Author: GAO Zhanjun and Benjamin M. Friedman

 

In an exclusive interview with China Forex, Benjamin M. Friedman, William Joseph Maier Professor of Political Economy and formerly Chairman of the Department of Economics at Harvard University, shared his views with GAO Zhanjun, Executive Editor-in-Chief of China Forex, on issues about economic policy, growth, and social progress.

 

Benjamin M. Friedman is a fellow of the American Academy of Arts and Sciences and a member of the Council on Foreign Relations. His current professional activities include serving as a director of the Council for Economic Education. He is also a long-time director and member of the editorial board of the Encyclopaedia Britannica.

 

Among other distinctions, Mr. Friedman has received the George S. Eccles Prize, awarded annually for excellence in writing about economics; the John R. Commons Award, given every two years in recognition of contributions to economics; and the Medal of the Italian Senate.

 

Mr. Friedman's latest publication, Religion and the Rise of Capitalism (Knopf, January 2021), represents profound re-evaluation of contemporary economic foundations. Scheduled for a Chinese translation, this seminal work explores the intricate interplay between religious thought and capitalist development. His other two widely acclaimed works include The Moral Consequences of Economic Growth (Knopf) and Day of Reckoning: The Consequences of American Economic Policy Under Reagan and After (Random House), both of which have made significant contributions to public discourse on economic ethics and policy analysis.

 

In addition to his publicly oriented works, Mr. Friedman has authored and/or edited 14 scholarly volumes and published over 150 articles in leading professional journals, with content predominantly directed at economists and economic policymakers.

 

Mr. Friedman's research has extensively examined economic policy, with a particular emphasis on how financial markets influence the transmission of monetary and fiscal policies to aggregate economic activity. His work has explored specific themes, including the impacts of government budget deficits, frameworks for US monetary policy implementation, and crisis response stabilizing banking and financial systems. Additionally, he is a regular contributor to mainstream publications, most notably The New York Review of Books, where he engages a broader readership on economic issues.

 

The conversation, which follows in edited form, has documented a variety of crucial issues about economic policy, growth, and social progress.

 

Discussion 1

 

Economic growth is not the same as GDP growth  

 

Dr. Gao: Ben, I'm absolutely honored to have you here today! Thank you so much for engaging in this dialogue with me—I truly appreciate your time and contribution.

 

Professor Friedman: I'm delighted to be with you, Zhanjun.

 

Dr. Gao: Let's first start with your research. I've recently been reading your book The Moral Consequences of Economic Growth (2005; Chinese translation 2013). As I recall, your scholarly output has consistently centered on macroeconomics, with a particular emphasis on monetary policy, budgetary, and financial areas. However, this book seems to make a departure from your prior academic focus. What inspired you to shift your inquiry toward the study of economic growth?

 

Professor Friedman: It's not so much that I wrote a book about economic growth. What was new was writing a book about what I construed as the moral, in particular meaning the non-material, consequences of economic growth.

 

The way I got into this line of inquiry is that, as you rightly pointed out, for many years I had been writing and teaching and doing research on macroeconomics, especially the applied policy-oriented dimensions of macroeconomics.

 

Traditionally, there are two parts of policy-oriented macroeconomics. One we think of as having to do with business cycles, that is, how we can use monetary and fiscal policies and the other tools available to keep the economy as close as we can to the frontier of possible production and living standards for the population? And second, the growth part of macroeconomics, that is, how can we keep that frontier moving outward over time as rapidly as possible?

 

As I say, I had spent many years teaching and writing and doing research on these aspects of macroeconomics. One year, I was teaching a course at Harvard on this subject, which was not unusual for me. I wanted to begin the course with a lecture or two on why all this matters. By that, I meant why it would all matter for students and others in the US and in other high-income countries like the US. For much of the world's population, of course, who live at very low material standards, the question of why one would want their living standard to increase over time is pretty obvious. But for those of us in the US and other high-income countries, we already live so much better than people did historically that one would ask why this is important.

 

And similarly, for the business cycles part of the inquiry. A typical business recession in the US involves a decline in per capita incomes of perhaps 2 or 3%. And it doesn't last very long, maybe only 18 months or so.

 

So the question is, why is all this important? I assumed that other people must have had useful things to say about this question. I thought of James Tobin, I thought of Paul Samuelson, I thought of Robert Solow, I thought of Arthur Okun. I assumed that people had written usefully on the subject, and that I would look around and collect a few articles or book chapters for my students to read, and I would give a lecture or two on it myself at the beginning of the course, to motivate why all this was important.

 

To my surprise, I found that nobody I found had usefully and interestingly written on the subject. So I started thinking about it myself, asking why all this matter for people living in high-income countries like my own. That inquiry led me to the findings that I reviewed in the book that I called The Moral Consequences of Economic Growth.

