An Interview with Economics Journalist Paul Solman

YJIA: Professor Solman, our Journal seeks to bridge the gap between International Relations theory and practice, and most of our questions are geared towards that goal. With that in mind, in your years of experience as a journalist, have you found any areas of policy more in need of academic input or vice versa, specifically within the field of economics?

Solman: Those are two very different questions! My whole career has been what I jokingly call an “intellectual arbitrage,” which is to take a bunch of serious ideas that are developed in the academy and translate them for as broad a public as I can find to effectively communicate with. If I could translate key ideas from the academy to . . . kindergartners, I would, because I believe the earlier you develop an understanding, within certain limits, the better off your understanding of the world will be. So, for example, a key concept within business schools is the principal/agent conflict, and that is something I think you can explain, certainly to grade schoolers and maybe even kindergarteners. But, I’m an old guy, and although I’m great with kids and very effective, I haven’t put my energies into translating quite that far. And in fact, I’m well up the food chain in terms of the audience I have, seeing as it’s public television. Students don’t count because they’re already getting the benefits of the academy, but the effort is the same.

There are a bunch of very thoughtful people whose job it is to make sense of the world of economics. What are they thinking? What ideas have they developed that will be at least useful to you in thinking of the world and maybe vital, essential to your understanding? A key concept within business schools is the principal/agent conflict: the conflicting interests of those who own something (the principals) and those who supposedly work on their behalf (their agents).

So my entire career has been developed to mining the academy for those ideas which I think will be most useful and important for the American public to understand. If I was in a different country, it might be a different story, because other countries are not necessarily committed to the idea that the people should be informed enough to make decisions about policy, including economics, but here, that’s the whole point. And in more and more of the world in general that is the point. In a democratic society, what a journalist does is to try to inform the public so it can make informed decisions, and I do it within the realm of economics.

Now, should policy (broadly defined as policy that everyone is involved in at some level) more nearly inform the world of the academy . . . absolutely with regard to economics. And that’s why I’m at Yale, where I’m not so much translating the world of policy to academics, but bringing an on-the-ground hard-earned, long-term view of how economics plays out in the world, understanding as I do the ideas the academy has brought to it, and then bringing that back to the academy and saying, “Look, here is where the real world jibes with your understanding, and here is where it doesn’t.”

YJIA: Your “better-than- average”-selling book, Life and Death on the Corporate Battlefield, was published in 1983. If you were to write a follow-on book on global economics, what might you call it, and what might be some of the key points it contained?

Solman: In the interests of efficiency, which is one of the key drivers of economics, I would call it Life and Death on the GLOBAL Battlefield. Actually, I’d have to ask my co- author Tom Freidman (not the NYT’s Tom Friedman, another Tom); we would have to agree in any case. The key thesis of that book, although we didn’t know it until we’d written a first draft, was that the entity known as the corporation takes on a life of its own, and then operates in a way all life does: to keep itself going, to protect itself, to sustain itself. It is not at all obvious that is the way the material world ought to operate. There is something known as the Mesabi Iron Range: hills of iron ore. The corporate form, or the business form, used to mine that ore was a master limited partnership. You gathered investors, took their money, gave them an ownership stake, and mined the iron ore. With the profits you paid dividends back to the partners (who were taxed at the personal level) and when the iron ore was gone, the dividends ceased; no more Mesabi Trust, see you later. In the 1980s, when I first became aware of the Mesabi Trust, there was a thought that was an alternative and perhaps better model for how any company, especially one dealing in natural resources like an oil company, ought to be run.

I first heard about this during a breakfast with T. Boone Pickens, and a Harvard business school professor, Michael Jensen, in 1986 or 1987 at the dean’s house of Harvard Business School. They were making the case that this is the reason T. Boone Pickens ought to take over oil companies. He would pay a premium over the current stock price, but he’d buy the whole company with borrowed money (this was the method of the corporate raiders in the 1980s and he was a prime example). The argument was that he would be able to give to the owners of the company, the shareholders, the money due them by simply extracting the oil, selling the oil, and getting rid of “cap ex” (capital expenditures) and any peripheral business that they may have gotten themselves into to try to hedge themselves against a downturn in the oil market.

“Why do we need them to diversify the business?” asked Pickens and other investors, “We can diversify ourselves. The only reason they are diversifying is to try to keep themselves alive.”

This is what we were saying in the book: corporations were trying to protect “themselves.” The bigger the corporation, the higher the pay of the CEO, so why shouldn’t CEOs try to aggrandize themselves in terms of power and wealth as well? But fundamentally, the organization is trying to stay afloat: life, not death, on the corporate battlefield.

