Paul Romer, Nobel Prize in Economics 2018: “Governments have to do their job, and if they don’t, citizens must demand it”

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Paul Romer (Denver, 1955) is the second of seven brothers, something that makes him feel so lucky and grateful which makes him meet at least twice a year with them. Sometimes, the reason is a great celebration, such as the Nobel Prize in Economics that he won in 2018 along with the American William Nordhaus. In Romer’s case, his recognition came from his studies on the relationship of technological innovation with long-term economic growth: the benefits it brings to society that citizens work together and collaborate. It is the culmination of a career that began studying Mathematics at the University of Chicago. Years later he earned a PhD in Economics from that same university after completing his training at the MIT (Massachusetts Institute of Technology) and at the University of Queens. He has taught and researched at the Stanford Graduate School of Business and at the universities of Berkeley, Chicago and Rochester. He has been Chief Economist of the World Bank, founded the Marron Institute of Urban Management and has promoted the Charter Cities initiative, which seeks to help populations traditionally deprived of their rights to share the benefits of rapid urbanization. Romer has dedicated his career to studying the intersection between economy, innovation, technology and urban planning to accelerate human progress. He is currently Professor of Economics at the University of New York.

In your lecture after receiving the Nobel Prize, you commented that you spent time studying Malthus Theory, which reads among other things there would be no food for everyone if population continued to grow at the same rate. Against this, you defend the power of innovation and the human mind to solve the problems of scarcity. Brought to the modern era, one could think of the policy of the only child in China or the fear of losing jobs by automating business processes as limiting elements of innovation. In the case of China, do you think they would have grown quicker if they had not had the one-child policy?

I think what we see in all countries developed is that family sizes are getting smaller. And so, even now after the one child’s policy has been waxed, the family sizes remained blown in China in the population process, I mean blown… so I think what we are dealing with is a general change in what people want and so I think is a little bit less of a question of what the policy is and more just the question of people expressing their desires. As an economist I think we have to try respect what it is that people want. I don’t know how much difference it would have made if they didn’t have that policy. Because, I think as they grew… the income grew in China, I think fertility levels would have fallen just as they have in every other country, but I’m not sure the policy make that much difference. The other thing to remember is usually what people care about is something like income per capita, per person. If you just have more people and more total income that doesn’t necessarily raise equality of life per each person. I don’t think more total income is what people want. They want more income per person. Well it’s, you know… Growth’s been very rapid in China. Income is growing, income at the very top is growing. I think there is a trade-off between having more millionaires and billionaires and having a more equal distribution of incomes is one of the policy questions that they would have to address in China.

Do you think they are well focused on the issue of inequality?

I think it’s very important to make a distinction between the questions that economists have expertise in answering and the questions where everyone can have their own view. On a question about what would happen if a society has a wealth tax, economists should be able to look at the evidence in this watered project to say what will happen. There is always a little bit of disagreement, but eventually will converge on what we think will happen. But it’s a very different question to ask what should a society do about inequality, or what should our tax policy be as a society. And economists have expertise answering the-what-will-happen if questions but the-what- should-questions are ultimately decided by voters in a democracy. Everybody has the same say: I think it’s dangerous for economists to pretend that they somehow have special understanding of what’s ultimately a moral question about right and wrong.

Thomas Piketty has recently visited Spain. He is always speaking about these aspects. What do you reckon about his studies?

Again… there’s a question about what would happen if we impose this tax in this form, will there be a taxation? What adjustments could you make in the tax to avoid the taxation, how will people respond? So economists can ask all of those questions, but, again: I want to emphasize in that difference from the question about what a society should do and I think is dangerous for an economist to suggest that somehow they can be this philosopher kings who can tell people what a society should do. And the reason is dangerous is because, you know, Piketty is a serious economist. He is part of the community that answers these questions about what will happen, but when economists start to signal that they can be philosopher kings, then is what is likely happen as we get these pretenders: people who pretend to be economist, because they want to observe influence the decision about what type of society they’re living. And those pretenders can really do damage to society and make do damage to the reputation of economists. It will be better economists stock to their area of expertise and we let the big moral questions about what society should look like be resolved by a different process than the process we use to answer the questions of science.

What are your impressions of the global trade war?