 

Dr. Gao: In the renowned John R. Commons Lecture you delivered at the 2006 American Economic Association meetings, you distinguished between macroeconomics and microeconomics, as you just hinted. I'm getting the sense that the definition of economic growth, from your point of view, is quite different from conventional thinking of economics. So, could you please elaborate a little bit more about that?

 

Professor Friedman: I think what you say is fair, Zhanjun. The usual definition of economic growth is simply whether a country's gross domestic product, its total production, increases. Or sometimes people define growth in terms of whether the gross domestic product per person increases. For reasons that connect to what we were just talking about,why all this matters, my interest was instead focused on the living standards of the broad bulk of the population, what Adam Smith would have called the great mass of the people, or sometimes, living in a low-income era as he did, what he called the laboring poor. I concluded that what matters for what I called the moral consequences of economic growth is not whether the gross domestic product rises per se, but whether the living standard of the broad bulk of the population is or is not rising.

 

Now, this immediately gets us into questions of distribution, because one can ask, if the GDP is increasing rapidly, why wouldn't the income of the broad bulk of the population be going up? Aren't the two the same?

 

The answer, of course, is that if distribution remains unchanged, then yes, to be sure, they are the same.

 

But we live in an era in which, in many countries around the world, including my own, the distribution of the fruits of additional GDP growth is sufficiently skewed that it is not obvious that the increase in total production ends up improving the living standard of the broad bulk of the population. And so, in the book, as you rightly point out, I drew a sharp distinction for purposes of this inquiry. What I meant by economic growth is that the material living standard of the great majority of the population is improving.

 

This is not a book about the success of the few people right at the very top, and it's also not a book about the very poor. I don't think of it as about the top 10%, but also don't think of it as about the bottom 10%.

 

And I have to tell you, I've been criticized from both ends of the political spectrum. People on the right have been critical that I don't think of the success of people in, say, the top 5%, or the top 1%, as very interesting for my purposes. And similarly, people on the left have complained that what I focused on was not the poverty of the very poor.

 

Both of those complaints are correct. What I'm interested in, in this book, is the broad bulk of the population. We can think of it as people from percentiles maybe 15 to 85. A significant majority of the population, but not necessarily the people at the very top or the very bottom.

 

Discussion 2:

 

Employment economy is not necessarily a growing economy

 

Dr. Gao: Keeping the economy healthy is one of the most important jobs of a central bank. The Federal Reserve, the US central bank, has a dual mandate of price stability and maximum employment.

 

It is generally believed that the Federal Reserve's goal of maximizing employment is the same as economic growth, or that low unemployment means economic growth.

 

But in your book, you argue that low unemployment does not mean economic growth. Why?

 

Professor Friedman: If a country's productivity gains are low, then it's entirely possible that it would be using all of the available labor, and not increasing its production much over time. Hence low unemployment does not necessarily mean even that the GDP is increasing. If productivity gains are low, then lots of people may be working but there's not much additional product to show for it.

 

The second reason for the two not to be the same, as we've just discussed, is that, depends on how the fruits of any additional production are distributed. Even if there are significant gains in productivity, and even if everybody is employed, if the fruits of the additional productivity accrue only to people at the top of the distribution, then it isn't true that the rest of the population is enjoying an increase in their living standards.

 

I certainly endorse the fact that the Federal Reserve System is charged with a mandate that's partly about maintaining maximum employment. I think it's a good idea. But it is not the same as pursuing economic growth in the sense that I mean in my book. That's just not what our central bank is for.

 

A full employment economy is not necessarily a growing economy. Nearly 200 years ago, John Stuart Mill famously wrote about what he called the stationary state. A stationary state in Mill could well be one of very high employment, but that doesn't mean there's economic growth.

 

Discussion 3:

 

Persistent economic growth matters: the principle driving force underlying the positive influence of economic growth

 

Dr. Gao: In your book, you wrote and I quote “When people are asked how well off they think they are, they almost always respond by comparing their lives to some kind of reference point. Further, whether most people think what they have or how they love constitutes ‘more' or ‘less' depends on how their circumstances compare to two separate benchmarks: their own (or their family's) past experience, and how they see people around them living.”These two separate benchmarks, as discussed in your book, are very important reference points. Could you please explain a little bit more about that?

 

Professor Friedman: Yes, I think you're quite right, and the passage that you've just quoted from the book is extremely important to the underlying reasoning behind the hypothesis that I put forth in the book.

 

The plain fact is that our living standards are very difficult for us to evaluate in any absolute sense. I understand, of course, that when people are sufficiently poor and don't have enough to eat, they know that; they don't need any relative standard to know they're hungry. But, to repeat what I said before, my book is not about how people in very low-income countries should look at all this. I'm interested here in why economic growth is relevant for citizens of high-income countries like my own. For a typical American, and I would think these days for a typical Chinese as well, it's very difficult to evaluate our living standard absolutely. The human tendency is to do that in some relative way.Most people if asked, how are you doing, will respond with something like, compared to what?

