David Beckworth: Our guest today is Tyler Cowen. Tyler is a professor of economics at George Mason University, and is a co-author of a popular economics blog, Marginal Revolution. Tyler has published widely in economics, and is the author in numerous books, including his 2017 book, *The Complacent Class: The Self Defeating Quest for the American Dream,* which we discussed on a previous episode. I encourage our listeners to check it out if you haven't done so already. While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected] Beckworth: Today, however, Tyler joins us to discuss his newest book, *Big Business: A Love Letter to an American Anti-Hero.* Tyler, welcome back to the show. Tyler
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David Beckworth: Our guest today is Tyler Cowen. Tyler is a professor of economics at George Mason University, and is a co-author of a popular economics blog, Marginal Revolution. Tyler has published widely in economics, and is the author in numerous books, including his 2017 book, *The Complacent Class: The Self Defeating Quest for the American Dream,* which we discussed on a previous episode. I encourage our listeners to check it out if you haven't done so already.
While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
Beckworth: Today, however, Tyler joins us to discuss his newest book, *Big Business: A Love Letter to an American Anti-Hero.* Tyler, welcome back to the show.
Tyler Cowen: Thank you, David.
Beckworth: Well, it's great to have you back on the show. A lot of your books can be framed around the long run economic growth view of macroeconomics, what drives that kind of trend growth rate, your Great Stagnation book, The Complacent Class book. I think this book, your newest book is also a part of that story. Is that fair?
Cowen: Yes, it's striking to me how much business and big business in particular, are a source of comparative advantage for the United States. It seems we have the best managers, the best CEOs, overall the best companies, that's one driver of both levels of growth. In part, my book is somewhat of a homage to that.
Beckworth: Yes. I want to ask as we get into this book, first off, why write this book now? You have a chapter titled, “A New Pro Business Manifesto.” Again, we can tie this back into long run macro growth, but why does the world need a new pro- business manifesto at this time?
Cowen: In American history, hostility toward business seems to run in cycles. Right now, it's at a peak in both political parties. I think there's much more anti-business sentiment today than there was 10 or even five years ago. This book is really just a set of correctives about the basic facts. It's not a comparison of capitalism versus socialism. It's just saying that when it comes to business, people believe this one set of facts. What I think is actually true is something a bit more positive.
Beckworth: Yeah, it striking where we are in today's history. You mentioned some interesting facts in this chapter about the increasing hostility toward business. You mentioned for young people that 42 percent of the 18 to 29 year olds support capitalism, or only 42 percent; whereas 51 percent do not support capitalism. Even more striking, 33 percent support socialism.
Cowen: I don't think those people necessarily know what they mean, but still, it's not exactly a pro-business manifesto to say you support socialism. I think we're in this funny paradox where if you look at actual time allocation, Americans, especially young Americans, they allocate more time to big business than ever before. In some ways, they trust it more than before. They trust their smart phones. They'll spend time on social media. They're very happy to take Ubers. In part, it may be because of that increased actual dependency that ideologically they express a lot more skepticism about all the sort of things we're supposed to trust, not just business, but organized religion, politics, Congress, many other features of life.
Beckworth: Would you say that sentiment is in part an extension of the argument you make in the Complacent Class that we become so complacent given all of this income or growth where we are, that we begin to question things?
Cowen: I think that some of it, there are higher accumulated stocks of wealth. I think the internet also makes it easier not to trust things. You see more of the truth. The truth often is a bit of an ugly sausage. You see the people you disagree with, how irrational they are, just like you are, by the way, how emotional they can be, how they over-respond to your totally rational criticisms on Twitter.
Cowen: Then, if you dislike those who disagree with you more, these different institutions, you connect them with people. If you're say, a progressive left winger, you might associate organized religion or big business with conservatives or republicans. What you're really distrusting are the other people and the institution of business itself, maybe a kind of phony stand-in. The end of the day comes, you still go off to Chipotle and eat your meal.
Beckworth: Fair enough.
Cowen: It's a complex psychological phenomenon.
Beckworth: It is. Okay, so it's a lot wrapped in there. You mentioned the young people in your book, you mentioned the Bernie Sanders supporters, the media itself is a big part of the story, but even Donald Trump himself-
Cowen: Especially Donald Trump.
Beckworth: Especially Donald Trump. He's been very much going after business. Even people, the right-of-center conservatives themselves are willing to go after business, like Facebook or YouTube, they think that they're ... it's taking away their way to say their views. They're willing to go break up big business.
Cowen: This is a complete flip from attitudes of less than 10 years ago, where you'll see like the New York Times, when Facebook, use of Facebook data helped Obama win an election. This was just like so super cool. They published articles. Now, Trump has won it, probably was not because of Facebook, but some kind of sacrificial victim is required. Someone has to be at fault. Well, who could it be exactly? Google, it's hard to pin the blame on. Facebook is a kind of natural target. It is, in some ways, like being a major publisher. Arguably, it helps Fox News more than a lot of other media sources. They get blamed, and Russian interference, and so on. It's this multi layered set of emotional reactions where we push things onto big business, that maybe don't have that much to do with the reality at all.
Beckworth: All right, so you've listed the increasing hostility. You call it cyclical kind of peak of hostility towards business. In that first chapter, you also say that we don't love big business enough. This kind of comes out through the book, but you give a couple of examples there. We have amazing US management skill levels compared to the rest of the world. There's more trust in our country, so they can delegate tasks easier, which leads to greater productivity. We're better at creative destruction. Anything else about big business we don't appreciate?
Cowen: Big business as a liberalizing progressive social force, for instance, for gay rights, for women's rights, for just general acceptance and tolerance, and internationalization of people's perspectives, American big business has played a critical role in all of those developments. A lot of major companies were giving same sex partners, like health insurance coverage rights before the Supreme Court legalized gay marriage. That helped the idea, it seemed normal to a lot of people. Then it happened legally, but a lot of business was ahead of that curve.
Cowen: People think of big business as just stodgy, and conservative, and reactionary. That's not really true. Businesses want to typically sell to very broad audiences, hire the best talent no matter what their religion or background may be, and that's a pretty positive social influence.