The new dimension to that book that I would add now is the increased extent to which corporations are international, and therefore threaten to supersede sovereignty. I don’t know if that’s a critical problem that is going to destroy the world or anything but to answer what I would write now compared to what I wrote thirty years ago, implicit in your question is the fact that it is a global world, far more so than it was back then, and therefore I would be focusing on the corporation in an international environment, not so much a local or national one.

YJIA: You’ve done several interviews with leading economists over the years, including Nobel laureate Paul Krugman. You have also done interviews with people who are unemployed or are otherwise feeling the bite of the current economic situation. What seem to be the most frequent ideas for improving the U.S. economy, and which do you think might be the most effective, either in the U.S. or in the global economy? 

Solman: I have interviewed an awful lot of Nobel laureates, and I have interviewed an awful lot of people who are out of work. The people who are out of work have said, “we’re willing to work, we want to work, we’re desperate for work, we’re equipped to work,” and I can guarantee you that even though mine might be a biased sample, all of those statements are true. Particularly the “equipped to work,” because there is this notion that people who are unemployed are . . . if not ill-equipped than less-equipped. But in the last ten or fifteen years that I have been a reporter, and I’ve been on this beat for thirty-five years, it has become increasingly difficult to tell a worker from an unemployed person, given their skill set, sociability, and things you might think would identify someone who is out of work. Sometimes it’s a big surprise, sometimes it’s quite shocking. And that is more true now than it used to be. In the past there were perturbations. In the 1970s there was high-tech unemployment but back then you had the feeling that this was short-run, that these people would soon be re-hired, even if the people themselves weren’t so sure. That hasn’t been true for years now.

What’s the solution? People say: “just create jobs.” So now you go to the economist, and you say, “how do you create jobs?” There are two basic positions and I don’t subscribe to either of them. One is you create jobs by getting the government modestly involved in doing what government has done historically—by which I mean the last eighty years. Since the New Deal, let’s say.

You invest in public goods—things that the market won’t take care of but that are obviously needed—a continuation of things as they have been: roads, bridges, shovel- ready infrastructure projects. And—you mentioned Nobel laureate Paul Krugman— you put money into places where temporarily, because of an economic downturn, local governments can’t spend money on public goods: teachers, or firemen, or policemen. That would be municipalities, localities which have constraints on their borrowing. So let’s use the federal government’s money, give it to the localities, they will rehire these people, and we will eventually emerge—the economy will eventually recover.

That approach is predicated on the idea that this downturn is cyclical in nature. The economy goes through cycles, we hit a particularly deep downdraft because the higher you fly, the harder and further you fall, and therefore it will take us longer to get back up. Historical evidence shows that. The now famous book by Ken Rogoff and Carmen Reinhart, This Time Is Different—both of whom I interviewed before that book came out—showed that a really big financial crisis of the sort we were having takes a really long time to rebound from, but eventually of course we will rebound.

So the Paul Krugman argument, if you want to call it that, is: let’s buy time, let’s get people back to work, and let’s get the cycle up and running faster than it otherwise would have. He was echoing the great insight of John Maynard Keynes, the twentieth century English economist who said an economy can get depressed and stay depressed because if people simply don’t have jobs then they don’t spend money, which means other people don’t have jobs, and you can get stuck, he said at one point, as if you’re in a down elevator and you just can’t go up. The idea is: how do you reverse the trend? The government starts spending money—the government can always print the money, right? Money’s back and circulating so people will become more optimistic, start to hire, and then, once people are working—why, that is economic growth! After all, all wealth is, really, is people doing stuff for each other—mining minerals, making jewelry, whatever.

The other main answer is the Friedrich Hayek argument. And this played itself out in the last election as Obama, more nearly Keynesian, and Romney, more nearly Hayekian.

The Hayekian argument is: you start messing around—you meaning government—and you’re going to make things worse. There are natural cycles of overenthusiasm and under-confidence. They have to work themselves through. And the only way you’re going to ever really create jobs is by the entrepreneurial class which undertakes to do things. That’s what an “entrepreneur” is, literally, not an undertaker in the sense of dealing with dead bodies, but of taking on a task. Prendre, “to take” from the French.

