We edited this book last year for the Center for Economic Policy Research, a European research group, the economic consequence of the second Trump administration. So, it's a very dense document. We have more than 50 specialists. And there was some discussion about how to do outreach, how to connect this material with broader audiences. The goal of the podcast is to focus on demystifying relatively complex and totally fascinating policy issues, particularly around economics and finance. That's what we do in the classroom, Gary and I, multiple classrooms, particularly one course on exactly these kinds of topics. And that's what we're trying to bring to the podcast, and so far at least we've been very happy, and the listeners we've managed to attract so far have also given us some good feedback.
How do you define power and consequences?
Power is the power of ideas, the power in politics, economic power, technological power. We look at history to see what lessons can be drawn for today. You know, every law was written by humans, and those laws written by humans were in a context of a certain policy debate at that time, and generally some economic debate at that time, and in a technological context. So we do a lot of that on the podcast. As for consequences, it's what does it mean to our viewers. So we look at today and yesterday to see what does this mean for you, the listener, for tomorrow. How do you invest around it? How do you think about your economic well-being, your families or your businesses? And what are the consequences for tomorrow's power centers as well?
I have to say, John, we thought of a lot of different potential titles. Our students gave us terrific input. There's I think four and a half million podcasts out there, so most of the good titles are taken already. And then Gary said, "How about Power and Consequences?" And for me, that kind of clicked because a lot of times what we talk about and what interests our students is who has power, what does power mean, what do you do if you have power? But then they're really interested and we're really interested in what are the consequences, who does that impact. Episodes we've done so far include monetary policy, economic effects of the US-Iran conflict, is Greenland next—that's what we're on this week. Next week is prediction markets, and the week after is private credit under pressure. So, I think that title, Gary, thank you for coming up with it, lets us cover a really wide range of topics that frankly interest us.
At the core of Simon's research over decades—I mean, he researches so many things. He's one of these multi-talented individuals. But that core research with Daron Acemoglu and Jim Robinson that was really recognized properly with this Nobel Prize is about institutions and the rule of law, both political institutions and economic institutions, and how they can be tilted towards one group of the public rather than another group. It could be the elite or it could be the broad public. And every policy debate that we bring into the classroom for our students, we remind them that policy choices affect individuals, but they don't affect individuals uniformly. They tend to have some ebb and flow or push. And so that also appealed to me, that that's also the power and then the consequences of who are the winners, who are the losers in economic terms. Look at what are the economic rents, what's being extracted possibly from the system.
And this, of course, is a matter of choice in these policy debates. Do you create something where one set of parties can extract rents or excess profits, or do you do something that creates public goods? In capital markets, we think of that around transparency, market integrity, access, competition in a market, because of course, in any policy debate, there are winners and losers.
Do you plan on bringing on guests?
I would hope so because also we'll broaden out the discussion, and we do that in the classroom as well from time to time. Many classes are just the Gary and Simon show, or if you wish, the Simon and Gary show, but when we have those guest speakers, it's just marvelous. We tend to like to set up the conversation with our students, and I think we'll be tempted to do that here as well. But if we've dove into immigration, do we have an immigration expert to come in at some point if we dive into a topic and then bring somebody later?
I think it's the combination, Gary, that works well in the classroom. So we make sure the students are really well informed and well briefed. And Gary, as you may know, John, is really an intense preparer for everything. So he gets me prepared and the students really prepared, and we often have a discussion chaired by just the two of us for a whole 90 minutes, and then a follow-up discussion where we bring one of the world's leading experts on this issue, for example immigration or monetary policy. And then the back and forth with the student, which is moderated by us and involves us, that's much more intense and much more enlightening, I think, for everyone. And I tell the students that my main objective in all of these discussions is to have the guest stagger out of the room afterwards saying, "Whoa, these MIT people are pretty intense." That's what I'm looking for, as well as a big exchange of ideas and substance.
What are the key takeaways from the immigration episode?
We, the United States, have benefited tremendously based upon our immigrant heritage. Other than Native Americans who were here when Europeans first came, the vast majority of Americans are descendants of immigrants, and we've greatly benefited. But the other lesson is we've oscillated. We had that whole 19th century that was pretty open. We started to close to Asians and particularly Chinese in the 1870s, but then we really shut the border down quite a bit in the 1920s. My personal life story involves that my grandparents came, but their siblings were shut out and a number of them lost their lives in the Holocaust. And then we opened up again in the 1960s, and we seem to oscillate, and here we are in the 2020s narrowing that window of opportunity. Now, along the way, we have some other messages: it's going to have consequences in this country now by lowering economic growth probably by half a percent to seven-tenths of a percent. It's just math. We're going to have less people coming in to fill the labor pool, and it affects a lot of sectors, not just agricultural sectors, but healthcare and service sectors, and construction and many others.
