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 Robert Lawrence of the Kennedy School at Harvard.

Robert Lawrence: I'm Robert Lawrence. I'm a professor of international trade and investment at the Harvard Kennedy School. I'm also a non-resident senior fellow at the Peterson Institute for International Economics. My research interest generally is international trade, although I've just spent the last five years studying global manufacturing and asking the question of whether manufacturing can still be a source of inclusive growth.

Nathan Hunt: Robert, you are known and have been known throughout your career primarily as an expert in the economics of trade and globalization. But this present article that you wrote with your co-authors focuses on a number of different things; institutional and systemic racism, income inequality, addressing climate change, and of course reinvigorating democracy. I suspect there may be a relationship between the current state of crisis in the United States and globalization, or at least a perceived relationship. But I'd like to hear your thoughts on the matter.

Robert Lawrence: I actually, by studying what impact trade had had on the US economy, came to the conclusion that trade was part of the transition for the United States from an era, and indeed a golden age, between 1950 and about 1980 in which we saw robust income growth shared across the board by Americans at every income level and regions of the United States actually converging, where the poorer regions were growing faster than the richer regions.

Now, after 1980, we've experienced exactly the opposite. One part of this has to do with what international trade has done to our economy. But actually, my research suggests it's a relatively small part of the story. The much bigger part of the story is that technological change has been especially rapid because of the digital revolution, and as a consequence, not only has the share of employment in manufacturing declined dramatically, but also the way we manufacture things has changed.

So we're using much more technology and much fewer production workers in order to produce our products. This has actually been reflected in the fact that particularly men who don't have a college degree have seen an erosion in their economic opportunities and have seen virtually no growth in their real incomes for almost five decades. The bulk of these men are not poor. The median earnings of a man without a college degree in the United States is about $40,000 a year. But it's remained at roughly that level for these five decades.

And I think this has led to a dramatic change in the political environment. It's brought us Donald Trump in the United States. It's brought us Brexit in the United Kingdom. So in addition to what most people talk about, which is the rise of income inequality, I've been struck that we've had non-inclusive growth, that a very significant segment of the United States has not shared in the fruits of economic growth.

Because of that, I've found my interests broadening to the kinds of topics that we touched on in our paper, in particular the question of economic opportunity for people who don't necessarily have the educational background, the implications for cities and regions which has fallen behind as economic growth has become increasingly concentrated in superstar cities, the implications for black Americans who were among the very first to be hit by this trend actually going back to the 1970s and '80s, famous study by William James Wilson who looked at Chicago and found that de-industrialization had caused the erosion of employment opportunities, especially for black men, the divisiveness that is also a subject, and polarization, which is a topic that we try to deal with in the paper.

So starting from this, trying to understand what been happening as a consequence of the decline in manufacturing employment opportunities, I found my vision was raised and I was being forced to confront the host of problems which we now face. Then of course in the background, there's been climate change. So these are the major issues that I relish the opportunity to think about. I'd also finally say that my methodologies that I was traditionally trained in and used focused very much on the role of economic incentives.

But I've become convinced, and it's also reflected in the paper that we've written, that we need to go much further than simply look at how we change our economic policies into how we change our norms and our mindsets, because to really solve these problems, we need those facets to change in addition to our economic policies.

Nathan Hunt: Robert, I'm not sure whether this particular person is to your taste. But one thing that I found very interesting in Thomas Piketty's book, Capital, which talks a great deal about income inequality and measuring income inequality, is he suggests that the golden age of the '50s to the '80s that you talked about, occurred in Western Europe as well as in the United States, that because Western Europe had more of a social-democratic tradition with more socialist policies being produced and the United States had more of a free market tradition, each country had an experience of going through a golden age and having the policies that they preferred be borne out by rising incomes and a rising standard of living.

When you talk about cultural norms, do you think there's anything to Piketty's argument that we just had a brief moment in time that was very, very good from an economic standpoint and that is causing us to think that certain policies are effective and other policies are not?

