Greg Mankiw (Harvard Econ Prof) on New Keynesian Macro, Growth and Econ Policy

Greg and Jon discuss Greg’s career and main contributions to economics. This includes the development and limitations of New Keynesian models in the 1980s and 1990s as a tool for central banks to understand how the macroeconomy works. Jon and Greg also discuss economic growth, growth accounting and the Solow model. They conclude by talking about Greg’s time in government, including his time leading the White House Council of Economic Advisors under President George W. Bush as well as Greg’s advocacy for carbon taxes.

ABOUT THE SPEAKERS:

Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University. As a student, he studied economics at Princeton University and MIT. As a teacher, he has taught macroeconomics, microeconomics, statistics, and principles of economics. He even spent one summer long ago as a sailing instructor on Long Beach Island.

Professor Mankiw is a prolific writer and a regular participant in academic and policy debates. His research includes work on price adjustment, consumer behavior, financial markets, monetary and fiscal policy, and economic growth. His published articles have appeared in academic journals, such as the American Economic Review, Journal of Political Economy, and Quarterly Journal of Economics, and in more widely accessible forums, such as The New York Times, The Washington Post, and The Wall Street Journal.

He has written two popular textbooks—the intermediate-level textbook Macroeconomics (Worth Publishers) and the introductory textbook Principles of Economics (Cengage Learning). Principles of Economics has sold over two million copies and has been translated into twenty languages.

In addition to his teaching, research, and writing, Professor Mankiw has been a research associate of the National Bureau of Economic Research, an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York, and a member of the ETS test development committee for the advanced placement exam in economics. From 2003 to 2005 he served as Chairman of the President's Council of Economic Advisers.

Professor Mankiw lives in Boston with his wife, Deborah. They have three adult children.

Jon Hartley is a Research Associate at the Hoover Institution and an PhD candidate in economics at Stanford University, where he specializes in finance, labor economics, and macroeconomics. He is also currently a research fellow at the Foundation for Research on Equal Opportunity and a senior fellow at the Macdonald-Laurier Institute. Jon is also a member of the Canadian Group of Economists and serves as chair of the Economic Club of Miami.

Jon has previously worked at Goldman Sachs Asset Management as well as in various policy roles at the World Bank, the International Monetaty Fund, the Committee on Capital Markets Regulation, the US Congress Joint Economic Committee, the Federal Reserve Bank of New York, the Federal Reserve Bank of Chicago, and the Bank of Canada.

Jon has also been a regular economics contributor for National Review Online, Forbes, and the Huffington Post and has contributed to the
who is the Robert Barron professorof economics at Harvard University.
Greg is one of the leadingmacroeconomists of our time and

(00:29):
one of the founders ofNew Keynesian economic modeling.
Greg also served as the chair ofthe Council of Economic Advisors
under President George W Bush, and
is the author of the best sellingtextbook, Principles of Economics.
Thanks so much for joining us today, Greg.

>> Gregory Mankiw (00:43):
Thank you, Jon, it's nice to be with you.

>> Jon Hartley (00:46):
Greg, I wanna start with talking a bit about your upbringing.
You grew up in New Jersey, where you wentto the Pingree school for high school.
Then you attended Princeton for undergrad,and you saw economics there and
your classmates with David Romer,one of your longtime co authors.
And then you went on to doyour PhD in economics at MIT.

(01:08):
How did you first getinterested in economics?

>> Gregory Mankiw (01:11):
Well, when I started at Princeton, I thought I was gonna
be a math major because I kind of likedmath, I thought I was good at it.
And what I learned pretty quickly was thatI was good in the sense of being the best
math student in my high school.
Once you sort of go to a topmath department like Princeton,
the level of talent there is farin math is far beyond what I had.

(01:31):
And math became increasingly abstract.
And even though it was my first declaredmajor, I didn't stick with it and
eventually switched economics.
The thing that got me to economics wasactually a friend in my freshman year.
She was taking an economics courseher first semester, freshman year.
And I didn't really know very much whateconomics was, I knew sort of vaguely, but

(01:53):
not very specifically.
And she would come back and
tell me what she was learning in herclass was the principles of economics,
microeconomics with Harvey Rosen,who's a great teacher.
And I thought it was more interestingthan anything I was learning.
Sort of looked at her textbook,which was the Lipsey Steiner book, and
I started reading it,it seemed really interesting.
And so the next semester,I took both principles of macro and

(02:15):
principles of micro, the principlesof macro with Burton Malkiel,
principles of micro with Harvey Rosen.

>> Jon Hartley (02:23):
Wow.

>> Gregory Mankiw (02:24):
And they were both great teachers.
And I approached Harvey to see if Icould get a summer job for it with him.
I knew also economics,I'd only taken the principals course, but
I did know some Fortran programming, and
he needed somebody who could doFortran programming for him.
And so I basically spenta summer working for him, and

(02:46):
he had to teach me all the economicsI needed to know for the job.
And soI learned a tremendous amount that summer.
And he's really the one who sort of gotme fundamentally interested in economics.
It was a great pleasure that years later,I got to work with him on
the council of Economic Advisors,where we were both members.
But it really was Harvey who gotme interested at the Princeton.

(03:07):
I basically drifted towardmacroeconomics as an interest,
and I did my seniorthesis with Alan Blinder.
And he was the other sort ofprofessor at Princeton that
was extremely influentialin my career development.
You mentioned David Romer,
it was actually an interesting group offuture economics professors in my class.

(03:30):
David Romer was one of them,Danny Kwa was another, Jim Rauch,
who's now Uc San Diego, is another.
Larry Ossebel was a friend of mine,we were the same eating club.
He wasn't an economics major then,he was a math major, but I knew Larry.
So all of us ended up goinginto economics, and so
going to get a PhD in economics seemedlike kind of a normal thing to do cuz I

(03:50):
had a bunch of friends whowere doing the same thing.
I don't think it's as normaltoday among my Harvard students,
I think it's much rarer.
But at the time, it seemed likea very normal thing to do, and
the great teachers I had atPrinceton were a large part of that.