But the Krugmanian/Keynesians say, wait, that’s crazy because there’s all this idle labor. And all we have to do is employ it and we’ll get the game going more quickly once again and we’ll have wealth. These are idle resources that we’re letting lie fallow. And the Hayekian/Romneysians say “no no, when you start giving them work then they think of it as an entitlement.” The great insight of Hayek was that a market, using the price system, carefully matches needs to resources because the prices reflect exactly what people will want, and that’s dispersed knowledge, whereas a government making decisions about whom to hire and for what is centralized and therefore fundamentally flawed; it can’t know what the resources are worth or what the people could actually most efficiently do with them. That’s what the market system is for. And there will be corruption as well because it will be a cadre, a core of people, who will be making the decisions in a government-run system. So don’t muck around! Don’t do it—that will screw things up.

My position, insofar as I have one, is offered as a thought experiment because as a devoutly evenhanded journalist for the devoutly evenhanded PBS Newshour, I don’t actually advocate policies. But my thought experiment for the moment is: neither of those. Or, you might say a hyper-Keynesian, hyper-Krugmanian idea. It’s predicated on the notion that we are moving into a world—may already be in a world—in which the jobs of the past are gone. They’re behind us. And in the same way that we automated agriculture so that in Benjamin Franklin’s day he said ninety-nine percent I think of Americans were down on the farm and now it’s one percent. But manufacturing too has been automated away. Twenty-five percent of the U.S. workforce (something like that) was in manufacturing in the ’50s. Now it’s down to ten percent, maybe. And it depends on how you define manufacturing as to how big even that number, today’s current ten percent, is.

Seventy percent of Americans do not get a four-year college degree. And it’s hard for me to imagine a world economy going forward in which the seventy percent of Americans have a whole lot to sell to anybody else at a wage that Americans are used to earning. You might say it doesn’t matter what they’re used to earning, they just have to live with it, but believe me, from my reporting, I can tell you for sure: once you become accustomed to a certain standard of living—and I don’t mean high off the hog or anything—and that living is seriously threatened, you are one unhappy, resentful person. So to me the question is, moving forward, is there anything we can do to make that 70 percent productive: help give them some skill to sell?

My thought experiment is not the CCC—that is, the Civilian Conservation Corps, a major Roosevelt New Deal project which would be very hard to do today because they were paid peanuts. Mine is the MMM. And the MMM is the Mass Massage Mobili- zation. The Mass Massage Mobilization is a one hour massage per week (you can do the numbers on the back of an envelope or any scrap of paper you like) that would employ, depending on how hard you want to push the massage therapists, between seven and ten million Americans. There are right now 12-point-something million officially unemployed. On my website, Making Sense, every month we track a more inclusive number that includes everybody who says they want a job but doesn’t have one, regardless of whether they have looked for work recently or not (which is the main criterion of the Bureau of Labor Statistics). Our “U-7” number also includes everybody who’s working part-time but tells the Bureau of Labor Statistics they’re looking for or want a full-time job. If you add all those people together, you get about twenty-seven million. There are about eight million who are part-time looking for full-time, there are another six million to six-and-a-half million who are not looking for work at all but say they want a job, and then there are the twelve million we were talking about who are officially counted. So it either completely solves the unemployment problem, my Mass Massage Mobilization, or it makes a major dent.

Now, what’s the net effect of a program like that? Everybody’s better off. Everybody who gets a massage a week—at least as well off as they were before. And for lots of people, arguably way better off, right? Meanwhile we’ve employed seven to ten million people—they’re all better off. Moreover, you don’t need a four-year college degree.

So, what’s the problem? This is a massive government program where there will be cheating, there will be corruption, there will be, you know, “happy endings” . . . what some people would consider to be the sleazy side of the massage industry; where you’ll have to subsidize poor people or people who don’t have the means of buying the massages, as well as train all the people to become massage therapists. And then you’ll have to worry about all the kind of central planning or quasi-central planning issues that are implicit in a government economic program.

But I offer the thought experiment because I don’t see—honestly don’t see—a better alternative or a clearer alternative. You could argue that infrastructure would be preferable, and you might be right. But it strikes me that this is at least a way of posing the question starkly about the world we may be moving into and trying to answer the question: “How do you create jobs in that world?” I think that if you go the Hayekian route, which includes lowering tax rates to give more of an incentive to the entrepreneurial class to invest in businesses, that there’s absolutely no assurance and, in fact, considerable skepticism on my part as to whether or not that would create any new jobs at all. Remember, you’ve only got thirty percent of the population with four- year college degrees. What are you going to hire the other people to do, as machines increasingly replace routine tasks and of course, increasingly, competition from people who are willing to work for less in other parts of the world?

