Public Lecture at Fulbright University Vietnam
Dean Douglas Elmendorf
January 14, 2020

Thank you, Dr. Tu Anh, for that gracious and thoughtful introduction. I am honored to be visiting Fulbright University Vietnam and to have this opportunity to speak with all of you. Indeed, one of my great joys in serving as dean of Harvard Kennedy School is to meet and engage with people around the world. I am especially delighted to be here in Vietnam, where my colleagues and I will be visiting important sites here in Ho Chi Minh City, in Hanoi, and in Hue. We are excited to learn about Vietnam’s rich history and culture, and I am already struck by the beauty of your country and the warmth of our welcome. I am also delighted to see how Fulbright University Vietnam is flourishing.

Both the Fulbright University Vietnam’s School of Public Policy and Management and my institution, Harvard University’s John F. Kennedy School of Government, train policymakers and public leaders to face challenges. Today’s challenges are big ones. We are living in a time of significant economic, social, and political changes. These changes touch nearly every country in the world, and policymakers and public leaders need to respond to them in principled and effective ways.

Therefore, our schools, and other schools of public policy and government, play a critical role in the world today. They teach students to understand the important issues at stake both locally and globally, and they give students the tools to contribute in real and practical ways to their communities and nations, and ultimately to improve the quality of people’s lives. This work is so important, and it is fascinating and rewarding as well. So, I am encouraged to see people embarking on careers in public policy and leadership—including many people in the audience here this afternoon. Thank you for the public service you have already given in your lives and for all of the public service you will give in the future.

My focus in this lecture will be on the most important forces driving economic policy and outcomes across the globe. This is a large and complex topic, and I cannot do it justice in a single conversation. But I hope I can offer some ideas that will be helpful in your further thinking about these subjects. I will discuss five key forces. First, I will talk about the impact of demographics and productivity gains on the sustainable growth rate of output. Second, I will comment on the low interest rates we are observing in many countries. Third, I will address the causes and consequences of rising economic inequality and stagnant standards of living for many people. Fourth, I will talk about growing populism around the world. And, fifth, I will discuss nationalism, which is connected to populism but different from it.

Each of these forces is an important determinant of economic policy and outcomes in many countries in the world. But, of course, not every factor matters in the same way in every country or is important in every country. Because my own career before becoming dean of Harvard Kennedy School was focused on U.S. economic policy, many of my examples will draw on the U.S. experience. I hope to learn more about the economic and social factors that are especially important in Vietnam during my visit here.

Let me begin with the impact of demographics and productivity gains on the sustainable growth rate of output. I will start with demographics. Around the world, many countries have aging populations, partly because people are living longer than they used to and partly because birth rates are generally declining. These changes are marks of success in most countries. Increasing longevity often reflects better nutrition, education, and health care. Decreasing birth rates often reflect greater access to health care and family planning options, as well as growing confidence by parents that their children will survive to adulthood and less need by parents for children to assist in farming. To be sure, in some countries, decreasing birth rates are a sign of lack of confidence in the future, and in some cases, birth rates have fallen so low that populations are shrinking rather than growing. But in most cases, increasing longevity and declining birth rates are signs of economic success and modernization.

Nonetheless, population aging poses two significant challenges for policymakers. One challenge is that sustainable economic growth is lower when birth rates are lower, all else equal. In the United States, our labor force is now growing by only about one-half percent per year, after growing by one-and-a-half percent per year in the 1970s through the 1990s. The differences are that our baby boom generation is retiring now and the participation rate of women in the labor force has roughly plateaued after increasing rapidly in earlier decades. As a result, sustainable economic growth in our country has now fallen from about 3 percent to about 2 percent. The other challenge posed by these demographic changes is caring for a much larger number of older people relative to the number of workers. The population of Vietnam is aging faster than the population of other countries in this region. On current trends, the elderly population in Vietnam will double in the next 17 years. These people will need income support when they retire, greater amounts of health care than younger people, and so on.

