Economist Tyler Cowen on inequality, Canada, and the state of global superpowers

The academic and blogger mourns the world’s bullies, takes on Piketty, and predicts Canada will never have its own Silicon Valley.
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May 1, 2015
A view of Parliament Hill in Ottawa. REUTERS

Tyler Cowen is an economist, academic and writer. His popular blog, Marginal Revolution, co-written with Alex Tabarrok, a colleague at George Mason University, turned Cowen into “an economics celebrity,” in the words of one LA Times writer. More recently, Cowen and Tabarrok ventured into the world of online education with their creation of Marginal Revolution University in 2012.

The author of ‘Average is Over: Powering America Beyond the Age of the Great Stagnation’ was in Toronto earlier this year as the keynote speaker at the University of Toronto’s conference on Inequality. He spoke to OpenCanada on that subject, Canada’s current challenges, and the future of international institutions.

1. On inequality

You mentioned [during the inequality conference] a few ways beyond income in which we can think about inequality. Which are the most relevant measurements?

A very relevant measure of inequality is happiness. What is the difference between happy people and not so happy people? And we don’t even know whether or not that’s gone down or up. If you look at questionnaire evidence, which I don’t really trust, but if you just ask people ‘how happy are you,’ happiness inequality has not gone up at all.

So I think people are not thinking carefully enough about well-being and they are focused too much on markers of income. I do think there is a real problem [of inequality] in any case but I’m not sure we’re identifying the problem correctly.

How do we go about creating a new marker of inequality then — income is perhaps the easiest one to create data sets and compare.

It is the easiest but I think it’s fundamentally wrong. The key to me is mobility. I’m not sure how we will ever measure or understand happiness but if people at the bottom advance to the top, I think we can be modestly confident things on the whole are OK. And mobility and inequality are not the same. Inequality is about narrowing gaps, mobility is about creating opportunity.

You also mentioned different perimetres in which to measure inequality — country to country or within one country or locally — but that globally, inequality has actually gone down.

That’s correct, that is because of the growth of China, India and other countries.

Is that a useful perspective to keep in mind?

It is. It makes you much more optimistic. You think of this actually as an egalitarian age. There are political economy problems within countries where, say, poor people don’t have the chance to get a good education and move up the ladder — that’s still a problem. But when you frame it in this bigger, more optimistic picture you see more chances of solving it.

This is related to general growth in Latin America, Africa…

Chile is virtually a developed economy these days. Much of it is very well off. They still have their own problems with upward mobility, in particular through education, but compared to 30, 40 years ago…

They do have a high level of income inequality.

Very high.

I question then the idea you have spoken of that the problems of the lower half of income inequality scale are not related to those who are at the top.

Exactly. It is not always the rich standing in their way. What’s standing in their way is something like a bad school. And it’s a subtle difference in perspective but I think an important one. There are Latin countries which don’t have the rich like the Chilean rich but actually have them as a way of driving further growth.

Are those two issues truly disconnected — is the growth of millionaires not within the same system that’s also driving lower incomes?

If you have more millionaires, I think you have a better chance of helping people at the bottom.

What about the idea of tax reforms; that part of the solution is connected to millionaires paying more in taxes.

Well, that’s what Argentina has done — how well has that gone for them? I would spend a lot more money on educating the poor and of course some of the taxes for that would be paid by the well-off, but I don’t think the goal is to knock down the well-off. The goal is to elevate the poor.

And that is a separate endeavour.

Absolutely. I think in the long run, the well-off will be better off for investing in the poor. In that sense, their incomes will be higher yet. In a way, you’re creating more inequality in the longer term.

Which countries are doing that right — where you have a high level of income and good social programs, investment in education, etc.

If you look at much of Latin America in the last 10-15 years, especially Brazil, you see income inequality has gone down. The poorer are getting better education, they’re getting conditional cash transfers. There are better public health programs. Taxes are somewhat higher but it’s not as the wealthy have been confiscated. And the wealthy are themselves better off. In my opinion.

Your view differs then to [Thomas] Piketty’s view on tax proposals and wealth distribution.