Robert Lawrence: Well, Piketty is right that both the US and the Europeans had golden eras up until about 1980. Of course, what the Europeans had in addition to the expansion of their social welfare states was the benefit of being able to obtain American technology. The US was by far the technological leader during this period, and so we had to continue to innovate, whereas the Europeans, although at the end of the period they were innovating, also had the benefits of being able to obtain US technology.

But what's interesting is that in the more recent period, even though Europe has more active social policies, they have nonetheless been subject to quite similar political trends where we see extremist right-wing parties emerging in Europe, we see a disenchanted with leadership in Europe. In fact, the Brexit vote is an indication that it isn't only social policies, but there are also changes in attitudes in Europe that resemble America quite remarkably.

By the way, there are numerous European countries which actually haven't experienced as great an increase in income inequality as has the United States. I think the shift to polarized politics, the emergence especially of right-wing populism, is actually something we've shared with the Europeans rather than something which is unique to the United States and that they've been very different.

Nathan Hunt: At Harvard's Kennedy School, you teach a course with Larry Summers on the political economy of globalization in which you caution your students that "passion without careful reason is dangerous" and that "reliance on rigorous analytics and empirical evidence can contribute to a better world." When it comes to the need to reinvigorate American democracy, do you perceive that the country has in some way rejected reason, analytics, and evidence in favor of passion?

Robert Lawrence: Absolutely. I do think one of the missions of our course is to convince the students of the importance of understanding data, of looking at evidence. Part of our course involves looking at the history for instance of globalization going back to when man first walked on the Earth, being aware of the dangers of those passions that have at times taken over the global system and have led to great periods of protectionism in the 1930s and of course of two world wars.

We want to make the students aware of those dangers, but also the potential for collaboration, for cooperation, and indeed the requirements of cooperation if we are going to solve the global challenges that face us, especially in areas of global climate change and technological change.

Nathan Hunt: Robert, you have over time collaborated on many occasions with Bob Litan, one of your co-authors for this article. Back in 1986, you two wrote Saving Free Trade: A Pragmatic Approach in response to the protectionist policies being advocated at that time. Why is it do you think that free trade and globalization have enjoyed such consistent and historical derision and yet have consistently triumphed?

Robert Lawrence: Well, I actually think in that book Robert Litan and I were warning that international trade offers us a lot of promise because there are tremendous gains from being able to specialize and to reap the fruits of that specialization. But in addition, it's a process of creative distraction that can cause dislocation. What we tried to do in the book was to come up with proposals that would help people adjust to that change. I think we came up with the idea, for instance, of what today has become known as real wage insurance.

We were struck that among the most fierce opponents of free trade were workers who were earning high wages in the steel and the auto industry at the time and then were being dislocated and forced to go and work in other activities where they couldn't earn equivalent wages. So we proposed the idea of what has become known as real wage insurance, in which if you were dislocated and you got a new job, the government would ensure some share of your wage, and if you were earning much less than you had previously, you would be compensated.

We were also very conscious that we needed to think about the impact of trade on communities and we needed better policies. One of the ideas we came up with was community tax base insurance, where we advocated that communities could pool the risks that they experienced, not only through trade, but also if they had a crop failure or for some other reason, not because they lowered the tax rates, but if their tax bases were eroded, they could then dip into the fund. We found that there was a lot of opportunities for risk pooling among communities and among states in the United States.

Now, those kinds of policies were not adopted in the US. We underinvest in labor adjustment policies. So after 2000 when we were hit by the shock from China, which came at a time when our economy was already being hit by the Dot-com Bubble bursting and then later on the Global Financial Crisis, we have not had adequate policies in place to either help people who were dislocated or to help communities. So this has been a concern that I think has been present. Typically, America depended on its economy being sufficiently flexible so that people could just move from the jobs they had to new jobs.

