Nathan Hunt: This is the essential podcast from S&P Global, My name is Nathan Hunt. Over the past year, I have had the privilege of working with four of the leading economists and academics working in the United States today, as they wrestled with the challenges America faces in the coming decades. S&P Global is proud to present the output of their work, an article entitled, entrepreneurial leadership must help meet America's 21st century challenges in a post pandemic world, to accompany this article, I am interviewing all four co-authors. The purpose of these interviews is to understand this article in the light of each author's past published work and career, today, I have the good fortune to interview Matthew Slaughter of the Tuck School at Dartmouth.

Matthew Slaughter: I'm Matt Slaughter, I'm Dean of the Tuck School of Business at Dartmouth, also a professor here, and most importantly in life, I'm very happy to be the husband of Lindsay and the father of two sons.

Nathan Hunt: Matt, there are four co-authors to this article on income, inequality, climate change, racial injustice, and a crisis in American democracy, three of the four authors, including yourself, are recognized experts in globalization and trade, is there a relationship between these challenges facing the United States and globalization?

Matthew Slaughter: There definitely is, I think in the past one to two generations, there's now a wealth of academic and other research that shows the rising inequality in the United States of jobs, income, wealth, opportunity, hope, that globalization in different forms, meaning international trade, international investment, immigration, has played a role over some of those 40 years and some industries and, or some geographies has played a role in contributing to those inequalities rising. And those inequalities are kind of the heart of what animates our work in this paper, most of the research shows on most measures of rising inequality and in terms of following real incomes, for example, globalization in different forms was not the predominant cause.

A lot of the forces at play seem to be technology innovation, has played the biggest role, and yet in the minds of individuals and in the minds of our political discussions, these different dimensions of globalization tend to be ascribed in underlay contribution relative to what [inaudible 00:03:01] would say. So sometimes we'll summarize that by saying, we've had marches in Washington DC, and other global capitals against, again, different forms of trade and investment and immigration, we don't see people marching at the wall in Washington DC to protest automatic tele-machines or the internet. So, we have a different deep political economy in the United States than most other sovereign nations about the good and bad of innovation broadly defined, than we do about globalization.

Nathan Hunt: Back in 2001, you coauthored a book called Globalization and the Perceptions of American Workers, that tackled the widespread skepticism of global free trade among the American electorate. There are some economists out there who believe that the backlash against globalization is based on regionalism or bad math in terms of a cost benefit analysis, how do you see the backlash against globalization today?

Matthew Slaughter: Great question, and thank you for mentioning that work with Ken Scheve, who's a wonderful scholar and an old college roommate, one of our main findings in that book, I would summarize this way, Americans are very sophisticated pocketbook voters and those who think otherwise and assert, Americans don't understand some of the basic economic forces at play and they're easily swayed by leadership voices, clearly leadership voices and other noneconomic considerations matter. But when you look at the empirical evidence from the variation in voter opinions about globalization in America, what you see is people understand their economic interests, so that means a few things, one is contrary to what is sometimes asserted, the problem with people's perceptions about globalization is not, they all need to come to the Tuck School business at Dartmouth and take class from some of my great colleagues to understand the benefits of globalization.

Large majorities of Americans for decades consistently understand the aggregate benefits that globalization has long brought, and fingers crossed, will continue to bring us [inaudible 00:05:18], they get the benefits of its [inaudible 00:05:20] innovation, it tends to, on that, increase employment in average incomes. And yet, a lot of individuals, they think not just about the aggregate or if anything, they think more about their own personal analysis to circumstances, they themselves as workers, their families, their communities. And what you see is consistent cleavages in American public opinion, which is more skilled Americans on the basic measures we have in our empirical research, tend to support globalization more than less skilled Americans do. And that's very consistent with what we talked about a minute ago which is, incoming quality across skills, one of the main outcomes of the dynamism of the global economy of technological change and trade and theses other forms of globalization.

