John Cogan is a senior fellow and Kevin Warsh is a distinguished visiting fellow in economics at the Hoover Institution. Both of them have spent their careers in and out of government trying to make it more efficient and cost effective. On this show, they discuss their newest white paper, Reinvigorating Economic Governance: Advancing a New Framework for American Prosperity, which is intended to provide an outline for revitalizing the governance of economic policy based on our nation’s foundational system of natural liberty. They also discuss how liberating the power of the individual, encouraging the promulgation and dissemination of new ideas, and ensuring the fidelity of institutions to their mission will enable the United States to significantly improve its economic performance and serve as a more formidable force in the world.
To view the full transcript of this episode, read below:
Peter Robinson: What does a nation need in order to produce economic growth? I'm not talking about this policy or that policy. What is the deep structure that a nation needs? John Cogan and Kevin Warsh on Uncommon Knowledge, now. Welcome to Uncommon Knowledge, I'm Peter Robinson, a fellow at the Hoover Institution and a member of the Stanford Faculty, John Cogan served during the Reagan administration at the Department of Labor and in the Office of Management and the Budget, his most recent book, a study of the federal budget, entitled "The High Cost of Good Intentions". By the way, I should note that, although I just introduced that as a study of the federal budget, and it is that, it's also a thoroughly readable and engaging book. A fellow at the Hoover Institution, and again, a member of the Stanford faculty, Kevin Warsh, served from 2006 to 2011 as a member of the Federal Reserve Board of Governors. Now John Cogan and Kevin Warsh have co-authored a study, Reinvigorating Economic Governance, Advancing a New Framework for American Prosperity. John, Kevin.
John Cogan: Peter.
Peter Robinson: Welcome. All right. A brief overview of where we've been, beginning in the mid 1980s, the economy starts to grow briskly and it does pretty well with a couple of brief recessions, but it does pretty well for more or less a quarter of a century. And then things change. And the two of you write, I'm quoting your paper, reinvigorating Economic Governance. "Three major shocks of the 21st century undermined the economic ethos and each government policies that were once unthinkable became inevitable." Let's just go through those shocks really quickly on our way to today, the terrorist attacks of September 11th, 2001. Two planes are flown into the World Trade towers, another plane attacks the Pentagon, and almost 3000 Americans die in a single morning. How did those attacks affect the economy, John?
John Cogan: Well, it certainly threw us into a deep economic recession. As you recall, right before those attacks, the economy was doing fine. We had a balanced budget, a strong economic growth, and 9/11 really threw us off in a very important way. Before 9/11, we had sort of believed that our country was safe from international terrorist attack. This attack, the first attack since Pearl Harbor, had a devastating impact on people's view about the future. No longer were we safe from international terrorists, it had come to our shores, and I think that threw our government off, and I think it threw private industry off as well. There was this sense of uncertainty that we really hadn't confronted before.
Peter Robinson: I see, financial crisis of 2008. Over a period of two weeks, the financial market seizes up. Bear Stearns and Lehman Brothers, gigantic storied institutions on Wall Street fail, instruments of all kind, but especially mortgage backed security stopped trading and the recession that follows proves the worst since the Great Depression, President George W. Bush in December, 2008, quote, "I've abandoned free market principles to save the free market system." Close quote, you were at the Fed when all of this is happening, how is it that what happens on Wall Street undermines the ethos, that's the word you fellas use in your paper, undermine the ethos of our economy?
Kevin Warsh: So I think it does it two ways, first, in the US it showed the vulnerability of the banking system, but large of our financial markets. It showed that the US economy was not as resilient, as strong as many investors and business people, consumers believed. And as a result, for reasons of those exigent circumstances, the policy judgment at the Federal Reserve and everywhere else was we'll do whatever it takes. We'll go to the edges of our legal authority, we'd go to the edges of what we thought would've previously been fiscally responsible, and we will get to the bottom of this and fight our way out. And the global financial crisis gave rise to what's now come to be known as quantitative easing, where the Federal Reserve buys the debt of the Treasury. At one point, if you had suggested to self-respecting central bankers in the US they do that, they'd think that was a Ponzi scheme. That's a banana republic stuff. The treasury issues debt on Tuesday and Wednesday. The Fed buys it on Thursday and Friday. Certainly that's not the policy of the greatest economy in the history of the world. Fast forward from that day till this, and we see that quantitative easing became the defacto policy, not just in the US and not just in bad times, but in good times everywhere around the world until this inflation struck. So I think that's the first and the second. I can just jump in.
Peter Robinson: Sure.
Kevin Warsh: Before the global financial crisis, the rest of the world, our allies and adversaries thought, well, those Americans, they certainly would know how to run an economy. And the global financial crisis suggested maybe we don't. So the soft power and the hard power of the US was really substantially hurt by that. And the legacy that you had talked about from the quarter century of prosperity, was significantly impinged. 'cause if you don't really know how to run a banking system, why should we be copying your policies on anything?
Peter Robinson: All right, 2001, terrorist attack, 2008 financial crisis producing a deep, deep recession. Now we come to the one that we're just coming out from under, the lockdown, the COVID lockdown that begins in 2020. COVID spreads in the United States, as it spreads in the United States, in the spring of 2020, the government in effect locks down the entire economy. It turns off the American economy. And in various forms, the lockdown would last much more than a year. The lockdown is over. People still wear masks here and there, there are arguments about recommendations whether we ought to get vaccinated, but people are allowed to go back to work. Well, why can't we just flip the switch and turn the economy back on, again, you use this interesting word ethos. How did this lockdown undermine our ethos, economic ethos?
John Cogan: So I think the real story behind the lockdowns is faced with this unprecedented infectious disease, what did government do? It locked down the economy, as you said, Peter, and then it tried to make up for it with a massive amount of government spending. So it restricted individual liberties at the outset, kept those restrictions in place way beyond what I think the scientific community would now say was appropriate and spent billions and trillions of dollars to try to make up for it.
Peter Robinson: So much money really, for once it really is impossible even to imagine what that kind of money means.
John Cogan: And when I think about these shocks, I think what's thrown the public off is not so much necessarily just the shocks. I think it's the government's response to the shocks that has thrown the public off, the way the public saw the response to the great Recession was we bailed out the banks. Thank you very much. The response to COVID is government restricting your liberties, your way of life, your ability to earn a living, and then trying to make up for that with the issuance of a large amount of debt to finance, government spending.