>> Jon Hartley (04:07):
That's Fascinating.
And Princeton is known forbeing this really big hotspot for
macro, certainly in the 90s, butI'm sure many of the precursors
that were there were formingin the 1980s as well.
A lot of those, like Paul Krugman,Mike Woodford, and others,

(04:30):
who sort of started building a lotof the new Keynesian framework
that you yourself have been a hugecontributor, well, at Harvard.
And I'm sure there'smany interlinkages there.

>> Gregory Mankiw (04:46):
Those people were at Princeton later, actually,
they weren't there when I was a student.
I was a net student in the 70s,I graduated 1980.
But the one person who was there wasa grad student named Julio Rotenberg.
And soJulio was sort of doing his early work,
his dissertation of some ofthe early new Keynesian stuff.

>> Jon Hartley (05:03):
Fascinating, fascinating.
So what was graduate school at MIT,Econ, like in the 1980s?
Like your advisor there was Stan Fisher.
You had, I mean, over the course of yourcareer, you've had a many famous students.
Sam Fisher has had many, many famousstudents over his career as well.

(05:27):
You've also taught act ten for many years.
I'm curious, what was thatexperience at MIT Econ like, and
you're sort of interested in advising andmentoring students.
Was that something that youkind of something that grew on
you while you were beingadvised in grad school?

>> Gregory Mankiw (05:50):
Well, there were two people at MIT who were particularly
influential for me and my cohort.
One was Larry Summers, who was therebefore he is an assistant professor before
he joined the Harvard faculty.
Olivia Blanchard was notthere at that point.
Stan Fisher was the other person whowas very influential in my cohort.

(06:11):
My cohort had a lot of peoplebecame macroeconomists.
Myself, there was Mike Woodford,Matthew Shapiro, Bob Barsky,
Larry Ball, Steve Zeldas, andI'm sure I'm missing a couple others.
So there's a lot of people went on toquite prominent careers in macroeconomics,
and it was a natural to be interestedin macroeconomics cuz the faculty was

(06:34):
obviously fantastic.
I mean, Stan was really a role model fora lot of us, but
also the economy really demandedinterest in macroeconomics.
So this is like the heyday of highinflation, and Paul Volcker was
just getting appointed andthe whole Volcker experiment was going on.
And so there was naturalinterest among my cohort and

(06:55):
the questions of macroeconomics.
And Stan was a great person tobe academically rigorous, but
also very focused on policy andcurrent events as well.
And I think that combination wasreally extremely compelling.
And in that group, I developed coauthorial relationships with a bunch of my
colleagues have written papers withMatthew Shapiro and Bob Barsky and

(07:19):
Larry Ball and Steve Zeldas.
Oddly, ive never writtena paper with Mike Whitford,
even though he has a tremendousnumber of common interests.
It's just never kind of,it's never worked out.
But I remember spending many hourstalking to Mike, and he's a close friend.
And it was clear, by the way,that he was one of the stars of our class,

(07:39):
even from, even from the beginning.
He won his MacArthur Fellowshipwhile he was a grad student,
which is kind of extraordinary.

>> Jon Hartley (07:48):
That's unbelievable.

>> Gregory Mankiw (07:49):
It is, this is early in the MacArthur.
I don't think the MacArthur has giventhe award to people quite that young
now, I think.
But early on,
they were trying to get people who wereat the early stages of their career.
And my mike Quickly establishedhimself as a star among the faculty.

>> Jon Hartley (08:06):
Well, that's amazing.
Well, I wanna talk to youa little bit about how your
ideas developed while maybeyou're a grad student and
as a professor at Harvard.
I really just want to really get into thehistory of new Keynesian DSGE modeling,

(08:29):
which I think some of yourmost well known work and
major contributions lie.
How did a lot of those early newKeynesian papers come about,
the three-equation model?
I know there was a lot of early workthat was done on sticky prices and

(08:51):
sticky wages,people like John Taylor and Ned Phelps,
and you're a co-author with Ned Phelpson some of those early papers.
You also wrote a number of the earlypapers as well, on menu costs and
sticky prices.
I'm just curious howthat thinking came about,

(09:13):
because I've talked to certain peoplein some of those early contributors.
And some of them kind of say, well, wehad this RBC revolution in the 1970s and
80s, rational expectations revolution,full information, rational expectations.
That was sort of a response tothe static ISLM framework to

(09:37):
incorporate micro foundations,micro-founded rational behavior,
to also think aboutintertemporal decision making,
that culminated in this RBC model.
Think Sargent,think Prescott and others, but
my understanding is that a lot of peopleweren't happy with that framework.

(10:02):
It was also, some people argue,in response to the great inflation of
the 70s and ISLM not being able toaccount for things like stagflation,
inflation going up while unemploymentgoing up at the same time.
My understanding is, so that's RBCs,Real Business Cycle models.
My understanding is that there were a lotof people who weren't happy with the fact

(10:23):
that Real Business Cycle modelsdidn't have room for policy.
And so my understanding isthat some people just said,
well, what's great about somenominal rigidities is that,
well, now you have room for policy,and that's why we threw it in there.
I'm curious,was there an empirical basis for
including wages and Sikhi prices,and Beaulieu later sort of,

(10:47):
I think, tried to do some empirical work.
But I'm curious what the historywas there with why people felt
it was important to includesticky wages or sticky prices, or
sticky information, which is,I think, an amazing idea,
and perhaps one that'snot appreciated enough.

(11:11):
But why was it important then to includethose in our macroeconomic models?
And did that lead to a betterdescription of how business cycles work?
And do you think that's stilla relevant description?