In the rather epic preparation for that classroom discussion and episode, Gary found an article from the New York Times in 1924 written by Senator Reed, who was the sponsor of the immigration legislation that was adopted in that year. And in this article, Senator Reed laid out why he felt immigration needed to be restricted. The language is not the modern language; there's much more open discussion of race than you would hear today. But a lot of the fears being expressed are remarkably modern: fears about where are the jobs going to come from, fears about the rest of the world being disrupted and dangerous and therefore people flooding excessively quickly to the United States. To Gary's point, there's this question of: is there a cycle? Are we coming back around because of what's happened in the labor market, because of what's happened to inequality, because a lot of people have got pushed down to the lower end of the labor market? There's definitely that pressure. But at the same time, as Gary said, we've become an economy that's about technology, it's about innovation, it's about building and expanding. And in that economy, immigrants—like myself, I've been here for 40 years, I'm very proud to have become a US citizen—immigrants have been an important part of the story. So, which is going to prevail now? This tendency to say, "We're not really sure if we can take in so many new people," or allowing new people to come, providing them with opportunity and using that dynamic to help the United States become more prosperous and more powerful?
What's wonderful is that I was born here, I'm second generation, but Simon is an immigrant, and he chose to come here and contribute his energy, his intellect, his insatiable curiosity to this country. He becomes a citizen and, yes, ends up winning the Nobel Prize in economics as an American. So, you know, we bring that into an episode like that. In an episode that we will just be releasing in the next week or so about private credit, we like looking at history and saying, "Well, where are their lessons?" So is there a lesson, for instance, from the junk bond era of the 1980s and Barbarians at the Gate and all the leveraged buyouts and so forth, and that came a-thunder in 1990 with multiple things, but the collapse of Drexel Burnham, and yes, we had the savings and loans crisis, and yes, we had the 1990-91 recession. And, you know, I guess a consequence of that was that Bill Clinton won the presidency in '92, and I'm on this show with you. So we like to look at those cycles in each of our podcasts.
How do you see regulatory frameworks holding up under stress?
Simon and I are looking in this program and podcast much more broadly than just the financial markets, but the financial markets are an important part of the story. One, it's how we allocate economic resources. We price and allocate both money and risk through our capital markets. Two, we in the US really have the deepest, most liquid, and I would say the leading capital markets—almost half of the world's capital markets and equity markets are here—and for a reason. It's because we have laid the groundwork with great institutions: an independent Federal Reserve—I stress the word independent from political ebb and flow—a very solid and, yes, for 90 years independent Securities and Exchange Commission, and CFTC and others. There's always an ebb and flow. Elections have consequences; they should. And there's an ebb and flow between Democrat presidents and Republican presidents that tend to be a little bit more leaning into the creation of public goods through regulation, and on the Republican side a bit of loosening of that and trying to loosen that up for businesses and entrepreneurs.
But I think something more is happening during this administration. I think that there's really been a challenge to two things. One is the independence of many of those regulatory agencies. And secondly, I'd say we've seen backing away from the institutions that Simon studied so much about the rule of law, and that when the Department of Justice or the Federal Housing Finance Agency, the FHFA, or other really important agencies of the US government, the Federal Communications Commission, are suggesting that if a company—put aside individuals for a minute—that does not do something aligned with this administration, that they'll be investigated or that they'll have their license removed, like the Federal Communications Commission has talked about, that undermines not just democracy, but it undermines the rule of law and undermines economic opportunity. I think the system works so much better, and economists beyond Daron and Simon and Jim, economists uniformly agree on the importance of the rule of law for economic opportunity.
Are there areas where consequences have not yet caught up with power?
Whenever technology changes, it's pretty common that regulation falls behind. Perhaps some of that is normal and even not such a bad thing because we don't know exactly what AI—will it turn into a bust? I think crypto has got a lot of issues around regulation. I'm just speaking for myself here, not speaking for Gary, but I have many, many, many concerns. And I think systemic risk, John, is something that was quite salient on everybody's minds in 2009 and 2010. I don't find it to be quite as clear in the language used by the Federal Reserve and other officials today, and that's a worry, for example, around what may or may not happen to private credit.
So critical to economic well-being and fairness and systemic risk is market integrity. And now let's look at what's happening in prediction markets. How do you protect the integrity of the underlying market? And John, I'll do a shout out: you wrote an excellent piece on prediction markets. You've written multiple pieces on it. But how do you protect the integrity of elections? How do you protect the integrity—if you're going to go in, agree or disagree, but if you're going to go into Iran or Venezuela to take out the leader and seek regime change, that somebody might be betting on those markets and they might be in receipt of material non-public information when they're trading on Polymarket or Kalshi. So market integrity really does matter, and it could even undermine the broader economy.
