We met with Harvard University economist Dr. Greg Mankiw to talk economic advisers, the Laffer Curve, Reaganomics, and so much more. Enjoy!
Top economist Dr. N. Gregory Mankiw discusses the Laffer Curve, taxes, and issues with Reaganomics. He also shares his insights into the pandemic and subsequent recession, his hope for a rebound after vaccination distribution, the usefulness of studying both economics and medicine, and how voters can benefit from understanding economics. Robert M. Beren Professor of Economics at Harvard University, Dr. Mankiw talks with Dr. Jed Macosko, academic director of AcademicInfluence.com and professor of physics at Wake Forest University.
…we're already in a recession, we seem to be coming out of it a little bit, we're recovering. The path of recovery that we're going to see going forward is really going to depend more on microbiology than macroeconomics.” – Dr. Gregory Mankiw
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(Editor’s Note: The following transcript has been lightly edited to improve clarity.)
Jed Macosko: Hi, I’m Dr. Jed Macosko at AcademicInfluence.com in Wake Forest University, and today we have a very special guest coming to us from Harvard, Professor Gregory Mankiw. Greg, it’s great to have you on today’s show. We have a couple of fun questions for you.
Gregory Mankiw: Oh, thank you. It’s nice to be with you.
Jed: Yes, you’re welcome. The first question I love to ask is, how did you get interested in Economics? And where did it happen? Was it when you were in high school or in college?
Gregory: No, for me, it was freshman year of college. I had really no idea what Economics was. I started college at Princeton, thinking I’d be a Math major or maybe one of the sciences. But then a friend of mine was taking an Economics course, and she was telling me what she was learning, and it seemed more interesting to me than anything I was learning in my courses. So I started reading one of her books and thought this was really interesting. And the next semester, my second semester of freshman year, I started taking Economics courses, and it was a smooth ride from thereon in.
Jed: Did you go straight into a graduate program, or did you do something between college and grad school?
Gregory: I did. I started my PhD at MIT right after I graduated from Princeton. In the middle there, I did a few other things, though. I didn’t finish the PhD uninterrupted. I went and spent a year-and-a-half actually in law school, thinking maybe I’d try a law degree as well. Decided not to, so I was a law school drop out. I also spent a year working on the staff of the Council of Economic Advisors 1982-83.
Jed: What was that like, being on a Council of Advisors like that?
Gregory: It’s a fascinating organization. The Council of Economic Advisors is a small group. It’s got three members that are appointed by the President, and a staff of 30 or 40. And their only job is just to advise the President and give him the best economic advice we can. So I arrived as a relatively junior staffer back in 1982, and then I came back in 2003 with a different President, was Chairman of the organization.
Jed: Wow, that’s fascinating. So obviously a lot happened between those two time points. You finished your degree at MIT, and then did you immediately become a professor, or what happened next?
Gregory: I immediately became a professor. I got my first job at Harvard as an Assistant Professor. I had taught a couple courses as instructor at MIT. But basically, my first full permanent job was as an Assistant Professor at Harvard, where I got promoted, and I’ve been there ever since. So other than the couple of years that I’ve gone off to Washington, I’ve been a professor at Harvard my entire career.
Jed: That’s so fun.
Now, when did you then go back... Why did you go back to the Council of Economic Advisors and be the Chairman there? What was the process?
Gregory: Well, I’ve always been a very policy-oriented economist and interested in applied topics. So it was very natural for somebody like me to get a job like that. The way I particularly got the job is, I knew my predecessor, a guy named Glenn Hubbard , who had worked for George W. Bush’s campaign, and he became the first Chairman of the Council of Economic Advisors, when George Bush became President. Two years later, Glenn was going to go back to Colombia, where he’s on the faculty, and at the time, I believe he was Dean at the Business School. And he was looking for his successor and he called me up and said, "Greg, are you interested?" And I went down, interviewed, got the job and then I spent two years there.
Jed: Fun. That was fun. Did you bring your whole family down with you or did you go alone?.
Gregory: We had a big debate about that. I had three small children at home, and there was a debate whether to dislocate the whole family, move everybody into new schools or have me fly back and forth. And it was a tough choice. We decided that, in the end, the people here in Boston were happy with the schools they were in, and so I wouldn’t disrupt their lives, and I’d fly back on weekends. And I did almost every weekend fly back. So basically, my wife basically became a single parent five days a week, which is a tough job with three small children...
Jed: Oh, my god.
Gregory: And then, I flew in on weekends.
Jed: Yeah, but it all worked out. Your kids have grown up, flown the coop, and you guys are still in the Boston area.
Gregory: That’s right, still in the Boston area. We’re empty-nesters. Fortunately all my kids are relatively close. But now, it’s just my wife and I at home.
Jed: Fun. Really fun. Well, going back to working in 1982 in the same Council, that was when Reaganomics were a big thing.