Besides demographics, the other determinant of sustainable output growth is productivity gains. Economists say, correctly, that the key to long-term improvements in economic well-being is improvements in productivity. Unfortunately, productivity gains have not been very impressive in many countries in recent years—despite the apparently revolutionary nature of advances in digital technology and big data. Why productivity has not been improving more rapidly is not clear. In some countries that are on the technological frontier, the challenge may be that pushing out that frontier has become increasingly difficult and expensive—essentially, the more things we learn about the world the harder it is to learn the next thing. In some countries, the challenge is allocating capital investment efficiently. China, for example, has very high levels of investment, but these investments are not all paying significant returns. In other countries, insecure property rights and poor systems for resolving disputes are holding back new investments. And in other countries, a lack of public investment in education and health care and infrastructure is restraining productivity growth.

Whatever the cause, limited productivity gains restrain trend economic growth. Thus, between demographic factors and productivity, the growth of overall economic output in many countries is more moderate than we would hope. Boosting economic growth is a central challenge for policymakers.

A second force driving economic policy and outcomes in many countries is low interest rates, and especially low interest rates on safer assets such as government debt. In the United States, interest rates on government debt are now essentially the lowest they have been in my lifetime and are sharply lower than they were 20 years ago. But this is not just an American phenomenon. In many countries with large capital markets, interest rates are at or near the lowest levels they have been in decades, reflecting a gradual decline in rates over a long time.

The low level of interest rates shows that the demand for loanable funds to be used for investment is low relative to the supply of those funds by savers, and therefore the price that equilibrates demand and supply—the interest rate—is low. Why interest rates have declined so much over such a long period is a subject of ongoing research. Leading possibilities include a declining demand for investment funds (perhaps because of the changes in demographics and productivity that I just discussed, and perhaps because of the falling price of information technology), shifts in saving patterns (perhaps related to rising income inequality), and increasing focus on the safety and liquidity of government securities. Understanding movements in interest rates is a complex matter, and predicting future changes is hard. Still, the best recent research suggests that the key factors that have brought down interest rates will probably persist. And even if interest rates rise somewhat, they will likely remain low by historical standards.

Low interest rates have at least two crucial implications for economic policy and outcomes. One is that governments can finance more debt when rates are low than when they are high. Moreover, governments should finance more debt when rates are low, because the right uses of those borrowed funds can have substantial social benefits, and the social costs of that borrowing are reduced when interest rates are low. I should emphasize that some governments still face high costs when they borrow and should be very careful about the debt they incur. And even governments that can borrow at low costs will ultimately have to make changes in policy to keep their debt from increasing indefinitely. But for many countries, the urgency of reducing government budget deficits and restraining the growth of government debt is much less than many analysts have been saying. This change in circumstances is affecting policy debates in the United States and a number of countries in Europe, and it will lead to large amounts of government borrowing for the foreseeable future.

Another crucial implication of low interest rates is that central banks in many countries have much less room to cut rates when their economies fall into recession. This means that when the next national recessions occur, and certainly when the next global recession occurs and everyone is looking for someone to provide a boost to economic activity, central banks will be able to do less than they have done in past recessions. To be sure, central banks will compensate for some of the reduced room to maneuver on interest rates with quantitative easing (that is, purchases of assets on a large scale) and forward guidance (that is, statements about future interest rates). Still, on balance, central banks will be able to do less than we would like. Some of the gap will and should be filled by more expansionary fiscal policy, and I and other researchers are developing approaches to make that happen.

The third force driving economic policy and outcomes that I want to discuss is growing inequality and stagnant standards of living for many people. In many countries around the world, income is less equally distributed today than it was a few decades ago. In the United States, at least by some measures, income inequality is now the highest it has been in many decades. Moreover, the increase in income inequality has been accompanied in many countries by very slow growth in incomes for people in the middle and bottom of the income distribution. In the United States, the probability that someone will have a higher material standard of living than his or her parents—in other words, that there will be income gains across generations—has fallen markedly in recent decades. Thus, even people who are focused only on their own family’s economic circumstances and are not concerned about comparing themselves to other families, the economic system does not seem to be serving them very well. I should admit here that measuring income inequality is difficult, especially because in the upper tail of the income distribution, capital income is quite important, and it is particularly badly measured. Nonetheless, in my judgment, the best estimates show a substantial rise in income inequality and a stagnation of income for many.