 

And as you rightly cited from the book, we have plenty of evidence for two kinds of comparisons we make in this regard. First, people compare their current living standard to how they or their parents or their grandparents, or their families more generally, have lived in the past.I exploit that tendency a great deal in the book.

 

I continually picture people making such comparisons in an intergenerational way. I picture young adults asking themselves questions like how am I living compared to how I remember growing up in my parents' home? How do the career prospects that I face compare to what my parents and my aunts and uncles enjoyed in their time? I picture people a little later on asking themselves questions like how am I raising my children compared to the opportunities that I had, and people yet further on asking themselves, how I am living as an adult now compared to the way my parents lived?I think of people continually comparing their own living standards today to what they and their families had in the past. And we have plenty of evidence that people do evaluate their living standards in this way.

 

The second benchmark of comparison is that people compare themselves to others around them. Now, perhaps they shouldn't. We know that there are lots of moral injunctions about the dangers of comparing oneself to others. In the Catholic Church, for example, two of the seven cardinal sins are about exactly that, one about envying, and the otherabout coveting.

 

So, we may understand that from a moral or religious perspective, perhaps people shouldn't compare themselves to others, but the mere fact that the church took this position historically is pretty good evidence that, in fact, they do. People do compare themselves to others.

 

And there's a very rich economic literature having to do with the question of who is in the relevant comparison group.When I think about my standard of living, am I comparing myself to other people with whom I work at my university, or perhaps to other people who live on my street? Am I maybe comparing myself to everybody else living in Cambridge, Massachusetts? Am I comparing myself to all Americans? Am I comparing myself to people whom I see on television?

 

There's been a lot of economic study of just this question. But regardless of to whom I'm comparing myself, the evidence is very clear that I'm comparing myself to other people, and everybody else does this as well.

 

As you rightly indicated in highlighting the importance of these two separate benchmarks, a large part of the analytical reasoning underlying the hypothesis that I lay out in the book has to do with the interplay between the satisfaction that people get from realizing that they're living well compared to their own and their family's experience, and the satisfaction that they get from realizing that they're living well compared to other people. These are different, but they're both valid, and we have lots of evidence for each one.

 

Dr. Gao: So these two benchmarks actually are substitutes, not complements.

 

Professor Friedman: You're again getting at something that's very important for the hypothesis that I offer in the book. A crucial assumption that I make in my reasoning is precisely that the two are substitutes, in the standard economic sense in which, for example, coffee and tea are substitutes. If I've just had a cup of coffee, this makes me less interested in having a cup of tea. If I've just eaten a piece of apple pie, that makes me less interested in eating a slice of chocolate cake. We could go on and on, but I think people get the point.

 

Goods can be substitutes, or they can be complements. If I have just drunk a glass of beer, that probably makes me more eager to eat a bowl of pretzels. If I'm eating a hamburger, this makes me more eager to eat some potato chips.

 

In economics, sources of satisfaction can be either substitutes or complements. And here we don't have any evidence. We have plenty of evidence individually on these two sources of comparative evaluation of people's living standards. What we don't have is much evidence on whether the two sources of satisfaction are substitutes or complements.

 

For my purposes, I simply assume that they are substitutes, meaning that if you and I have the sense that we are living better than our families lived before us, we become less concerned that we have to live better than people around us, or vice versa. It is very important in economics to keep track of what it is that we know because we have evidence, and what it is that we're simply assuming. One of the crucial assumptions underlying my hypothesis in the book is that these two sources of satisfaction are substitutes for one another, not complements.

 

Dr. Gao: Here comes one of the crucial points you make in your book: the principle driving force underlying the positive influence that economic growth has over people's attitudes, and through the political process therefore over the character of their society, in the interaction between how each of these two respective points of comparison affects people's perceptions.

 

Why are they so important? Why are they of crucial importance to the way in which economic growth versus stagnation affects people's attitudes toward openness, mobility, and tolerance?

 

Professor Friedman: As long as these two sources of satisfaction are substitutes to one another, then when people realize with economic growth that they are indeed living better than they and their families have lived in the past, the satisfaction that they get from that realization lessens the concern that they have for living better than other people. That's what being substitutes is all about. Think again of the coffee and tea example.

 

And if they are less concerned to live better than other people, then they are more willing, for that reason, to give other people a chance, and less concerned to block other people. From getting ahead. If I thought that incomes are going to be stagnant, that, on average, there will be no improvement in Americans' living standards, I would probably be very concerned to make sure that my sons have at least the same position in society as I do, I don't want them falling behind.