Peter Robinson: All right, and this is just the layman here, but the layman says, they don't know what they're doing, that's really corrosive. They just don't know what they're, okay. So three huge shocks. You were in the Reagan administration, you were at the Fed during the administration of George W. Bush. All three of us are old enough to remember when things worked. The two of you have now written a white paper here at the Hoover Institution, in which interestingly enough, you say at the outset, we're not going to talk about this or that policy. We're going to about deep structure. What's the shape of governance that we need to renew? And you come up with what you call a triptych, three panels so to speak. So let's take these one by one. Your paper again is called Reinvigorating Economic Governance. We employ a triptych as a means for organizing the central elements. Let's just take these one at a time. Ideas is the first of the three from your paper. Unlike other economic goods, ideas are special. How come?
Kevin Warsh: So they're special because so much of the discussion through these three shocks you highlighted were something about this is all zero sum, more for you means less for me. And the fight was who's gonna get what slice of the pie? But the core of the American ethos, the core of American prosperity, the core of the economic liberty John referenced, is what made you the United States special was new ideas. It wasn't the natural endowments of the country, it was the people's ability to generate new ideas. The pie can become bigger in economic terms. We say ideas are non-rival goods. The more of my idea gets out there, the more value it is for everyone. So the question that we asked ourselves in this paper as this first leg of the triptych is, are we quashing the ability to create new ideas or are we giving rise to them? And throughout these three shocks where the extraordinary became ordinary, it strikes us that the implications of this larger, more intrusive government was suppressing this idea generation. And if you were going to run an economy or economic policy in a period of managed decline, that would be fine. But that's what's contrary to the American ethos.
Peter Robinson: I see.
John Cogan: And so the focus of economic policy should be on allowing the private sector to create and disseminate new ideas. As Kevin said, that's where economic growth comes from, is the generation and insemination of new ideas, right?
Peter Robinson: Panel two of your triptych individuals, again from your paper, "The talents, motivations, and decisions of individuals are key determinants of an economy's potential." Close quote, not corporations, individuals, not even startups, individuals. How come?
John Cogan: Well, when you get right down to it, all of human progress depends upon individuals, individuals working, individuals saving, individuals investing in their own human capital. Where do ideas come from? They come from individuals. How do institutions get formed and what's their purpose? Their purpose is to aggregate individuals. And so if you're looking for, if you will, the ingredient to a growing healthy economy, it always starts with the individual.
Kevin Warsh: And to build on that, you described at the outset, individuals aren't companies, they're not government. Here's another thing individuals aren't, they aren't groups. Individuals are different from some group to which we might associate with them by virtue of their socioeconomic status or race or background. Individuals have unique preferences and talents. There was a time that that wasn't such a radical idea. And so what we're trying to do is resuscitate that because those individuals are going to be key to generate the ideas in a way such that American prosperity can drive the next leg of economic growth.
Peter Robinson: Your paper is not this pointed, I want to ask, here's what I'm asking. Are you then pushing back against the whole notion of identity politics? You are reasserting the claim that we need to think of our fellow citizens as individuals, not as members of a race or a region. We've done way too much in terms of identity, in particular, if the government thinks of us in terms of identity politics, forget about the rights and wrongs of it, that is not conducive to growth, correct. Are you saying that?
Kevin Warsh: In a word, yes.
John Cogan: Yes, we are.
Kevin Warsh: That's easiest question we're gonna get today.
Peter Robinson: John is nodding, how can Robinson be so slow? Yes, yes. Okay, the third of the panels on your triptych. And, and the next thing that's gonna happen is, well, I'm gonna ask you how to apply these, this triptych, what does it tell us about this issue, this issue and this issue? But here's the third of the three panels, institutions, again from reinvigorating economic governance, the quality of a nation's institutions. This is very striking. The quality of a nation's institutions is more important than natural resource endowments. Close quote, both of you, that's a striking thing to say. Do institutions matter more than the oil in the ground or the natural gas available to frackers?
Kevin Warsh: So look at Singapore, wasn't exactly endowed with the greatest natural resources. Look at other countries, other continents endowed with great excess of natural resources. But unless the governance regimes in their own way had a triptych of ideas, individuals and faithful institutions, the natural resources are squandered. So what we're suggesting here, I think is that institutions matter. And there's this bright line that we seem to have confused in recent years between public institutions and private institutions. Companies are not state actors. They are free and flexible to follow their customers, build new businesses, disrupt, even go out of business. But more and more we hear the heads of private institutions that sound a lot more like politicians, seems as though they're taking on some quasi-governmental responsibilities. And our own judgment as that's in part been caused by these shocks. As the governments encroach more on the world of private institutions like companies, companies themselves have also crossed that line. And that's a line that we think should be resurrected. And then within the private sector, excuse me, within the public sector, we think just because something is an important public policy imperative doesn't mean it's the job of every institution to do it. I suppose in the next link, we'll talk about the Federal Reserve in that regard.
Peter Robinson: We're very likely to, yeah.
Kevin Warsh: But our constitutional regime doesn't say that the importance drives which government actor acts. in our regime, it says, is that your job? And if that's your job in government, you should execute that as well as you can. But you shouldn't be trying to compensate for the failings of other parts of the US government.
John Cogan: Yeah, so lemme come at it in a slightly different way. If you look back over history and ask the question, what produces a sound growing economy? What raises standards of living? And the answer is that there are four key institutional arrangements that are essential for human flourishing and economic growth. Their private property, the rule of law, free and competitive markets and limited government, countries that have those four institutional arrangements are countries that have succeeded. You go back before the 17th, 18th century, and you find a period of centuries of little or any growth, economies and standards of living, they just stagnated. We lacked those institutions. And then over time, societies gradually understood the importance of those four institutions. And since the development of those institutions, we've seen a world progress like nothing before. And so in a large sense, institutional arrangements, these fundamental institutional arrangements are really important for maximizing the individual liberty of individuals to produce, save, invest. The generation of ideas is assisted by the development of these institutions. And so we think, as we said, this sort of, they're interrelated institutions, ideas and individuals, they're interrelated. And it's the institutions which permit the other two to really flourish.
