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Nobel Prize Winning Economist Professor Paul Romer on Hyperinflation & Protecting Science

Nobel Prize Winning Economist Professor Paul Romer on Hyperinflation & Protecting Science

Education / Science

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Paul Romer during Nobel press conference in Stockholm, December 2018. Source: Bengt Nyman from Vaxholm, Sweden – EM1B6039

RR: Rebellion Research

PR: Paul Romer

Paul Romer is an economist and policy entrepreneur and co-recipient of the 2018 Nobel Prize in Economics Sciences. He has spent his career at the intersection of economics, innovation, technology, and urbanization, working to speed up human progress. He is a University Professor at NYU, with an affiliation in both the School of Law and the College of Arts and Science.

Before coming to NYU, Paul taught at Stanford, and while there, started Aplia, an education technology company he later sold to Thomson Learning. He earned a Bachelor of Science in Mathematics and a Doctorate in Economics from the University of Chicago. 

RR: We have the Nobel Prize winning professor from NYU, Stanford, Chicago, Paul Romer, who is really a hero and an icon in the field of economics. To have him with us today is absolutely a life’s honor. Paul, thank you very much for being here.

PR: Yeah, it’s great to talk to you today. Sometimes people give that whole list: like University of Rochester, Chicago, Berkeley, Stanford, and NYU. And I always feel like when people give that introduction, it’s kind of like–come on guy, why can’t you hold the job? I mean, what do you have to keep leaving town every few years but done quite a bit?

RR: As chief economist of the World Bank, you’re one of the most respected minds in America and academically globally. Today, I’d love to talk to you about hyperinflation and protecting science. Let’s start with hyperinflation. What can we learn from history? Do you see it? Is it here in the United States? Will inflation top 10%? 

PR: It’s definitely not here, and I think the people who are worried about it are overestimating the risks. At least at the moment, we have central banks that know how to keep inflation under control. As inflation starts to pick up, they will do their job and slow things down.

This is the amazing legacy of the decisions that Paul Volker took in the 1980s. In the ’70s, many economists were seriously concerned that inflation might forever keep increasing and just spiral out of control; that a series of episodes of inflation going up, a slowdown during a recession but then going up even more after that. But Volcker just completely turned things around and showed that if a central bank wants to stop inflation, the central bank can do it. And in the wake of that discovery, I think we’re not going to see the kind of hyperinflation we saw during the 20s and 30s.

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Volcker in 2014 with Alan Greenspan and Ben Bernanke

RR: Interesting.  How do you feel about migration? Is New York going to stay in power? How much will Florida attract over the next few years with those two states?

PR: If I compare hyperinflation and migration, migration strikes me as a much more serious problem. It’s funny. The bank I used to have troubled people and I would tell them, “I don’t want to worry about the problem that we might have, but I want to worry about the problems we do have. Let’s work on those first.” We have a huge problem with potential migration around the world in the following sense: there are 750 million people who report, when asked, that they would like to leave and move to another country right now.

The world has no capacity to accommodate that kind of desire right now. If it happens in an uncontrolled way, we saw in Europe that modest migration flows, on the order of like a million people, could threaten the political stability of an entire nation. We have a kind of European democracy that survived the threats from fascism and communism, which might be destroyed by uncontrolled migration. It’s this kind of ticking time bomb, and we have no way to manage it. That’s really, I think, morally acceptable. All we’re trying to do is just force people to stay in conditions of real misery and desperation, and we should be trying harder to give them a chance to find someplace better to go.

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Zaatari in Jordan, currently the largest camp for Syrian refugees.

RR: How bad could it get from Europe?

PR: Well, I think if you look at what’s happened in Hungary, for example.You see an erosion of institutions of government as opposed to the further strengthening of those institutions, and you look at the influence of some of the parties on the right in other countries in Europe and the return of kind of violence right-wing extremists who were willing to resort to violence These are signs of a real erosion of a kind of a quality of life that’s built up over centuries.