Beckworth: Yeah, and you mention, they just give us stuff; stuff that we enjoy. You have this list on page two, “without business, we wouldn't have ships, trains, and cars, electricity, lighting, heating equipment, most of our food supply, pharmaceuticals, clothes, telephones, smart phones, books we read, the ability to access information.” They provide a lot of what we consume.
Cowen: That's correct. I think also if you think of our future problems, something like climate change, where business partly has been at fault, though I think you can say it's consumers who have driven that. But the likely solutions to that will require the cooperation of big business. If we simply demonize business and call it the fount of all evil, they're destroying the environment, our chances of actually having a true mobilized solution that works its way through the American economy, and ultimately other countries, those chances are going to go down.
Beckworth: All right, so this love letter to big business, it's a great book. You go through a number of questions or critiques that are raised about big business. I want to go through them with you. But before I do that, I want to get to the, kind of a key question that your book raises in my mind. What is business? What is a firm? In your appendix, you go over kind of the standard professional view or the academic view of a firm, then you have your view. Can you explain the difference?
Cowen: Like so many other people, I grew up in the tradition of Ronald Coase and Oliver Williamson, that businesses are there to minimize transactions costs relative to the market. That's still the dominant view in my opinion, but at this point in my life, I no longer think it's true. It's because I've spent enough time working within big businesses, in different ways dealing with them. If you want something done, I assure, transactions costs are not always so low. What's really low transactions costs is to go to Amazon and click once, and have them send something to your home. Amazon and I, we're not part of the same company, per se.
Cowen: What can be really difficult is trying to go through the purchasing department of a large business, and have something delivered to your office that you need. Sometimes the purchasing department might do really well. But just as you accumulate more and more instances of that, it seems business is about something else. Business has to do okay on transactions costs. I think of it as a carrier of reputation, a bearer of legal liability, and a collected set of assets which have, in a sense, one public face, and a name, and a brand. This is closer to the overlying institutionalist notions of business, say from John R. Commons, even. Again, transactions costs are important, but to me, that's not the essence of what a business is. It's more institutional.
Beckworth: Okay, so part of your definition is it's carrying of all of this culture, these people, these personalities. It frames them. You have another chapter near the end where you try to explain why big business is so disliked. I think it's tied to that understanding of firm. Can you connect the two?
Cowen: I think we first have to disaggregate how is big business so disliked? If you look at, say the American median voter, or say like the proverbial soccer mom from southern Ohio, I doubt if that person dislikes big business more today than five or 10 years ago. I think our intellectual class has swung very much toward the left on business issues. Our politicians are way more willing to attack big business, say Elizabeth Warren calling for the breakup of big tech, Donald Trump tweeting against CEOs. Media, far more hostile to big business than was the case 10 years ago.
Cowen: It's only particular groups. I think again, it's a mix of factors. There's a feeling that the social equilibrium has shifted, and we have to look for victims. Business is only one of the victims, but it's much less of a positive sum mentality. It's more of a blame mentality. It's more about the internet and social media lowering, perhaps trust and helping us see the flaws in many things. Big business has partly taken a lot of the fallout from that, but again, with ordinary Americans operationally, probably they trust big business as much as they used to. The intellectual foundations of our belief in big business and capitalism, those are taking big hits.
Beckworth: All right, you mentioned in your book in that chapter, though, that we tend to view corporations as people. The critique you might apply to someone who's offended us, or some criticism of a person we apply to a corporation. I think that runs the line with your view of the firm. It's a carrier of reputation, a kind of metaphorical personhood. Is that right?
Cowen: Yes. We're programmed to think of most things in terms of people. If there's a big storm up in the sky, primitive man tends to think somehow the gods caused it. We think in terms of intention, of plan, design. It's just our basic programming.
Cowen: We didn't evolve next to anything like big business, or not really even much in the way of small business. When you encounter big business, you think like do I trust IBM? Do I trust Microsoft or Apple? As if it's a friend. But business is really just part of the impersonal order, kind of Hayekian construct of abstract rules. Business is pretty selfish. That's okay. It can go wrong.
Cowen: You need to judge it as part of that abstract order. If you think of it as like oh, your friend, you're always going to be disappointed. It's like they leave you waiting on the help line for 17 minutes, because it wasn't profitable to serve you in one minute. Well, what friend of yours would do that? You'd be pretty upset, right?
Cowen: But here's the funny thing: we actually partly need to think of businesses as our friends to trust capitalism enough to have it. It's this funny tension where thinking of business as a friend, we kind of need it, because we're not rational enough to support business for the proper reasons. But at the same time, it means we're always disillusioned. That's why in society, you get this complex mix of what people think, what they do, how they act, what they choose. It really doesn't at all fit together. The simple like, “do you trust business or not?” There's not actually any single answer to that question for most people. The answer is, it depends.
Beckworth: Okay. Interesting. Interesting tension you bring up there. You mention in your book, you raise the story of Mitt Romney's gaff in 2012 on the campaign trail running for president, where he said corporations are people. The media went crazy. Critics went crazy. You bring up the very same progressive critics today also apply that kind of criticism towards corporations, as if they are people.
Cowen: That's right. We view them as institutions which fail us, or can fail us. So much is about moral blame. If you read the New York Times op eds about the big tech companies, just a number of moralizing adjectives in those pieces, to me is astonishing. The number of actual facts or like substantive economic analysis is often quite low. Again, I think this is a shift in how discourse operates.
Cowen: Media have often become more like social media, which is pluses and minuses; but a lot of minuses.
Beckworth: Alright. Well, let's move on then from our understanding of what the firm is to the criticism of the firm, and then you're going to respond to them, and particularly big business; since this book's about big business. The first one you address is this question, are businesses more fraudulent then the rest of us?
Cowen: I look at a lot of different measures of fraud and misbehavior. Overall, I think businesses are about as fraudulent as individuals operating outside of business. If you look say, at for profit and non-profit hospitals, it's very hard to find much of a difference in terms of what they do, what their budgets look like, how good of a job they do. You can find plenty of instances where businesses seem to be more honest. I pose the question, who lies to you more, Match.com or the people who fill out the online dating profiles for Match.com?