He’s all about confiscating capital income. I think that’s a big mistake. I would readily admit you sometimes need to raise taxes to do good programs but it’s a different emphasis. And I see a world where rates of return on capital are usually quite low. Or negative even. And in his model, those rates of return are high. I think they are high only selectively, like for Apple or people who have innovated or taken chances.

Let’s turn to technology as a tool or advantage for the younger workforce today. You have said while it is a benefit, sometimes it is also just plain luck that differentiates one candidate from another. Is the world still becoming more ‘flat’ thanks to technology?

Sure, absolutely. More people have more opportunities than ever before. But that’s not an all-together pleasant world for everyone because everything’s more competitive, like getting into a top school. It used to be, I wouldn’t say easy, but if you were top in your high school and had good SAT scores and straight As, you would apply and they would take you, and you would waltz in, have your Princeton degree. It’s way harder than that now, even to get into a top-tier state school like Berkeley, Wisconsin, Michigan.

What kind of hope does that leave those who can’t even make it that far, is that view pessimistic?

It’s sobering, but service sector jobs are the hope.

Do you see growth in that sector or investment in education for it?

I’m not sure you need education. You need a willingness to learn and a good temperament. Someone will work in this [cafe], they don’t need a lot of education. They may never get a raise, but over time, new stuff will be invented and they will have it in their lives.

2. On Canada

Turning to Canada, and whether Canada can partake in the knowledge economy. Many see that as an opportunity that we will either miss or that we could take. What are the options for Canada right now in that?

Some economic sectors are distributed everywhere, like every city has its dentist, and other sectors are quite clustered. Banking is pretty clustered — New York, London, Hong Kong. Tech has been evolving in a pretty clustered way; I don’t mean simple software support, which is more like dentistry, but big, grand projects — the next Google, the next Facebook, Uber. We see those come out of quite a small number of places, so Skype coming from Estonia is quite the exception. Even then, it was improved by people in the clusters.

I think any location, not just Canada, has to ask itself, ‘are we going to be one of those clusters or not’? And the correct answer may be ‘no’. It may also be the sector evolves so it’s less clustered and more like dentistry, and then everywhere including Canada would partake. But maybe the future is Canada will have a knowledge sector doing small-scale things like software design for local projects but not anything like its own Silicon Valley. I guess at this point that seems likely — that Canada will not be a huge innovative part of the knowledge economy.

You have mentioned however that to do that, a lot of money just needs to be invested. Where specifically should that money be invested? Waterloo, Ontario, for instance, home to BlackBerry, has seen innovation happening there.

I’m not sure you should spend more to do this. People want to be near the other people who work on the same thing and just throwing tax incentives at them or cheap land, I’m not sure it’s ever going to overcome that desire. So there’s so much expertise in Silicon Valley, so much workforce. I don’t know that the outsiders can overcome that.

Other challenges for Canada?

Resource prices, huge.

Is the only need then to diversify?

The low price of oil will do that for you. It may in the long run be a blessing. Not for Alberta but maybe for Canada as a whole. It will force people to re-gear now while they still can, rather than becoming so undiversified that years from now it will be much harder. You look at Canadian GDP figures — they’re not actually down that much, it’s been a pretty smooth transition. And forecasts and the like, a lot is clustered around 2.5, which is really about as well as a developed country on the frontier could hope to do. Maybe a wee bit short, but not much.

What about Keystone?

I don’t think it matters that much for Canada. I think my country was stupid but you’ll get over it. And with the price low, it matters less but even with the price high again… it’s sort of a symbolic slap in the face from your neighbour, your best friend, but I think Canada will be OK with that over time.

3. On global superpowers and the state of international institutions

Now, on global dynamics. You have mentioned that China’s facing its own '1929.’ There’s been so much talk about China on the cusp of being a superpower, but like with Brazil or Nigeria even, are there doubts we may see the potential fully realized?

More and more people think China is in trouble now. But I do think they will become the superpower of Asia.

Are they not already?