So one of the things… you know…my father was a businessman, one of the businesses young when I was in high school, was the flight school, pilot trained-school, so I became a pilot. One of the things you do as a pilot in a single engine plane, is you say to yourself I can’t predict when an engine might fail, but I will have a plan for what I’m going to do if the engine fails. This is the way I think nations and individual businesses should approach the answer to the uncertainty of the trade war. We don’t know if the trade will get worse or better. We can’t predict that right now. But what we can do is have a plan how we might respond if it gets worse. And here I think what most nations need to do is to think about what they can control, and it’s like the decision to invest in infrastructure, in health, in safety, improvements in air quality, in water quality… A nation can control its own decisions about investments inside the nation. There’s a risk that the productive resources of an economy would be idle in an external shock, a nation needs to have a plan: how do we make sure that we keep all of our resources fully employed doing things that will lead to a better life.

The US economy is growing as never before and unemployment levels are at record lows. What do you think of Donald Trump’s economic policy?

I never take side in political debates. I’m not going to say whether Trump policies are good or bad, or the other side policies are good or bad. That’s part of what should society do, and that’s not my expertise.

One of Trump’s main criticisms shared by other global leaders is that Chinese companies are subsidized by the state. What can you tell us about it?

The first thing we can answer is: does it work for society trying to subsidize technologies? Whether a society should or shouldn’t do that, is a different question. And it’s related to questions about does it work for a society to trying impose regulations as well. I think it’s clear that regulations can prevent harm that might otherwise takes place. Subsidize, which are kind of the other side of regulation, can encourage things that are good for society. It’s clear that there is a role for the government in trying to influence what the market does, and whether a society wants to use that power of the government is something that voters have to decide. But I think we should be clear that the voters in my country don’t get to decide for the citizens of another country. Each country gets to make its own decisions.

The bad influence of politicians in economic decisions is something that you had to suffer while passing through the World Bank. You denounced that something was being done wrongly in the preparation of the Doing Business report and you had also to leave the institution.

It’s a kind of a complicated story. But as just evidence, I was brought in to get some integrity to a research group that did not live up to the standards of integrity that we need to insist on in the world of science. And then once I was inside, I discovered that the senior leadership was not willing to back me when I made the decisions that have to be made to try to framework the integrity of the process. I was worried that by just resigning I would do harm to the institution, so I got myself fired. I gave a public interview which I knew would get me fired and that was what worked best. Then they fired me I was not going to work in a place where the senior leadership was not committed to integrity. Specially, when what they have just brought me to do was trying to resolve problems with the research group… On Thursday I said I’m gonna resign. I was told that this would do enormous harm to the institution. On Friday I gave a newspaper interview. Over the weekend they said that you broke the rules we are going to have an investigation. I said: no reason for investigation I broke the rules. And then they said,  well you’re gonna have to sign this MOU (memorandum of understanding), we’re gonna put on a kind of administration leave for six months and part of the deal is you can’t say anything, I’m not gonna sign any MOU, and then they you know you have leave the bank on Monday and I said that’s what I’m trying to do on Thursday. And that’s the end of the story…

What do you think is your main contribution to economy?

The lasting contribution I have made so far is in clear understanding about the economics of ideas and how they’re different from the economics of objects. This is the heart of my contribution to the theory of economic growth. I think in practical terms there’s still an opportunity for me to influence in a policy on urbanization, because urbanization is one of the areas where government policy has a huge influence for good or for harm. And government policy doesn’t encourage urbanization. Encourages “successful urbanization” can be a very successful way to speed up the growth process and to make growth inclusive, to give everyone a chance to enjoy the benefits of growth. By the way, one of the big successes in China has been their commitment to successful urbanization, and the speed with which they have made it possible for people to move into urban centers and get jobs in the modern economy.

Are cities in China the most successful, or would you highlight some others in another countries?

There are very successful cities in Europe and the United States. And what’s unusual about China is the rapidity with which this very large cities have emerged. You take Paris, London… They grew to the size that they now have over about 200 years. You know like this massive increase in the scale of those two cities: population, geographic scale, you know China is being doing the comfortable growth about twice as it has. But I think we can move at the successful cities of Europe and United States and China and see lessons about what other nations can do to encourage successful urbanization.

Would you highlight anyone in Spain?