The pressures that economically have tended to fall more on less skilled Americans, as a footnote to that, you see other cleavages in public opinion that are consistent with those measures of economic self interest. So a couple other findings that Kevin and I have had over the years with other coauthors like Gordon Hanson, and some of which we talk about in that book, homeowners in communities that are heavily pressured by import competition and we know those are the communities that, for example, in 2016, were some of the ones that [inaudible 00:06:32] electoral victory for president Donald Trump. Homeowners in those economically pressured communities are much less likely to support globalization than non homeowners are, kind of independent on their skill levels, and the other thing that we've found in the research is there's variation across space based on how generous states are in the public finance supports that they provide to immigrants. So independent of skills, people in California are more wary of immigration than people say in New Hampshire, the state I live in now, and that's consistent with there's many more immigrants in California that put more pressure on the public finance system.

And I say that without any judgment, I firmly believe that immigrants [inaudible 00:07:15] generate large benefits to America above and beyond [inaudible 00:07:18] and kind of ethical reasons that open immigration balance is a quite important policy, but on your good question, a lot of the geographic variation that we see in some of these policy issues in America, they have a lot to do with people pretty sophisticated, understanding of how forces like globalization affect their economic prospects.

Nathan Hunt: You wrote a couple of articles for the international monetary fund back in 1997, that demonstrated that globalization had only had a very small effect on wages and employment in advanced countries, now that was many years ago, you have pointed out on many occasions that real wages for unskilled workers have stagnated or actually declined since the 1970s. And I should actually amend that, you've pointed out that all the way up to graduates of four year college, sort of BA, BS type degree, their wages have stagnated or declined, this correlates with the pursuit of free trade policies by administrations from both parties, I guess what I'm wondering is looking at the numbers over the last 40 years, doesn't correlation imply causation at some point?

Matthew Slaughter: Great question, the deep scholar me will say, no, it's one of the deep things that why we need to try to have as accurate of an understanding of data in the world to understand what forces are driving outcomes and in what relative contribution, but as you pointed out, over the past 20 to 40 years, depending on what measures of inequality we look at, it is inaccurate to say that international trade or other dimensions of globalization [inaudible 00:09:21] have played zero role in putting a downward pressure on real outcomes. So, it's not that it's zero, the only thing I'll point out, you mentioned kindness of the work I did in the late 1990s, there's been excellent work done again by my coauthor, Gordon Hanson, one of the leading scholars on this, and David [inaudible 00:09:42], and their coauthors, putting out that what sometimes gets called... At least the economic [inaudible 00:09:46], the China shock, the accession of China into the global economy.

After their joining the WTO starting in 2000, 2001, roughly the next 10 to 15 years, then accession into the global economy of China was a much larger aggregate shock of unbalanced, less skilled workers coming into the global economic system and putting some downward pressure on the wages of less skilled Americans and less skilled workers in other sovereign nations as well. Even coauthors like Gordon and [inaudible 00:10:17] have pointed out, even during that time period, if you wanted to describe a relative apportionment of causation, most of the research continues to show that the single biggest contributor to different pressures on real wages or rising equality during that time period, was still different measures of technological change and innovation.

Here we are today, 2021, I think a lot of people point out that China shock has passed actually, China's real and relative wages can bring the rest of the world [inaudible 00:10:47] dramatically as their productivity growth, so fast over the past 20, 30, 40 years, and yet it comes back to the policy dynamic is what I mentioned earlier, you have a few people marching in the streets complaining about technology innovation, that's been true for a long time in the underlying political economy and American public opinion. And that working county referenced, that Ken Scheve and I did in our book, no judgment, but American public opinion about the forces that drive overall average economic growth in dynamism, and sometimes economic pressures for many, Americans are more willing, historically at least, to tolerate the creative destruction of technology change than they are the creative destruction of globalization. There's more focus and more salients in voters minds on the distributional pressures of globalization.

Nathan Hunt: Wages for unskilled workers have been stagnant for a while, income inequality has been an issue in the United States for a while, but the sense of crisis in America only reached fever pitch over the last decade or so. There could be many different explanations for that shift, the growing visible impact of climate change in terms of extreme weather events, the rise of social networks, the confluence of online shopping and international trade, what factors do you think are leading to a sense that America is in crisis?