 

But if I think instead I live in a growing economy, such that my sons are likely in their lifetimes to have a standard of living somewhere between 2 and 3 times what my standard of living is, then whether or not they remain in exactly the same percentile of the distribution where I fall becomes less important to me. And therefore I'm more inclined to have the country pursue policies that provide opportunities for people, who are not already at or near the top, to get ahead. And I certainly wouldn't be inclined to pursue policies that block other people's progress.

 

I assume that as we go forward in our conversation we're going to talk about the way some of these attitudes manifest themselves, having to do with attitudes toward immigrants, having to do with generosity to the poor, having to do with race relations, and so forth. In all of these cases, what it's largely about is giving other people the opportunity to get ahead.

 

My hypothesis is that when people know they are already getting ahead in their own standard of living, compared to what they've known in the past, they are therefore more willing to allow others to move ahead, and less eager to block other people from doing that.

 

Dr. Gao: You argue that economic growth matters because it enables the majority of a society's population to feel better off compared to benchmarks that are still recent enough to be meaningful. But once growth stops, it is only a question of time before habits adapt and the sense of heightened well-being dissipates. Only if growth and change persist will people continue to feel better. What makes this aspect of economic growth all the more important? What might be the difference between a progressive state and a stationary state, as Adam Smith put it?

Professor Friedman: Smith was a very insightful man. But even so, as you point out, he lived too early to understand the possibilities for ongoing economic growth in our sense. He did not anticipate the possibility of ongoing technical progress.

 

Nonetheless, he did understand the difference between being already at a society's maximum living standard, and being in progress on the way to it. He thought progress made people happier.Part of what he had in mind was the difference between Britain and the British colonies in the United States. He saw that Britain was at a high income level, especially in England. But without the possibility of ongoing technical progress, he didn't see the possibility of much ongoing increase in English living standards.By contrast, he understood that in the New World, with all of the unexploited farmland to be developed in the new continent, the Americans had lots of possibilities in front of them, and he thought that on that ground, they were happier.

 

But no, he didn't have a story that was exactly like mine. In my book, however, rather than emphasizing the differences between what I have to say and Adam Smith's thinking, I put emphasis on the similarities. He thought the Americans, who were still in progress toward their maximum living standard, we're on that account, happier.

 

The way I would put it is that Smith understood, at an intuitive level, that people gain satisfaction from living better than they or their families have lived in the past. He didn't have the empirical evidence that we have, and he didn't have the theoretical apparatus that we have. But I think that, at some deep level, he understood it.

 

What makes this aspect of economic growth all the more important is that people respond differently to the hopes of having “more” than to the fears of having “less”. People who feel that they are living no better than their parents will search for enemies. Countries where living standards improve over sustained periods of time are more likely to seek and preserve an open, tolerant, and inclusive society. But where most citizens sense that they are not getting ahead, the society instead very often becomes rigid, exclusive, and isolating.

 

Discussion 4:

 

Connection between economic growth and inequality

 

Dr. Gao: The link between economic growth and inequality remains a highly contested topic, with scholars and policymakers holding sharply divergent views. You argue that if economic growth is to have favorable moral consequences, then it should result in appreciable reduction of poverty and inequality. You are worried that unequally distributed prosperity is not really prosperity at all.

 

Professor Friedman: To begin, my book is not about inequality. Some people have criticized it in that respect. My book is about the consequences of whether the living standards of the broad bulk of the population are improving or not.

 

But this does become, indirectly, a story about inequality because, if inequality is widening sufficiently, compared to the growth rate of the economy as a whole, then even if the total production in the economy is increasing, the living standard of the broad bulk of the population is not improving.

 

Why? Because the fruits of the increased production are accruing very narrowly.

 

Here I think the contrast between China and the United States is very revealing. From what I can see in the data, in both of our countries the inequality of incomes has been widening over the last generation and more. The difference, however, is that the Chinese GDP is increasing much more rapidly than the American GDP.

 

This is true for all sorts of reasons, starting with the difference between an advanced post-industrial economy that's already operating at the frontier of technological production versus one that's just been coming up to the frontier as Chinese has, very rapidly, over the last half century.

 

In the United States, the result is that we've hadperiods of extended stagnation in the living standards of most Americans. Not because the GDP has not grown,for it's kept growing, but rather because together with our slow rate of GDP growth, the widening inequality means that the great majority of Americans have during these periods not participated in the improvement in living standards.

 

By contrast, I have the impression that in China, even though inequality is widening, the increase in production has been rapid enough that despite the widening inequality, the great bulk of the Chinese population live a lot better than they did twenty or thirty or more years ago.