>> Gregory Mankiw (11:28):
I remember at some point in graduate school Stan Fisher
giving a lecture, and he said,
why do we believe that money matters,that it has real effects?
And he said, two reasons,Paul Volcker and Friedman and Schwartz.
So, I always took it as established factthat monetary policy had real effects,

(11:55):
I think very few economiststoday would doubt that.
Very few economists say,money is completely neutral,
what the Fed does doesn't haveany impact on the real economy,
even though we don't fully understandalways the impact it's gonna have.
So I always took somedegree of stickiness as

(12:15):
necessary to understand howthe business cycle works.
And I thought Real Business Cycle theorywas really a turn in the wrong direction.
My own personal interest in thisliterature dates back even before
Real Business Cycle theory was around.
But really it dates back to me writing myundergraduate thesis under Alan Blinder.

(12:36):
I remember taking a graduatemacro course from Alan, and
he was explaining the standardKeynesian mechanism at the time.
And at the time,the big emphasis was on sticky wages.
The nominal wages were sticky.
And that's the reason whymonetary policy is not neutral.
And the mechanism was basically,when aggregate demand increases,

(13:00):
prices increase.
If nominal wages are sticky,real wages have to go down, and
it's lower real wagesthat increase employment.
And that's pretty explicit inthe Keynes general theory,
the countercyclical real wage.
And I remember talking toBlinder about that, and
he sort of admitted to me that, that's,yeah, I know that's true in the model, but
that's not really true of the data.

(13:21):
The real wage is not countercyclical.
And I said, wow,that's a pretty damning observation to me.
And that's what I wrote a lotof my senior thesis about.
Actually, that senior thesis became a,part of it became an article that I
co-authored with Alan Blinder inthe Journal of Monetary Economics.
It's one of my earliest articles,not one of my most important, but

(13:42):
one of the first things I published.
But it was that idea that realwages weren't countercyclical,
that said, you have to start thinkingabout not only sticky wages,
I have to start thinkingabout sticky prices.
And if I'm gonna start thinking aboutsticky prices, you have to have firms that

(14:02):
are not competitive,that are price setters, not price takers.
Because if you're going to think aboutthe incentives that firms have to adjust
prices, you can't havethem being price takers.
And it was that that got me towrite my small menu cost paper,
which I think was my first very successfulpaper in the sense of garnering
a significant number of citations andgetting some notice.

(14:24):
I wrote that actually after, I thinkafter my first year of grad school.
And so that was what did think.
But then I think the motivationwas largely conservative,
not conservative in a political sense, but
conservative in intellectual sense.

(14:46):
Lucas and Prescott were all about,this Keynesian stuff's a failure,
let's throw it out,let's start from scratch.
They were very derogatory to much ofthe literature that had come before them.
And I remember always thinking,that seems a little too radical for me.
My temperament was always like, okay,not everything's right with these models,

(15:07):
but there's some truth to the models too.
And just throwing everything out andstarting from scratch may seem like fun
from the standpoint ofintellectual revolution, but
it seems a little too immersed.
And what the new Keynesian literaturetried to do is say, okay, there's some
truth in this stuff that Tobin andDigliani and that generation was saying.

(15:28):
But how can we take Lucaseriously without throwing that
previous generation'sideas out the window?
And I think that was a largepart of the motivation
of the new Keynesian literature.

>> Jon Hartley (15:44):
That's fascinating, any thoughts on, I feel like now there's,
you're absolutely right in a greatobservation that Keynes general
theory was more focused on sickywages than, say, sicky prices.
And I feel I feel like now we're slowlymaybe shifting back, or at least in terms
of what papers are using, I thinkslightly less focus on sticky prices.

(16:09):
When you have companieslike Amazon that can adjust
prices basically in matters of minutes orless or in seconds.
Where you have dynamic surge ofpricing in Uber and elsewhere,
I guess prices are becoming less sticky.
And there's work from folks likeAlberto Cavallo and others that suggest

(16:33):
that with a bigger online economy,prices, prices are becoming less sticky.
So maybe wages matter more orwage stickiness matters more.
Maybe in the housing market,rental contracts,
those are renewable only once a year, andthere's a lot of frictions there as well.

(16:55):
I'm curious, your seeking informationpaper with Ricardo Rice is
also one of your most high papers.
I'm curious what your thoughts are on sortof the legacy of seeking information.
I think it's such a great theory andinformational frictions are so important.
I mean, they're one of the reasons why,for example, the work done by Joe Stiglitz

(17:19):
and others arguing why the firstwelfare theorem doesn't work so well.
And similarly, you sort of applythat idea within business cycles.
But I guess there's the problem, whichis like, how do you measure information?
And that's a very difficult thing to do,so I think it's a great theory, but
a difficult empirical kind of thing.
And Ricardo Rice hasdone more follow up work.

(17:40):
I'm curious what you thinkabout the legacy of that paper,
I feel like is very early alsobehavioral economics, too.
And a lot of people are sort ofinterested in behavioral macroeconomics.
There was interest in behavioralmacroeconomics, I think, 20 years ago.
I think there even was a behavioralmacroeconomics mbrtaina group of some form
20 years ago.
And now there sort of is like a summercamp now and a working group again, but

(18:03):
I'm curious.
I also feel like now there's a bit ofretreat from behavioral economics,
like we had sort ofan apex in the mid-2010s.
But there's some sort ofquestions about Dana, Ariely, and
I guess some questions aboutreplication and things like that.

(18:25):
But I'm curious what you thinkabout the legacy of that paper and
informational frictions.