Matthew Slaughter: I think part of it is, it takes time for people to recognize and evaluate in their minds and in their hearts that are real and relative economic performance, so [inaudible 00:12:40] couple of years, and I think Americans... I mean, US citizens, I should say, so I've always been inspired by the innate optimism that so many Americans have had historically, but for reasons that I think the historians will still be wondering about in the coming years and decades, something has changed, I agree with your question. So, I'm answering your question by saying, yes, it's a great question, I think there's much less of a sense of optimism across our country today, I'm a lifetime independent, so I'm always careful that trying to have people hear things in partisan sense, as summary for what has changed I will encourage you, if you haven't watched or read, go back and listen to, or watch, or read the text of president Trump's inaugural address in January 2017.

It was a shockingly bleek address, it was one that says, America is in decline, the rest of the world is largely responsible for that and we're going to start building walls, and what bothers me about that among many things is, trade wars are not easy to win, they inflict damage on the waring country as much as they do on the rest of the world, but it doesn't speak to what Americans actually want. I think in some related work that Ken and I did, we had a piece in foreign affairs a few years ago on this, we surveyed thousands of Americans in non metropolitan areas in the US and across the country, and we gave three options, we said, to address all these pressures that people are much more aware of and concerned about is three broaden policy options, we said, do you want to build walls to the rest of the world? Or do you want to build more bridges to the rest of the world? So that's kind of anti globalization or pro globalization.

Build more bridges to the rest of the world, but build more social safety nets to help those who are impacted by the pressure of the globalization? Or the third option was, do you want to build more bridges to the rest of the world and build more ladders of opportunity, so that more individuals and more communities have a chance to benefit from rather than be pressured by all the dynamism of globalization [inaudible 00:14:42]? And in every one of the nine metropolitan areas we survey and all the focus groups qualitatively that we did confirmed this, in every one of those metropolitan areas, those three that had the most support was, build bridges with a ladder of opportunity to get out of those bridges. So Ken, I did a piece on that and I connected with the joy that I had working with Ella and Robert and Bob on this piece here, that is the impetus for our great conversation.

While I continue to believe we need to build more bridges to the rest of the world and build more ladders of opportunity, the policy making in Washington DC is pretty broken right now, and I think we need to be identifying and celebrating all of the innovative individuals that change entrepreneurs across our country, who are not so discouraged by what they see Washington DC. Either Independents or Republicans or Democrats, and are really trying to address the yearning that Americans have for a better shot at jobs and hope, and they're doing it in their local communities, they're doing lots of different ways. So on this great question, I've connected this project with Ella and Bob and Robert, I don't think any of us think Washington DC should be excused for the mess we're in with not enacting policies that are looking into the future ways that Americans want, but we wanted to really give voice to all the great innovation and inspiring change agents that we see across our country.

Nathan Hunt: You served on the council of economic advisors during the last Bush administration, a job you have in the past described as being paid to worry, reading this article and other articles you've written over the last couple years, it seems to me that you have to worry pro bono, what worries do you have as an economist that did not make it into this article?

Matthew Slaughter: I'm worried that we're going to run out of time, and by that I mean, I don't think America is going to devolve into revolution again, but if you look at the sweep of history, there's empires that have their time and their political cohesion and enough of a sense of a unified vision that they thrive for their citizens, and then those empires fade for different internal, external reasons. And so I worry that we're going to run out of time meaning, I worry that we will not find fresh leadership narratives in the United States to allow a sufficient number of people, to see more hope and to see more sense of an opportunity to be a part of the dynamic global economy. Running out of time meaning, in the economics [inaudible 00:17:32] but the opportunity cost of not making the right policy changes just continues to grow and grow.

I look at myself today when we were having this conversation, I'm a 50 year old white American male privilege, and I had the opportunity to grow up in a wonderful, loving support family in a little suburb in the Twin Cities called Minnetonka, Minnesota and had a great education through combination of private and then public schools, went to a great public high school. I kind of pointed out about working at CEA one day, I didn't spend every day in the Oval Office, despite what my mother in law might've thought I wanted, but I was there a bit, and one day I was in the Oval and I wasn't leading the briefing but was present to be there to be an advisor, to the key principles that we were grappling on some decisions, and my mind drifted for a moment, and I thought to myself, my goodness, I'm in the Oval Office with the president of the United States, and I'm just a kid from Minnesota.

And I thought to about my grandparents actually, and I thought about my dad's dad who had to drop out of school in eighth grade, I believe it was, when his father died, so grandpa at that time, it was like 1921, I believe, and he was the oldest of his siblings and had to help support his mom and his siblings. And I was like, wow, we go forward two generations and now one of his grandsons is in the White House, the Oval Office here, probabilistically that's happening less and less in our country, and more and more people are not convinced they got shot at that, even some of our MBA students, as amazing as they are at top.