Not a lot. Barcelona is one of the cities that people point to that had a plan which now makes it a successful city.

Climate change is one of the aspects that is addressed when talking about cities. How do you think it is being treated?

You spoke about my lecture. I can understand innovation at the end of that lecture: because of the kind of the emotion and the kind of… the possibility, the optimism of the potential serve of progress. Even though this kind of possibility of progress is very real, most nations right now don’t seem to be making progress. We have to understand what are we doing wrong and we do need to do to success. One of the key elements here is the recognition that it takes both innovation and regulation to make progress. You need a government that can encourage new discoveries, new cities, new developments, new ways of doing things… But you also need a government which stands ready to stop the activities that will be harmful to everyone. If you look back to the 1980’s and look at the problem of a class of chemicals called chlorofluorocarbons (CDC), which are destroying the ozone layer, this is a time, under the Reagan Administration in this country, where the government did its job. The government said: we can’t let firms make a profit like doing things that will destroy the environment. So, the US and the governments of the world regulated the chlorofluorocarbons: basically, told firms you cannot keep selling these chemicals. The problem right now is that governments are not doing their job. Were doing something to do global environment, which is harmful, which is risky?, and yet compared to the 1990’s governments are not taking action. The question we have to answer is what went wrong between the 90’s and today? Why the governments no longer do their job of protecting all of us from harms that the market pretenders of profit can do? I’m confident that governments will eventually respond because citizens will say we don’t want to live in a world that is getting worse. We don’t want regress, we want progress. But at least at the moment, there is something that is going wrong in our decision-making systems and governments seem uncapable of doing their job.

What would you do to solve it?

Some economists have been saying for a long time: well, if the goverment is not doing its job, just get rid of the government. But that’s incredibly short-sighted. We can’t make progress as a society if you don’t have a government that will do its job. So, the right response when we see the government is not doing its job, is for the citizens to say to the government: you have to do it your job. There is no excuses here. You got to do what we want. I think they will do this, but it takes a while…

Does the same thing happen to the automation of jobs?

Automation is the same issue. For centuries, new technologies have displaced some workers, have reduced their opportunities, and we have governments that have addressed that problem. They said we are going to find the way to take advantage of new technologies but to make sure that everyone in society can share in the benefits from growth. So societies implemented policies that make sure that a large fraction of society was not left behind. I think the most successful policy was a commitment to universal education: universal primary and universal secondary education. This meant that workers could do the new jobs that were available in the world of new technology. Part of the job governments have to do right now is to say that we will find the way to make sure that everybody can share the gains that new technology will bring, and we will regulate this new technologies to make sure that they don’t harm society. We won’t let something like the chlorofluorocarbons destroy our environment. I think they should be saying we won’t let spying by these new tech firms undermine the basics of privacy and individual autonomy and freedom that we as citizens want to enjoy. So, I think we’re across of the whole range of issues, what we are dealing with is the failure by government to do its job, and the protest which don’t quite nowhere of focus their attention, I think will eventually converge on the notion that the government works for us and it has to do its job, and if it’s not doing its job, we, as citizens, are going to make a change.

And how can workers affected by automation be relocated to new posts?

Go to Ask Google, and ask: do you have these many resources that you could use, if you have more people, could you do you do a better job of educating many people? If you have more resources, more people, more skilled people, could you help make people healthier? Go to a park and ask: could this better preserve the kind of environment that people want to visit? If you ask those questions, you see that there are more opportunities for people to make a contribution. My answer is that everybody can contribute something and make the world that we live in better. My personal belief is that everybody should contribute something as well. So, they can and they should. And if we stick to that commitment, will be fun.

What can you say about universal basic income?