 

I see this improvement on my visits to China. As you well know, Zhanjun, I do not think of myself as an expert on China. But I've now been visiting China for a very long time. I first went to China in 1982, now more than 40 years ago, and I can tell you that just walking around the streets of Beijing it's perfectly obvious, even to a non-expert like me, that the Chinese people are better dressed, better housed, and better fed than they were when I went there for the first time in 1982. I look at the buildings in which people live, I look at the restaurants in which they eat, I look at the clothing they wear, I you look at the automobiles they drive. The whole situation is very different from what it was years ago.

 

Why is this true?Because, even though China, during this period, has had widening income inequality, just as have we in America, the Chinese growth of GDP has been sufficient to allow the great majority of the population to experience improving living standards despite the widening inequality.

 

So, in that sense, yes, what I say in the book does depend on assumptions about inequality, and inequality does matter. But the book is not, per se, about inequality.

 

Discussion 5:

 

Impacts of progressive state versus stationary: the experience of the United States

 

Dr. Gao: To analyze how economic growth or stagnation has shaped a nation's social and political development over time, the United States offers a prime case study. Not only has this country's long-term record of growth and expansion been the world's foremost, but, as you mentioned in the book, Americans have always attached a particular importance to getting ahead economically.

 

How, then, have eras of economic growth or its absence, during the course of America's history, influenced the development of popular attitudes that in turn have led to important social, political, and legislative changes? In what ways have Americans responded when growth has slowed, or even stopped altogether, for more than the span of an ordinary business cycle? And to what extent has stagnation led to inwardness, defensiveness, and rigidity of the nation's social and political structure?

 

Professor Friedman: I think the easiest way to answer your question would be to focus on a concrete example rather than to talk in generalities. Maybe the most obvious example, given what's happening in the United States today, would be to focus on immigration and attitudes toward immigrants.

 

To go back through these various periods of American history that, as you point out, I review in the book, back in the 1840s and on into the 1850s there was a great deal of hostile agitation, and even outright violence, directed against immigrants. Then, after our Civil War, that violence went away.The country used lots of immigrant labor to build the railroads and industrialize the country. Then, in the 1880s and on into the 1890s, the situation reversed again. Not that there was much anti-immigrant violence, but there was a lot of really ugly anti-immigrant agitation and prejudice in this period, much of which I review in the book.

 

But then that, too, changed. Starting in the mid to late 1890s, and going all the way up to World War I, there was a period of not only very high immigration, indeed the peak period of immigration in American history, but of welcoming of immigration. Americans weren't resisting these immigrants, they were welcoming them. To use the vocabulary of the day, the goal was to “Americanize” the immigrants so that they would stay and fit into the country.

 

Then all that changed again after World War I. Starting in the early 1920s, we had not only the most restrictive, but the most discriminatory immigration legislation the United States has ever had, the immigration bills of 1921 and 1924. This attitude persisted up until World War II and a little after.

 

But in the mid-1960s, all that was thrown out in favor of a much more welcoming attitude toward immigration once again. The law was changed, and the 1921 and 24 restrictions were abolished. The new immigration laws were based on asylum and family unification.

 

But by the mid-1970s, we started to get pushback against immigration, especially movements in high-immigration states like California, Texas, and Florida, to restrict certain public benefits even to immigrants who were here legally.

But then all that went away, so much so that in the 2000 election the one candidate who ran for president on an explicitly anti-immigrant platform got so few votes in the Republican primaries that during the summer before the election he had to change parties. Even in the Republican Party, he was getting no traction whatsoever.

 

And, of course, now here we are 20 years later, and we have as president Donald Trump, who ran on the idea of massive anti-immigrant deportations.

 

To stick with this one very concrete example, which I didn't pick at random but because it is the most salient domestic economic issue of the day in the United States, where did all of these changes over time in American attitudes toward immigrants come from? What made these changes happen?

 

It would be naive to take an economically deterministic view that the only force at work was the ebb and flow of prosperity versus stagnation for the majority of the native-born American population. And I hope I don't fall into that trap in the book. I tried hard not to. But I think it would be even more naive, indeed just willfully ignorant, to pretend that the ebb and flow of prosperity and stagnation didn't have anything to do with it. It plainly did.

 

And the same kind of influence that I've just reviewed on attitudes toward immigration comes up again and again, whether we're talking about race relations, or ethnic and religious prejudice, or generosity toward the poor, or opening up opportunities to people who don't begin with much.

 

Just look at America today. The basic commitment to democracy, I think, is very much under threat in the United States, just as it was nearly 100 years ago during the Great Depression, and probably more so.

 

I think, in all of these ways, there are very concrete manifestations of the difference between whether the broad bulk of the population is getting ahead or not in its living standard.

