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Thought Leader: Alan S. Blinder

January 31, 2013

As part of the Carnegie Council Centennial Thought Leaders Forum, Carnegie Council's Devin Stewart spoke with Alan S. Blinder, the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University and the vice chairman of the Promontory Interfinancial Network, a financial services firm based in Arlington, Virginia.

DEVIN STEWART: We start off by asking our interviewees to describe the world today as they see it. What's unique about the world today?

ALAN BLINDER: I think probably many things are unique about the world today. Time marches on. I think the thing that I would start with, the biggestand it's an old story by nowis the emergence or the joining-in to the economic world over the recent decade-and-a-half of a lot of people that really weren't part of it. I'm talking about China, I'm talking about India, and I'm talking about the former Soviet Union. They were there. They were doing things. They were working on things, but they weren't really adjoined, at least, to the Western part of the economic world very much, until 15, 20 years ago, with China being the first.

That is a lot of people. That is roughly a doubling of the world workforce. When you talk about a doubling of the world workforcenot literally, but in this figurative way of thinking about itthat is an event of historical import.

Among other things, I think it has been very good for India and very good for China, and probably good for Russia, although Russia is kind of a special casebut not very good for a lot of workers in the Western world, including American workers, who suddenly find themselves competing for employment with hundreds of millions of people that in decades gone by they never thought of competing with.

DEVIN STEWART: Economic theory says that prices will adjust to reflect your comparative advantage.

ALAN BLINDER: Correct. One thing I should have added is that when the former Soviet Union, India, and China, quote, joined the world, they didn't bring much capital with them. If you look at the capital stock they had in Russia, for example, it was a lot of junk. But they brought a lot of labor.

Basic economic theory says this is going to cause the price of labor to go downthat's the wageand cause the price of capital, the return on capital, to go up. And I think, broadly speaking, that's what has happened. There's a lot of detail around that. That's a very simplified version. But in a very broad sense, that's what we're seeing over the last several decades.

DEVIN STEWART: What are the implications?

ALAN BLINDER: The implications are not very good if you're an American worker or a European worker. They're good if you're an Indian worker or a Chinese workervery good. They are good for American capital. Now, we had a very bad recession, which destroys profits, but they came back relatively quickly. So the broad story over the last decade-and-a-half, say, for profitability of American industry has been very good. The story over the last several decades for ordinary working AmericansI'm not talking about the very high-skilled sort (that's a special story), but ordinary working Americanshas not been very good. Wages have been lagging.

Now, some of the data exaggerate it. These are technicalities. They don't deflate properly and so on. So it's not really true, as some people say, that wages have been falling for three decades or something. But what is true is that they have been crawling upward, close to stagnant. And that is not good at all.

DEVIN STEWART: What's getting good and what's getting bad in the world? Do you think the world is, overall, getting better? Can you get into some of the details?

ALAN BLINDER: I think the answer is probably, overall, getting better, but with an awful lot of bumps. "Bump" is too small a simile here. Some of these bumps are more like craters and mountains and things like that. But if I come back to what I was saying before, we have now brought into the functioning world economy, where there are opportunities for advancement, 2.5 billion people. That, I think, is the big, big story of this historical epochIndia, China, and the former Soviet Unionas I was saying before.

It is not without its downsides, and a lot of the downside is hitting the workforces in the rich countries, which now compete. But, still, if you would look from a 25,000-foot perspective, is this good for the world? It has to be good for the world. This has been the biggest poverty-reduction program, so to speak, in world history. To me, that has to count as good. We ought to be doing more to protect our workers in America than we are. That's one of the bumps that I was talking about.

A major impact of this revolution in the parts of the Third World that are participating in it, which is a lot, is rising living standards, caused by very strong increases in productivity. When you move people in China off of subsistence farming and bring them into the real economy, even if they are factory jobs which are not very pleasantand they aren'ttheir incomes go up a lot. It then raises the opportunity in the next generation to advance up the economic ladder. I think that's very good.

Another thing that I hopeI hope; I'm not an expert on thiswill be good eventually, but is looking pretty rocky now is whatever we now call the Arab Spring, the transformation of the Arab world, which is very, very rocky-looking now in Egypt and a variety of other places. That's a lot of people that, partly because of tradition, but largely because of dysfunctional government, were just kept suppressed and out of the march of world progress, especially the women. That doesn't seem to be changing so much, and it should.

There is now much greater hope that, not next year or the year afterbecause things look very unsettled in many of these countriesbut as we go down and start counting time in decades moving forward, if democracy takes root in these countriesand it's not a sure thing by any means, but if it doespeople are going to be better off. They are going to be better off politically, they are going to be better off in their human rights, and they are going to enjoy higher living standards than they have in the past.