Kevin Warsh: To state John's point another way, this is in some ways an old fashioned document. There's references to a lot of our fellow scholars and economics profession. But the real citation here is to the enlightenment. We're trying to bring the enlightenment thinking, which created the greatest hockey stick in human history, massive economic growth when the enlightenment came on and got rid of that stagnation and try to make it relevant and resonant to the new generation of policy makers. Because if not, we're afraid that the line gets very flat again.
John Cogan: All right, so these four institutional principles serve, if you will, Peter, as the foundation for our framework, right? And then when you deal with policy, you look at how they are related to these four institutional arrangements. Do they enhance them or do they detract from them? One other point on institutions that I think is very important, one of the motivating factors for us in writing a paper was our concern about our public and private institutions and how well they're functioning.
Peter Robinson: That distinction that Kevin made a moment ago.
John Cogan: Yes. And it's our sense that people have lost some faith in our institutions. There was a recent Gallup poll that I thought was pretty interesting. They asked people, do you approve or disapprove of 15 or 16 institutions, police, fire, government institutions. It's fascinating. Every one of these institutions has received less approval now than prior years. The only two institutions today that received a majority approval were small business and the military. All three branches of government are now at their historic lows in the Gallup Poll. And other institutions like big business, criminal justice system, news, media, are all at 30 year lows. And so there's this general worry that we have about how well our institutions are functioning. And an important part of any economic governance framework is how your institutions are before.
Peter Robinson: Got it. Can I, all right, so let's now the layman, I've been fumbling along enough as it is, but I'm gonna start fumbling even more because you guys know way more about this stuff than I do. All I can do is put a few questions here. Let's now permit me to ask you to apply this framework to current issues. And we'll get to monetary policy in the Fed, which was the first question I have noted here. But you just raised a point, a question occurs to me that you may wanna bat away or you may wanna take on, I don't know, the notion of corporations, private enterprise are different from government and they ought not to be trying to do the government's job. BlackRock, the huge investment operation headquartered in Manhattan, you being you Kevin, I'm sure you know the people who run that operation because you know the financial players on the island of Manhattan, and they have been for the last year or so, pushing DEI, diversity, equity, and inclusion as one of their central criteria for making investments. They're an enormous operation. They have investments across corporate America. And when BlackRock says, oh, we own 4.2% of your company, by the way, we'd now like to review your DEI policies. Is that an example of a private institution crossing into the wrong lane?
Kevin Warsh: So it's an example if the government has the thumb on the scale, I have no trouble with a private asset manager looking to increase their assets under management by marketing themselves as special and different and applying any three initials, ESG, DEI to them. And if they wanna separate hardworking people from their hard earned money by doing that and charging a larger fee than they could on an S&P index, that's how the private market works. But when our government decides that certain types of description, certain types of behaviors by companies give them an extra plus, either the SEC, the bank regulators or others, then we've crossed that line. But if a company wants to try to raise money through a new marketing scheme, then they're perfectly well to do it. But I think your broader point is right, which is we see financial institutions, some of which we bailed out in the 08 crisis, some of which have emerged stronger since the crisis that have decided that shareholder capitalism really isn't all that it's cracked up to be. We need some kind of third way. We need to look at stakeholders. Again, if that's a decision of private entities, that's fine. But it appears though, that's increasingly becoming the ethos of government policy.
Peter Robinson: Okay, so I was wrong then to ask about BlackRock. They get to try whatever they want, market yourself any way you want to. I should have asked about the CFTC and the SEC, government institutions. The chairman of the SEC, Gary Gensler, is that his name? Now I'm just reaching from memory, I don't have this in front of me. You two will know. But he is proposing that the SEC adopt rules that will favor companies that pursue certain social policies. Is that not correct? That's a fair statement and he's wrong to do that. John, come in on this.
Kevin Warsh: I'll give a more troubling example.
Peter Robinson: All right.
Kevin Warsh: The threshold at the SEC for disclosure by public companies used to be this old fashioned thing called materiality. Is it material to that business? And if so, they should tell the public they're gonna invest in those shares to do so. But now there's a new idea, which is we're not gonna debate whether it's material. We and the government have decided that you are engendering grave climate risks. You need to tell us proactively all that you're doing in and around climate in a series of rule makings that are coming forth from the SEC separate and apart from materiality. And again, it's fine if companies want to advertise their environmental record, but when the government puts the thumb on the scale and changes the standards, changes the morays, then it's wandering from its day job, it's wandering from its remit, and it's doing something that I guess as small C conservatives, we find troubling. It's chasing trends, it's chasing fads.
Peter Robinson: And that suppresses economic growth.
Kevin Warsh: Instead, yes, it does. In a word, yes.
Peter Robinson: All right. John?
John Cogan: Yeah, the result is inevitably a misallocation of resources. As Kevin said in our framework, there is a bright dividing line between what governmental functions are and what private business functions are. And so often in government, when government steps in to interfere in a market on behalf of a particular participant, that has a compounding effect because other participants now see, gee, the government has hung out at shingle, it's open for business and we are gonna get in that business and have them help us. And so what you get is this compounding effect where once you start a small sliver of the economy, government intervening, then you create a demand by other companies for similarly beneficial action subsidies, regulations that harm competition and so forth. And so the worry here is, of course, once you cross that line, you create incentives for further crossing that line. So it's very important to have this separation between the two and to try to maintain as best you can the separation.
Kevin Warsh: And John, correct me, this is not the people's representatives duly elected making these decisions. This is the administrative state.
Peter Robinson: Right.
Kevin Warsh: This isn't a law signed by the president that we might like or not like, but it's in some sense the will of the people. This is a group of experts across the government. It's taken on their own to capture the sense of the season.
Peter Robinson: And one index of the health, one index of the extent to which government is straying outside its correct duties is the size of K Street in Washington. When you and I served in the Reagan administration, I don't remember the expenditures, but you could go back and look this up. The expenditures in real terms on lobbyists was X. And today it is closer to 10 X, correct?
John Cogan: Correct. Why are housing values in and around Washington DC now among the highest in the nation? Whereas when we were back there, it was sort of in the middle and the answer is lobbyists. The answer is rent seeking behavior on the part of companies to try to influence the government to favor them. And it's manifest now like it has never been manifested.
Peter Robinson: I believe it's tremendously important. So if you are in a competitive industry and you say to yourself, I can spend X billion dollars on R and D, my outcomes are uncertain, my expenses are enormous. I'm not sure when I'll get a new product out of all of this. The market, all that is very, very hard. Or I can spend another $15 million a year on lobbyists in Washington and tie up my opponents, when you say misallocation of resources, you mean resources shifting over to gaming the government and away from the actual production of goods and services. Have I got that right?