RR: What are your thoughts on the Turkish lira falling maybe 80% in value over the last five years due to Erdogan’s awful policies? 

PR: Yeah, unfortunately with Turkey, this is kind of “deja vu” all over again. When I was saying, “we won’t have hyperinflation, we won’t have a depression of the kind we had during the 1930s,” that’s true in countries that have reasonably effective institutions. Turkey is still a country that doesn’t have strong enough institutions of government to manage the basics of macroeconomic stability. It is going through another kind of crisis and turmoil. You just hope cumulatively they’ll start to develop the capacity that other countries have to  manage a floating exchange rate and keep the economy growing at a stable rate.

RR: When you look at hyperinflation in countries like Turkey or Venezuela, do you feel that it is due to a degradation of the government agencies and a lack of trust in the government?

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PR: I mean, if the government can’t function and you don’t have people who can make the right decisions to do their jobs, you could indeed end up with hyperinflation.  This is my confidence about how things will play out in the West. It is a sign of my general confidence in the institutions of government, but we shouldn’t be complacent about this because you can destroy institutions of government.

RR: I’ve got to ask you about Russia and how do you feel about Putin, who is clearly a strong man in power? How has he been able to navigate Russia’s economy?

PR: Yeah, well, when people look back at the era of my life span, I think the historians will focus first on the successful transition from communism to sort of a more modern economy in China, and they’ll contrast it with the failure of transition or the much more unsuccessful transition in Russia.

RR: Do you think it was simply due to one man gaining power whereas one man did not gain power in China? Is there more to it?

National Congress of the Chinese Communist Party

PR: I don’t think so. If Putin were to have a heart attack and die, I think there’d still be these systemic weaknesses in Russia that would lead to another autocrat like Putin in charge or would lead to the takeover of the economy by a bunch of gangs and thugs. Competing gangs and thugs, and those autocrats are your two choices. I can see why the people of Russia would rather have an autocrat than a bunch of competing thugs about fighting leaves with each other, but what’s unfortunate is that they didn’t establish the basic institutions and rule of law and governance, and they didn’t establish a process for a gradual evolution of those institutions. This idea that The Big Bang would be the right way to make the transition that some of my colleagues recommended has really not worked well at all.

RR: When you look at it, Napoleon, for instance, was able to keep value because he made sure his government agencies were respected, despite being an authoritarian. Would you say he ruled without fear but more respect?

PR: Yeah, well, I guess the way I would judge this would be to ask, in a nation, can the system of governance attract some of the most talented people in that nation to help the government do its job? And if it can still attract the most talented people, it’ll have the human capital and the skill, and it’ll get the respect to do the kind of job a government has to do. But if you can’t, then the nation’s in for a hard road.

RR: That’s very well said. Let’s get to America’s migration. Do you see urban strengths kind of weakening? Do you see more of a shift to country suburban life? Where do you see the mix of country, suburban, urban over the next couple of years?

PR: Well, I’ve thought a lot about the emergence of new cities. I think of a city as something on a scale of, say, 10 million people. There are some people who still talk about creating new cities in the United States. I don’t know if there’s enough , unfulfilled demand for urban life to make it viable to start a new city in the United States. We see that prices for land and residential properties have generally gone up in the most successful cities, but we have lots of cities where they haven’t gone up. The dynamics, I think, that’s playing out is that just as an industry, the biggest cities have a substantial advantage compared to the medium-sized ones.

It’s a kind of a winner-take-all dynamic where the biggest cities are going to keep getting bigger. People say rural areas could move into some of the declining cities, but they can’t move into the most successful cities, and we haven’t figured out as a nation how to manage that whole ecosystem. 

We do have people in rural areas who really feel like they’re being left behind, and a lot of our political polarization right now is along the lines of the successful urban elite centers and the marginalized rural places where people are feeling left behind. But as I said, I don’t think just starting a brand-new city is necessarily going to mean it’s worth considering. I don’t think it’s necessarily the best strategy. And for the nation, I suspect if we could figure out how to do it with a light touch, then the best thing for the US would be to make sure we have a number of competing centers in the country.