Beckworth: Good point.
Cowen: Pretty clearly there the individuals are the big liars, not the company.
Cowen: The company may exaggerate how wonderful romance is or something, but the people are just lying flat out as much as they can get away with. I think there's some cases where the businesses are worse. So for profit education has been especially fraudulent. A lot of the markets for herbal supplements, penis enlargers; there's plenty of examples. I think on the whole, you look at more capitalistic societies with more big business. They tend to have higher levels of trust. There are experiments that have been run. CEOs tend to cooperate somewhat more than just ordinary people, like not any one of those proves the point, but I think overall is very good reason to believe business is probably somewhat less fraudulent than people operating in other contexts.
Beckworth: You raise a good point in this chapter. You ask the question, who's more likely to rip you off, your local mechanic, your local doctor, or Walmart or McDonalds?
Cowen: The very most predictable experiences I have are with big business. I go say to Target, there's not a Walmart near me. I know exactly what to expect. If they're selling me a rubber basketball, I bring it home, what do you think I'm going to get? I'm going to get the basketball, right? You buy some underwear there, you buy plums, it's what it is. The price they post is the price they charge you at the register. A remarkably clean, predictable experience. Big business, not in every case, but actually in the overwhelming majority of cases, gives us that predictability really very well in this country.
Beckworth: Yeah. They have more of an incentive to be predictable, to be ... have a good reputation.
Beckworth: Because you're going to go back, whereas maybe a HVAC repair person or a local mechanic might cheat you once because they don't think you might come back for a next visit. This to me was interesting because it ties into this other point you just raised that in wealthier countries, the level of trust tends to go up, which leads to more cooperation and more productivity growth.
Cowen: Well, people learn how to trust. They can see there is gain in taking a longer term perspective. I think there's some incomplete spillover into other areas of life. If you're at work all day long, actually trying hard to serve your customers, and make an honest living, are you then going to come home and kick your dog? Well, sometimes, but I actually think it helps make people somewhat better and teach them win/win thinking. You have an evolutionarily more stable sense, lower discount rates becoming more important, giving people more resources, more authority. That shifts the overall tenor of society in what is mostly a positive direction.
Beckworth: So can I say then that the rise of big business is closely tied to some marginal improvement in the level of trust in a society?
Cowen: Yes. I think the causality runs both ways. There's more trust, it's easier to build a business and make it larger. Having successful big businesses in turn reinforces trust. That's a positive virtuous dynamic. You see it in many countries. I don't think we know exactly how much the causality runs in which way, rather than the other; but it's clearly both ways.
Beckworth: Okay. Chapter three, you get into the question, are CEOs paid too much? A very controversial topic now.
Cowen: I think it's controversial in the media and maybe with some ordinary Americans. I don't think it's that controversial in the economics literature. But basically CEO pay has been rising with the size of firms. CEOs are paid mostly with a mix of equity and options. That's to incentivize them for what to economists are pretty obvious reasons. If companies are worth more, CEOs are paid more. It's not a huge surprise. It's not weird. It's not all about rip offs, or taking advantage of shareholders. I think that's pretty well established in the literature. It hasn't really been seeping through to broader society. There are plenty of particular cases where individual CEOs are overpaid, just like musicians and athletes are.
Cowen: That's part of the bidding for talent, professors. You hire them, you tenure them. Maybe more than half of them don't work out, right? But the superstars are great for you. If you're chasing after the superstars and you don't know in advance who they'll be, you are going to overpay some people. It's not ideal, but again, viewed from the systemic impersonal perspective, it makes a lot of sense.
Beckworth: So CEOs today are creating a lot more value than they were back then. That's tied to why they're getting paid so much. What is a CEO doing today that generates so much value?
Cowen: Companies tend to be more global. You just have to know more. You have understand other cultures. You're more closely connected with marketing. Most companies have more to do with tech. Tech expertise is not easy. A lot of companies have more to do with finance. Almost all, they require more public relations. The CEO has to take on some kind of public role. There's more dealing with government than there used to be. To find one person who can do all of that well, it's very, very hard. We're asking a lot more of CEOs, harder to find the best candidates, and through market supply and demand, of course the pay on average is going up.
Beckworth: Yeah. I know pretty recently how Wells Fargo's having a hard time finding their replacement CEO. They've had some trouble with the government and some issues, but it's just hard to find someone willing to take on all that responsibility just outlined.
Cowen: And banking's especially hard. If you think of a lot of banks as really needing to upgrade their software for 2019 and beyond, the people who have those skills, and who have financial and banking skills, that's a very thin market.
Cowen: Just to hire some kind of old style banker who can keep the trains running on time, the way things used to happen at Wells Fargo, and not reform some of the abusive practices, not re-establish a positive reputation for the company, it's one of the hardest CEO jobs out there right now, Wells Fargo, I suspect.
Beckworth: Yeah, I mean you almost have to be a super person to do this. Now, you've mentioned this superstar firm effect. Can you explain that to our listeners, what that means?
Cowen: Some economists are using the word, 'super firms.' Those are very often just big famous companies that you've heard of; like Microsoft and Apple, would be two obvious examples. In those companies, productivity has been phenomenal. Earnings, share values, and the data show that a gap has opened up between these super firms and most other companies; which typically you haven't heard of, small, medium size, or even like the smaller large companies.
Cowen: The size of that gap is growing. To me, that indicates we ought to be trying to build more super firms, but people have taken this different ways, of course. One response, you get this a bit from Elizabeth Warren is “oh, we need to tear down the super firms.” In some way, they're doing too well, or they're all big monopolies, or whatever.
Beckworth: You think we need more super firms?
Cowen: They pay higher wages. They innovate more. They have more of a global presence. If I think where do I spend my money? Well, the thing I buy most often by far is books, maybe three a day. Then I go shopping at Whole Foods. What company owns both of those?