YJIA: In the wake of Obama’s reelection is there a global economic issue that you believe is more deserving by the Obama administration in his second term? 

Solman: I think it would be the Mass Massage Mobilization [jokingly]. That’s a domestic issue. It’s a how–do-we-employ-Americans issue. I admit it really is fanciful, not feasible. But like hanging, I’m hoping it focuses the mind wonderfully. What would I have the Obama Administration think about? If I have anything interesting to say in answer to that question, I think it would be to bring into their inner circle people like Simon Johnson of MIT, who are substantially more skeptical of Wall Street, meaning the regime of modern finance, than they seem to have in there now. I’m not an anti-finance guy, but I think that finance has been commandeered, shanghaied, taken-over by people who are narrowly, as opposed to broadly, focused. And that the same critique that Adam Smith leveled against the merchant class of his day is preeminently pertinent or relevant to the financial class of our era in America and elsewhere.

I think the financial upper crust has unfairly rigged the game in their favor, for obvious reasons. Why wouldn’t they? They have the money, campaign contributions are crucial to electoral success, and voilà, there you have it. But it’s a bad thing, I think. It skews, if nothing else, the talent that comes out of places like this [Yale] who go work for investment banks. So I’d like to see a reappraisal of the role of finance in the world and in this country.

YJIA: You’ve written some pieces about both income inequality and wealth inequality in the United States. This growing disparity between rich and poor is fact. What does this mean for America’s place in the world and its relations with other countries, and do you think it’s more of an internal/in-country issue, or does it have effects on a global scale? 

Solman: Well it’s precisely where my Mass Massage Mobilization comes from. I think it’s happening in many industrialized countries. It is happening less in countries where government is a much bigger share of the national economy than it is here. For example, Denmark has the highest level of government as a share of the economy of any industrialized country that I’m aware of—I think it’s close to sixty percent. We’re down near thirty percent and we only tax ourselves at about eighteen percent, borrowing the rest. Denmark does not do that. So Danes pay something like three times or more the taxes we do, per capita. And boy, you talk to people from Denmark—they ain’t complaining. And they’re certainly not complaining about inequalities of income or wealth. And in fact they’re not complaining about anything, relatively speaking. When world happiness or contentment surveys are done, Denmark consistently tops out as the number one country in the world.

So my Mass Massage Mobilization or something like it, or infrastructure plus massage or whatever, doesn’t necessarily mean that Americans wouldn’t be happier; that if you taxed people heavily in order to subsidize this kind of grand project, that they wouldn’t be happier than they are now, even if they tried to spend a lot of money to prevent you from doing it (with campaign advertising and so forth because they didn’t think it was in their short-term interest). So I think it’s a huge problem, because it’s very hard to imagine—not impossible, but very hard to imagine—how you have a contented polity in a democratically run society in which some small number, or relatively small number, or even half of the people, have a real role in the economy of that society and half don’t. Or thirty percent do, and seventy percent don’t. So I’m suggesting that the fifty percent or the thirty percent—the minority, the well-off—share way more to get the other guys and gals into the game. Because I don’t think it’s just wealth that’s important; it’s also having a productive role in the society. That’s the reason for my little thought experiment with the Mass Massage Mobilization.

YJIA: Last question: how accurate are betting markets when it comes to predicting major international political or economic decisions? To what do you attribute their rate of success? 

Solman: They’re better than anything else. It’s a probabilistic universe, and nobody can really know the odds. So, when you’re trying to figure out what will happen in the future, you could cast dice, look at animal entrails, you could try to read tea leaves, you could get the village shaman in, or you could take a bunch of people and you’d say to them, “listen, your wealth matters to you, right? Yes? How about you take a little it of it and you make a prediction where you’ll get it back plus some if you’re right, and you’ll lose it if you’re wrong?” Well, that provides ample motivation for most people, I think. The motiva- tion will then impel them to learn about the subject and bring their most rational, as opposed to irrational, processes to bear on their analysis. And you pool all those people together . . . I can’t figure out a better way of trying to guess the un-guessable. That’s all a prediction market is. It’s better than a poll because it’s seen the polls! And it knows what’s happened since the poll was taken.

So polls look like they really work if you take enough of them and you average the results of all the polls, but I still think that the polls are systematically missing a little bit, and I think we saw that in the election actually. There were people like me who would never answer a poll—there’s some systematic bias there. There must be some bias in the prediction markets too: people who would never bet, so I’m not saying that prediction markets are a sure thing. There is no sure thing with regard to the future!