That's a keep-your-fingers-crossed.

DEVIN STEWART: You said that democracy in the Middle East would correlate with a rise in living standards.

ALAN BLINDER: I think it will. I'm sure it will, if we actually get there. Look at Iran. Iran had a revolution decades ago. They threw off the Shah. But look what came after.

DEVIN STEWART: You talk about democracy and rising living standards. What's the causation?

ALAN BLINDER: It's actually dual. As people prosper and an economy starts functioning, they start demanding more aspects of democracy. We're seeing the glimmers of that in China now. That will grow, I'm pretty sure. We saw that play acted out in other Asian countries. Taiwan used to be a dictatorship. South Korea used to be a dictatorship. As you got economic progress and a growing middle class, there was a demand for more democracy, and it was met peacefully in those places. Hopefully that will happen in China as well.

In the other direction, democracy is a code word or an accompaniment of freedom. The relevant part of freedom in this case is freedom of enterprise, freedom to work where you please, freedom to move for better opportunities, and the freedom to get education. Again, I come back to women's education especially, which lags in many of these societies.

I think they go together. You remember Gorbachev had glasnost and perestroika. I don't think he sequenced it quite right, actually, but that was the idea. Both rise together.

DEVIN STEWART: How can democracy help with economic progress?

ALAN BLINDER: One thing you do in a democracy is lift off government controls that stultify progress in a number of places. You enhance personal freedoms, and that includes the kinds of freedoms I was just speaking about. You enable the abilities and the creativities of your population to come to the fore. In repressive societies, people with the ability go underground, they try to get out of the country, and even if neither of those happensthey don't go underground and they don't leave the countrythey are not free to flourish in the ways that they would be in a more free and more democratic society.

China again is a great example. You see it now. I believe that will wither away as China progresses, but at this point, that's a guess. It looks to be happening a bit. China looks to be a more free place now than it was 25 years ago, although it's still far from a free place.

DEVIN STEWART: You also mentioned working conditions in Chinese factories. Do you see that getting better, and how?

ALAN BLINDER: I think it will get better. They are probably pretty bad right now. I'm not an expert on this. I think they're a bit better than they were 20 years ago. As the Chinese open upand they are opening upto more foreign businesses coming in, the foreign businesses will tend to bring in more Western practices. Now, it's going to be a long time before Chinese factory workers work a 35-hour week, with coffee breaks and vacation days and pensions and all of that. China is not nearly rich enough to afford that. But it will get there. It's getting richer and richer at a pretty rapid rate.

It's related to this political liberalization we were talking about. Part of the way workers earn better pay and better working conditions and so on is through the markets, as I was just talking about. But part of it is through the political system. You go back to the 1930s in America. We passed the Fair Labor Standards Act and minimum wage and a whole lot of things in the 1930s that made workers' lot quite a lot better.

DEVIN STEWART: Touching on all these issues, what would you say is the biggest challenge in the world, particularly from a moral perspective?

ALAN BLINDER: I find that an almost impossible question to answer, because the world is such a big and heterodox place.

But let me try to just pick the alleviation of poverty or, more generally, the reduction of inequality. You have inequality. The part of inequality that we worry about, of course, is the low end, the poor people. We don't worry so much about the rich people. They'll take care of themselves. And if they're rich, they're rich, as long as the poor aren't so poor. So they are not identical but very similar problems.

As I was saying before, the big, big story there is very favorable. Chinese people, Indian people, and a variety of others are getting richer gradually.

The part of that story that's American is not very favorable. In the United States, for more than 30 years now, with a few little breaksand not incidentally, one prominent break was the late 1990swe have been moving towards a more unequal society.

Again, the problem is not so much how rich the rich are getting, because a lot of that new wealth is actually earned rather than inherited. Mark Zuckerberg is a pretty rich young man, but he created something for it. I don't understand Facebook, but a lot of people do, and they benefit from it. So I don't worry so much about that, except that people that earn such huge money ought to be paying more taxes, I believe, than they are.

The problem is at the low end, where we, first of all, don't do nearly as good a job as we should helping out people in need. We do things. It's not that this is a heartless society or anything. The image is not a Charles Dickens novel. That's not what's going on in America. But given the wealth in our society, we could afford to do more for the have-nots.

A good step in that direction, by the way, is what's now getting called Obamacare, which is going to at least bring us into the company of all the other advanced industrial nations in making sure thatwell, I almost said "nobody" lacks health care. That won't be true. It won't be "nobody." But it won't be so many as it was before.

There's a strain in America that just looks at the European welfare state and says, "That's awful. That kills capitalism." I don't really agree with that. You can take it too far. You absolutely can take it too far. But we in America are so far from that position that I don't think we have to worry about taking it too far.