Indeed, those patterns of income changes are mirrored in various social indicators. In the United States, we have a growing gap in life expectancy. Americans of my age in the top three quintiles of the income distribution are expected to live significantly longer than their parents, on average, while Americans of my age in the bottom two quintiles are expected to live no longer than their parents, on average. Moreover, mortality rates for less-educated middle-age Americans have increased recently, even though mortality rates in all countries tend to decline over time, except during wars, because of improvements in nutrition, sanitation, and health care. The rising mortality rates are linked to increases in what economists Anne Case and Angus Deaton have termed “deaths of despair” owing to alcohol, drugs, and suicide.

The causes of the increase in inequality and stagnation of living standards for many people seem to fall into three categories. One is technological progress. The ever-expanding use of digital technology—and soon the spread of artificial intelligence—will continue to benefit better educated people. In particular, people who can work effectively with computers and data are becoming increasingly valuable in the workforce relative to those who cannot. Another cause of the increase in inequality is globalization. As our world becomes more connected, people with distinctive talents can sell the products of their work in a large global market and will be very well rewarded. However, many people without distinctive talents who are producing basic goods and services end up competing with many, many other people and are not very well rewarded.

I want to emphasize here: Technological progress and globalization raise countries’ overall income; the problem is that they don’t raise everyone’s income. Thus, the challenge for policymakers is to widen the benefits of technological progress and globalization. That takes us to the last cause of inequality and stagnation, which is changes in social norms and institutions. In the United States, for example, we have allowed top salaries to balloon relative to salaries further down in companies, let the legal minimum wage fall behind other wages, and recently reduced tax rates on high-income people. In many European countries, by contrast, strong unions, higher tax rates, and more public services provided to everyone have limited the growth of inequality—despite those countries experiencing very similar pressures from technological change and globalization. But still, in European countries, some people and some areas have struggled much more than others.

The fourth force driving economic policy and outcomes that I want to discuss is growing populism around the world. Populism is defined in my dictionary as “a political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups.” Populism is always a political force, to at least some degree, because there are always people who are frustrated or angry about the ways their lives are affected by decisions made by other people who have greater influence in their societies. But populism has become an increasingly powerful political force in recent years because the number of people who are frustrated or angry with the course of events in their societies have increased substantially. Many people around the world think that their established public leaders have been making decisions too much in the interests of the elites and not enough in the interests of societies as a whole.

This growing populism has arisen in part because of the growing income inequality and stagnation of living standards for many people that I just discussed. Many people are right to feel that the economic system has not been serving them well. And as income inequality grows, not only do the material circumstances of people at different points in the income distribution diverge, but often so do their lives more generally; naturally, people will have less trust in other people with whom they never come into contact.

But it is not just economic conditions that have led to rising populism. Social changes have been as or more important than economic changes in many places. In the United States, for example, women, people of color, LGBTQ individuals, and some others who have been discriminated against and marginalized historically are now in somewhat stronger positions, on average, in American society. These changes are long overdue and far from complete, but they are real. As these changes have made the United States more fair, they have lowered some other people’s relative status, and some of those people want to stand up for themselves. Also in the United States, immigration over the past several decades has now made the share of the U.S. population born outside the country the highest in a century. The resulting increase in diversity of language, food, and custom is exciting for many Americans, but it is disorienting and disconcerting to others, who fear the loss of the culture and lifestyle with which they are familiar.

These sorts of social changes are not unique to the United States, of course. As millions of refugees from the Syrian civil war have fled their country in desperation and sought new lives in European countries, their arrival has been disconcerting for many Europeans and caused social conflict. And in Southeast Asia, Rohingya refugees and others have migrated in large numbers.

Growing populism has manifested itself in different ways in different places. In democratic countries, people have thrown their established political leaders and political parties out of power and replaced them with previous outsiders. People have also overturned some of the policies that their previous leaders had supported. Obvious examples include the election of President Donald Trump in the United States and the vote for Brexit in the United Kingdom. In countries without democratic elections, or where the winners of democratic elections are perceived to have limited power, people have been more likely to protest in the street. According to the Economist magazine, there are more mass protests and anti-government demonstrations around the world right now than at any point in decades.