In the elective I teach here, we can be in mock congressional parliamentary hearings, it's called Leadership in the Global Economy, and it's [inaudible 00:19:20], I've been doing it for years now, and even among our MBA candidates who are these amazingly talented, accomplished individuals who wanted permission to talk about [inaudible 00:19:30], even they are more unsure, being US citizens of the [inaudible 00:19:37], students here at Tuck, whether the system is going to be working. I'm a Tigger by disposition, if I go through Winnie the Pooh characters, but yes, there's an Eeyore in my work throughout all this stuff that hasn't abated, again, it was not to serve the president, I'm a lifetime independent, so it was [inaudible 00:20:00] to do things with both Republicans and Democrats, but I just see this [inaudible 00:20:04] in partisanship today compared to when I worked in our government 15 years ago.

That's worrisome, and again, I'm worried that we're running out of time with the opportunity cost getting so high that we're not going to pull it together in a way that we could, in a way that would just be amazing to have the 21st century be as successful in some sense for the United States and the world as the 20th century.

Nathan Hunt: Let's talk about US productivity growth, according to some measures through the years, 2007 to 2019, we saw US productivity growth, average 1.4%, which was a significant dip from earlier similar periods, is this dip a symptom or a cause of the problems you and your coauthors have identified?

Matthew Slaughter: Yeah, great question and the nerdy congress me, thinks this is great, so let's just take a minute on this, it is largely a cause, my main dissertation advisor is Paul Krugman, and Paul wrote a lovely book called The Age of Diminished Expectations, I think it was kind of late '80s, early '90s, and it still just a brilliant read on the basic economics of what drives standard [inaudible 00:21:25]. And Paul has a quote, I'm going to paraphrase it, early in that book that says, productivity growth isn't everything, but in the long run, it's almost everything, that might be exactly, pretty close. That chapter and some other parts just point out that in societies where you have fast growth in labor productivity, that's kind of average output per worker, you tend to have all sorts of virtuous reinforcing outcomes, we tend to have high rising average incomes, we tend to have... Not necessarily, it's not a law of physics, you've got to have institutional supports and labor markets, so that ideally, that growing prosperity is shared broadly.

You tend to have fiscal balances that are stronger, so you tend to have higher tax revenue and, or the need for less, kind of automatic stabilize spending, as an example, we saw this in the second half of the '90s and early 2000s, the only four years from 97 through 01, where the United States in like 50 years, has run fiscal surpluses was in the late '90s into the early 2000s. And if you go back and look what was unexpected relative to all the forecast of all the great congress and policy makers at CBO and treasury, we had unexpectedly fast growth in labor productivity and therefore unexpectedly fast growth in income for workers and a lot of businesses. And so the revenues coming into treasury were much faster growing than had been forecasted, so we end up having these fiscal surpluses for a few years. Remember, the 2000 election there was all this discussion about, wow, we might actually pay off all the national debt, what happens if there's no treasury securities outstanding? My goodness, seems like a gazillion years ago.

So in the long run, productivity growth is almost everything, and I can't remember which year it was in the Obama administration, but the CEA under President Obama did a lovely chapter where they did some counterfactual analysis, which is really cool, looking at rising inequality and slower average income growth for [inaudible 00:23:26] that we're talking about. They did a kind of counterfactual experiment where they said, okay, let's have slow productivity growth during this time, like we actually realized, like you pointed out, but artificially constrain relative incomes to not have grown, or the alternative said was, let's assume that the use economy had delivered faster productivity growth throughout that period and we still allowed inequality to rise. And then they looked at...

I'm not sure what year they ran it through, like 2015, what would've been those two counterfactual distributions of income, and looked at real and relevant outcomes, and all the usual measures that we care about in real and relative outcomes, their conclusion was, wow, this economy would've been in much better shape if we had just had faster productivity growth, even if we allow the inequalities that we've seen in relative incomes to grow in the way that they did. And the other example I'll give is, China in recent decades, China on many measures has had extreme growth in inequality in relative incomes on some measures on par with the growth in inequality in the United States, but productivity growth in China has been so fast over the past, now almost 45 years since the open door economic reform started in 1978 in agriculture and extended to manufacturing in less assessed services.