That's point one: the level of disparities.

But point two, which may be more important, is that these disparities are growing. It would be one thing if we had much too much poverty in America, which we do, but if it was shrinking rapidly and regularly. It's not. That's a big problem. The broader issue of inequality is getting worse, not better.

The third aspect, which I find also very troubling, is that what used to be true about intergenerational mobility is not true anymore. We used to pride ourselves in America on saying, "Yes, we have a lot of inequality in America, but people rise and fall. Short sleeves to shirt sleeves in three generations." Remember that? That's archaic now. It used to be the case that if you compared mobility on the income ladder in America to, say, Europe, rich countries in Europe, we had much more. It's not true anymore. In fact, it's something between equal and they have more. It depends on which European country you look at.

That's a very big change. I don't even think knowledge that that is the case has crept much into the American consciousness yet. We still view ourselves as the land of opportunity, which, in a sense, we are. But the opportunities are not trickling down to the bottom the way they used to. It's now the case that if you grow up poor, you are much more likely to inherit the poverty than was true previously. And that's a shame, I think.

DEVIN STEWART: What's causing that?

ALAN BLINDER: I don't think anybody knows the answer to that, but one thing that's certain is education. If you grow up in an American urban ghetto, you are liable to get a very poor education. You are much more likely to drop out of school than somebody who is growing up in a wealthy suburb.

I don't think that's a 100 percent answer to the question, but it is certainly part of the answer, and it's something we can do something about. We can throw more resources into educating people that are not getting a proper education right now.

But the phrase I just used is "throw more resources." We have to be willing to pay the bill. If we're not, then I think things will just keep getting worse.

DEVIN STEWART: Tell me about inequality. Obviously, it's a big problem, and it's growing. Why is it bad? Why is it a concern?

ALAN BLINDER: There are two fundamental problems. One is sort of moral/ philosophical/ethical. Some people believe this and some people don't: that it's, in some sense, morally wrong to leave many people behind and not have them share the progress. A crude way, a utilitarian way to put thisbut it's not the only wayis that a marginal addition of a few more dollars up at the top doesn't bring society much good compared to a few more dollars down at the bottom. That's the case for trying to equalize. That's the case for progressive taxation, basically.

So that's the moral case. Some people just don't accept that. A lot of conservative people say, "People earn money, and that's it. We don't have any duty to support the people that can't earn much money."

But there's also an efficiency case. There is something basically wrong and damaging in a society that leaves behindpick a number10 percent, 15 percent, 20 percent of its citizens, that doesn't actually engage them very much in the productive economy. The whole society loses out. The pie shrinks when, for example, we don't educate ghetto children and they grow up, not to be productive income earners, but either in crime or in abject poverty, working sporadically and not really earning a livingnot contributing to the society. That's what economists would call an efficiency loss. To put it crudely, we wind up with a smaller GDP, gross domestic product, than we should have.

That's more objective and requires less of a moral judgment. As I say, my mental moral code says it's wrong to have so much wealth at the top and so much poverty at the bottom. But not everybody buys that. But the other part, the fact that if we leave a hunk of our population out, so to speak, standing outside the door and not in the room, is that the whole society is poorer for that.

DEVIN STEWART: Speaking about moral codes, you said that not everyone buys the immorality of inequality. One of our projects here is to look at an idea of what we call a global ethic. Are there values that people share across cultures and societies?

ALAN BLINDER: Oh, I think there are. I think people largely value freedom, even the ones that don't have it. In fact, probably the ones that don't have it value it more. We Americans just take it for granted, because we have so much freedom. I think that is pretty much global, with some exceptions. Of course, a lot of governments are exceptions that are trying to stop it from happening. But I think it's normal.

Not everybodythere are ascetic Buddhist monks that don't care about things like thatbut most people on the planet want to better their economic status in life. I think maybe the two exceptions are ascetics who just don't care about the material thingsand that's fineand extremely rich people. That's right, in the sense that whatever is driving them, it's not more material goods. How many yachts can you have? How many private planes? How many expensive apartments? Yet some of these people are very driven. Society benefits from some of that. To most people, you sort of scratch your head and say, "Why does he want another $100 million? He already has $15 billion." That's a little bit peculiar, and it can't be driven by material betterment. It has to be driven by something else.

That's a tiny number of people. The Buddhist monks are a tiny number of people. I think the vast majority of the people in the middlealmost everyone is wanting to increase their material well-being, if not for themselves, for their children, and probably for both.

DEVIN STEWART: Is that a global ethic? Is there such a thing?