John Cogan: Yes. And that protection that they achieve from the government prevents new entrants. And new entrants are the companies and individuals with new ideas. And so when you prevent entry into the industry, you're impairing the ability of an economy to move forward through the generation of new ideas, okay.
Peter Robinson: Fiscal policy, this one's, both of you come in of course, but Cogan here knows more about fiscal policy.
Kevin Warsh: Agreed.
Peter Robinson: Than anybody should really. The size of the most recent, when you were at OMB, what was the rough size of the federal budget?
John Cogan: Oh my gosh, it was around $600 billion.
Peter Robinson: And you thought that was outrageous.
John Cogan: It was, it was.
Peter Robinson: Okay, all right. Here's the size of the most recent budget President Biden signed into law, 5.8 trillion. Now that's down a little bit from the previous year's budget of about six trillion because COVID spending gets phased out. But the Biden budget contains about 1.6 trillion in new spending. The budget contains billions, tens of billions, for example, to pay for last year's infrastructure bill and American Rescue Plan. And this year's, I'm giving the formal names of these pieces of legislation, this year's, get ready for this one, Inflation Reduction Act. Close quote. Okay, so Cogan and Warsh, ideas, individuals, institutions, help me as a layman. These numbers are enormous. We have inflation and it's going up. They passed it in Inflation Reduction Act, it seems to be pushing, what's going on, and how can this be fixed. Fiscal policy, what the federal government raises in taxes and spends and borrows.
John Cogan: Well, as you said, Peter, things have really gotten outta control. I mean, they've been bad for the last 60 years. So in the last 60 years, the budget has been balanced or run a surplus in only five of them, and the other years.
Peter Robinson: George W. Bush was the most recent, is that right?
John Cogan: Well, his first year, right, before the 9/11 and the recession.
Peter Robinson: Squeaked in one balanced budget before 9/11.
John Cogan: Four of those five of course were high tech years when we had the high tech bubble in the late 1990s. And that wasn't a consequence of government restrain on spending, believe me, that was a consequence of a gush of revenues from high techs.
Peter Robinson: The definition of a surplus is when the money comes in so fast that even Congress can't spend it.
John Cogan: Very good.
Peter Robinson: Remember Cogan formulation.
John Cogan: That's right. What's amazing about the current Congress is the money has come in rapidly and Congress has outspent that, I'm gonna give you an example. So we just finished fiscal year 2022 on Friday, okay? So the numbers are not quite final, but we have 11 months of data, we kind of know where we're gonna land, okay? When treasury comes out with its estimates in a couple weeks, between 2019, right before the pandemic hit and 2022, federal revenues increased by 40%. And this year, the Biden administration will report that the deficit for 2022 was a trillion dollars. So they not only outspent the 40%, they went even beyond that. And that doesn't count the student loan forgiveness, which will certainly have a big effect on the budget and the lower economic growth that I think we're seeing towards the end of the year.
Peter Robinson: So Kevin, John just said something, the budget's been outta control for six decades, it's over. I mean, how do you, I'm asking a serious point. The two of you write a white paper, which by the way, I should say it's intensely frustrating that the paper is so much richer than we can get to in this conversation. Any viewer can go to the Hoover Institution website and Google on Cogan and Warsh, it'll pop up. But what's the point, honestly and truly, is there any real prospect of restoring some semblance of sanity reasonableness if the whole thing has been out of control for six decades.
Kevin Warsh: It hasn't been outta control anything like this.
Peter Robinson: All right. There is out control and there's really out of control.
Kevin Warsh: Going back to the first day I walked into Cogan's office when I was 19, and as you can see, I have never left, but George Schultz used to tell his young proteges and John and me, government policy doesn't have to be perfect, but it just can't be too, too destructive. Well, we've gotten to the point where it's just too, too destructive. So what happened? I should just add one fiscal point and John will correct me. It's not just that we had a gush of revenue in these periods. The United States government is a third bigger than it was the day before COVID. And while those revenues will no doubt fall off as we enter what's got all the makings of a global recession, I think John and I would agree, the government isn't going to be shrinking then. In fact, it'll be figuring out a way to try to offset that pain. So let me just try to offer one explanation of how it went from quite bad fiscal and monetary policy for a very long time, but serviceable to one that is so dangerous because of the shocks you outlined at the beginning. The Federal Reserve decided to take on more responsibility than it ever had before, when I joined the Fed in 2006, it was an important organization with a printing press, but quite a narrow remit. We are gonna ensure that prices were stable from those years until these years through the shock, it's expanded its authority, when crises hit, like in the 08 crisis and in the 2020 pandemic crisis, it is the Fed's job to do some extraordinary things. But when those shocks disappear, it's this faithful institution's job to go back to ordinary course stuff. But instead, they kept zero interest rates and massive buying of the debt securities from the treasury in all seasons and for all reasons. So just one fund statistic. Last year, 2021, a virtual economic boom in the US, real economic growth was 5.7% ranking among the strongest economic year since World War II.
Peter Robinson: As we come out from under COVID.
Kevin Warsh: as we're coming out from under COVID.
Peter Robinson: recovery looks good.
Kevin Warsh: The recovery looks fragile, but at least empirically strong.
Peter Robinson: All right.
Kevin Warsh: Jobs are being created, the economy is strong, prices and inflation's moving higher. So in a year like that, where would we guess the Fed should be? Well, I'll tell you where they were, in 2021, they bought 54% of all the debt issued by the Treasury Department. More than half of the net issuance was bought by the friendly Federal Reserve. And that was not a crisis year. It was a boom year. That's the sign of an institution that went past its remit, that outstayed its welcome, that decided that the crisis maybe is continuing in some sense and thereby sowed the seeds of what we have in front of us now, which I would describe as a major inflation problem that I will describe. I don't wanna associate this with my co-author unless he signs up too, these economic institutions in the last couple of years have made the largest economic policy error since the 1970s, and there is a price to pay for.