The growth of populism has important consequences for economic policy and outcomes. One consequence is greater attention to the distributional impacts of alternative policies. Rather than focusing on raising overall income, policymakers will focus increasingly on raising incomes for lower- and middle-income people in their countries. In some cases, that will mean pulling back from international trade; in other cases, it will mean combining trade with other policies to protect people who might otherwise lose out. Moreover, the effects of technological progress on jobs and communities will receive increasing focus in determining regulatory policies and tax and subsidy policies for businesses. In addition, the populist reaction to social changes will lead more countries to adopt more restrictive immigration policies.

That brings me to the fifth and final key force driving economic policy and outcomes around the world, and that is growing nationalism. Nationalism is connected to populism but different from it. While populism is based on a distinction between so-called average people and elites, nationalism is based on the distinction between people in one country and people in the rest of the world. Like populism, nationalism is a force that is always present to some degree. But, like populism, nationalism has become increasingly powerful in recent years.

The reasons for the rise of nationalism are similar to the reasons for the rise of populism. Many people see economic globalization as a source of trouble rather than gain, and that leads them to distrust international trade. Many people see immigration as a source of trouble rather than gain, and that leads them to distrust more-open borders. In many countries, moreover, the elite establishment supports international trade and more-open borders—and in this way and others, that elite establishment sometimes seems to have more in common with the elite establishment in other countries than with the rest of the people in its own country. So, economic and social populism tends to foster nationalism, and nationalism in turn reinforces populism.

Therefore, leaders can gain populist credibility by talking about the interests of their country in opposition to the interests of other countries. President Trump’s use of the slogans “America First” and “Make America Great Again” is an example, as is President Xi Jinping’s campaign to strengthen the role of China in the world. And nationalism, like populism, drives the rhetoric of right-wing parties in many countries around the globe.

The growth of nationalism has significant consequences for economic policy and outcomes. Countries are tending to become less outward-looking and more inward-focused in both the economic and political realm, with less support for alliances with other countries and for international trade. The trade dispute between the United States and China is one important example. President Trump’s particular focus on the trade balance is widely viewed by experts as a mistake, but the broader concern that China’s economic policies have become increasingly adverse to interests of the United States is widely shared. Debates about intellectual property rights and other aspects of economic policy will remain contentious for years to come. Of course, there are also ways in which China and the United States can and should be allies. Managing the combination of ally issues and adversarial issues in the U.S.-China relationship will be a central challenge for our leaders in the decades ahead.

Let me sum up. Economic, social, and political changes are buffeting many countries around the world today. Each country is experiencing its own particular combination of changes, with its own causes and effects. But I think that five forces are relevant in most countries and are driving economic policy and outcomes around the world: demographics and productivity affecting sustainable economic growth; low interest rates; rising inequality and stagnation of living standards for many people; populism, and nationalism. I hope my discussion of these forces will prove useful for your own thinking about economic trends and prospects, and about the challenges faced by policymakers and public leaders.

One important subject that I have not mentioned yet is climate change. I do not think that climate change is one of the key forces affecting economic and policy and outcomes in the world today, but it will become one soon. It will become a key force in a positive sense, I expect, because more citizens will demand action to slow climate change, and more policymakers will respond to those demands. Unfortunately, it will also become a key force in a negative sense, because changes in the weather and oceans that we can no longer prevent will affect how and where we practice agriculture, how and where we build our cities, and how and where we live more generally. Thus, climate change is adding to the list of public challenges we face.

But I am very optimistic about the future. In particular, for those of you who are students of economics and public policy, I am delighted that you are choosing to dedicate your careers to these important issues and to public service. Good economic policy has the potential to increase economic opportunity, raise living standards, and improve people’s lives in so many ways. I participated in the process of policymaking and observed up close the results of good and bad policymaking during my 20 years in Washington, D.C. As I worked on economic policy for the U.S. national government, I had the pleasure and privilege to work with an incredible array of public servants—people whose outstanding skills and deep commitment were making a tremendous difference in the lives of their fellow citizens. Since becoming dean of Harvard Kennedy School, I have had a different connection to talented people who choose to go into government—participating in their training and education. Those talented people include students from Vietnam who attend the Kennedy School and then return to serve their country. And here at Fulbright University Vietnam, I know that many of you are training to deal with public challenges here. The passion and skills that students like you will bring to your careers and lives give me great hope for the future of governance. I am truly heartened to see a new generation of public leaders from all over the world answer a call to serve.

It has been a great honor and pleasure to speaking with you here today. Thank you.