ALAN BLINDER: I don't know whether we should call it a global ethic. It may be driven more by biology than by ethics. We see bacteria trying to feed themselves and things like that. I'm not an expert in this. I think it may be more a part of evolutionary biology than it is ethics.

But when you think about it a little more deeply, maybe it is different than we think. In universities they are in completely different departments. They are compartmentalized. But they may be actually related. There are, as you probably know, evolutionary biologists that work on notions that cooperation and altruism is actually functional; it helps the species. That is, one member of the species may actually be sacrificing for another, but actually helps the species to grow and prosper. So there you have a case where ethics and evolutionary biology start sounding alike.

Needless to say, this is not what we economists normally are thinking about.

DEVIN STEWART: Also, we're coming up to our 100th anniversary. We have been thinking back to the last 100 years and also thinking to the future. What would you like to see happen in the next 100 years?

ALAN BLINDER: My goodness. A lot of things. I would like to see, in America, at least a stop of this trend towards greater and greater inequality and hopefully a reversal. That would be nice. I'm not super-optimistic about that. I would like to see us and the whole world get serious about climate change. This planet may be a much worse place to inhabit 100 years from now if we don't start taking serious action.

The problem with that, or one of the problems with that, is that with issues that are inherently global, even if the United States, which is unlikely, got really serious about cutting down carbon emissions, but it was only the United States, it would hardly make any difference. When you start talking, as I just did a moment ago, about a century, most people's eyes glaze over. A century? I can barely think about next Wednesday. When you have a problem that has those two aspectsglobal and long-runmy attitude is usually despairing about that. How can we get the governmental institutions to actually do something serious about that?

To cast a slightly brighter lightthis is ironicon the prospects for that, the climate change phenomenon seems to be happening faster than even some of the big pessimists were anticipating 20 years ago. That may scare people into taking action.

That said, I can't stop worrying about the possibility that things that are long-run and global are hopeless. We have no world government.

DEVIN STEWART: Is it a question of reconfiguring institutions to deal with the problems?

ALAN BLINDER: Yes and no. You could say the way to tackle this is to actually have a world government. We're not going to have a world government, ever. I think the planet will fry before we have a world government. I think it's much more a question of raising public consciousness so that people come to understand that we're in peril and it may affect them in their lifetimes, and if not them, their children in their lifetimesnow we have sort of stretched the time horizon maybe to 50 years plusand being willing to sacrifice something to prevent the planet from getting a lot hotter.

And it's not just hotter. In the broad sweep, it's global warming, but it's more global climate change. It's erratic changes in climate.

So I think it's mainly a question of raising the public consciousness and, I might addhere's where economics comes ingetting done what needs to be done at the lowest possible cost. We can try to arrest the climate change phenomenon in clumsy, costly ways, like command-and-control: You may have not have a second car. Or we can do it in less costly, more efficient ways, like we need to put on a tax so that we Americans pay, not $3 or $4 a gallon for gasoline, but $6 or $8 or $9, like they do in Europe.

Having said that, and if you look at American politics now, we are miles and miles away from doing that. But I just use that as an example of trying to get a reduction in carbon emissions done on the cheap or doing it very expensively.

DEVIN STEWART: Is that related to leadership?

ALAN BLINDER: I think it's definitely related to leadership and it's related to education. Leaders have to have followers. Yes, you do need to have leaders that will have the guts to propose things like this and try to explain to the people why it's a good thing, not a bad thingnot an easy thing to do. But then you need a lot of public education so that somebody will actually follow these leaders. Leaders without followers don't get anywhere.

DEVIN STEWART: How do you define leadership?

ALAN BLINDER: Leadership, to me, starts with a vision, a notion of where you want to lead. Some people just want to be leaders and they don't have any place to go. That, to me, is not useful leadership.

Secondly, you have to have some pragmatismand this in many cases means political pragmatism, although that's not the only place that leadership is relevantabout what you may have to do to get there, including compromising. It's morally satisfying to be an absolute leaderthis is the right thing and the other is wrong. I don't think you get very far usually with things like that.

Thirdly, you need to have communications skills and a little bit of charisma. Boring people like economists don't make good leaders generally. This is a little bit like the Potter Stewart aphorism: You know it when you see it. Some people have it; some people don't have it. That's not so bad. They can do other useful things with their lives. They are never going to be leaders. Most of us, frankly, are not going to be leaders.

And you have to be willing, to be an effective leader, to take a risk, to put yourself on the line there, stick your head out, even though you know you're on the chopping block and you might lose.

It's a combination of attributes like that that not so many people have. But, fortunately, we don't need that many. We need a lot more sensible followers than we need leaders.

DEVIN STEWART: Excellent, Dr. Blinder. Thank you so much.

ALAN BLINDER: Thank you.