 

Now, one can ask, is the United States unique in this historical feature? And I worked hard, when I wrote the book to argue, no, it's not. Although I devoted much more space to reviewing the American historical experience (after all, I am an American), the book has a chapter on the German experience since the unification of the Empire in 1871, a chapter on the French experience since the founding of the Third Republic in 1870, and a chapter on the British experience since the ending of the Napoleonic Wars in 1815. In each of these cases, by looking at the experience of France and Germany and Britain, I believe I showed that the United States is not unique in this regard.It's been the pattern in other countries, too, especially the Western democracies.

 

I also have a former student who did a parallel study of Japan that was very interesting. I would love to see other people do analogous studies for other countries, too.

 

Discussion 6:

 

Market failure, public policy, and economic growth

 

Dr. Gao: In your book, you argue that the positive influence of rising living standard on the public character of the society makes economic growth itself the source of an externality. Externalities create a vacuum in the functioning of the market system.In this case there is a role for public policy.

 

In economic theory, what kinds of policies are most likely to succeed in promoting economic growth?

 

Professor Friedman: There are two dimensions for those policies to be helpful. One is to create an economic environment in which it's not only possible for people to do what is useful to contribute toward economic growth, but people have an incentive to do so.

 

When I wrote this book, I was focused on the fact that the federal government was absorbing a very large amount of the country's saving by the need to fund the federal government deficit. I'm sorry to have to tell you that this problem has only become worse in the time since I wrote the book. The federal government is absorbing today even more of the country's scarce saving, which means that funds that would otherwise be available to finance investment in growth-producing plant, equipment, innovation, technology, and all that, are not available for these purposes.

 

This is an especially important consideration for the United States, going way back in our history. The United States has always been a low-saving country compared to other countries abroad.

 

It's therefore all the more important to make sure that what little saving the country does remains available to finance investment. But that's not what we're doing, and it's not what we've been doing for a long time. I wrote another book about this problem back in the 1980s. But the problem has gotten worse since then.

 

One thing we should do, therefore, is adopt some combination of tax increases and spending cuts that would significantly narrow the federal deficit. That would be the important thing to do at a macroeconomic level.

 

At a microeconomic level, I think the right approach is to recognize that because of a wide variety of unfortunate circumstances in the United States, having to do with the failures of our education system and with the consequences of our wide income inequalities,many of our young citizens grow up with little opportunity to become genuinely economically productive. We should focus on school-aged children, or even preschool children, who are likely to wind up as adults in the left-hand tail of the distribution of individual labor market productivity, and educate these young people in a way that will move them toward the middle of the distribution.

 

Doing so would have two important effects. One is to improve the average productivity of the working population as a whole. Think of any distribution and take a lot of the mass of the left part of the distribution and move it into the center.Doing that means that the mean increases.

 

And secondly, in keeping with the conversation we were having about equality before, by moving people from the left tail of the distribution into the center we would also narrow the very wide income inequalities that our country currently has.

 

Where would I focus on these efforts in education? I think the most obvious place, given the structure of our education system in America, is preschool education. We have many, many children who show up for the beginning of school, at age 5 or 6, already at a disadvantage that they can never overcome. Nobody thinks this disadvantage, already at age 5 or 6,is somehow morally these children's own fault. That just can't be right.

 

And we also have lots of evidence that preschool education programs improve life outcomes. For those children who are at risk of failure, participation in the preschool programs makes it more likely that they will finish high school, more likely that they will go on to college, more likely that after finishing their education they will have what economists call job attachment, meaning have not just bouncing around from one job to another with period of unemployment in between. Participation in preschool programs also tends to increase people's earnings as they become working adults. And it prevents many pathologies. Children who have gone through preschool programs are less likely than comparable children who haven't to get in trouble with the law while they're juveniles, and the girls are less likely to become pregnant at an early age. In all these ways, there are very strong benefits of preschool programs, for which we have lots of evidence.They're a powerful way of investing in human capital.If I were to focus on the microeconomic side of growth-enhancing public policy, that's where I would do it.

 

Similarly, when we were just discussing narrowing the federal budget deficit as the most promising form of macroeconomic policy to enhance growth, making more funds available for investment, that's in large part about physical capital.But I envision the increased investment not just going on into physical things, but also intangible technology. Increasingly, we live in an era in which productive investment is not something you can see standing across the street.

 

Discussion 7:

 

Trump 2.0: a radical departure from prior experience

 

Dr. Gao: How do you see Mr. Trump's reelection?It seems very rare to see such a wholesale and multi-dimensional reversal of long-standing public ideas in the US history.

 

Professor Friedman: Yes, I think that's right, I see the Trump administration as a radical departure from prior experience. But I think it's a reaction that's been building for a long time.I see it as, in many ways, a consequence of just what we've been talking about.