>> Gregory Mankiw (18:30):
Well, that particular paper was motivated by what I thought was
a flaw in the prevailing paradigm.
I mean, if you look at most ofthe work in New Keynesian economics.
The model of price stickiness inthe Phillips curve that people turn
to is usually some version of what'scalled the new Keynesian Phillips curve or

(18:53):
the Carville model.
I mean, Holy Rosenberg had a versionof this, too, slightly different.
But the essence of the Calvomodel is that prices
are set in this forward looking way.
And as a result,
inflation depends on what peopleexpect inflation in the future to be.

(19:14):
And that was introduced one interpretationof Friedman's natural hypothesis.
The problem with thatis that in that model,
inflation can jump inresponse to monetary policy.
So because inflation dependson expected inflation, and
that expectation can jump immediately.

(19:35):
When there's a monetary shock,
inflation can adjust literallyinstantaneously to the monetary shock.
So the price level issticky in that model, but
the inflation rate is notthe inflation rate is a jump variable.
And it seemed to me that in the data,people didn't seem to think that
was the case inflation wasdeemed as very inertial.

(19:57):
So the question is,how can you get inertial inflation and
have some sort of model of priceadjustment the way people often do it?
If you look at a lot of the applied work,they will often take the Calvo model.
And then pend it withsome ad hoc assumption,
like indexation of someprices to past prices.
So they basically built in an ad hoc way,inflation inertia.

(20:19):
But that's nothing really in the model,that's just something they'd added on.
So I was trying to think, okay, well,what might be generating this inflation
inertia, other than just sortof putting it in an ad hoc way?
And that was what motivated me to startthinking about sticky information.
You're absolutely right aboutthe connection, by the way,
to the behavioral economics literature.
This idea that informationmay be slow come in.

(20:40):
I saw a paper by David Lisbon and
Xavier Quebec that was applying thatidea to the consumption problem.
And I remember after seeing their present,their paper,
I said, look, let's try to applythis to the price setting problem.
That's what led to the stickyinformation model.

(21:01):
In this model, expectations matter,but it's different expectations.
In the Calvin model, what matters iscurrent expectations of future inflation.
And the sticky information model,
what matters is past expectationsof current inflation.
And because past expectations are alreadygiven, that's gonna generate a certain
degree of inertia that you're notgonna get in the capital model.

(21:21):
It was that motivated the model.
How influential has it been?
It's widely cited, but I don't thinkit's become the go to workhorse for
price adjustment in the literaturein that sense, I failed.
But I think I've sort of,
I still believe basicallythe basic critique of the Calvin.

>> Jon Hartley (21:44):
Right, I'm going to talk just a bit about
the legacy of new Keynesian DSG models,and
I guess just macro asa field more broadly.
So while I think today newKeynesian DSGE are still being
extended in some forms,like in the Hank literature,

(22:06):
the heterogeneous agent innew Keynesian literature.
There's several economists out there,Ben Moore,
Adrian Eau Claire,their co-authors, and many others.
And DSG models are beingsimulated by central banks or

(22:27):
maintained by central banks.
But I think there's a lot ofquestions out there about
the validity of thingslike the Phillips curve.
And really just whether thesemodels are actually that useful,
especially when theybecome more complicated.

(22:51):
We have certain things like,I think the Taylor rule,
which empirically fits the US data,for example, fairly well.
And I think a lot of central banks aroundthe world use Taylor rules in some way.
I think that's actually one ofthe more successful components,

(23:11):
if you will,of the sort of new Keynesian framework.
But in general,
I think most central bankers kind ofhave something more like an ISLM.
Something even more simple like an ISLMkind of thing in the back of their head,
rather than paying sort of attentionto every read off a DSG model.

(23:35):
Just having talked to a lot ofcentral bankers in terms of,
while the staff does crank out DSG models.
They're producing forecasts from DSGE, but
they're also producing forecastsfrom VARS, vector auto regressions.
I think often the vector autoregressions produce better forecasts,
and then central bankers usethat to form their analyses.

(23:59):
So I'm curious what you think about that.
I mean, there's also this sort ofgeneral decline of macroeconomics in
economics departments giving way toapplied microeconomists who argue
that macro doesn't really passa good identification smell test.
I'm curious, what do you thinkabout the legacy of new DSG

(24:20):
modeling today in academia and elsewhere.

>> Gregory Mankiw (24:24):
I mean, on the issue of micro versus macro,
I have long thought that microeconomicshas the better answers, but
macroeconomists have the better questions.
And so I don't think macroeconomics isever gonna die because the questions
that macroeconomists address are justtoo important, even if we're

(24:45):
not gonna have the clean, naturalexperiments that micro people love.
On the general shows ofthese big DSGE models.
Let's flash back to when I was enteringthe economics profession at the time.
There were these big models likethe NPS model, the DRI model,

(25:05):
these huge macro econometric modelsthat were run by policy institutions and
academics and some private firms.
And a lot of macroeconomicresearch was of that sort.
And at the time I remember being,
at the time I remember beingskeptical about a lot of that.

(25:27):
And if you go back to the rise of Lucasand the Lucas critique of these models,
part of the reception to Lucascritique was all the stagflation and
the events of the 70s.
Part of it was,I think people were getting a little tired
of these big models becausethey were large, non intuitive.
They seemed very black boxy, so you didn'treally know what was happening in them.

(25:50):
And so I think that people,
I think they started losing credibility,in these big models.
I think that a lot of the DSGE modelsare suffering from the same fate now,
they're getting large andcomplicated and lots of equations and
you don't know exactlywhat's driving what result.
And I do think at some pointpeople are going to get

(26:12):
tired of them for that reason.
I agree with you completely that if you'rean actual practical central banker, you
listen to your staff, present the results,but you don't take it as God's truth.
And a good central banker takesa healthy dose of skepticism.
When I was in Washington, I watched AlanGreenspan up close, and I think Alan, more

(26:34):
than most, had a deep, healthy skepticismof the macro econometric models.
I should note, by the way,
in my own research I tend to focus not onbig models that purport to be realistic.
But rather smaller models that are moreillustrating points than trying to say,
this is a real replicationof the whole economy.