Take, for example, housing prices in New York. If a young couple wants to start a family but did not complete college, it’s just almost impossible to move to New York and have a prospect of owning a house. But they can move to Houston, where they keep building new housing, where the price of housing is not high. A couple like that can actually get us started in Houston. It’s good that this country has both a New York and a Houston and other competing cities.

I would kind of try and aim to make sure there are enough successful cities that compete with each other, and that are trying hard to not become one of those declining cities where people are left behind. That would be my strategy for the United States. Relative to, say, Venezuela, where the government has just completely collapsed, I think we should be thinking about how can we create a city where 10, maybe a couple of 20 million Venezuelans could move to and just leave the country because they’re forcing them to stay and are trapping them in conditions where they can’t thrive? And I think the threat of losing many of your people is one of the most powerful ways to discipline a government which is misbehaving. I don’t know, it’s tough.

RR: Do you want to send out the military? 

PR: I know the answer to that one. NO. We do not want to occupy any place, but I think we could create these kinds of secure enclaves. 

RR: We don’t want another Apocalypse Now moment?

Apocalypse Now poster.jpg

PR: No, well, I mean, I just saw the movie within the last year. My wife said, ‘Paul, you cannot be a literate person if you haven’t seen Apocalypse Now.’ But I’m not emotionally connected with the military experience. I do think that military organizations play a very important role. But if you just do the math about the US efforts in the Middle East like Iraq and Iran, we were spending about $130,000 per square kilometer to try and stabilize these countries.

RR: George W Bush’s investment in the Iraq war was the worst investment in the last maybe in human time. 

Destroyed US Military M1A1 Main Battle Tank (MBT) sits along Route 1, in Iraq, April 2003
Destroyed US Military M1A1 Main Battle Tank (MBT) sits along Route 1, in Iraq, April 2003

PR: Yeah, and if you look at a place like New York City, we spend far more than $130,000 a year to secure a square kilometer. Instead of trying to spread our resources thinly, if we focus those resources on like 1/100 of that amount of area and just a few cities, a few places the size of Hong Kong or Singapore, New York City, those we could have kept secure with the kind of expenditure like New York, spends maybe 5 to 10 times on police each year than what we were spending in those countries.

If we made some secure cities, those could have succeeded. The military intervention strategy failed because we were spread too thinly. The other thing was that you can’t make a place secure unless you can run the police force. You don’t secure an area with an army. You need a police, and to run the police, you’ve got to have some system of government that works, you can’t have corrupt competing gangs. I wish we thought about creating security by establishing places that were like Hong Kong rather than by trying to go in and occupy the way we did in Iraq because, the Iraq strategy and the Afghanistan strategy, they just completely failed.

RR: I mean, that was essentially the ethos of the apocalypse. Now, that there was no strategy, and that the Americans were just kind of doing this clown parade.

PR: Yeah, yeah. And all I mean; you have got to recognize you’re dealing with people. It’s not like they’re cattle or machines. They have their own desires, they have their own wishes, they have their own beliefs, and you can’t force them to do something you want. What you can do though is you can offer them opportunities. If you create a place that’s kind of like a new Hong Kong and say, ‘look, if you want to come, raise a family, get your kids educated, have a job, this place, you can do it. We’re not going to force it on you. If you don’t want that, you don’t have to have it.’

However, if we recognize that people need to be able to make their own choices but then create options for them, I think we could do a better job of helping people who want something different, and we should have a much more potent tool for destabilizing a regime like Venezuela.

If you think about what really destroyed the legitimacy of the government in communist East Germany, where a government actually has to threaten to kill people to keep them from escaping, you’re beyond the point where you can pretend there’s any legitimacy there. I think we should just be making it clear that lots of people want to leave Venezuela, if they had a chance. We just need to create a place where they will go, and I think that ultimately topples the terrible regime that’s in place there.