Yes and no. They try to push around all their neighbours with the islands and the like, but they haven’t gotten that far. And they’ve alienated everyone they’ve dealt with. And in an actual conflict between China and Japan, Japan would probably win. China has a massively corrupt military. I think they like to think they are the regional superpower but they are not. If you cannot beat up on a country less than a tenth of your population, I’d say you’re not the regional superpower — like let’s say the U.S. could not push around a Latin American country with 20 million people.

Is this related to the idea on why you say the IMF isn’t relevant anymore — that we might not have superpowers in the same way?

Yeah, G-zero. Scary.

Why do you think is it a negative to lose superpowers?

It’s a negative in my view. It’s a tragedy of the global commons. You need some hegemons, you hope they are nice ones, but you look a the European Union — Germany’s a bit in charge but not quite, and it’s not working. It’s like you’ve removed a lot of national governance but not put anything in the centre back in its place. And if Germany could be bigger, richer, in a way a bit more of a bully, in a way that would run better.

To whose benefit?

Well Germany would do it selfishly as indeed they do now. But it’s better than no governance at the centre. Same with the U.S. in the new world. U.S. is a totally selfish country, it's often very unfortunate, but it's often better than no one there.

This is your idea that it is better to have some stability with control in the hands of a few?

It is my opinion but it’s never going to be popular. And the mistakes will be enormous. I mean Chile is a big example. U.S. history in Chile is by no means uniformly positive, to say the least.

How do you view the state of the World Bank and the IMF, and their future roles?

The World Bank has lost relevance for good reasons — poor countries have developed and private capital flows are so large. The original idea of the World Bank was to be a kind of bridge until capital would flow to poor countries. Now if anything, you see private capital flow out of poor countries to rich countries, so poor countries have capital. They have big problems, but not always things the World Bank can fix. The IMF is fading for mostly bad reasons.

Which are?

It just doesn’t have the heft to throw around its weight. And there are big financial problems and we are somewhat in a G-zero world, and the IMF’s legitimacy and influence just isn’t that strong. So somewhere like Greece where I don’t at all blame the IMF but they cant fix it. Ukraine, I predict they cannot fix. So just a bunch of problems bigger than their mandate and without their main backer countries – U.S., Europe, Japan, also Canada – who’s caring enough to make it a priority? Everyone’s for the IMF doing this, doing that, but for no one in politics is it a priority or close.

And how do you view the future roles of the two. A time of transition or stagnation?

Transition. World Bank will become more like the UN. It will be less about capital flows and more anti-poverty. Which in a way sounds good but when you think about the actual organization structure of the bank or where the money comes from, it means they’ll be poorer and do way less even in the area of poverty. The IMF is harder to predict. I think in a way it might just hang around in its current form but just keep on failing because problems are too big for it. I’m not sure on paper it will look that different.

Do you see that as a loss?

It’s a loss but the World Bank has come out of good reasons. The IMF was designed for a world run by a half dozen countries. And that’s not the world anymore. I mean it’s a good thing that’s not the world anymore but a scary thing too.

Postscript: On Tyler

When you were introduced at the University of Toronto, it was said you are hard to peg, politically. Do you get that a lot?

Yes, I do.

Does that make things interesting for you in that you get challenged from all sides?

Yeah. It’s good to get criticized from all the different sides but I would describe myself from having started from broadly libertarian positions and then just evolved a lot in a lot of directions and I try and absorb as much from as many different influences.

We certainly like to give labels.

People need them.

You write often on technology, which changes quickly — how do you keep your writing apace with trends?

When I was writing Average is Over, the U.S. was in the middle of an economic recovery. My book was basically predicting that even in the recovery wages would be flat or falling, and that turned out to have been true so I was revising up until the final date putting in more evidence so when the book came out it sounded pretty current and it was.

Are the kinds of innovations you mention — the driverless car or the computer program that can write a newspaper article — are those going to stay small or how do you predict which will be used at a national or global level?

Hard to predict, I think, but if you look at how computers have done in the last 40 years, the rational position is to think they’ll do a lot more and continue to be a big effect.

So its an interesting but scary time to live and if you had to live anywhere to witness it, it would be North America. The real privilege is that of birth and we’re lucky enough to be have born in the right places.