Peter Robinson: Jerome Powell, chairman of the Federal Reserve in December last year, less than a year ago. Inflation is quote, transitory, close quote, meaning that, quote, it won't leave a permanent mark, close quote. We are now four interest rates hikes later, including two so-called jumbo hikes of 75 basis points each. Can you compare what's happening now and your degree of confidence in what's happening now with what Paul Volcker did when he was chairman of the Fed to ring inflation out of the economy during the end of the Carter and the beginning of the Reagan administration? Is that a useful thing to ask? Because what I'm so struck by, the government has screwed up everything it's touched forever, but it didn't used to be too destructive. That's the kind of comparison. Is that a useful thing to say? Volcker versus Powell, that's what I'm asking.
Kevin Warsh: Sure, so these periods aren't perfectly analogous, but there's something to the analogy that you make, right? And in some sense, I think the heart of our paper, Peter, is to summon what Milton Friedman said in 1978, 1979, when he said, then never in my life have I seen a period with more danger and more hope than the moment in which we're now in.
Peter Robinson: The year again.
Kevin Warsh: 1978, 1979. And he felt the country was at one of those tipping points from the ashes, from the despair. If we get policy right, there could be a boom that would come and you would become a speech writer as part of that boom. If we get it wrong.
Peter Robinson: With Cogan marking up all my speeches, taking out all the good stuff. All right, go ahead.
John Cogan: Only the expansion should cover having to sneak in every once in a while.
Kevin Warsh: John told me that speech writers weren't allowed to ever dictate policy. So I don't wanna re-litigate that, but at that moment, that was the seminal moment. So where are we today? In some sense, our risk, the concern we have that motivates the paper is this the opposite of 1981. In 1981, what was happening, Paul Volcker who said, not on my watch, we will stop inflation and we will then over the next 25 years have interest rates fall. That's a huge, huge uplift for an economy at that point, coming through the Carter administration and the Reagan administration, massive deregulation, massive ability to give those animal spirits back, to make those parts of our tryptic work. Where are we now, if anything, we're doubling down on reregulating because of these shocks, in 1981, where were we? We thought that this might be the beginning after a Cold War that you helped win of a durable piece and integrated global economy, where are we now? The global economy is being ripped apart, the G2 rivalry, it has everyone taking sides, moving to two spheres of influence. This is the opposite of that period. And so the question you ask is the right one, is the leadership of the Fed prepared now, having really missed the boat early on to quash inflation, now that it is front page news, now that every kitchen table, every boardroom is talking about the unstable prices, high prices, are they prepared and willing to do what's necessary? And now I'll have to admit at substantially higher costs than would've been the case a year ago to beat these high prices out of the economy. Because ultimately what inflation does is it distracts households and businesses from allocating capital properly and preoccupies them with something they can scarcely control. That is this moment.
John Cogan: Yeah, so let me add a little bit to what Kevin's saying. It really is the case that it wasn't just Paul Volcker and it's not just Chairman Powell that's produced the inflation. We'll also have to look at the fiscal side and the regulatory side as Kevin mentioned. That is the policies that the Biden administration is following now are restricting supply, regulatory policies are restricting supply. You see it most acutely in the energy sector, but it extends out into the labor markets as well. Back in the Reagan days and preceded by Carter, we saw a deregulation of energy, we saw an increase in supply as a consequence of the policies pursued. So the fiscal on the fiscal side, the divergence even greater. We have an administration that continues to promote expansions in government spending.
Peter Robinson: Today?
John Cogan: Today, back then, Reagan's fiscal policy was very consistent with Volcker's monetary policy. Reagan wanted to cut spending, which is ultimately the source I think, of inflation, lower tax rates to increase incentives for greater supply. And the Biden administration, you have more spending on tap, higher taxes on tap. The deficit being at a trillion dollars is exactly contrary to the fiscal policy that you would want to tame inflation.
Peter Robinson: Okay, so let me turn again, this is frustrating because we, well, maybe we should just go for three hours and just assume that by the end, we'll only have two listeners left and it'll be Mrs. Cogan and Mrs. Warsh. My wife never listens. But here's to shift from what's happening, to shift from policy makers to fall again, I'm a layman, I'm putting all of this crudely, in the first instance, the first redress is to shift, change policy makers. So Biden's in charge now, Biden and the Democrats are in charge. And I look around and say, what is the opposition saying? Let me quote to you from Marco Rubio, Senator of Florida and a conservative, this is Marco Rubio speaking a couple of years ago, which I emphasize because this is something that's in Republican thinking now, quote, "A fundamental shift in the US economy has occurred over the last four decades." Fair enough so far, driven by the consensus that the goal of business is to maximize financial return leading to suffering on the part of the American worker and American industry, close quote. So this is the notion that business offshore to Mexico first and then to China and hollowed out our, you know the whole argument. But this is Marco Rubio, intelligent, well spoken, surely a presidential candidate, a past presidential candidate, surely a candidate in the future. And he is saying the kinds of things that you say two seconds before you announce a new industrial policy, which used to be anathema to Republicans, what's going on?
John Cogan: So I think the problem is one of diagnosis. I think, Mr. Rubio's sentiments I think we would agree are good sentiments. He's concerned about the plight of the American worker. He's concerned about the plight of the American family.
Peter Robinson: This much is true, he's saying, I look at what's happened over the recent decades and ordinary, good people got screwed.
John Cogan: Right.
Peter Robinson: And he's not wrong about that.
John Cogan: He's not wrong.
Peter Robinson: Okay.
John Cogan: Where he's wrong is that if you listen to what he's saying about policy, it seems that he's presuming that markets have failed and therefore government needs to step in. What he should be saying first is, gee, has government policy created the problem? Have we made workers worse off because of the labor market restrictions that would've been imposed over the last 20 years? Have we made it worse off by taxing corporations so much so that they don't invest in worker skills, he needs to refocus. And what we're hoping is that our framework would help someone like Mr. Rubio focus on market oriented policies to fix problems rather than just to go to, here's another government program for this problem. Here's another one for that problem. Let me say this, when I think back on Donald Trump's performance as a president on economic policy, it seems that Mr. Trump, if you will, provides a good example of what happens to a politician that doesn't have a sound economic framework underlying their policies. So if you look at what he did on tax policy and deregulation, it was extraordinarily beneficial to the economy. Wages of all workers went up, wages of high school educated workers went up the most.
Peter Robinson: We're talking about the first two,
John Cogan: Before COVID.
Peter Robinson: COVID hits, that changes everything. But there were two and a half, almost three.
John Cogan: Good years, right?
Peter Robinson: The economy grows and the.
John Cogan: Poverty rates come down.