Cowen: That's a super firm. Their prices are lower on almost everything. I wouldn't say Whole Foods' prices are lower, but they stock items I can't get elsewhere. Do I want more companies to be like that? Of course I do.
Beckworth: So, when I think of these firms, I think of increasing returns to scale, or they get on the lowest part of the average cost curve because they're out there first. They’re first movers sometimes, they really ... they get the market share, and you got to have a big part of that market share to get to those low average costs.
Cowen: There's low marginal costs and very often low prices, too. They're building platforms.
Cowen: The goal is not you're a big super firm, and my goodness, Amazon charges 2X for books compared to Barnes & Noble; no. What is $27 at Barnes & Noble is $17 on Amazon. That's a big price gap, right?
Cowen: It's not just a dollar or two, and the shipping's incredible.
Beckworth: Right. My question is, are there opportunities for other super firms to emerge, given the skills that are required?
Cowen: I think it's very hard to build super firms. You need these concentrated clusters of human talent. There are limits on human talent. We're getting better all the time at finding and mobilizing human talent. As tech spreads to more and more sectors of the economy, I think we can and indeed will have more super firms virtually everywhere. There's areas where we clearly keep them out, a lot of healthcare, a lot of education, partly through regulation, partly just custom. Those areas frankly could use some super firms.
Beckworth: That might be part of the answer to the great stagnation.
Cowen: Yes, but it's an answer that is slow in coming.
Beckworth: Slow and incremental, and marginal. You also raised the point in this chapter how a lot of our conversation about income inequality can be tied to these firms. Is that right?
Cowen: That's right. If you look at companies putting aside say the CEO, or two or three top earners in that company, the wage gap between the very high earners, and say the janitors, the receptionists, that really has not changed over time. Income inequality as we observe it has come from the super firms paying everyone more than the non-super firms. Another way to put it is the janitor at Google is much better paid than the janitor at the local high school. That to me is a reason to have more super firms. Elevate more janitors and people doing all kinds of tasks. There's a profit surplus in there. Super firms give consumers lower prices, better selection, for the most part, in most areas.
Beckworth: Okay. Also, tied to this idea is this question of short term-ism. Do firms try to game the system for short term gains because of stock reporting, stock purposes? What are your thoughts on that?
Cowen: I don't see the evidence that markets are on-net overly short term. You look at the share price of Tesla, which is a highly speculative venture. At times, Tesla's been worth more than General Motors or Ford. That's because people think there's some long, long run out there where Tesla's amazing. I'm not sure that will come, but that's markets thinking long term. Amazon having a high share price before it had real net profits. Uber, you can debate how profitable Uber is right now, but again, share valuations have been quite high; including in the private market before it went public. That's based on the promise of a more distant future.
Cowen: I think what people do is say markets on average get it right. Well, half the time markets are too long term; Pets.com. Other half of the time, they're too short term. There's then a ready trove of examples, like 49.9 percent of the economy, where yeah, markets are thinking too short term. You can pull those out of a hat all day long. But I think there's plenty of evidence, on average, markets getting to that right.
Beckworth: Yeah, you mentioned in the book that R&D expenditures, or research and development expenditures, as a percentage of GDP has been relatively constant, which would not support a short term-ism view.
Cowen: A lot of R&D now, it's not counted as R&D. That may be a misleading number favoring long term thinking. So Facebook has had new products, pretty impressive. That doesn't show up as typical R&D spending. Originally it was Mark Zuckerberg in his dorm room, right?
Cowen: It grew beyond that, but that's a lot of innovation, not showing up in R&D.
Beckworth: All this intangible capital.
Cowen: All this intangible capital. What we do to create that very often does not show up as R&D. R&D numbers are not that illustrative. But nonetheless, you just see more and more people thinking long term, trying to build comparative advantage. In the areas where you don't, like not every sector can be long term. You and I, we both run podcasts. How far out do I plan? Well, I'll tell you: September. Right now it's June.
Cowen: Am I supposed to line up a podcast guest for three years from now? No. But you wouldn't say I'm thinking too short term.
Cowen: Like a lot of the capital is evaporating and being rebuilt again and again. The way to run a podcast is to plan out only a certain amount. The more intangible capital you have, some of that depreciates very rapidly. You have service sector companies. They're not building big factories as fixed assets like the old days of the Big Three in Detroit. They may be thinking shorter term because their assets are shorter term; because say software and other more intangible things are changing more rapidly; and them thinking shorter term is the right thing to do.
Cowen: If software in your field is going to improve vastly two years from now, should you sink like all your money into a big 10 year project? Maybe not.
Beckworth: Right. Those are great points. I can definitely relate on the podcast front, because-
Cowen: How far out do you book?
Beckworth: Well, we were just talking before the show, actually, that we have shows going through the end of August, and that's pushing it because things are going to change.
Beckworth: It won't be topical anymore. I said, we just slow down, you know? We need to be careful.
Cowen: They would say you're thinking too short term, David Beckworth.
Beckworth: Right. Well, and a real concrete example of this is we had our colleague, Dan Griswold on the show. We recorded the podcast on Friday. It was kind of at the end of a very busy trade war week. On Monday, President Trump was threatening to impose the new tariffs on Mexico, new five percent, starting at five percent. We're like we've got to get this in because man, there's so much happening. We usually take more time between recording and airing. Lo and behold over the weekend, Trump decides that he's not going to do it. My podcast is a little bit dated, just in a few days like that. So I can definitely relate to this tension that you outline.
Cowen: This year I scheduled some on Emily Wilson. She translated Homer's Odyssey. I had no fear of scheduling her six months in advance, right?
Cowen: Homer's still going to be Homer by the time the recording rolls around.
Beckworth: Right. So in that case, it's easier to do; but if you got stuff that's very topical and timely, you have to be very careful and nimble.
Cowen: Markets I think on average get that right, as do I hope podcasters.
Beckworth: Yeah, but I want one more thing just on the short term-ism, just to be very clear to our listeners. The critique is that CEOs, again this is the chapter of getting paid too much, the critique is that CEOs, their income is tied to shares of the company. They want quarterly reports to look really good, so that the share price goes up, they're wealthier and so forth. You addressed that. Another critique, though, is the share buybacks that's been going on. There's been a lot of discussion about that. Many people on the left have been critical, but even recently and surprisingly, Marco Rubio, Senator Marco Rubio has been critical of this. I wish you would speak to that, if you can.