(26:58):
I never really want to goback to those huge models.
We'll get better at these, butI think macroeconomics is so
complicated that actually saying I havea model that really replicates the data,
we can take it seriously forpolicy alternatives.
I think that's,I think it's a very hard ask.

>> Jon Hartley (27:21):
Yeah, no, I'm totally with you.
I think simpler macro models thatillustrate some sort of point,
maybe with some empirics.
And I do see a lot moreidentification being brought
in in different ways into macro papers.
Ricardo Rice has done some of this,say, for example,

(27:42):
his swap lines papers and thinkingabout those natural experiments and
then adding in a model, or thinkabout the work of Nakamura and seism.
And thinking about variousnatural experiments,
things like unemployment trends orexchange rate devaluations or
things like that, where there'sclear exogenous policy shocks.

(28:06):
Or thinking about what's a monetarypolicy shock, things like that.
I definitely see that asbeing a step forward, but
it's certainly on the empiric side.
Yeah, also,I definitely take a simple model,
over 100 plus page modelthat I think only maybe
the author can really claim tounderstand it, say the least.

(28:29):
But interesting just in general, andI think you're seeing fewer, and
fewer macroeconomists ineconomics departments.
And I think one thing thats happened,
though, is a lot of macroeconomistshave moved to finance departments too.
And so I think thats an interesting shift.
I totally agree with you thatthe big questions that people,
the big macro questions that people inDC and elsewhere in policy circles and

(28:54):
just broadly the public, when recessionshappen, people are wanting answers.
And I think really only macroeconomists or
people who study macro questionsare able to come up with some answers.
So I don't think macroeconomicsis going anywhere,
maybe it's shifting tofinance departments, but

(29:18):
I think it's still gonna be aroundforever as long as we have recessions.
And not to mention, I think the otherthing that I think is so important,
in which you've contributed quitea bit to, is the literature on growth.
And there's a famous Robert Lucas saying,
which is when you startthinking about growth,

(29:42):
you can't stop thinking about it,you can't really think about much else.
And so I want to talk a bit about growth.
And Manki Roman Weil is a hugecontribution to the empirics of growth
literature, a very highly cited paper,one of your most cited papers.
And was really the firstpaper to do a comprehensive

(30:07):
growth decompositionwhere you have output and
you're trying to explain that withlabor l K and human capital is h.
And thousands of researchers have followedthis and repeated similar exercises.
And in a sense, it's trying to comeup with empirical coefficients for

(30:32):
what something like a solomodel would look like.
But then along cameendogenous growth theory, and
in the time period that you measured,I think it worked quite well.
But then along cameendogenous growth theory.
And I think a lot of further criticismfrom the applied micro crowd and

(30:57):
the applied crowds,
criticizing aggregate productionfunctions as being misspecified.
That is, maybe aggregate economic output
doesn't follow somethinglike a Cobb Douglas
production function whereoutput y is equal to

(31:18):
alpha times k to beta timesl to the one minus beta.
I'm curious, any thoughts on the evolutionof the growth literature and
where it is today.
I think growth is so
much more, so essential whenyou think about one recession.
Maybe a big recession is maybe four or5% of GDP.

(31:40):
But when we're talking aboutgrowth differentials, say,
across countries, you've got countries,many countries in the world,
say China's, say an 8th ora 6th of the GDP of the US.
Increasingly, the US is starting to growmuch faster than, say, Say, Western Europe

(32:02):
or Canada, a lot of advanced economiesare starting to fall behind, and
they've been falling behind forat least since the great Recession now.
And there's a huge divergence there.
But there's been tons of researchdone over the years about
unconditional convergence,which models predict should happen.

(32:23):
That is why is it that poorcountries aren't catching up with
richer countries or poor countriesgrowing much faster than rich
countries to catch up to an advancedeconomy, economic level?
We think that ideas and technologyare things that can spread easily.
That's something that should be happening,but empirically,

(32:46):
we didn't really observe that fora long time.
The past couple of decades, 2000s, 2010swere maybe a time where we did see some
convergence, but I think since actually,since COVID and the 2020s inflation,
I think we've actually seena reversion back to diversion.
So I'm curious what you think about sortof just growth in general growth theory,

(33:09):
where it's at today, and
what you think people should bethinking about on that topic.

>> Gregory Mankiw (33:16):
Sure, that particular paper which you write is my most cited in
some sense,is a little bit like the new Keynesian
papers of beingintellectually conservative.
Just as the new Keynesian stuff was sortof responding to the people like Lucas and
Prescott who were saying throughoutall this Keynesian stuff.
This paper was in some sense respondingto the early endogenous growth theory by

(33:38):
Paul Romer andwhich had the tone of this solo model and
this neoclassical growth theory.
That's useless.
And our point was, no, no, there'ssome truth to the basic solo model,
especially if you extend itto include human capital.
You can do a reasonable job of explainingsome of the cross country variation in
growth experiences that we see.

(33:59):
So in some sense,that it was meant to bring Solow back
from the dead in some sense,and to say, no, we really.
That's why the first line is,this paper takes Robert Solo seriously,
because it's like, no, we actuallythink this model is still very useful.
I was actually, I wrote that papersort of the same time I was writing my
intermediate macro textbook,the first 1st edition.

(34:21):
And as I was writingthe chapter on growth,
I was writing the solo model,and I was thinking to myself,
am I wasting students time byteaching them the solo model?
And I started thinking hard about theempirical implications of the solo model.
That's one of the things thatled me in this direction.

(34:41):
I think now we're in a situationwhere endogenous growth
theory has made a big contribution, and
I think it coexists happily with sortof more neoclassical models, and
both provide insights for differentquestions, and I think they can coexist.
I don't think we need to sortof throw out one or the other.