Peter Robinson: Poverty rates come down. And for the first time in decades, again, as I recall, as I understand it, there's a growth in real income for ordinary working Americans, is that not correct?
John Cogan: Is absolutely correct. And the largest increases were registered by those in the lower half of the income distribution.
Peter Robinson: That's exactly what we want.
John Cogan: Exactly.
Peter Robinson: All right.
John Cogan: Right, and his tax and regulatory policies were the driving force behind those outcomes. But then if you look at tariffs, worked in exactly the opposite direction. If you look at his response when COVID hit, what was it, recommended lockdowns. Right, completely against the fundamental principles of the fundamental institutional relationships that have generated.
Peter Robinson: He let public health bureaucrats take over presidency.
John Cogan: Exactly.
Peter Robinson: Is that roughly.
John Cogan: Roughly, there was no philosophy, the point though is that there was no philosophy there, there was no underlying set of principles that was motivating his policies. So he got it right on some occasions and then on other occasions with lockdowns and so forth, he got it massively wrong.
Peter Robinson: If you don't have your principles in place, then when a crisis hits, your response is just random. You may get it as wrong.
John Cogan: Exactly right.
Peter Robinson: Okay.
Kevin Warsh: John and I receive calls periodically from friends of ours on Capitol Hill, and what do you think of this policy? But what we often hear is, I don't know how to think about it. Are we forward or against? Well, where's the other side, we're trying to do is give a framework that if you believe this framework, you'll then be able to think through that policy idea. I'll just make one one final point on the American worker Senator Rubio's comment, the most harm, the most regressive tax that we could possibly have come up with, nevermind made a part of the economic situation is this inflation. If you were trying to do harm to the American worker, you would have inflation that's a 10%, and a year ago you would dismiss it as temporary. What happened really between the shock of the 2008 crisis and the shock of the 2020 crisis, we had inflation. But those of us in the top half of the income distribution did quite well with it was asset price inflation. And that was driven by extraordinary Fed policies, by and large, subsequent to the pandemic.
Peter Robinson: Again, the effect of that policy, the Fed floods the economy with liquidity and it drifts to assets and it makes rich people even richer. And Marco Rubio sees that too. And he's not wrong, correct?
Kevin Warsh: He's not wrong. But 52% of our fellow Americans own no financial assets, no equity in their home, no 401K plan, no account over at Schwab. And so they said what was in it for me, during the first part of the Trump administration, they finally got the real wage increases.
Peter Robinson: Got it.
Kevin Warsh: They said, maybe it took a while, but it's finally coming. But because this massive fiscal spending and extraordinary monetary accommodation happened well into the cycle, that same 52% are having a cost of living squeeze, dividing the country yet again in the name of trying to unite it. And that is the most dangerous policy, especially at this moment in time. And so when policy makers say, we're gonna run a hot economy, we're keeping rate zero for you, we're gonna do more of these bailouts for you. Real Americans right now are saying, I don't need that kind of help because my real wages are falling further and further behind. And that's what's created this parallel moment.
Peter Robinson: I can't afford to tank up anymore.
Kevin Warsh: That's exactly right.
Peter Robinson: So one more question on what's in Republican thinking, what we see. So let me quote to you, president Trump's US trade rep, Robert Leitheiser, known to both of you, also, I think we can agree, certainly a patriot and also an intelligent person. This is Robert Leitheiser writing last year. "International trade has largely failed America. America has shipped trillions of dollars of wealth to foreign countries in return for goods, often short-term consumer goods. Our trading partners use those dollars to purchase American assets and debt instruments. In a real sense, America is trading ownership of its productive assets and economic future for short-term consumption." For cheap T-shirts at Walmart, we're giving up control of the American economy to the Chinese and others plausible argument. And the correct answer is the Cogan Warsh triptych, ideas, individuals, institutions. How does that help me think about the Leitheiser attack on free trade?
John Cogan: So the Leitheiser attack translates into a policy of protectionism.
Peter Robinson: Yes, raised tariffs, correct.
John Cogan: Right, right and in our triptych, trade among individuals is a natural liberty. That is all individuals should be able to trade freely among themselves.
Peter Robinson: You get to say what you want and you get to trade with anybody you want, right?
John Cogan: That includes domestically and includes internationally. And so we think of these protectionist policies as restrictions on individual liberties, like restrictions on what makes an economy grow. And you gotta keep in mind that the harm that's done by these tariffs is substantial, but we don't see it because it's spread across the entire economy. When we impose a tariff on imported goods, the price of imported goods rises. But it's also the case that imports are used in the production of goods here in the United States. So even those domestically produced goods, their costs rise. Something like 60% of all imports are inputs into US production. And so there's a lot of cross.
Peter Robinson: Lumber from China that goes into American houses.
John Cogan: Right.
Peter Robinson: Glass from Mexico that goes into American cars.
John Cogan: So the increase in.
Peter Robinson: Lumber from Canada, sorry.
John Cogan: So the increase in prices throughout the economy from tariffs, even if there is no retaliation, is really high. But what politicians find good about tariffs is the benefits in terms of jobs, if you will, protected, those are very, very apparent. And they can point to them, the cost of lost jobs because of higher costs, the loss of real incomes on the part of consumers because prices have risen, those just can't be directly tied by a politician or by anybody to tariffs.
Peter Robinson: That we all share the costs, doesn't mean they aren't real.
John Cogan: Right, that's right. They're just hard to see. And so the political equation is quite unbalanced. And so you get arguments like Leitheiser's that these tariffs are really good for America.
Kevin Warsh: And listen, I think Bob's right in that this G2 rivalry, the United States and our allies against China and their allies, whether we like it or not, will likely define the 21st century. And if we think back to the framework you outlined at the beginning of this ideas, individuals, institutions, the direction that the US policy is going is the Chinese direction, strip away the individual preferences of institutions. They're nothing more than cogs in the machine. Don't have to create new ideas, you can steal them, you can just steal them from someone else, and after all, we're really just fighting among ourselves and institutions. There's only one institution that matters. It's being driven by President Xi and the CCP. So all those red lines we talked about, those are all gray. We can cross them all. That's the broad direction of policy. Obviously the CCP is an extreme version of that. It strikes us at core, if you wanna win the G2 rivalry, which is in some sense analogous the description we had of the 1980s. The best way to do that is not to imitate the policies of your adversaries, but double down on the policies that created the greatest economic miracle that made the biggest improvement to humankind. And what bothers us, we seem to be slouching towards that other model. And at this moment in time, given the threat economically from a national security perspective and even more broadly to society, this is the moment to double down on what worked. But this isn't a call back to us or Reaganism. this is a call forward.