Cowen: Cliff Asness and I refer to this as share buyback derangement.
Cowen: If a company buys back its shares, it’s getting money back out to the shareholders, who believe it or not, own the company. If you want to say something like well, they're spending the money buying back the shares instead of innovating, instead of paying workers. I mean I have a better argument for you: in most companies, there's more debt in equity. Companies pay out of lot of interest to bond holders. Would anyone say, 'Oh, companies are paying interest back to bond holders, rather than X, Y, and Z?' Like no, issuing bonds is how you fund what the company does.
Cowen: You have to pay back to bond holders to fund the company. It's not a problem if you're financing the company. People who are attacking share buybacks, I think that's just kind of a very basic economic illiteracy. That argument, there isn't anything to. Is CEO pay too high? There are arguments you can make, but share buybacks, it's a kind of analytic derangement, I think is the right way to put it.
Beckworth: Well, I agree with that. I think .... I wonder if you, get your response on my take on why there's such an issue with this; particularly people on the right of all places. I wonder if there's like a zero lower bound hangover effect going on. This is what I mean by that. During the zero lower bound period, if a firm did do a share buyback, and sent it out to the shareholder, in theory, they are literally maybe hoarding their funds because they're at the zero lower of bound. You can't reinvest it in lower rates to kind of get the markets moving. Whereas today, if I get a share buyback, if I get funds, I put it in the markets and everyone's doing it. Presumably, interest rates will adjust. There's some kind of offsetting investment somewhere else.
Cowen: But even if you're at the zero lower bound, you're not at zero for everything. So a lot of people I know would say, 'Oh, I got this money back,' whether it's buybacks or bonus, whatever. Their attitude immediately is I'm looking for a venture capital fund to put this into.
Beckworth: That's a fair point, yeah.
Cowen: Which is not zero return. Even people late into VC have at times, done pretty well.
Beckworth: That's a good point.
Cowen: With tech growing, other biomedical technology companies growing. The more the zero lower bound, actually the more likely you are to take some risk with it, you might argue.
Beckworth: That's a good point. That's a good point. But the point is those-
Cowen: You won’t buy T-bills, right? Perhaps.
Beckworth: Yeah. The point is those funds are fungible. They're not just sitting under someone's mattress. They're going back into the economy.
Cowen: Of course.
Beckworth: Investing in some other productive endeavor. I think that's where people get hung up. They don't think through the dynamic story.
Cowen: But I'm not even sure it's logic. I think there's some emotional valance, like there's a negative feeling about power in the world. Big companies have done well. They're a source of power. All the arguments out there that seem to be critical of big companies, they fit into your world view better than they did before. People are just latching on to them, to some of the anti-tech arguments. Then they're just acquiring lives of their own. They get repeated on social media, and there you go.
Beckworth: Okay. Well, let's move onto the next chapter, the next critique. Is work fun? Do we find meaning in work?
Cowen: 'Is work fun' is a complex question, a bit like do people like businesses? But I think work is a bit underrated. First of all, they pay you, right?
Cowen: Second, there's plenty of data on how people fare when they're unemployed. That's pretty miserably, in terms of suicide rates, their health, how well they get along, even with their families, divorce rates. A lot of people when they retire, have serious problems. They miss the connections of work. Work validates your ego. It gives you a social network, somewhere to go in the morning. It can be a respite from an unhappy family life. If you ask like a simple question, is a woman more likely to be hit at work or at home? Almost certainly it's at home, not at work. Work is more fun than it's often made out to be; but I don't want to argue that all work is just fun, joy, and a barrel of monkeys, because it's not.
Beckworth: But, I think the point you raised in your book is that in many cases, where work is meaningful provides all these benefits you just outlined, big business does a great job of enhancing the work environment compared to say, the small business.
Cowen: And they try to make it more fun. They have the resources and the design capabilities to put you in touch with the people you work well with, or create play spaces for you, as in the case of Google. Or, give you the kind of benefits you need to continue in the job, or lure you in, in the first place, or help you try to live where you want to be, try to accommodate, dual earner couples. Easier for big business to do that than small business.
Beckworth: Okay. So work can be fun, and has a-
Cowen: My work is fun, and I hope your work is fun.
Beckworth: I'm living the dream here, for sure. Of course listeners, full disclosure, Tyler is my boss. So I had to give that answer, but I mean it. I mean it from the bottom of my heart. Okay, let's move on to the next chapter, where you raise the question, how monopolistic is American big business? This has been very topical, too. A lot of papers, a lot of claims, at least, that we're having more monopolistic behavior, more monopolies in the US, so how do you respond to that?
Cowen: The papers you read that say there's more monopoly, they're just measuring that there are more national brands; which is true, like Walmart, like Amazon, and many other sectors. If you actually look in local markets, is there more competition? Is there lower prices, or at least prices not going up? By those more accurate measures, the American economy is not seeing any problem with growth in monopoly. You read it again, and again, and again in the popular press, and sometimes in the academic literature. Oh, monopoly is way up.
Cowen: You can even look at cases like the airlines, where now the number of major carriers, it's like four, and it used to be eight to 10. But on particular routes, the number of choices is about the same. Actually relative to age is the price of airline tickets mostly has been going down. Some of the problems we have are with airports and access. But flying has, on average, been getting cheaper. There's not a generalized problem of monopoly in most parts of the American economy. There are some exceptions to that, but that's one of the biggest fallacies.
Beckworth: Yeah, I like that point you just mentioned. That if you look at a symptom of monopoly, typically we think of higher prices, less output – we see the opposite of that.
Cowen: Again like Amazon, clearly a big player. You can call it a monopoly because it's big, but you look at what does it do to your actual choices? It's the opposite of monopoly. Lower prices, greater selection. Walmart also.
Beckworth: Yeah, very similar.