(35:03):
My most recent publication,which came out last year, and restart,
was basically putting market powerinto neoclassical growth models.
So I take that as some indicationthat you can still make progress and
get some insights,even with neoclassical growth frameworks.
The sad thing is, I don't thinkeither set of models give easy policy

(35:24):
prescriptions forwhat poor countries can do.
I mean, if you look at Sub Saharan Africa,you can point to
a variety of elements they havethat prevent them from growing.
But saying,this model of endogenous growth,
of this model of neoclassical growth,gives me an easy recipe for
what Sub Saharan Africa can doto join the developed world.

(35:46):
It doesn't.
It brought you maybe a framework forthinking about those issues, but
there's no easy answers.
Or similarly, why is productivity beenslower since 1972 than it was before 72?
We don't think we haveany easy answers to that.
You can say sort of general thingsabout the importance of institutions,

(36:06):
importance of savings and investment.

>> Jon Hartley (36:08):
Running out of ideas.

>> Gregory Mankiw (36:10):
Running out of ideas.
Yes, right?So I think we can say, we can say things,
but I'm not sure the mathematicalmodels give tremendous
additional insight beyondwhat is sort of obvious.

>> Jon Hartley (36:24):
Do you, I guess,
have any sort of stance on sort ofthe fundamental cause of growth?
This is, I think,been a big debate in the growth
literature in the past,say, 30 years or so.
Is it institutions,is it culture, is it geography?

(36:44):
A lot of people having verystrong opinions on that.

>> Gregory Mankiw (36:49):
I don't think there's one thing,
I think it's a combination of things.
It's always nice to say, everything'sdue to this, have a causal explanation,
but I think it's multiplethings in my principles text.
I have a case study in recent editionsabout why is Sub Saharan Africa poor?
And I go through a whole bunch ofhypotheses and you read through these

(37:11):
different hypotheses and you realizeall these things could be true.
And maybe it's not one cause of ailments.
It's not like if only you hada better health system or if only so
many countries weren't landlocked.
I mean, so it's not going to be.
It's probably not just one thing,it's probably a combination of things.

>> Jon Hartley (37:28):
I want to talk just shift gears a little bit to policy.
So you served as chair ofthe Council of Economic Advisors
in the George W Bush administration.
But I think some people maynot know that you interned at
the Congressional Budget Officewhile in grad school.
You also worked in the Reagan CEA.

(37:50):
There were a lot of very interestingeconomists that worked at the Reagan CEA
along with yourself.
John Cochrane was there,Paul Krugman was there,
Larry Summers was there, and many others.
The list is actually pretty unbelievable.
I'm curious, like,
what were the highlights of yourvarious experiences in Washington?

>> Gregory Mankiw (38:12):
Sure, give you one small correction to your chronology.
I was actually a summer intern at theCongressional Budget Office while I was
an undergraduate, and I actually took offa year of grad school to work at the CEA.
So I worked at the CEA inthe middle of grad school, and
that's in the Reagan administration.

(38:32):
And what happened there, this is 1982.
Reagan had appointed Marty Feldstein to bechair of the Council of Economic advisors.
Marty Felstein hired oneof his star students,
Larry Summers, to be on the senior staff,and Larry Summers,
who knew me in grad school as a student,hired me to be on the junior staff.

(38:55):
So I easily came and spent a year,82, 83, being Larry's assistant.
And so I learned a lot.
That was just a fantastic year becauseLarry is such a great economist.
I was very generous with his time.
And you're right,there were other people there at the time.
I mean, John Cochrane was there that year,Paul Krugman was there that year.

(39:15):
But Valerie was mainly the personwho I worked closely with.
I've myself primarily as an academic, butI have sort of spent probably three and
a half years of my life in Washington,various policy jobs.
And one thing I'll say isthey're fascinating jobs.
They provide useful perspective.

(39:37):
So I think academics benefitfrom taking some time off.
And they view, when they come back, theyprobably view a lot of academic squabbles
and a lot of intellectual battles and alot of research lines is less interesting
than they would after seeing economicsfrom a more practical perspective.

(39:58):
One thing I'll say aboutbeing chair of the council,
which I did from 2003 to 2005.
And I worked harder those two yearsthan any two years of my life,
by far, because the days are long.
In the Bush administration,
every day started with the 7:30 AMstaff meeting in the Roosevelt room,
which is the conference roomright next to the Oval office.

(40:21):
In all my years at Harvard,I've been in Harvard almost 40 years,
nobody's ever called a 07:30 AM meeting.
[LAUGH] While I was at the White House,every day it was at 7:30 AM meeting.
It's not like you take offearly at the end of the day,
you work long hours atthe end of the day too.
So they're are very, very long days.
I left my family behind in Boston,my wife was a saint and

(40:43):
took care of my three small kids.
And I basically moved intoa hotel just a few blocks from
the White House because I knew Iwas gonna have much time to travel,
basically, it was extremely long days.
And by the end of two years, when I wasrequired to come back to Harvard or

(41:04):
give up my chair, it was not a difficultchoice, I was exhausted after two years.
So I was happy to come back to academia,where life is much more relaxed.
In terms of particular policies, let mejust mention a couple of policies that I
was involved with when I were therethat people might not be aware of.
I'll mention one that was a small policythat we won that I think basically was

(41:27):
completely under the radar screen.
Sometime in the middle of my tenure there,the Financial Standards Accounting Board,
FASB, was going to pass a regulationthat required companies to
deduct options as expenses forpurposes of computing earnings.
Many Silicon Valley companieswere unhappy about this,

(41:51):
because what looked like profitablecompanies become unprofitable and just
started subtracting out all the optionsthey were giving to their executives.
Their solution to this was to haveCongress pass a law preventing FASB from
making this accounting change.
And so there were a variety ofcongressmen, mainly from Silicon Valley,

(42:14):
who are pushing this legislation.
During the campaign, George Bush,when they asked about this,
had actually expressed some sympathy forthe Silicon Valley view.
So they were hoping that George Bushwould help this law get passed.
The economic team got together, we said,this is a terrible idea for two reasons.