Jed: We just had an interview with Steve Keen, who I’m sure you’ve heard of his name, and you probably have feelings about him and his renegade economics. He said something interesting about the Reagan years, and said that this whole sketch that the guy made for Reagan on a napkin, about how that there’s this peak and then it comes back down, and if you can lower taxes, you’ll actually improve the amount of revenue you get because businesses will be growing, you’ll get more taxes in the end. And he followed that sort of Reaganomics, and then, according to Steve Keen, it actually had a totally different effect, but then it ended up stimulating the economy. So I was fascinated about that.
What’s your take on that Reagan period of time?
Gregory: Yeah, that curve you’re referring to is referred to as the Laffer curve.
Jed: That’s right.
Gregory: The Laffer curve is not controversial as a matter of economic theory, the tax rates can reach such high levels that cutting them could potentially raise revenue. In fact, I teached the theory in my textbooks. But very few economists thought that taxes had reached that high levels and that we were actually in the region of the curve, where cutting rates would raise revenue. And indeed they didn’t. We ran very big budget deficits during that period. On the other hand, it did stimulate the economy and we recovered quite rapidly from a very deep recession in 1982.
So I think there are arguments for the tax cuts, beyond the Laffer style of arguments, but I don’t think many economists at the time really thought that we were on the wrong side of the Laffer curve.
Jed: And I think that Steve Keen would agree with you at that point that economists knew that that was all hog wash, but Reagan bought into it, and then as just a happy side effect, it ended up stimulating the economy for other reasons. And I know that Steve Keen has his own thinking about what stimulates an economy. Are you familiar with his alternative theories of economics that...
Gregory: No, I’m not intimately familiar with his views, but it’s certainly correct that changes in taxes have both what we call supply side effects, which is what the stuff that Arthur Laffer emphasized, and demand side effects, which is what Keynesian theories emphasize. And I think it’s standard textbook treatment is it affects both sides of the economy and part of what happened in the aftermath of the Reagan tax cuts was an increase in aggregate demand, which was probably needed at the time, because we were suffering from a very big recession. Students today will probably forget this, but 1982 was a very, very deep recession at the time, it was the worst recession since the Great Depression. So it was really was a very depressed period of time, and the tax cuts did help pull us out of that.
Would you say that standard economics, as you referred to it, doesn’t talk very much about finance? It talks about supply and demand, but not about the financial ways that money is generated by sovereign nations and things like that. Is that something that’s not part of standard economic textbooks?
Gregory: Oh, no, I think quite the contrary. I think financial markets, financial institutions are very much part of economics textbooks. The idea... What does a central bank do? The central bank is the Federal Reserve in the United States, European Central Bank in Europe, Bank of England, in England. Those financial institutions are very important for understanding the macro economy. The way we teach it at Harvard is the first semester is microeconomics, which is specific firms and consumer decision making in markets, supply and demand, and then you don’t really get much into finance. But in the second half of the year is macroeconomics. We do talk a lot about financial institutions, including the central bank, and indeed recent years, we’ve probably talked more about financial institutions because of the deep recession in 2008, which basically came on the heels of a financial crisis, and so to really understand that economic downturn, you have to understand how the financial system works.
Jed: That makes sense.
Do you think we’re headed for another deep recession because of COVID and are there warning signs, like there were before the 2008 recession that, maybe not this time in the housing market, but maybe in the business sector, there’s bad debt and things like that, that might lead to a recession?
I don't think we can really get back to a normal economy until people feel safe to do normal economic activities.” – Dr. Gregory Mankiw
Gregory: We’re already in a recession. The COVID has caused a big increase in unemployment, and the National Bureau of Economic Research that dates recessions has already said we’re in a recession. The unemployment rate reached a new post-World War II high at about 15%. So we’re already in a recession, we seem to be coming out of it a little bit, we’re recovering. The path of recovery that we’re going to see going forward is really going to depend more on microbiology than macroeconomics in the sense that it’s really going to depend on are we going to get a vaccine, are we getting better therapeutics, are we going to figure out how to contain this with non-pharmaceutical interventions like masks? I think... So I don’t think we can really get back to a normal economy until people feel safe to do normal economic activities. Things like the restaurant sector has been hit very hard and they probably really can’t come back to normal until people feel like they can go into a restaurant and be close to other people and not feel like they’re putting their life at risk.
Jed: That is for sure.
Do you track what’s going on like in Europe and with COVID where it looks like they’re having a resurgence, but the cases are not as fatal, things like that? Do you monitor that as part of what...
Gregory: Well, I do to some degree. Now, the connection between medicine and economics is as close as it ever is. So I’m watching what’s going on, how different countries are dealing with it differently. I actually am somewhat optimistic economically, in the sense that I think once a vaccine is developed, and it’ll probably happen in the next six, nine months, then we can start distributing it and I think that life can start going back to normal. But I think it’s... We’re in a very difficult time, and as we’re all social distancing the best that we can, we really can’t expect economic activity to resume.
Jed: That’s really encouraging. Now, just talking a little bit about economics as the field to go into. If a young person is thinking about going into economics, you mentioned you thought you might do math, is math a really critical part of economics, or are there parts of economics you can do without really high-level math?