If the government tries to implement universal basic income, the tax would have to be very high on the people who work to be able to provide a real income for people who don’t work. It will take a very high tax rate to do that. My second prediction is that this will cost enormous polarization in any society because the people who pay the tax will resent the fact that they are working, they are contributing, and other people are not. I think it’s a very basic universal human response believe in the idea that everyone has to contribute. The idea that you are going to collect a lot of tax from somebody who works and give them some income back, that’s not going to change anything. We are going to see that they are paying what more tax and what they are getting backs? This is a system of take money away from people who work and give money to people who don’t work. I think it will cost enormous polarization and division in societies, and I don’t think it will achieve its goal of reducing inequality, because the key requirement for maintaining a low level of inequality is a sense of common purpose in a nation, a sense of unity, that we are all in this together, and that we will all help each other, and if you polarize people and fractions at war with each other, it will not automatedly lead to the shared purpose, the more equal opportunity that the advocates of these programs say that they want. I predict that these types will not achieve the goal that they want to pursue. There is a clear alternative here, which is the wage subsidy. There are people which skills that are so low that there are companies who don’t want to pay very much to hire them. But if we subsidize wages at low levels, firms can say: ok, I don’t get very much work form this person, but it also doesn’t cost me very much. If we want use tax revenue to achieve more equal outcomes, I think it will be far better stand on the wage subsidy that emphasizes this notion that everybody can contribute something. Part of the reason why I think this is very important is because we have to remember that people acquire skill on the job. Work is really like schools in that sense. You do something that is hard, but you get something from it. When you get on job is not only some money to take home; it’s a new skill. It’s a disaster have young people who are not in a job, not learning, not acquiring skills that they can acquire in a job. Universal income commitment could make that problem even worse. What we should be doing I think is making work more attractive with lower levels of skills and making them more attractive as employees to potential employers.

What does Europe look like from the United States?

I don’t think Europe has done as good a job as the US in improving air quality. I’m in this scenario where you could invest and be better, and it is not an objective date to reach pretty quick. On the other side, I think Europe has done a better job in terms of preventing powerful firms on becoming dominant monopolies in the market state serve. I think the US should learn from the successes that Europe can take credit for. I personally fly in an airplane very frequently, the development of Airbus conveyed enormous benefits on the entire world. This is a very important innovation in our global system right now. Boeing looks like is a company in a very serious trouble. We are all fortunate that Airbus exists. The Europeans should be thinking what is the next thing that we could do.

How do you think Brexit will evolve?

In terms of what will happen if questioned, here’s what I think an economist can say… It’s correct that Britain could operate successfully in the global trading system independently of European Union. But that statement about where Britain could end up in the future: the question I don’t think has gotten enough attention is, what will the transition have the likes as Britain tries to get somewhere it is to where the people who voted to Brexit want to go? Just because there is a good place you can get to, it doesn’t mean it’s going to be easy to get there. I think the costs of the transition has not been fully appreciated, but, in the end, this is the kind of decisions that voters can make. What economists could do now is answer questions that people might raise about what will happen if we do this first, or we do that later and do something else first. We need to stand ready to answer those questions, so that them, the citizens, can decide what to do, and also stand ready to answer questions in the EU about how the remaining members can adjust.

A few months ago you launched a global proposal about targeted digital ads. What does it consist of?

It’s a tax on revenue from targeted digital advertising. The first point: It’s not a corporate income tax. Because we have to know that corporate income tax is incoherent. Makes no sense, because income is the difference between revenue and cost. If revenue is collected in one place, and cost is incurred in another place, there is no way to say where income is earnt. We know where revenue is collected. If one nation or one state or one city, we are going to tax the revenue collected from the people who lives in our jurisdiction. There is no problem on that tax. There is no raise to the bottom, there is nothing gone wrong. The reason I would tax targeted digital advertising is the same reason I would tax carbon emissions. This is a tax that we don’t make any revenue, because we want the bad thing to stop. If the tax rate is high enough, digital firms will charge subscriptions. There is a way to get back to the way that market works. The way that market works is that I can buy something and then I get something back. If I don’t like what I get back enough, I can get my business elsewhere. If I pay the subscription for the digital services, we’ll be back to the way that market should work. But right now, with these digital ads, nobody knows what they are giving up. People don’t know what they are getting, and because of the monopolization is taking place, they don’t have any opportunity to take its business elsewhere. That advertising model is a cancer on the modern economy, and it is the job of the government to stop it. That’s just my proposal, and I hope the governments around the world will take this seriously.

What do you think are the trends that will dominate the future?

I don’t believe that this question serves or not the citizens of the nation put pressure on their government to do its job, or whether they get so frustrated that they try to destroy the system acknowledged. That’s the big issue. I think burning things now is very dangerous. It could always rebuilt but this is what I said about Brexit: it could be incredibly painful, and it could bring out a very ugly side of people if we go through that kind of turmoil. I think is scary.

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