John F. Kennedy visiting the Berlin Wall at Checkpoint Charlie, June 26, 1963
John F. Kennedy visiting the Berlin Wall at Checkpoint Charlie, June 26, 1963

RR:  Do you believe in investing in super cities?

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Northeast megaregion (megalopolis) at night. Imagery was collected by the Suomi NPP satellite in April and October 2012, courtesy of the NASA Earth Observatory/NOAA NGDC.

PR: Well, I think the basic unit is like if you’re going to start a new city, you should make sure you could get to 10 million people. I think that’s like the minimum viable kind of product in the city market. Urban areas that will grow to fifty, 100 million people. We don’t know for sure how those were gonna turn out.

Each time we get to a certain size, we say, ‘Oh, surely this is the biggest size.’ Like, ‘Oh, we go back in the street. You couldn’t possibly have a city of more than a million people or more than five million or more than 10.’ We might finally get to a point where we say, ‘Oh, it really wasn’t possible to make it work when you’re above, like 50 million.’

But who knows? Maybe the 50 million to 100 million places will turn out to be the most exciting, productive places to work. But I’m pretty sure that in the cities of a million people, they are not going to be competitive in that global market. Like, think of the most talented young people thinking about where to go get a job, they can go anywhere. They’re unlikely to go to a city of less than a million people when they’ve got these cities of 10 million or more they can move to.

RR: Affordable housing and strong police?

PR: Right, if they’re safe, right? If the housing is affordable, right, exactly. 

RR: Definitely. Let’s talk about protecting science. I know you’re very passionate about that.

PR: Yeah, the amazing thing about the progress that humans have made is that it’s the result of discovering facts. If we know what’s true, we can use that truth to do amazing things. We’re guided by the truth instead of by dogma. All kinds of opportunities open up to us. Science is a remarkable system for discovering the truth. It’s the only system humans have ever established for converging on agreement about, even agreement of any kind that doesn’t involve coercion. Everything else involved coercion. But because science is effective at establishing and convincing people of the truth, we’ve got billions of people all over the planet who converge on beliefs about what’s true. But it’s a social system, and it depends on certain kinds of behaviors and activities that are essential to make it work.

One of the things that is critical to science is the notion of a reputation.

I don’t just publish an anonymous paper. I put my name on a paper that if it turns out that if I report some data and fudge the data, I cheated, and people will find and know I was the one who did it. And then I will be effectively excommunicated. I will never be taken seriously as a scientist again. But we’ve got a whole generation of young people who’ve grown up thinking, ‘Oh, communication should be anonymous, and you should just look at what I write. You shouldn’t have to know who I am.’ And what they’re going to discover is that, without reputations, there were people trying to maintain a reputation for being trustworthy and reliable. We’re just going to have a world that’s a proliferation of fakes and deeper fakes, and we’re not going to be able to establish what’s truth anymore.

RR: Of course, Ray Croc said, McDonald’s great value was trustworthiness. People believed in the name of McDonald’s. If you don’t have trust, what do you have? There is much of a problem with anonymity, and it’s kind of spam.

PR: If there was a warehouse, and they’re just a single window where things could come in and out. You can go there and say, “Well, I want to get some food.” I say, “Sure, OK, but we’re the anonymous food provider.” Well, we’ll give you some food, but you don’t know who we are, and people would not go buy food from the anonymous food provider. And in the same way, I don’t see how these young people think that you can have the world of science or intellectual discourse without reputations and trust that’s built on people trying to protect their reputations.

RR:  I guess you’re referring to the vaccination situation that’s going on in the United States? 

PR: Well, that’s one, but I think it’s an issue that goes back further. The emergence of digital communication has just radically changed things, it’s much tougher to establish a reputation in the world of digital communication. I will give you an example. I’ve started to learn to code, and I think code will be one of the ways we communicate in science, just like math became the critical language for communication.