They've had such growth in average labor productivity, that average incomes have been rising unprecedentedly in China over this period, so I think when we think about why we need to build bridges to the rest of the world, ladders of opportunity, which is my magic wand, kind of policy stance that the US government needs to have, it's because we know that global engagement in lots of forms tends for all sorts of reasons to help raise the growth in productivity. One example is high talent individuals coming into the United States through high skilled immigration, those individuals tend to be much more likely to patent, to come up with their own innovations, to start and scale new companies, and even inside other companies that hire more talented foreign nationals, they tend to hire more, both moderately scaled and high scaled native board workers as well.

There's all these virtuous productivity growth benefits that globalization brings and kind of good technology innovation tends to bring too, so if we could have a policy agenda that would raise productivity growth in America, I firmly believe based on all of the historical evidence in academic research, that a lot of the anxiety that animates the paper that Bob and Ella, and Robert and I wrote, a lot of these broader policy issues would be lessened, and that would be a great policy goal. I think it's a huge issue that you raise here, that one, our country, unfortunately, isn't addressing in the [inaudible 00:26:12] of anger.

Nathan Hunt: Matt, back in 2007, you gave a lecture in Michigan, which can still be viewed on YouTube, in which you talked about income inequality and education, you talked about Lou Dobbs and the perceptions around the opinions he was promoting at the time, and you talked about declining support for international trade and immigration. Do you look back with 14 years of hindsight on that talk in Michigan and feel a bit like Cassandra, the priestess of Apollo in Greek mythology, who was faded to predict the future, but never be believed?

Matthew Slaughter: That's a very kind question, Charlie Wheelan is a colleague at Dartmouth, Charlie wrote a piece a handful years ago saying, boy, I wish more people had listened to Matt, and Ken Scheve, line of that talk was by working with Ken Scheve at the time, because we pointed out that inequality was rising, we put out that it wasn't just inequality, but real incomes for a shockly large fraction of US labor force, were actually falling along rising. And then because people are pretty sophisticated pocketbook voters, they were starting to worry that globalization and other forms of dynamism were to be sort of reviled and worked against rather than saying, how do we address the underlying dynamic of, productivity growth is slowed and inequality is rising, there's a different policy mix rather than building walls?

At that time, Ken and I wrote a piece in foreign affairs called A New Deal for Globalization, our policy response that we proposed, we said, look, inequality is rising and this is going to bring more anti globalization voices into the policy conversation, based on all the research that we talked about, Ken and I done some pointing out people's economic interests when they think about globalization. So we said, we need to address this anti globalization backlash that we think is going to be coming, and sure enough, it came, [inaudible 00:28:20] culminating in some ways with President Trumps election, and the trade war that has followed. Our proposal at the time was we said, we need to have a globalization tax cut for less skilled Americans... Because Ken and I are Baby Busters, we said it needs to be fiscally neutral, so we said, we should raise taxes on the upper half of the skills and income distribution, in particular, we're talking about the payroll tax and [inaudible 00:28:46], that's actually a pretty regressive tax because it's a flat rate on a largely capped base.

So I think the specific proposal we said was, to offset these pre-tax forces, we should have a globalization tax cut for less skilled Americans, financed by globalization tax increase on more skilled Americans, and at the time many people said, you're crazy, that amount is so large, it's nuts or it's too big of a solution, we just need to tinker the edges with some of the [inaudible 00:29:15] trade adjustment assistance programs. And Ken and I liked it, I think our moms liked it and our mother in laws, but here we are, and in hindsight, this is why I think some of the subsequent work that Ken and I did... That in of itself might not have been sufficient because of how strong the slow productivity growth was and how acute the dimensions of inequality were coming.

And that combination... That's why I think of some of more subsequent work we put out, we need that and we need some pre-tax economic policies per the ones about building ladders of opportunity, to build more human capital for people so that the productivity growth for individuals and the aggregated economy is higher. I don't think anyone foresaw, for example, it's not just a matter of individuals pocket books in their 401ks, it's about, do they see a reason to get up anymore?

