Helping the U.S. Economy Keep Up

A Conversation with Edward Lazear, Davies Family Professor of Economics at Stanford University’s Graduate School of Business; Former Chairman of the Council of Economic Advisers

The United States will face increasing economic competition from fast-growing countries like China and India while technological advances change the makeup of the job market. To minimize disruption, innovation in our education system and fair immigration policy are necessary.

Edward Lazear on stage at the Bush Center's Forum on Leadership, April 18, 2018. (Paul Morse / George W. Bush Presidential Center)

Edward Lazear is the Davies Family Professor of Economics at Stanford University’s Graduate School of Business and the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution. The former University of Chicago professor also served as Chairman of the Council of Economic Advisers under President George W. Bush from 2006 to 2009. 

Lazear spoke with The Catalyst during the recent Forum on Leadership at the George W. Bush Presidential Center. In this exchange, the economist discusses the disruptive challenges stemming from growing world powers, the rise of populism, America's education shortfalls, an outdated immigration system, and the unaddressed $21 trillion federal debt. He also presents ways to deal with each of these forces.

We think about China as part of the future but, looking 10-20 years ahead, what forces or nations might we be looking at as disruptive or consequential?

We will certainly be looking at China and India. If you project out even China’s lower rate of growth two decades from now, it will be at where our level of per capita GDP is today. Hopefully, we will continue to grow, but they will be at our level of per capita GDP. 

They have 1.5 billion people, and we’re 330 million in population. If China has the same per capita GDP as we have now, they’re going to be about four times our size. That tells us that they are going to dominate the world economy. That’s just sheer numbers. 

If China has the same per capita GDP as we have now, they’re going to be about four times our size. That tells us that they are going to dominate the world economy. That’s just sheer numbers.

India will be second, although they may be a decade or so behind. China and India are going to be major forces in the world.

Chongqing, China

One of the things that we know from history is that the most important political and military powers have also been the dominant economic powers. Think back to ancient Rome and the British Empire. They were both the richest society and the politically dominant one. So, we're going to have to deal with a China that is much more important in terms of its dominance in the world.

What about Africa? What is its likely role as a major force?

Africa is probably 50 years behind, but it is getting there. I would say it would take until 2050 to 2060 for Africa to be a force in the world. Latin America, too, although it is a bit ahead of Africa. Africa has a significant population and rich resources.

That will be a completely different-looking world. The question is, how are some of Africa’s political factors and types of government going to change as they become richer? That’s a tough forecast.

A force we are living with today is populism. If you believe in the flow of goods, services, and information across borders, how do you make that argument to people who feel that the global economy has left them behind?

The economy has left them behind, but that’s not so much a result of trade. We have had a change from a manufacturing economy to a service economy. Before that, we shifted from an agricultural economy to a manufacturing economy.

We’ve always adapted pretty well. People have acquired the skills to be consistent with those kinds of economies. That doesn’t seem to be as true in recent years.

The primary reason for expanding income inequality is that skills being provided by our school system to almost half of our population are not commensurate with the kinds of skills necessary for the economy. We need to rethink the kinds of education and training systems in our country. That’s probably the best way to remedy the problem.

The primary reason for expanding income inequality is that skills being provided by our school system to almost half of our population are not commensurate with the kinds of skills necessary for the economy. We need to rethink the kinds of education and training systems in our country.

What would that look like?

First, those systems would be better tailored to a technologically-advanced economy. As the economy becomes more advanced, higher levels of education are necessary to accommodate that advancement, including making sure more people have access to the goods that economy produces.

A student works on a robotics project

This is not a recent phenomenon. Historically, the average level of education in the late 19th century was well below what it is now. The difference between an educated person and an uneducated person in an agrarian economy is not as pronounced as it is in a technologically-advanced economy 

So, we have to invest a lot more in education. That’s point one.

Point two is that we need to invest in the kinds of skills that are more tailored to the economy. We need to be thinking about training our kids in school to get the necessary skills. We waste way too much time on things that half our population doesn’t ever use.  

When he was in office, President [George W.] Bush’s solution was community colleges. We tried to do some things there, but there is plenty of work left to do.

What impact is artificial intelligence (AI) having on productivity in the workforce?

Almost none. 

Where I live, Silicon Valley, everyone likes to think that AI is going to put everyone out of business. It may, but the problem now is almost the reverse. It’s not that we have so much productivity that there are no jobs to go around. It is that the productivity growth that we saw in the late 1990s and early 2000s has slowed way down. 