I have a GitHub site, and there’s a picture of me there. People can download code. It dawned on me at some point that anybody out there could get a picture of me, a create a GitHub account, and say, “This is Paul Romer NYC,” and pretend to be me. And other academics could unknowingly go download some malware thinking they’re getting software from me. I need a way to establish myself at GitHub or on my blog or on Twitter. I need a way to establish, “No, no, this is the place you can count on Paul Romer.”

RR: That’s a brilliant point. If I came across a Paul Romer GitHub account, I would assume it’s just a Paul Romer fan who wanted to put stuff up, and he could be from Ukraine for all I know. 

PR: Somebody sent me a Twitter account where someone was using my picture as the part of the profile for the Twitter. They weren’t trying to use my name for some reason, but randomly they had just taken my picture. And I realized we’re prone to just trust the image. It’s like a simulation of being face to face with a person, and we’ve just failed to take it on board how easy it’s going to be to fake things like pictures.

We need to figure out how to have digital communication, but where we have some assurance about who it is and where we’re dealing with it. It’s a little bit like what Twitter verified does, but we need to create a system where individuals are actually in control, that I don’t have to go ask Twitter for this. I can find a way to establish my reputation and put my digital signature on things. Another episode that made me realize how serious this is was when I got an email that pretended to be from Paul Romer. And I knew that wasn’t Paul Romer, but I started thinking, how does anybody else know whether that’s me or not? We need some new tools to facilitate knowing who you’re dealing with and protect against the impostors.

RR: That’s an absolutely great point.

PR: If I can just do a tiny bit of self-promotion. This is actually the thing I’m most engaged in right now. I’ve actually started a new nonprofit where part of our goal is to make it possible for anybody, I mean anybody, to have a mechanism for establishing that any digital artifact that they produced was actually produced by them. And we can have reputations in this world of digital communication like we used to have in the old world of analog communication.

RR: Thinking of reputations, my all-time science hero is probably Richard Feynman. Do you have a science hero that’s inspired you?

PR: Oh, that’s a good question. Well, Feynman is, he’s right up there at the top. I do quote him sometimes when I try to convey the spirit of science.

RR: My great uncle worked with him at the Manhattan Project, and he was an amazing individual. He loved his ability to make everything simple and practical.

PR: Yeah, I think Einstein was somebody who as a younger person I had great admiration for, and it inspired me a little bit to know that he had not been like a stellar student when he was first starting out. But I think Feynman actually did a better job of something that I’ve really come to believe is important, which is not enough to just discover a truth or an insight or a better way to think about something. You’ve got to figure out how to communicate it to others. Attention to just careful exposition, careful communication is undervalued, and we underinvest in it. But Feynman was somebody who did an extraordinary job of coming up with better ways to explain to others, “Here’s how to think about it,” including the kind of amazing device of the Feynman diagram for thinking about these complex questions.

RR: I saw the Feynman diagram book myself, but I would have to say that his O-Ring talk for the Challenger explosion might have been one of the coolest moments of the 20th century from a science perspective.

PR: I’ve never seen that, and it’s one of my favorites.

RR: I’ve watched it 100 times. Just marvelous.

Richard Feynman debunks NASA

PR: A related thing I do think about sometimes is who do I describe as my heroes? And there are some people in the world of science, but I like to remind people about, say, Paul Volcker who spent his whole life working for the US government, or Dwight Eisenhower.

These were individuals who made important decisions. We had a system where they had the ability to make a decision. They knew they would be held responsible if they made the wrong decision. But instead of hesitating, instead of setting up committees or having some legalistic process, these people who took responsibility, made crucial decisions, and decisions that turned out to be right, were pivotal in creating the world that we live in today. I wish more people appreciated the power that one can have if you’re a leader in these positions in the government, and not just think about becoming a leader in some tech startup.

RR: Was the rebuilding of Europe your favorite of Eisenhower’s decisions?