Cowen: Beer markets, clothing markets.
Beckworth: Yeah. Now, you do acknowledge in that chapter, there are some real concerns. You mentioned healthcare.
Cowen: Healthcare is a market where I think there's a lot of increased monopoly. Some of that's due to regulation, but some of it is just due to unfortunate turns of events. A lot of people are paying more for hospital services, and they have less choice. Areas with one or only two hospitals. If you want a real monopoly problem that's actually making people worse off, busting a lot of governmental budgets, I would look at hospitals.
Cowen: I'm very willing to call monopoly when I see it, maybe duopoly, but a problem in any case. Most of retail, almost all consumers in their gut common sense, they know prices and choice today compared to 20 years ago, it's like no comparison. Now, you cannot buy a heart transplant or bypass on the internet. That's one reason why it's more expensive. Regulatory issues, too many mergers, maybe. There's problems with pharma. The price of insulin, if we just had free trade on insulin, would be much lower, but we don't.
Cowen: Price goes up, people call that monopoly. It's not really a monopoly. It is a problem. The IP is too strict. We don't allow enough drug importation. A very real problem that should be addressed, but it's not, again, classic monopoly, like one supplier who's cornered all the insulin. Free trade alone would get rid of that problem right away. In Canada, insulin costs about 1/10th of the price here. Even that out. If you want.
Cowen: If you don't want, blame the law, not the market.
Beckworth: Right, right. You gave another example in the book that was very interesting that I hadn't thought about or been aware of, is that foreign airlines, they can land in the US, but they cannot do domestic flights.
Cowen: There's no good reason for that, other than protectionism. That could lower prices more.
Cowen: We could just do it. Plenty of other countries have done that. Obviously domestic airlines are not keen to have the added competition. So some monopolies, you need to look for entry barriers. Biggest monopoly in our whole country is K-12 education system, right? That's clearly just government flat out. I'm not sure how to fix that one. But if you're going to blame monopoly, my goodness, that's staring you right in the face.
Beckworth: Right. Okay. All right, next question. Are big tech companies evil? This is the basis of chapter six.
Cowen: It's amazing to me how quickly public ... intellectual public opinion has turned against the big companies, which are now blamed for everything. You hear privacy. To me, privacy is a valid concern, absolutely. Maybe we should regulate it differently. But the main sources of privacy loss in your life are not Facebook. It's your friends, colleagues, gossiping about you, rumors getting out. That's what actually hurts the privacy of most people. No one cares about that.
Cowen: Or consider like newspapers. They run obituaries. They collect information on people their whole lives, like how many wives they've had, how many bastard children they had. Then, when the person dies, they publish it and tell everyone on purpose. No one worries about that, but we're all so clutching our corsets about privacy? Again, I think it's that the tenor, emotional tenor, has turned against business. People are clutching for arguments that even actually may have some validity, but they're becoming way exaggerated and for the most part, tech gives us amazing things for free, or my iPhone, which is not free. It's like one of the greatest devices ever invented by humankind, and it was only 10 and a half years ago. It's like my goodness, I'm in touch with the whole world. I could even call like two thirds of the people in Africa if I want.
Cowen: Isn't that astonishing? And we're against big tech. Come on.
Beckworth: Okay. What about the claim that these big tech companies are making us stupid? We look up Google, we Google everything. We don't think for ourselves. We can't use a map. What's your reply?
Cowen: Again, it's case by case the reply. Google makes people a lot more informed, for the most part. All the smartest people I know use Google a lot. I think we should have K-12 classes on how to use Google better. It's still a pretty new institution, as the printing press once was. If you're looking for healthcare information, like you shouldn't just Google your symptoms. You should put in commands that would bring you to educational and public health sites. There's a lot we could do to improve how we use Google, close to a free lunch. There are cases where Google makes people stupider, but it's this incredible free thing that just gets us to everything. It's how people find podcasts, many other sources of knowledge. I think it's pretty amazing.
Cowen: Then with that money, what has Google done? Well, they give us free email, Gmail. They've invested in driverless cars. They tried to make Google glass work, maybe that failed, but someone will have a successor device that works in wearables. Google Maps helps you find your way around. I agree with the criticism. It can make you stupider. You stop learning how to get to an area. I have a simple adjustment. Usually I don't use Google Maps, it's simple as that. Make your own trade off. I don't see the big problem. I'm not saying everyone gets it right.
Cowen: But if you're going to just turn down free stuff and be upset, I don't know. I think mostly we should be grateful to big tech.
Beckworth: What about the concern that some have that these are becoming like major media platforms, and maybe they're stifling free speech if they don't like what you ... one view says on ... and it could go both ways, with left and right. There's been criticisms that they don't do enough, or they do too much.
Cowen: There are some deplatformings, people being pulled off YouTube, off Facebook, but again, compare that to the world pre-tech, where you couldn't publish anything. You couldn't write a blog. There was no Twitter to be on. You could try to send in your manuscript to Random House or somewhere as a nobody. They wouldn't even bother to laugh at you, right? It'd be like a slush pile, never opened, because they're afraid you'll sue them or something.
Cowen: So, just, opportunity to have a voice is up not like by a bit, but by enormous amounts. There are casualties along the way, some unjust deplatforming decisions. I mean let's look at those, try to improve that. But again, on-net, I think there were just far, far more opportunities for speech. In the so called 'good old days,' we didn't have podcasts. There were like these three network TV stations.
Cowen: It seems obvious to me what the net movement has been.
Beckworth: Well, I like that. I mean, kind of like what you're saying is the glass is half full, but you'd say 3/4ths.
Cowen: It's like no, 99.8 percent full.
Beckworth: Yeah, yeah.
Cowen: There's like .02 percent deplatformed.
Beckworth: People are looking at a small sliver there of space where we have problems, instead of looking at the full glass of water.
Cowen: My personal view, a lot of the deplatformed people probably deserve it. I shed no tears for them. It's a private company. They don't have to carry your message. Penguin doesn't have to publish my book, whatever. Am I deplatformed? No. So again, more options today than ever before.