It’s not like artificial intelligence and all these new technologies are causing our economy to grow so rapidly that no one can work. It’s actually the opposite. 

So in the near term, that’s not a major problem. AI affects people at the top, so it might put physicians and radiologists out of business. It might even put economists out of business, for all I know. But the kinds of skills that high school or college graduates do now in the service economy are not the kinds of things that AI is going to replace. There are too many jobs that AI is not well suited to deal with, at not yet. 

What other technological breakthroughs might have an impact on our productivity?

It’s not so much technological. Much of my time is spent as an educator, but we don’t know how to produce skills all that well. 

When you think about how we teach kids today, including my Stanford students, we do it pretty much the same way that we did 1,000 years ago. Even when you think of all the available online material, the technology is not particularly different. It’s basically the same technology delivered in a different way. 

When you think about how we teach kids today, including my Stanford students, we do it pretty much the same way that we did 1,000 years ago. Even when you think of all the available online material, the technology is not particularly different. It’s basically the same technology delivered in a different way.

Maybe there is no simple answer for a better education system. Maybe education is just very labor intensive, where you learn by talking to a brilliant mentor. I had many brilliant mentors who made my life and maybe that’s necessary. We at least ought to be thinking about what we can do that’s scalable. 

You have spent a lot of time looking at the impact of immigration on productivity and our economy. What does the data show about the assimilation of first-, second-, and third- generation immigrants? How might the data differ among generations? And what can we learn from that data?

Here’s what we know: The first generation of immigrants does worse than the native-born population; the second generation of immigrants does better than the native-born population; and the third generation of immigrants is the native-born population and they look just like everybody else. 

I’ve learned through my own research that the single-most important factor in assimilation– and assimilation is hard to measure but you can measure it through things like English fluency– is whether you reside in a community that has many people who were born in your native land. 

I’ve learned through my own research that the single-most important factor in assimilation... is whether you reside in a community that has many people who were born in your native land.
Mexican culture appears throughout the U.S., such as at the Dulcieria de las Americas shop in Dallas. (Andrew Kaufmann / George W. Bush Presidential Center)

For example, if you are from Mexico and reside in East Los Angeles, which has a very large Mexican and Spanish-speaking population, you tend to assimilate more slowly. But if you reside in St. Paul, Minnesota, you have to learn English or you can’t survive. 

That suggests we should be thinking about a more balanced immigration policy. Not less immigration, just a more equitable policy. Our current system does not treat all countries similarly. 

For example, if you come from an Eastern European country like Romania, it’s very difficult to get into the United States. You can migrate to Western Europe but you can’t get into the United States. That’s because most of our immigration slots are doled out on the basis of family reunification and there just aren’t that many Romanians here. 

We get people from a few countries. Right now, they are from Mexico, the Philippines, China, and India. Even India is way underrepresented given its population.

We need to think about an immigration system that is fairer in terms of its allocation of slots. It needs to allow people who are from countries where there aren’t necessarily family members living here a chance to get into the United States. That would be a more equitable and better system and would promote more rapid assimilation.

We need to think about an immigration system that is fairer in terms of its allocation of slots. It needs to allow people who are from countries where there aren’t necessarily family members living here a chance to get into the United States.

You have talked about the impact of the debt. It seems like an invisible force that we don’t see but it is coming.

I think we see it. The problem is that it’s difficult to deal with it. There are always strong political forces that induce you to ignore it in the short run. But if you add up enough short runs they become the long run.

Projecting out numbers for programs like Social Security and Medicare aren’t that tough because we already know the demographics. In 20-to-25 years, we would have to raise taxes by 50 percent to close the gap between spending and revenues. That would be devastating for the economy.

So what do we do?

I like rules, so I would constrain the rate of growth of expenditures and force Congress to figure out how to allocate those funds politically. They can fight it out. 

I like rules, so I would constrain the rate of growth of expenditures and force Congress to figure out how to allocate those funds politically. They can fight it out.

One specific rule might be that spending increases would be limited to no more than one percent less than the rate of inflation whenever we are running a deficit. Over time that would bring us back into balance.

You can think of other rules, but that would force Congress to say we can grow the budget but not at a rate faster than X. They would have to deal with this problem and decide which programs to fund and which programs not to fund.

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