Gregory: I think a person can certainly major in economics without high-level math, and economics is a great entry into lots of different fields. So if you want to be, say, a lawyer, getting an economic undergraduate degree makes a lot of sense, because a lot of laws are going to be dealing with economic issues, so understanding the economic issues are important. And you can certainly get an undergraduate major without much math. At Harvard, we require one semester of calculus to major in economics. When I first arrived at Harvard we didn’t even require that. So you don’t need a lot of math to do basic undergraduate economics.
If you want to then go become a PhD economist, then become a professional economist, then you really need to do a lot of math, in particular applied math, like probability theory, mathematical statistics, differential equations, and so on. So I think if you want to become a professional economist, yes, you gotta take a lot of math. That shouldn’t deter someone who wants to major in economics. I should say the way, my daughter, who’s now in medical school, was an undergraduate Econ major. And that might seem very strange, a combination of medicine and economics, but in fact she is very interested in the public policy associated with healthcare. And so that involves both an understanding of medicine and an understanding of economics.
Jed: That’s really cool.
Now, in your own research, do you use a lot of differential equation, math, that kind of stuff? What’s the main amount of math you use?
Gregory: At times. I mean, a lot of macroeconomics is about studying decision-making over time and the evolution of the economy over time. And that will often be described in terms of differential equations. So that’s a particularly useful branch of mathematics. There’s other branches of mathematics that are probably less useful. Taking a course in topology may train your mind, but it’s not going to be... The tools you’re learning in a topology course are not going to be useful in economics.
Jed: That makes sense. So for somebody who’s just thinking about the different things that you get to do as a PhD in economics, what would you say, besides being a professor, if you go all the way to the PhD level, what else is there out there?
…you see economists playing an important role, both in private industry, in the public sector, as well as of course academia.” – Dr. Gregory Mankiw
Gregory: Sure, there’s lots of different opportunities. One can go work in a government agency that’s formulating economic policy. So I’ve spent a couple of summers as an intern at the Congressional Budget Office, which is one of my favorite government agencies that basically does economic analysis to try to inform Congress, as Congress is debating legislative priorities. That’s really a very socially valuable use of economics.
Private firms will often hire economists. So a lot of tech firms like Google and Amazon are going to figure out how entire economists in order to figure out how to run auctions. They’re doing... Auctioning off ad space, for example, what’s the optimal way to do that? So you see economists playing an important role, both in private industry, in the public sector, as well as of course academia.
Jed: Interesting. Now, recently the news is that Goldman and Sachs came out saying that if Biden wins the election and the Senate is flipped to the Democrats, the economy will improve faster.
How do they know that as economists?
Gregory: I’m a little skeptical that they do know that. They obviously have a set... They have some model of the economy in mind and they have some guesses as to what the Biden and Trump policies will be. I think it’s always very hard to know, both because the models are going to be imperfect. We shouldn’t really know what their policies are going to be. Politicians take stands during the election. Sometimes they follow through, sometimes they don’t. Sometimes they don’t follow through for the simple reason they can’t get their policies through Congress. So, I think... I take those projections with a big grain of salt.
Jed: Okay, spoken like a true economist. [chuckle] Well, just as we finish up here, I’m curious, you’ve worked with a lot of different administrations. What have you seen that really helps the United States the most and helps international economic growth the most?
I think teaching economics is tremendously important and taking economics courses is tremendously important, because it's teaching and training the voters of the future.” – Dr. Gregory Mankiw
Gregory: I think fundamentally what we need is good institutions, good policy. We need rule of law. We need policymakers who understand how a policy can improve matters and when the things should be best left to the markets. But ultimately the policymakers are answering to voters. So I think ultimately what we really need is an electorate that’s thoughtful about economic issues. And the best way to make them thoughtful is that more people take economics courses. So I think teaching economics is tremendously important and taking economics courses is tremendously important, because it’s teaching and training the voters of the future.
Jed: Well said. What can you share just in this short last little bit of the interview that you think are important points that we as the electorate need to understand? And if you can’t obviously teach us everything, just tell us what we need to know, that we need to look into more, as we maybe take a class or some online MOOC or just pick up a book on economics.
What do we need to be looking at here?
Gregory: I think the big question in economics is when do markets work well and when do markets fail. And there is a large body of theory, much of which can be taught at the introductory level, that explains why did Adam Smith admire markets, why is this magic of the invisible hand, that somehow decentralized decision-making is going to lead to good outcomes. But when does the invisible hand let us down? When do we need government to step in to correct market forces these market forces are leading us astray? And that I think is really one of the big central questions of economics. And I can’t give you a simple answer because it’s a complicated problem. But it’s a problem you make a lot of headway in, in just your first economics course.
Jed: Okay, well, we’ll look into that. Thank you so much, Professor Mankiw, for taking some time with us today, helping us understand what an economist does and the fun things you get to do, and also what we as the people who are not economics professors should be thinking about. So thanks so much.
Gregory: It’s been my pleasure.