Nathan Hunt: Let's talk about the recommendations featured in this article, one of the most surprising recommendations to me is a de-emphasis on federal government action, you, Robert and Bob all have extensive experience working and advising at the highest levels of the federal government. Is it that you believe the federal government is incapable of acting to address these challenges? Or do you believe that local governments and nonprofits are just better at addressing these types of challenges?

Matthew Slaughter: The ladder and for me at least, that's a conditional statement just given the policy paralysis we have in Washington DC right now, I think all of us firmly agree, all four of us authors, there are certain policy changes that would address the themes we talk about on this paper that should, and in some ways can only come from Washington DC. In the constitution, for example, a lot of our international economic policies are set at the federal level states and other municipalities can, for example, have their own trade barriers or their own immigration policies. So to me, this is definitely a statement of, we've long known that one of the real strengths of the American federal government structure is we've got 50 state governments and many local governments where policy experimentation can and does happen. And so if anything, in an environment where we're not making a lot of sound policy progress in Washington DC in recent times, [inaudible 00:31:51] need then, for state local government innovation.

That's how I view it, I hope it is not the case for your question earlier about worry for the future, that the kind of partisanship and the kind of short term, as we see in a lot of policy making in Washington DC, that persists. To me, the magic wand would be a recognition of the need to try to build more economic opportunity for more Americans in the future and a lot of that having the federal level as a compliment, not a substitute, continued innovation and learning from the state and local governments. And I think in this context, what the four of us hit upon was, without arrogance, I think we thought the relative value we would add to... [inaudible 00:32:39] still might be the policy conversations in America right now, would be hired by highlighting a lot of what we see in civil society and entrepreneurs in the local levels, rather than another white paper trying to present another argument for the benefits of high skilled immigration to the benefits for more of that dynamic labor markets.

Nathan Hunt: One final question, Matt, the stories of the social entrepreneurs included as an addendum to the article are inspiring, but I can't help but think that they are inspiring precisely because these social entrepreneurs seem like they are engaged in such an uneven fight against massive challenges, how can we scale the kind of optimism these social entrepreneurs appear to possess?

Matthew Slaughter: Great question, I love ending on note of tutorish optimism, I think we hope part of the contribution we make in this report, which we're so fortunate to be able to write is sharing information, information is power, it's always been the case for centuries, and so illuminating some really impressive entrepreneurs of change is hopefully someone's going to read and say, wow, I could do that too, I could see myself in that. That's one dimension I wished we hoped that there's some momentum that comes out of this work, and I think another is, and the paper talks about this, a realization that in the not-for-profit space, whether that's with governments at different levels or civil society. There're oftentimes the mechanisms that the market system generates for the flow of what I'll call productive or optimistic information, and the capital and ideas of people that go with that.

One of the Adam Smith magics of the market is where there seems to be a need that's met in the private sector, ideas, and people, and capital naturally flowed in those ideas and organizations that are meeting needs. For some reason that it doesn't happen is naturally in and across governments in a civil society. And so, one of the things that we hope comes from this work and the subsequent work we might do together, with the sponsorship that S&P [inaudible 00:35:05] provided or others, is a way to figure out how can we create more market like mechanisms so that the inspiring stories that we tell so others will learn about it and talk about this report. There's market like mechanisms so information flows more, and social capital, and philanthropic capital, and other types of capital might flow to these types of [inaudible 00:35:29].

So that it seems like a little bit less, David against Goliath, and more like, wow, here's that dynamism that for generations and generations in America, we've been able to harness to be a force for progress, in not just the economic sense, but even more for the human sense, anything that we might be able to do with this report and any subsequent work so that people feel inspired that there's a catalyst, like we're all on board with it. It was great to learn about and write about these entrepreneurs of change and we just hope to the people who are going to work might come from [inaudible 00:36:04], that really inspires others, too.

Nathan Hunt: Matt, I am deeply grateful for the work, the commitment that you and your coauthors put into producing this article, and thank you for joining me on the podcast today.

Matthew Slaughter: That's great, I appreciate the time.

Nathan Hunt: The Essential Podcast is produced by Molly Mintz with assistance from Kirk Berger and Camille McManus. For more research and insight from S&P Global, please visit spglobal.com/subscribe. From the Majestic Heights of 55 Water Street in Manhattan, I am Nathan Hunt, thank you for listening.