Peter Robinson: Okay, so one last question about policy and then I wanna return to this notion of underlying structure in closing if I may, you just said we're talking about going forward, but actually I would like to ask a question, in some way what you're suggesting here is that we need a renewal today as sweeping, as uplifting as the renewal that took place during the 1980s. Right, okay. So again, I'm the layman here. I'm flipping through my news and I see as we record this, this is the big economic news of the last week, that there's a new prime minister in Britain, Liz Truss. And she puts in, she announces a kind of mini Cogan and Warsh program. She's gonna get around to peeling back regulations, that takes a while. But what she announces right away is a tax cut in the top rate from 45% down to 40%. Doesn't sound all that generous to me, but still, that's what she does. And there is such an uproar and the pound sterling, so tanks that a couple of days ago, she reverses herself and says, no, I'm gonna leave that top rate exactly where it is. And here's what the Economist magazine says, that she misunderstood the Reagan record. So this is important. If you're trying a renewal based at least loosely on something that happened some decades ago, you need to understand what happened those decades ago. And here's what the Economist magazine says Prime Minister Truss missed. The Reagan program's early record was mixed. The tax cuts did not stop a deep recession, yet by March, 1984, annual inflation had risen back to 4.8%. And America's bond prices reflected fears of another upward spiral in prices. Inflation was anchored only after Congress had raised taxes, close quote. So the Reagan expansion begins as a result of tax hikes.
John Cogan: There you go.
Peter Robinson: But if they're rewriting what actually happened, what did happen? Really when it comes to it, what happened in the eighties?
John Cogan: So the eighties to me it was a very consistent set of policies and monetary policy and fiscal policy. The monetary policy, if you know, was the titan, the fiscal policy was to increase the supply of goods. It takes time for a policy like tax cuts or interest rates, heights to work, lags might be six months, might be a year. George Schultz used to call them the economist nightmare with the lag because the politicians always wanted their actions to generate results immediately. But I have to say, we have never had an economic recovery as sustained as we had in the 1980s. So once we got through this sharp recession, we had economic growth that was unparalleled in any other decade, but perhaps the 1960s and postwar period.
Peter Robinson: The policies became, broadly speaking, bipartisan. Bill Clinton is elected in the nineties and he does not monkey around with taxes much. There's a little raise here and a little raise there. But he permits the basic regime. This is in the form of a question by the way, I'm giving you my memory. Bill Clinton permits the basic low tax regime of the Reagan years to remain in place. And he gives a speech in which, at State of the Union address in which he says, the era of big government is over, Clinton claims limited government for his side. We Democrats now embrace limited government. Is that correct?
Kevin Warsh: So that was the triptych working so well that the political economy adopts it.
Peter Robinson: Right.
Kevin Warsh: Now, there's different flavors between Democrats and Republicans in the early 1990s, but you had agreed on a sort of period of peace and prosperity and what you could do to achieve that. Jim Carville and others might have had little tricks on the margin, but we had a consensus. When you read the criticisms of Prime Minister Truss now 30 days into her Prime Ministership, I can't but help but note two things. It's quite convenient to blame her. And a single speech for a decline in the great British pound that's now been happening for a couple of years. It's quite convenient to blame her for this inflation, which has now been part of the UK experiment for a couple of years. And in fact, the move up in guilts that happened in and around this question about tax cuts.
Peter Robinson: Are you talking about financial instruments? Not moral payings.
Kevin Warsh: Yes.
Peter Robinson: All right.
Kevin Warsh: So this is the risk free rate of the United Kingdom. Blame her in this one's speech. I think that's really quite unfair. So just to give a simple example, she announced about a week before the tax cuts that there would be a bailout. So the government would pay for all the higher energy prices so consumers wouldn't have to pay the surge in their energy bills. Corporations wouldn't have to pay for the surge in their energy bills. That amount of money from the fiscal authorities in Britain is more than twice what the cost would've been of the whole tax package. But I didn't hear the economists barking about how uncomfortable that was. That was the obvious thing to do. So I think this might be more politics than economics. And we need to encourage people that believe in the triptych, not just in the United States, but around the world, to not be ones that are getting wobbly so early into their tenure.
John Cogan: You know, Peter, you raise a very good point though, and I think it's one about why we should be optimistic at this point. You back to the seventies, it was a very bad decade. You saw Reagan policies that followed what we think are sound economic governance principles. You saw a tremendous economic growth. And as you put it, we saw that view about limited government being continued throughout the 1990s, right.
Peter Robinson: By Democrats, it becomes bipartisan. In large.
John Cogan: It was also bipartisan during the Reagan days, as you recall, the house was ruled by the Democrats during.
Peter Robinson: There were 30, 35, so-called bold weevils, Southern Democrats usually who voted with Reagan.
John Cogan: Right, right, right. And so his policies generated bipartisan support. But the point I think I wanna make is that it's only when people realize in their pocket books or in their lifestyles, that things are going wrong for them. That they start thinking about policy and how there needs to be a change. And what we saw in the 1980s and 1990s, was the success of the policies of the 1980s in improving the lives of individuals led to its continuation in the 1990s. People are now sensing the same kind of angst that they did in the 1970s. We have the same inflation problem. It's not as long as it was in the seventies, but we have the same inflation problem. People are questioning the institutions just as they did in the late 1970s. And so there is good reason to believe that people will be responsive to a set of policies that would get us out of this quagmire that we're in. And so I'm very optimistic when I look back at history, I have to say, it's only when the American public wakes up to the harm that's being done by policies in their lives that they decide for a change.
Peter Robinson: John, here's my problem. I've known you for a long time now. You've always been optimistic. So that sets up a real, that sets up a sort of a closing question here. Back to this underlying structures, question of underlying structures. A couple of quotations here. You cite the economist, Joseph Schumpeter, who in 1942 produced a book called Capitalism, Socialism, and Democracy. And you mentioned this very famous book and you say he predicted the demise of capitalism, that capitalism contains within itself the very bounty that capitalism produces, tends to create the conditions for ideas that tend to thwart capitalism and close it off, capitalism leads to socialism, says he, couple of quotations here, Marxism, this is from Schumpeter, 1942. "Marxism is essentially a product of the bourgeois mind." Yeah, well you know what? So is wokeism, right?