 

Here we are in 2025, and many Americans have a standard of living which, after adjusting for inflation, is no higher than it was in the year 2000. This has been a period of protracted stagnation, for large numbers of Americans, that's comparable to the ones that you and I were discussing just a few minutes ago. It's comparable to the period back in the 1880s and on into the first half of the 1890s. It's comparable to what happened in the interwar period, between World War I and World War II. It's comparable to what happened in the 20-odd years after the OPEC cartel restricted the supply of oil. The United States has suffered these periods of stagnation before.

 

And they've typically led to reactionary policies in which people have become less tolerant,less generous toward the disadvantaged, less willing to make opportunities open for broad parts of the population. They even become less committed to preserving the democratic character of our government and the society. I think you see all of those tendencies in the Trump administration today.

 

As I said a moment ago, however, I see Trump himself as an even more radical departure. That's because the plainly illegal and unconstitutional methods that the president is using to pursue his goals, not because of the goals per se. To take again immigration as an example, as we did a few minutes ago, we've had periods of pretty intense anti-immigration sentiment before in the United States. What's radical about the Trump administration is the willingness to violate both the law and the Constitution in pursuit of those goals.

 

Dr. Gao: How do you see his first 100 days in presidency? There have been a lot of comments on that, people hold very different views. And many surveys recently try to reveal what voters feel during his first 100 days as a president. What might be your assessment of the situation?

 

Professor Friedman: I think it's very consistent with the way other countries in the past have imposed dictatorships. In America today there are lots of parallels to what was happening in Germany in the early months of 1933: seizing control over the criminal justice system, trying to intimidate the press and the media, seeking control overthe universities and other cultural institutions and opinion centers, and the like.All this is consistent with the historical pattern by which other countries have imposed dictatorships in the past.

Dr. Gao: On the impact of the current US economic policies, including tariff, regulation, income tax, and immigration, if combined all together, how do you see the potential impact on economic growth?

 

Professor Friedman: I think it's very hard to say, in part because we don't know what these policies will actually amount to. The tariffs President Trump announces come and go on an almost daily basis. Tariffs on China, for example, have been over 100%, and now they're much lower.But they may go back up.Or, if there's some agreement on something or other, which may not even have much to do with the two countries' trade, the tariffs may come down further. Or if there's no agreement, they could go back up. It's hard to predict what the consequences will be, in the first instance because we don't know what the policies will be.

 

I think it's important also to be aware that President Trump is not just using tariffs as a way to influence the country's international trade. He has had the insight that tariffs are a weapon he can use to punish countries that do not obey his wishes, or to threaten countries that look as if they may not want to obey his wishes. We've already seen examples in which tariffs have been either used or threatened over non-trade issues like immigration or drug control.

 

I would not be surprised to see tariffs on Denmark, at some stage, when the Danes refused to sell us Greenland. I would not be surprised to see tariffs on Panama if the Panamanians refused to give us back the canal. In all sorts of ways, tariffs for Trump are really just an all-purpose weapon.They're not just about the trade balance.

Now, you mentioned immigration in this context. Again, it's very difficult to know what will happen. President Trump, in his campaigning and even in his inaugural address, talked about having the largest mass deportations in American history. We don't yet know what that means. So far, most of the action seems to be not about genuinely mass deportations, but gaining headlines through small-scale actions that attract high visibility, such as deportations of specific people that generate television coverage.

 

But so far it doesn't add up to anything economically. The standard estimate of the number of people who are in the United States illegally is 11 million. If we take a guess that half of those people are of working age, this means if we deported all of them we would be reducing the American labor force by 5.5 million people. That would have a major economic effect. The American labor force is about 165 million. If we removed 5.5 million of those workers, we would really see the consequences. This is especially true because so many of those workers are concentrated in particular industries, like hotels, restaurants, construction, landscaping, agriculture, meatpacking, and the like. If Trump were actually to carry through withdeportations that would all or even a large fraction of those who are in the country illegally, that would have a big economic impact. But so far, it's all been very small numbers of people, focused on high-visibility groups that might be interesting for the point of television coverage or newspaper headlines, but to date it doesn't add up to anything economically.

 

Another useful benchmark to keep in mind for purposes of this issue is that during the Biden administration we were deporting on average about 200,000 people a year. At the current pace, it's not obvious that the Trump administration's deportations will get as high as that. I'm sure they will try, because I think it would be an embarrassment for Trump, after promising the largest deportations ever, to end up deporting fewer people than Biden did.I'm therefore guessing he'll get over the 200,000 mark, but in a labor force of 165 million people, deporting 200,000 people in a year doesn't matter. Deporting 5.5 million is something that would matter.

 

But how do we know what the actual policy will be? We don't. And so, predicting the economic effects is impossible.

