okay, here's my last question for you, John. I can't even formulate it very tightly because I haven't read much about it. I don't believe people are thinking it through in great detail yet, but I'm pretty sure you're going to have a response. The question is, I'm pulling this up. This is an economic concern that is living in the reptile brain and I'm pulling it up. It's nervousness about too much growth, about too much productivity, and here's why: because the next big thing is going to be robots, and it's going to throw enormous sectors of people out of work and we're going to invent an economy which is going to create . . .  Robots will be living better than this huge new underclass of Americans who've been tossed out of work and are too old to be . . .  We should think twice about the investments that are going to give us the new thing, which is robots. This is very scary. Growth and productivity have reached the point at which they're scary, not reassuring. John?

It's a shame that 75 percent of Americans work on the farm and the tractor just got invented, so they're all going to be out . . .  Sorry, that was my great- grandfather speaking. We have seen this before. The car has just been invented. Heavens, all of those people who shoe horses, stable horses, take care of your horses, shovel up what comes after the horses, they're all going to be out of a job. Whoops, no, they learned how to fix cars and drive cars and drive taxis and so forth. This has happened many, many times. This worry has been with us since the dawn of the industrial age. That doesn't mean it's going to be easy. This is not a surprise. Self-driving cars and self-driving trucks . . .

Yeah, let's take that example because that seems to be upon us. It's coming quickly.

It's going to be wonderful.

It's going to be wonderful?

It's going to be wonderful. It's going to come in ways you don't really imagine, and it's going to mean the job of truck driver will vanish.

Right.

This is not a surprise. This transition is going to take ten to twenty years, so people who are driving trucks now are not going to be suddenly and unexpectedly out of a job. No one who's twenty years old now and has a brain in his or her head thinks about going into the truck driving industry, as, when the car was invented, nobody said, "Oh boy, I'm going to take up horse wrangling" or whatever it is. It's a generational transition where people do other things rather than go into these businesses. It's not as bad.

There are going to be people who made a nice living as truck drivers and are going to lose that nice living. All economic growth has winners and losers. A safety net, I think, is an important part of a compassionate society. I don't think it necessarily should be directed at specific industries, because then they go to Washington saying, "Safety net for me," but the hard nut of economics is we need to respond to incentive. On the younger generation, clearly what's going to happen is that new jobs are going to be in services and they're going to require skill. The fact that our public school systems have been taken over by teachers' unions and keep low-income Americans stuck in a horrible place, that is going to be more and more painful . . .  It kind of was okay when there was a factory job you could send the poor people off to, but now the fact that they can't get an education really, really hurts.

Impediments in the way of people getting the skills they need to move into the new economy, we're going to have to let people get those things. The hard thing is, prices are the signals in our economy. If everybody makes the same amount of money, then there's no reason to take a college major in painful computer programming versus pleasant art history. That signal, a little bit of inequality is vastly important to be the signal to people. Here's where you are needed in our economy. For the moment, we are creating way too many barriers. Getting rid of the existing barriers will do a lot there. Software engineers make a lot of money. That's a big cause of inequality. If we let in immigrant software engineers, that drives down the wages and helps inequality. We don't let these things happen. The big problem is getting in the way of letting these transitions happen rather than needing more push to have them happen.

Got it. John Cochrane, who blogs as The Grumpy Economist, but who has just proven that he's actually a very optimistic economist. Thank you.

Thank you very much.

For Uncommon Knowledge and the Hoover Institution, I'm Peter Robinson.