(42:38):
One, we don't think Congress should getinvolved with accounting standards.
And secondly, we actually thought FASBwas right, options were expenses, and
not calling them expenseswas just misleading.
So we basically had to convincethe president to change
his mind on that issue.
So I remember the meeting vividly,and at the end,

(42:58):
I'm not sure we actually convincedhim to change his mind, but
we convinced him to basicallynot support the bill.
So basically, his silence onthe bill was enough to kill it,
and he didn't have to come out publiclyagainst it, he just had to not support it,
and that was enough to kill him.
So that was one caseunder the radar screen,
I don't think anybody was aware of thisat the time, other than, of course,

(43:19):
the few members of Congress whowere trying to pass this bill.
That was a win for the economic team.
Let me tell you another big issuethat we faced, that we lost.
This was before the financial crisis,
it was probably four yearsbefore the financial crisis.
So we didn't see the financialcrisis coming, but
we kinda knew that Fannie Mae andFreddie Mac were not ideal institutions,

(43:43):
this sort of uncomfortablepublic private view of them.
They said they weren't backedby the government, but
everybody knew they would bebacked by the government.
And so we thought,given that they were these basically
publicly funded institutions in some ways,
they should be better regulated andnot take on as much risk as they did.

(44:04):
And in that,we were joined with Alan Greenspan,
who was very much in favor of betterregulation of Fannie and Freddie.
So we put forward some proposed changesin legislation to regulate them better,
and that we failed.
The people who were lined up againstthis were basically the left,
particular congressman was Barney Frank atthe time, because I lived in Wellesley.

(44:27):
Barney Frank, who was a chair of a HouseFinancial Services Committee, I believe,
he basically came out opposed to this andhis view that, no, no,
you guys just don't appreciatepoor people getting houses.
So he was afraid that betterregulation would mean poor people would
have more trouble getting mortgages,and that'd be a bad thing.

(44:50):
Fast forward four years, in the financialcrisis, if some poor people hadn't
gotten mortgages, they might have beenbetter off if they had state renters.
But that was one thing we had failed.
We didn't see the financial crisis coming,but it would have been a less severe
financial crisis if we had succeeded ingetting better regulation of Fannie and
Freddie, and we didn't.

(45:10):
Those are sort of the kindof things we worked on.
And for me, it's a new perspective oneconomics, there's a lot of economists
who work in Washington, it's niceas an academic to see that world.
And also got to meet lots ofpeople who weren't economists.
I mean, the White House is filled withpeople who are usually hardworking and

(45:33):
successful, andthey're normally not trained in economics.
So I got to meet lots ofabsolutely brilliant and
fascinating people when I was there.
So, a person, for example, who I reallycame to love when I was there was
Karl Rove, who was obviously ina very different job than I was, but
he was very numbers-oriented.

(45:54):
Really wanted to hearabout the numbers and
was just fascinating to get to know andsee his perspective on the world.

>> Jon Hartley (46:00):
That's fascinating,
I actually just sawKarl Rove a couple days ago.

>> Gregory Mankiw (46:04):
Very nice guy.

>> Jon Hartley (46:06):
Very nice guy.
Very, very nice guy.
I guess I'm curious if you have anyjust broad thoughts on CEA and,
I guess economist influencein Washington in general.
I think what's interesting abouthow economists in Washington,

(46:26):
or how, I feel like their influencehas changed a little bit.
If you look Historically,
most CEA chairs used to be alltenured professors like yourself,
going back to James Tobin andmany others, going back to largely,
I think, the creation of CEA,the Full Employment Act.

(46:51):
And I think that was in maybe 1946.
I guess what's interesting now is,I think there's been a massive change,
which is the rise of think tanks.
And think tanks employa lot of economists or
policy analysts who are veryfocused on just understanding
policy rather than trying tomaybe discover something about

(47:16):
truth in the world,something related to economics.
And I think that's the generalmandate of economics departments and
finance departments as well.
But I'm curious, do you think the CEA haskind of changed in terms of its role?
When you're giving these storiesof having policy influence,

(47:40):
wow, those are amazing stories.
I feel like CEA has become much more of
a political machine nowto build charts and
graphs and things to sort of support
already drawn up Policy desires orpolicy ideas.

(48:06):
And this doesn't apply to CEA exclusively,but I think, and this is
something that Steve Lovett mentionedon the podcast a while ago, which is.
What often happens in DC is, orin these sort of policy settings,
is that policymakers or congressman or
whoever have you will havea policy that they want.

(48:30):
And that they decide forwhatever political reason they want it.
Maybe without thinking too much aboutall the benefits and the costs,
and then they will try andfind academic research that just supports
whatever that previously drawnup policy conclusion is.

(48:52):
And so, I guess at some level,if you sort of believe that that's often,
or, I don't want to say often,but when that's the case,
that's not a real example of economistskind of having influence per se.
Because, I think you can kind ofalmost always find a paper somewhere,

(49:12):
maybe not in the top journals,that will support almost any policy.
I'm curious what you think about that, and
what the influence of economistshave been in Washington,
and has it become morepolitical cheerleader-type
role than a real type of policy role?

(49:34):
Well, I know there'smany exceptions to this,
folks like Kevin Hassett havebeen very influential in things
like the Taxation Jobs Act andI also, I think the CARES Act.
But I'm just curious what your take ison the role of the economists in DC and
how it's changed.