 

Discussion 8:

 

Tariffs, dollar, and the so-called Mar-a-Lago Accord

 

Dr. Gao: As argued in your book, one of the benefits of persistent economic growth is an open, inclusive society—not an insular one. By contrast, periods of stagnation often drive societies toward isolationism and exclusivity. This brings us to the question of trade policy, which you just addressed. As you wrote in your book, “the higher tariffs of the 1920s were one concrete expression of the more general spirit of isolationism…the popular attitude of reckless disregard for the international consequences of American actions persisted. The decade ended with yet a further increase in tariffs, to all-time record level under the Smoot-Hawley Act.”

 

Looking back at history, US trade protectionism has gone through several phases. Could you discuss on the differences between the trade protectionist policies of different historical eras and the current ones?

 

Also, there are a lot of countries now are negotiating trade agreements with the US And for the United States, its reciprocal tariffs are actually against all the other countries. The paper A User's Guide to Restructuring the Global Trading System by Stephen Miran is not only about US trade protectionism policy, but also currency policy, which people call it Mar-a-Lago Accord. How do you see the indications of this paper?

 

Professor Friedman: There are two things to say. One is that historically, the United States has been a great beneficiary of open trade. I think it would be a pity if we were to move to some kind of restricted status in which we trade only with a small number of countries.

 

People often make the mistake of focusing on the losses associated with trade. The truth is, we reap a lot of gains from trade as well. But they are different. The people who are losing out to American imports are different from the people who are profiting from American exports. You can, of course, focus on one or the other, but the honest thing to do is to focus on both.

 

The second point I would make, referring in particular to Steve's paper on the so-called Mar-a-Lago Accord, is that the United States has also benefited enormously, over the last hundred years or so, from the special role that the dollar plays in the world financial system.

 

Now, nothing lasts forever. Do I predict that 200 years from now the dollar will still be the center of world finance and trade the way it is today? I don't know. To repeat, nothing lasts forever.

 

But this role played by our currency has been advantageous to the United States in many ways, and I think it's foolish to want it to go away. Even if we recognize that nothing does last forever, and so inevitably, at some stage, it will go away, speaking as an American I believe it's in our interest to keep it going as long as possible. If it lasts another 25 years, that's better than just another 2 years. If it lasts another 50 years, that's better than 25. I hope it lasts as long as possible.

 

Dr. Gao: Currently, markets are deeply concerned about the US dollar, with investors increasingly hesitant to hold US Treasuries. As evident in recent data, the 30-year Treasury yield stands at approximately 5%, while the 10-year yield hovers around 4.5%.

 

Professor Friedman: Yes, but it hasn't changed. There's all this loose talk about people not wanting to hold treasuries. I think the truth is quite opposite. The interest rate on 10-year US Treasuries is unchanged from 6 months ago. If you were a bond trader, you could have fallen asleep back in October of last year and you could wake up today, and you would say the market must have been closed while I was asleep. Nothing happened. The interest rate is unchanged.

 

And that's true despite the fact that because of tariffs and tax cuts and deportations, the outlook for inflation is worse today than it was six months ago. And yet, the interest rate is unchanged. To me, it just doesn't make sense to say that people have become unwilling to hold treasuries. People are just as willing to hold treasuries as they were before the election.

 

Dr. Gao: There might be actually very few alternatives at this point.

 

Professor Friedman: I agree with that. That was also part of what was misguided about the Steve's paper on the so-called Mar-a-Lago Accord.

 

Even if, unlike me, you did want the dollar's central role to cease, there's nothing to replace it. Nobody's going to treat British pounds as the center of the system, or the Japanese yen. The Euro isn't ready to play that role, and China's currency isn't either. Maybe 100 years from now, it will be China's currency, or maybe in 50 years, but not now. So, I just don't see what the alternative would be.

 

Dr. Gao: So, Ben, if I understand correctly, your contention is that the international monetary system will remain largely unchanged for several decades to come?

 

Professor Friedman:Certainly for one. I would be very surprised if there were a significant change within one decade. Two decades is starting to get to be a long time for any kind of prediction.

 

Dr. Gao: Thank you very much for sharing your views with us today, Ben. I truly appreciate your time and contribution. The analyses and comments you provided are incredibly informative, insightful, straightforward, and thought-provoking. I thoroughly enjoyed our conversation.

 

I would like to take this opportunity to congratulate you on your latest book, Religion and the Rise of Capitalism (Knopf, 2021). As a fundamental reassessment of the foundations of modern economics, it is imminently set to be published in Chinese translation. I eagerly anticipate its release.

 

Professor Friedman: I enjoyed the conversation, Zhanjun. It's always a pleasure to talk with you.

 

(The interview process was streamlined thanks to the efforts of GAO Lingfeng, a college student at Massachusetts College of Art and Design. He graciously hosted the online meeting and skillfully recorded the conversation, ensuring that the information provided was accurate and accessible to all.)