But what's happened over the past few decades, we've seen a dramatic decline in the mobility of labor and we've seen the elites of America concentrating in superstar cities and those who are left behind in areas that were formally centered on manufacturing, but today the factories have closed and some of those locations have had great trouble in adapting. So I think we were onto something in the 1980s about the need for complementary social policies if we're going to really reap the fruits of global engagement.

I think our experience in the decades since have proven that this is a critical feature. It may not be a panacea, but we need to think as hard about the policies that a company changes, even when those changes in the aggregate somehow benefit our economy.

Nathan Hunt: Looking at your book from 1996, Single World, Divided Nations? You suggested that while trade has played some role in reducing the wages of poorly educated workers in the US and raising the unemployment of unskilled workers in Europe, its impact has been small compared with other causes of these changes. These are themes and ideas you've returned to over the years, including in your book, Globaphobia: Confronting Fears about Open Trade. I'm wondering, when you talk about other causes of these changes, what are you referring to?

Robert Lawrence: Yeah, well, this is actually where I would say I have a large difference with Thomas Piketty. Piketty's view is that the great source of income inequality is between profits and wages, in effect that those who own capital have gotten rich and those who work have become poor. I think actually, until about 2000, you don't see that the share of profits really rose very much in the United States for instance. After that, there was some increase.

But the big source of income inequality has been what's happened in the earnings' capacity of Americans. It's inequality among wage earners. That reflects the fact that technology has changed in a way that economists call skill biased, basically raising the return to those who have college and postgraduate degrees and reducing the earnings particularly of those who work in more routine, middle income jobs. That's what I was talking about when I explored divisions. These are global divisions. It's got to do with the way technology has evolved.

Just to give you one idea, which I think is quite remarkable, about how different the way we produce things has become. And that is, today, American manufacturers are spending more money on intangible capital. That is to say they're investing more in things like data and software and branding and intellectual property than they are in equipment. So our whole mode of production has changed and that in turn has increased and complimented those who have skills and substituted for those who do more routine activities.

That's the big source of income inequality in my view, not to say that in recent years there hasn't been an increase in the profit share, but the big change has been what's happened to the returns to education.

Nathan Hunt: On a different topic, I wanted to get your thoughts on voluntary carbon markets. Clearly in climate change, we have a global crisis which demands global solutions. Do you foresee an international trade developing in carbon credits or some similar asset class? And what based on your experience looking at global trade might hold back that market from developing?

Robert Lawrence: Well, as with most markets, the real question is, how do you establish property rights? How do you secure and make sure that you get what you pay for? When the markets are international, that becomes a particular issue. It would be much more efficient, for instance, for us to pay poorer countries to invest in climate friendly projects. That was part of the original Kyoto Protocol with what they call the Clean Development Mechanism.

The challenge is making sure that they really do undertake meaningful action and that it is properly policed and regulated. We've been able to use tradable permit systems to deal with domestic environmental problems very effectively for SO2, for instance. So I think the challenge is establishing credibility through enhanced verification and regulation. If we can do that, then the markets actually don't have to be voluntary. We do write about voluntary markets in the paper and they do offer opportunities.

But even there, it's verification that actually what those who are paying for carbon reductions that they're actually getting what they pay for. That is the real challenge. That's a general problem with international relations and between countries, and that is the enforcement system has to be credible. People are going to invest millions of dollars, they really want to be sure they're getting something for their money. So I think that's the great challenge. It's not completely insurmountable.

We see international arbitration awarding large amounts of money in certain circumstances where both parties accept those judgements. So it's the development of these international markets that can be a very important compliment to national policies because it might be much more efficient for say Americans to pay but the reductions to occur in countries where it can be done more cheaply. Just as with trade in general, there are opportunities because of different circumstances to reap those gains from the trade.

Nathan Hunt: Robert, in my earlier interview with Ella Bell Smith, one of your co-authors on this article, I asked her whether she considered this article to be a hug for America or a kick in the ass, meaning that in confronting the challenges facing the country does she think the United States needs comfort or some tough love?