John Cogan: Yep.
Peter Robinson: College kids who are worried about getting a job when they graduate don't mess around on with wokeism. It's the college kids who've grown up during a period of peace and prosperity who have the, okay, you get the point I'm trying to make. Here's Schumpeter again, "Capitalism inevitably, and by virtue of the very logic of the civilization it creates, educates and subsidizes a vested interest in social unrest." Which looked at one way, a vested interest in social unrest is a pretty good description of a large part of the American university system today. Okay, now I quote you guys, in your paper you say, we strongly disagree. What the heck makes you so sure you're right? And I'm gonna go to Kevin first because you're always optimistic, John.
Kevin Warsh: So I've gotta be an optimist.
Peter Robinson: Serious question here. When the virtues seem to erode, the other thing you guys write is that a robust civil, our triptych ideas, individuals and institutions seeks to cultivate virtue. That's a very serious and sweeping claim.
Kevin Warsh: That's a word that would require a safe space on a college campus like this. We use words in this paper like culture, like virtue. We cite enlightenment thinking, going back to the voluntary associations of de Tocqueville, the little platoons of Burke. And we ask ourselves, are they alive today? Can they be rekindled? And I guess I'd say two things. One, in spite of our government's best efforts to destroy that underlying American ethos, our government has failed. If you go out to a factory floor in Toledo, a unionized plant, whatever you want, there are workers there trying to figure out how to be more productive, how to get that car off that assembly line. You go, not just to Silicon Valley, but to the center of the country. There are people that amid COVID said, I'm gonna start paying out my own shingle and start my own company, give it a shot. And this is with our government making this harder and harder, so we don't think we've yet destroyed that ethos. And I'll make one final point. If we wanna look at that model, that Marxist model. The good news or bad news is we can look to the other side of the world. The President Xi and the Chinese Communist Party are in a war with us, but it's not the war we often hear about. We are in a fight with them to see who can destroy the golden goose that created the prosperity in the US and China, and believe it or not, the Chinese are winning. They are destroying their golden goose even faster than we are. And we see it in the last couple of years. So we have an example, much like you had in the 1980s of a choice to make. And we think this is a time for choosing and the American people will lead the American political class having now been to peak wokeism and peak government intrusion and restrictions on liberty. This is the moment where the American people can speak not as Democrats or Republicans, but as Americans.
Peter Robinson: John?
John Cogan: So you have to ask yourself, well, shouldn't Peter write, what does history say? I think history would say that Truman Peter was dead wrong. It's almost been 100 years since he wrote, right? And what have we seen since, the Soviet system collapsed of its own weight, America has has really grown. China had this period of extraordinary economic progress. Why, because it embraced capitalism, it embraced markets. Sadly, as Kevin said, it's gone the other way now.
Peter Robinson: Hold on, that's really important, that the correct way to understand, excuse me. You hear it said over and over and over again that whatever is going on in China lifted something like half a billion or more people out of really abject poverty. And that creates a certain legitimacy of its own. But the correct analysis is that China lifted those people up. China didn't lift anybody out of poverty. Those people were given the freedom. That's what the Chinese government did. It backed away long enough to permit economic growth to take place, that's the correct conclusion. Not that dictatorial powers, a well meaning communist. That's not, okay, I've got that right.
John Cogan: You said it better than I.
Peter Robinson: That's very seldom John, but all right.
John Cogan: Right, so the upshot is the world in some sense has gone the other way from Schumpeter, right? They've gone more to capitalism, people have seen that when you have a capitalist system, when you have free markets, private property, rule of law, and you limit government, government steps back, you see progress, you see human flourishing. And I think when in America, as people come to grips with the inflation that's hit us, the likely recession that we're gonna see down the road, people could say, what got us into this, and the answer is gonna be too much regulation, too much spending, too much debt. And as we saw in the 1980s, that'll begin to change. Eventually the political leadership and a new direction will come about.
Peter Robinson: Okay, last question first John, and then Kevin. And it's the same question to both of you. We are seated at the Hoover Institution, which in turn is in the middle of a great university, young as Kevin is, he still remembers the eighties. You and I actually lived through it, old as we are, a freshman who just arrived on the Stanford University campus at the age of 18 was born after Ronald Reagan died, was born after the Berlin Wall fell, has no memory of what we're talking about. Can you give me the tightest statement you can on what this rising generation, I'm talking about Stanford, but of course all college kids. All kids, what the rising generation of Americans needs to grasp about what we need to do to promote economic growth again, John.
John Cogan: Well, Peter, I would go back to I guess what I said at the beginning, the four institutional arrangements that are essential for getting a rising standard of living. And by the way, when we say rising standard of livings, we mean more than just wealth. We mean the quality of life, your health, safe neighborhoods and so forth, the way.
Peter Robinson: Decent schools.
John Cogan: Decent schools, the way you get to that is by building your policies on these four institutional arrangements, private property, the rule of law, free and competitive markets and limited government. You get those four institutional arrangements as the foundation of your policies and apply the framework that we have that is look at their effects, look at the policies effects on the three essential ingredients of any economy, ideas, individuals and institutions. And you will get a set of policies that will cause a great turnaround in the American economy. And I think a prospect for tremendous non-inflationary growth in the economy and in our standards of living generally considered.
Peter Robinson: Kevin closing statement to 18 year olds.
Kevin Warsh: So I hope when he arrives at campuses like this from the leadership of the institution, he hears something that says, what matters most around here is what do you think? We also care about how you feel about things. But the university is about a search for truth. And what we're going to try to do in your next four years is expose you to the best that's been written and said. And at the end of that, we're not going to tell you what you have to believe. We're gonna let you pursue your own preferences and talents. And this will in fact be a safe place where you can fight about those ideas. And if we create that culture that I'm every bit as optimistic as John, the 21st century will be the American century again. And this will not be a century of managed decline where we hide and run away.
Peter Robinson: John Cogan and Kevin Warsh of the Hoover Institution, authors of "Reinvigorating Economic Governance." Thank you.
John Cogan: Thank you, Peter.
Kevin Warsh: Thanks, Peter.
Peter Robinson: For Uncommon Knowledge and the Hoover Institution, I'm Peter Robinson.