PR: Oh, I think that the story that’s the most interesting was the decision about when to launch the D-Day invasion. John Kennedy met Eisenhower at Kennedy’s inauguration and Kennedy made small talk and asked, ‘Well, what was the most important element in the success of the D-Day invasion?’ And without hesitating, Eisenhower said, ‘It was our meteorologists and better scientists who understood weather, who helped Eisenhower make this critical decision about whether to postpone or go ahead in times when the weather was bad.’ And I think it’s a great example for thinking about COVID.

I mean, Eisenhower did not ‘follow the science!’

He knew that he had to make the decision ultimately about whether to go ahead, but he listened to the scientists. He said, ‘Tell me everything, what’s your best guess, what’s your range of uncertainty?’

The scientists contributed in a very important way. They saw that the weather was really terrible, but it was likely to get somewhat better, and there were some real risks if they postponed and waited for the next opportunity. Eisenhower decided to go ahead. The Germans saw the same bad weather and didn’t realize it might get a little bit better, they assumed Americans wouldn’t launch the invasion and they were unprepared. There were people off on a training exercise. Some of the leaders weren’t at their posts. I always thought that the bad weather made it harder for the invasion to succeed. It may actually have made it easier because the Germans were much less prepared when we actually did the launch.

I really love this story because it kind of reminds us that there’s an important role for science, but there’s ultimately a different role for a leader who’s got to take all of the information and make a decision. And during COVID, I think we had too little leadership and too many scientists who thought that they should be in charge when that wasn’t really their job.

RR: Fantastic points! Such a wonderful conversation. I couldn’t be more thankful. All this was really just awesome.

PR: I guess if I’m trying to think about anything, what could I end up on? Imagine you’ll have some viewers who are young peopleand some who are old like me. Kind of doesn’t matter. I can’t change their minds. But they’re young people, and I hope I can encourage a few young people to think about the amazing career they can have in the domain of science, where they’re part of something that’s bigger than themselves, where they contribute to something but all possibly, our systems stay functional. The influence they could have if they become leaders in government as well.

Science and government are both ways to contribute to something that’s larger than ourselves, and I think the biggest risk for somebody in terms of having a successful career is narcissism and self-absorption. And the thing that leads to successful lives is to be part of something which is larger than yourself. And the military does this for some people, too. I hope young people will consider that as well, but don’t just think that becoming the leader of some startup is the only way to have a successful life.

RR: Of course, that’s well said. Making the world a better place is everyone’s responsibility.

PR: I wouldn’t quite phrase it that way because that’s almost become like a parody of what they say in Silicon Valley. The way I see it, those are part of something that’s bigger than you that you believe in that you’ll contribute to, but it will outlast you and it will give your life meaning.

RR: They feel that they don’t have the meaning in life and they want to pretend that they do have the meaning.

PR: Apps where they’re just trying to get rich and take over a market, and they try to imbue it with some meaning. One of the things that was sad at Stanford was I used to see these business people who come to Stanford after they made a bunch of money, and it was like they were saying, “Well, I made a bunch of money, but I don’t have any meaning in my life, I want to hang out with you academics because you guys seem to have something going on.” It just seemed like, “Passionate, why did you waste your whole life chasing all of this money? Didn’t you know in advance it was going to turn out this way?” But unfortunately, most people seem not to realize that.

RR: Follow the heart that’s important.

PR: And meaning. Think about what gives your life meaning because that’s more important than most people realize. 

RR: Meaning. I really love this. Paul, you’re really a fantastic mind, huge thank you.

PR: OK well, thank you very much. I enjoyed it. I’m going to go watch the Feynman video after this!

RR: Thank you very much, have a wonderful day, and stay safe.

PR: Take care.

Nobel Prize Winning Economist Professor Paul Romer on Hyperinflation & Protecting Science

Edited by Avhan Misra, Luxy Sun & Ruizhe Li

Paul Romer | NYU Wagner

Nobel Prize Winning Economist Professor Paul Romer on Hyperinflation & Protecting Science