While preparing for this interview, I stumbled on an article you had written entitled, Does a Kick in the Pants Get You Going or Does It Just Hurt? The Impact of International Competition on Technological Change in U.S. Manufacturing. You have many years of experience influencing policy and leadership in the United States. Over that time, have you developed any thoughts or policies on the advisability of a well placed kick in the ass?

Robert Lawrence: Oh, I think we do need a combination of sticks and carrots. I think one of the things we try to bring out in the paper is that America has been capable of remarkable change in the past. But at the same time, particularly when concentrating on long run problems, we haven't done all that well. We've an inclination to delay, we've an inclination to postpone, and that's really when the kick and some kind of sanction, it needs to be part of the package. I think that's especially true when it comes to taking decisive action on climate change.

We don't have a lot of time to waste. We don't have a lot of time to be bogged down in ideological differences. That's where looking at the science is absolutely crucial. We very unfortunately wasted four critical years during the Trump administration. Climate change became a political football as opposed to the urgent problem that it is, despite the overwhelming evidence that we are currently experiencing huge problems and unusual changes as a consequence of climate change.

So, in a sense, if the government doesn't provide the kick, mother nature is doing exactly that. So this is a very urgent problem. We don't have to solve it instantly, but we do need to take meaningful measures that are going to put us on a path so that we do achieve the 1.5 degree centigrade goal, which is the highest we should be tolerating by 2050 and we as a country have zero carbon emissions on balance by that year.

Nathan Hunt: Robert, you have in the past talked about global value chains being a product of networks of production and people-to-people relationships. These remind me a bit of your articles' recommendations for how to encourage social entrepreneurs. It also reminds me a bit of your collaboration on this article with Ella, Bob, and Matt. Are networks and relationships both a theme and a method for your work?

Robert Lawrence: Well, absolutely. I was a member of Brookings Institution for a long time and I work at the Peterson Institute precisely because I enjoy engagement with other scholars. Other people's insights are critical, other people's contributions are critical. In this particular paper, we all brought, I would say, different perspectives to the issue. I think the paper is much stronger because of that type of collaboration.

What we're learning, if we look at successful places in this world, they tend to be driven not by one or two firms, but by firms who congregate close to one another. That's precisely because there are these agglomeration effects, what we economists technically call scale economies, that come from networks. People have different strengths. In combination, they can achieve far more than acting alone.

Nathan Hunt: Robert, I'd like to ask you one final question, and it is the same question that I have asked each of your co-authors. When you confront the challenges facing this country, including racial injustice, income inequality, climate change, among others, are you optimistic or are you pessimistic about our ability as a society to respond?

Robert Lawrence: I'm South African born. I came to the United States, firstly, out of abhorrence with the apartheid system that I left, but also out of the attractiveness of the American system. I think the system has become much more polarized, I think its capacity to act has disappointed me when it comes to COVID. It's disappointed me when it comes to the democratic crisis, which we currently have because of the increased polarization.

But when I look back at the history of the United States, I'm reminded of what Winston Churchill said, well, "You can always depend on the Americans to do the right thing after they've tried everything else." And that's kind of my view. We are by design a country that has divided the sources of power, that has sought to prevent action unless it could command a consensus of some type. That's what divided government is really all about.

So watching the United States act is not necessarily watching something that is beautifully coordinated and well organized. But in the long run, there has been a whole history of immense progress, of bringing technology and bringing people together to bear on problems. That's what I hope and indeed expect that over the next decades we are going to see. We really basically don't have any other choice given the seriousness of the problems that we are currently confronting.

Nathan Hunt: Robert, I'd like to thank you so much for joining me on the podcast today.

Robert Lawrence: Well, and thank you very much for having me.

Nathan Hunt: The Essential Podcast is produced by Molly Mintz with assistance from Kurt Burger 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'm Nathan Hunt. Thank you for listening.