Beckworth: Okay. Well, let's move to your chapter on Wall Street, because it's really kind of ... it resonates with me as a macroeconomist. You asked what good is Wall Street, anyways? What have they done for us? I would like you to first speak to the role venture capital has played. One thing you brought up, I didn't recognize is that venture capital is something, it's not everywhere in the world. It's in the US, in Israel; so tell us about that.
Cowen: It's remarkably centralized in a funny way. It seems you need a strong ecosystem. You need a large home market. You're basically trying to pick the extreme talent out of a pool of a lot of applicants. Even the people who are like the very best in the whole world at doing this, Andreessen Horowitz, or Mike Moritz, maybe their success rate is two percent; which is astonishing, right? It means your winners have to do really well. They have to be in a country where they can do really well, face a big market, have the regulatory freedom to expand in some way so that your Ubers and your Facebooks are big, highly profitable companies to make up for all the losing picks you made.
Cowen: So venture capital is super fragile. America by far has the strongest set of venture capital institutions. Venture capital is running after talent right now. If you have a promising idea, the chance that you can get it funded is higher than it's ever been. Maybe it's even too high, you might say. That's driven so much of American innovation over the last 20 years.
Beckworth: So it's an important contribution that Wall Street has brought to-
Cowen: Well, it's not Wall Street. It's right deliberately off Wall Street. But Wall Street in the sense of all of American finance.
Cowen: And venture capital works with ordinary banks, and the more ordinary, less glamorous parts of finance to do what it does.
Beckworth: Right. They're doing what banks won't do.
Cowen: But banks are in the background with letters of credit …
Beckworth: Right. There's plumbing there that connects them. All right, I want to move on to another point that you outline in this chapter. The US economy, the US financial system, broadly speaking, acts as a banker to the world. Ultimately you frame it as a hedge fund to the world. Tell us about that.
Cowen: United States is a relatively equity intensive economy, and also our multinationals abroad tend to be more productive and other companies, multinationals in the United States. Some of that may be allocation of profits due to reasons of tax arbitrage, but there's also good independent evidence that American multinationals use information technology better. They probably do have better CEOs, higher productivity.
Cowen: In essence, we're borrowing from the rest of the world. Our country, government, sometimes homeowners, we're paying pretty low rates; especially our government. We're then investing in getting equity rates of return, which are much higher than the borrowing rate. I think of the US in some ways as like this highly leveraged hedge fund. Our debt seems crazy high, but if you look at our total asset position, also future profitability, intangible capital, intellectual property rights, our ability to pull off large projects, and IT, have this well-functioning venture capital infrastructure, our net asset position to me looks really good. A lot of that is due to American finance, which has helped us run what I call the world's most profitable hedge fund, the United States of America.
Beckworth: Oh, I love that.
Cowen: Qatar and Norway, they have their own deal that's not insignificant.
Cowen: But the United States, too. Even though we're a net debtor.
Beckworth: Yeah. So kind of the flip side of that, or a dimension that is this safe asset issue I've brought up on the show many times, but you're right. The rest of the world, they fund the US at really low rates. We take the funds overseas at a higher return, and that spread looks like a bank's spread. It's the bank's balance sheet. But one thing we provide, though, to the rest of the world, they park their funds here. They're not just parking there. They're getting the liabilities from us. They're getting IOUs, treasuries, commercial paper, bank deposits, they want these highly liquid safe assets. We're a provider of safe assets to the world.
Beckworth: So, our balance sheet looks like a bank's balance sheet. We're providing an important role to the world, as well as funding these activities with higher risk.
Cowen: But the world of course is thinking twice about this somewhat.
Cowen: So a South Korean economist once said to me, "Oh, our whole trade surplus, we simply ruin it and toss it away by buying your Treasury securities." A lot of net surplus countries have thought more, 'Well, we're going to put this into venture capital. We're going to put it into equity.' They've been doing that. Now China's attempts have been thwarted by investment restrictions, what's broadly called the trade wars.
Cowen: But putting that aside, we definitely have been seeing and would have been seeing a much stronger net tendency for the surplus Asian economies to invest much more in higher yielding equity, because some of them buying our Treasury securities was inertia. Some of it is they actually want the safety. Their own government may not offer them comparable assets. You can only buy so much of Japan, and then third biggest government debt market is Italy, my goodness.
Cowen: A lot is just people waking up. SoftBank is huge in venture capital. Single largest fund. That is in essence coming from that money being reallocated in other directions. So countries are learning from us. That's a challenge, but it should prove good for us if they do more with equity and risk-taking that innovates more on the behalf of US consumers.
Beckworth: Yes. Related to this point, you mentioned in the chapter, Pax Americana. Explain that to us.
Cowen: Well, America is a kind of a global policeman, or global hegemon, to a limited degree. But still, it's striking how many countries we have troops in, how many countries rely on us for their defense. While I have strongly mixed feelings about this, to me it is still definitely a net positive.
Cowen: That works in large part because we're a large economy. Dollar is a reserve currency. We control the piping of the global financial infrastructure. If we need to threaten to cut someone off, this has become a big, big issue very lately. People who won't go along with sanctions on Iran, we're threatening to cut them out of the global financial infrastructure. I think there, we're actually overreaching; and we're making a big mistake.
Cowen: But nonetheless, the point is a lot of America's heft is economic. It complements our use of military defense to help defend other free countries. For that to all work, America has to really be the world's number one financial center, and it is. People don't see that as a benefit of finance, but it's probably the single largest benefit of finance.
Beckworth: Yeah, so you say in the book that the US can credibly finance these commitments overseas without the world worrying about us blowing up. You mentioned one reason. One reason is we control the infrastructure of the world, like the SWIFT payment system.
Beckworth: Which has been an issue lately with Iran, and Europe had talked about maybe establishing an alternative one. I've read a number of Europeans don't want to use that alternative.
Cowen: Of course not.
Beckworth: They want to use what's established, SWIFT. So we control the infrastructure, but again, I think another ...
Cowen: Isn't that like IMF, World Bank, WTO?