>> Gregory Mankiw (49:54):
Well, there's always been some truth to what you're saying.
I think Paul Samuelson many, many yearsago used to tell the story that when he
was raising his children in Belmont,there was two pediatricians.
One, whenever they brought him there,he just said,
recommended bed rest, the otherthat always prescribed antibiotics.

(50:16):
And so Paul Samuelson would decidewhat he thought his child needed and
take them to the appropriate pediatrician.
That's a little bit like what politiciansdo, is they choose the economist that
are gonna give them the kindof advice they want, and
therefore they're consistentwith their views.
So I think that's true.
I think some contribution isreally in the details of policy,

(50:38):
because even if the, even if the presidentis setting the broad scope policy,
there'll be lots of details that he orshe's not focused on.
And that's the stuffthat the staff works on.
And the CEA and CEA staff workclosely together with the rest of
the White House staff,the Treasury Department staff, and

(51:01):
Commerce Department, Labor Department orwhatever, depending what the issue is.
So I think you can get goodeconomics in the details that
are flying below the radarscreen of the politicians.
The politicians probably come in withsome set of ideas of what they wanna do.
And certainly, what we can do ispoint out unintended consequences and

(51:23):
say, maybe you think this is a good idea,but have you thought about this?
The CEA has no authority overanything other than giving advice.
That makes it very different from,say, the Treasury Department or
the Commerce department, we don't runany programs, we just give advice.
And so as an advice giver,you're only as influential

(51:46):
as the person listening tothe advice wants you to be.
And that's gonna vary over time.
And right now, we have someonewho's not been an academic,
Jared Bernstein,who's the head of the CGA.
I know Jared reasonably well,and he's a very good guy, but
he's a Washington economist,he's not an academic.

(52:07):
Was that a good thing or a bad thing?
I think it's a mixed bag.
He probably comes to it a little morepolitically because he's been very closely
aligned with Joe Biden, he was Joe Biden'seconomist when he was Vice President.
But on the other hand, I think becauseof that, Joe Biden has more trust in

(52:28):
Kevin Jared than he would if he had somestranger coming flying in from Harvard.
So I see pros and cons of the changes, and
it will vary over time asnew presidents come in and
decide to set their ownrelationship with the CEA.

>> Jon Hartley (52:48):
And maybe there's something we said about gains
specialization, that maybe it's right that
academics really should befocusing on doing research.
And you have think tankers to fill policyslots when they're parties in power.

>> Gregory Mankiw (53:08):
Absolutely,
there's very good work ina lot of the think tanks.
Not all of them, I mean,some of them are not very good, but
I think some of the work ofthink tanks are very good.
And they're focused on the kind ofquestions that politicians want answered
more than the kind of questions thatthe academic literature once answered.

>> Jon Hartley (53:25):
Absolutely, one last quick question for you, Greg,
you've been a long timedefender of Pigouvian taxation,
carbon taxes as a policyresponse to climate change.
How do you see the carbon taxpolicy battles going on today and
the climate issue more broadly?

>> Gregory Mankiw (53:40):
I think it's a sad state of play right now,
because the Republicans seemto deny climate change.
And I've been told by peoplewho worked for Donald Trump,
that Donald Trump does notbelieve in climate change.
And the Democrats whobelieve in climate change but
don't believe in taxing anybodymaking less than 400,000 a year.
So basically, there's no constituency forcarbon taxes.

(54:02):
You can make a carbon taxsystem progressive, but
saying you're not gonna raise taxes onanybody making less than 400,000 a year,
that's probably impossible.
So the carbon tax, which most economiststhink is the first best approach to
climate change,is probably not on the table.
And this is partlya reflection of a variety of

(54:23):
dysfunction in Washington right now.
Tariffs are popular in both partiesright now, that's kind of sad.
No party is really worried about long-termfiscal sustainability, that's kind of sad.
So we don't have,state of economic policy in
Washington is not terrificin both parties right now.
In my mind, that makes teaching economicsall the more important, because I think in

(54:47):
the long run, educating the electorate isthe way to go to get better public policy.

>> Jon Hartley (54:52):
Its interesting, too, just because internationally, carbon taxes,
I think, have been a failure as well.
If you think about, in Canada,they're very unpopular.
Justin Trudeau has introducedcarbon taxes and the top policy,
a concern that's being highlightedby his opponent, Pierre Poilievre,

(55:15):
who's very likely to come into officein about a year or so from now.
And then in France, you thinkabout the Yellow Vest revolution.
And so it's, I think I agree,like the whole policy substitute idea,
There's a great argument that,I think, you made on the,
I think it was a National Geographicdocumentary that Leo DiCaprio,

(55:39):
I think,was doing about policy substitutes.
If you have a carbon tax,you can reduce people's income taxes.
And I think the challenge is,it's one of those things
where it's an interestingeconomic kind of idea.
Of course, we want lower income taxes and
it sounds like a great idea,who doesn't want less income taxes?

(56:03):
There's this weird political economyproblem of passing policy substitutes,
which is just a very difficultthing to do, I guess.

>> Gregory Mankiw (56:12):
Yes, yes, Milfree used to talk about status quo bias,
the people seem to like the status quo.
So it's a hard sell,even though economists,
both the right and the left,are in favor of carbon taxes.

>> Jon Hartley (56:26):
Exactly, well, it's been a real honor to have you on, Greg, and
hear about your amazing career.
Thank you so much for joining us.

>> Gregory Mankiw (56:32):
Thank you, Jon, it's great seeing you.

>> Jon Hartley (56:35):
This is the Capitalism and Freedom, the 21st Century podcast,
an official podcast of the Hoover EconomicPolicy working group where we talk about
economics, markets, and public policy.
Our guest today was Gregory Mankiw,
who is a professor of economicsat Harvard University.
I'm Jon Hartley, your host,thanks so much for joining us.
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