Cowen: We don't control those, but we're the single biggest voice; at least we were pre-Trump. That gives us a lot of heft to impose a somewhat American vision of globalization on the world. Again, I know all about the abuses, and stupidities. I still think on net, it's been a good thing.
Beckworth: Right, so we have a lot of influence over the infrastructure of global finance; but the second reason I think this is important is going back to what you said earlier about the US as banker to the world, is we can finance these deficits to do an excursion into different places of the world. We run these deficits without having huge amounts of interest payments going up. We don't face the same problems that other countries do if they did that.
Cowen: Angela Merkel in Germany, which is not a small country, they won't spend even close to two percent of GDP on defense. They won't do it. They won't borrow to do it. They're afraid to do it. They want to spend on other things. They're afraid of the deficits. It seriously harms Germany's global heft, makes them perpetually dependent on the US, resentful of the US, dependent more on Putin. It's a big, big deal.
Beckworth: Okay. Finally the time we have left, let's talk about the last chapter of the book where you get into crony capitalism. How much does big business control the American government? Is this an issue?
Cowen: It's an issue. I'm against virtually all crony capitalism. I don't think governments should in general subsidize business, or put up tariffs. I just think in the debates today, it's become exaggerated. There's a common view, especially on the left, that just big business runs our government. The billionaires are in charge. Every billionaire is policy failure.
Cowen: The reality is most of the federal budget is shaped more by voters than by business, per se. I think there's a bunch of areas. Again healthcare, big example, pharma, agricultural subsidies, that are blatant, awful, costly crony capitalism. But for the most part, big business is not calling the shots in American government. If you ask why did Amazon leave New York City and New York State, it's because they felt they wouldn't get their way; and they would be a perpetual victim.
Cowen: I would say like the banking lobby, pharma, agriculture, have done better controlling American government than big tech has. Just the tales you hear about, 'Oh the billionaires are in charge,' are grossly exaggerated. 'Big business is running the show,' mostly exaggerated. I tried to put that in some context.
Beckworth: So the industries that do have some influence, like agriculture, you mentioned that's really a small part of the overall government budget compared to what you would think would be the influence of a big tech company.
Cowen: Like pre-Trump, agriculture was running about 20 billion a year, depends on prices levels. Trump has this special allotment due to the trade war. We'll see how much of that actually happens. But again, relative to the trillions and trillions, even farm subsidies, which I've strongly opposed, like for forty years, in dollar terms, percent of GDP, they're not what they once were. To think it's like going to be a great grand liberation of the US economy to get rid of those things. It's not true. We should get rid of them. It's just cost, no real benefit. Most of them are spent on just a few commodities. It's exaggerated somewhat.
Beckworth: The areas that we should be concerned about, in terms of influence, you've mentioned them, just say them again, in terms of we do see some cronyism.
Cowen: Pharmaceutical protectionism, excessive intellectual property in some areas, would be examples. I don't know if you count trial lawyers. They're often organized into companies, but they have more influence over matters of litigation than they ought to. Agriculture, arguably defense contractors – Boeing push for export/import bank, which is probably a mistake. They may get markets of price over marginal costs that are higher than they need to be on weapons systems we don't always need. All that happens, just when you add it up in the aggregate, it does not mean big business is in charge.
Beckworth: Okay. Again, this all comes down to perspective, looking at how big this is of a problem compared to the total size of the economy.
Cowen: Correct, and I just see discourse in those areas becoming much worse.
Beckworth: All right, well one last thing then in the few minutes we have left. Where do you see this cycle going? You mentioned one reason you're doing this book now is because the increasing criticism, it's risen to kind of a cyclical high, do you see it going back down in the future? Do you see it plateauing? What do we look forward to?
Cowen: I don't see hostility toward business going down soon. I think there's been a fundamental shift in people's emotional makeups, where their basic gripe is with the other individuals they disagree with. So people on the right disliking left wingers more, and vice versa. They then take that out on the institutions affiliated with those people, as kind of almost a tactical device. So if you ask, like 'Oh, what's your opinion of Harvard?' Most people don't actually know much about what's going on at Harvard, but they sort of know Harvard is mostly a left wing place. The right wingers will have a negative view of what Harvard does. The left wingers, a more positive, or at least defensive view.
Cowen: In that kind of world, big business will be a casualty, but not only big business. It's easier to destroy trust than to rebuild it. I'm not saying things will be this way forever, but I think for at least the next 10 or 20 years, that's the most likely outcome that all this continues and gets much worse. A lot of American 19th century politics was like this. We have precedent.
Cowen: It's not some new weird thing. It's actually a lot of our country's history. So to think it could happen here … well, it could happen here. It did happen here. It is happening here again. Do with that as you will. I tried to write this one book to be a voice standing up, I hope, on behalf of some sanity.
Cowen: I think a lot of penalties put on business should be tougher. It could be right now we're taxing a lot of businesses at too low a rate. I would stress a lot of businesses are fraudulent. I would agree with all that. But still, like on the broad terms, I'm seeing way more misconceptions on the anti-business side of the ledger. That's why I wrote this book.
Beckworth: Well, I find it to be a very convincing book. But the last thing you just said, 10 to 20 more years of this noise is kind of concerning. Are you a long term optimist, beyond those two decades?
Cowen: I'm a very long term optimist.
Beckworth: Very long term.
Cowen: That's the way I would call it. Some of the noise can be productive in other areas, because noise is a way you break gridlocks. We've had a cycle of gridlock. I think we're actually out of gridlock now. That to me is scary and nerve wracking, but it could be we get some good things done when we're out of gridlock.
Cowen: One way of being out of gridlock, like people in both parties are now for protectionism. To me, that's very bad. But like gridlock really is over. People haven't seen that yet. Let's hope we get some better examples of gridlock being over. I hope and think we will, but I'm still waiting.
Beckworth: Okay. Well, on that positive note, our time is up. Our guest today has been Tyler Cowen. His book is 'Big Business: A Love Letter to American Anti-Hero.' Tyler, thank you for coming on the show.
Cowen: Thank you, David.
Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. While you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening.
Photo credit: OECD/Hervé Cortinat