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James Pethokoukis, AEI: “We’re Not Just Victims of Fate and Macroeconomic Circumstances”

James Pethokoukis is one of the smartest economic analysts we’ve ever come across. And it so happens that he wrote a book on a topic of great interest to us: the slowdown in American dynamism and in breakthrough innovation, and how to reverse it. The book is titled The Conservative Futurist: How to Create the Sci-Fi World We Were Promised, and we highly recommend it.

We recently caught up with Pethokoukis to discuss his book. The interview was conducted over videoconference and lightly edited for clarity.

PolicySphere: Please tell us about the book.

James Pethokoukis: I wanted it to be a book of optimism, a book that says: “This isn’t the best possible realistic reality we could be living in–and our decisions matter. Our decisions played an important role in creating the world of 2024, and our decisions can play an important role in creating a better world five years from now, ten years from now. We’re not just victims of fate and macroeconomic circumstances and macro-atmospheric circumstances.” And obviously, I work at a think tank, so it would be strange if I did not think our decisions as represented by policy mattered. That’s my starting point.

PolicySphere: The basic idea of the book is that you accept the theory of what’s been called the Great Stagnation by Tyler Cowen and Peter Thiel, what Ross Douthat called decadence in his eponymous book. You agree that we fell off the wagon some time in the ‘60s or ‘70s, that technological innovation and productivity have been stagnating since that time. So, let’s start with the two most obvious questions. First: what went wrong? Second: how do we fix it?

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James Pethokoukis: Yes. What some people call the Great Stagnation, in my book, I call the Great Downshift, as an echo of the Great Depression. For all my earlier monologue about how decisions matter, there were, I think, macro circumstances that cut across all rich countries that played a role in this Great Downshift. Essentially, at some point, we squeezed all the big gains out of the big inventions of the Industrial Revolution. At that point, climbing up the tree of knowledge becomes harder and we need more people doing it, and they need more resources. The debate on what caused the Great Depression is I think settled, but what caused the Great Downshift is still open for debate. You can look at all sorts of causes. For example, the fact that we had a World War II that totally discombobulated all of Europe and all the science and research that was coming out of that. You can come up with a lot of reasons. I try to address them. 

But as I said, I think our decisions played a role. I think the fact that the United States quit funding science the way we used to, and the fact that we tried to regulate the economy as if our regulations had no material impact on innovation and progress and growth, I think that was a factor. 

Let’s say you’re really into renewable energy and wind turbines. It’s hard to build wind turbines offshore in this country. It’s also hard to build the factory to make the wind turbines. So this is not a 1970s story. It’s a May 2024 story.

PolicySphere: Yeah. And it’s hard to build offshore wind turbines because a lot of very liberal, very progressive, very environmentalist rich people own a lot of beachfront houses, and they don’t want to look out the window and see the wind turbines, which is a delicious irony. 

James Pethokoukis: “Citizen Voice” is the fancy phrase for that, I think.

PolicySphere: We want to get into the regulation part of what you just said, because that’s a big part of your argument, and it’s very interesting. But we want to pick up on something else you brought up, which is: we stopped funding science the way we used to. Can you unpack that a little bit?

James Pethokoukis: Yeah. I would think that one policy that should be able to get broad support on the left and right is that one thing governments should do is fund science. You can get into a debate about whether it should just be theoretical science. Let’s say someone has a new geothermal project, and they need money to demonstrate it, or something like that. Is there a role for the government there? We can debate that. And then on the other side of the spectrum, we can ask: should we give money to companies to build chip factories? That’s sort of on the spectrum. Then I suppose further along on the spectrum: should companies be nationalized or something? So there’s a broad spectrum of opinion out there. But I think when you’re talking of the more lightly applied basic research, I think we should agree that that’s something the government can do. I would have liked to have seen the levels of government funding that we saw in the 60s, which was multiples of what we see today. I think there’s reason to think that we would be further ahead than we are today if we had done that. And even though people do talk about that issue occasionally in Washington, it still seems very difficult to dramatically increase that funding, unfortunately.

PolicySphere: Let’s unpack this a little bit more. You’re saying that science funding is lower now than it was in the 60s.

James Pethokoukis: As a share of the economy?

PolicySphere: Yeah.

James Pethokoukis: That’s correct.

PolicySphere: We did not know that, and we suspect many of our subscribers, like us, would have imagined that government science spending as a share of GDP had ballooned since the 1960s. That’s fascinating. Nevertheless, let’s play Devil’s advocate: first of all, if someone were to simply look around the campus of any top American research university, they would hardly get the impression that these are people who have no budget; the amounts spent as a percentage of GDP may have gone down, but absolute amounts are still very large. For example, science spending in the US dwarfs what’s spent in Europe; and you could argue Europe is behind the US in science, and on average, it probably is, but it’s not that far behind. Also, if one were to look at all of the things that are broken in academia, like politics, the peer review process, the replication crisis, and so on, it really doesn’t seem like the total amount of money is the limiting factor. It feels like the problem is more very large amounts of money badly spent. Maybe this is completely wrong–you’re the one who wrote the book. Convince us.

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James Pethokoukis: I don’t think you are completely wrong. I think the efficiency of that spending is important. And this is an area of policy research that has been getting a lot more attention in the last few years, if you think about problems like peer review or just the difficulty of getting unconventional or audacious projects funded. There’s a lot of inherent caution and risk aversion in the scientific world. And I would certainly want to see that addressed, and to see more research on what reforms are needed, but I think we’re still in the early days of that. There’s more research to be done before I would say: “Hey, let’s just start shoveling more money toward universities,” or anywhere else, for that matter. I think that’s a super important point. That said, there’s good research to show that had we followed Project Apollo with, I don’t know, Project Nuclear Fusion or Project Something Else, you would have gotten better personnel. You would get more people going into science, if there was a certainty that money will be spent. One of the the foundational ideas of that section of the book is that accomplishing big things and big ideas is going to cost more and require more research, researchers and investment dollars than in the past than you would expect. 

And listen, this isn’t economic research, but I love the TV show For All Mankind, which plays out this scenario. It’s by the creator of Battlestar Galactica. It’s about a world where the space race never ended, we kept racing with the Soviets, and we kept spending money. And we had nuclear fusion by like 1986. And, I mean, that’s the future I would like to live in.

PolicySphere: Amen to that.

James Pethokoukis: It’s not crazy to think that we could have had that scenario.

PolicySphere: Yes, but the question is: is the difference between that future and where we ended up really just, say, 20% additional funding to the NSF?

James Pethokoukis: More.

PolicySphere: Or even 30, or 50%. 

James Pethokoukis: More like 200%.

PolicySphere: Fair enough.

James Pethokoukis: That’s my argument. Do you recall how last year, for about ten days, we thought that Korean researchers had created room temperature semiconductors-

PolicySphere: Which would have been completely transformational technology.

James Pethokoukis: Yes. And so that brief moment of excitement, I think, shows the power of what just one fundamental breakthrough could create. So I think the upside, whether it’s from superconductors, or AI, or CRISPR or something else, from just one groundbreaking technology, is just tremendous. And so it’s worth this level of spending, even if there’s some waste, if we get just one of these breakthroughs and it translates into faster economic growth, which is what everybody expected in the ‘60s and into in the late ‘90s. That would be a more prosperous and healthier world. Not a utopia. I’m not saying that all human suffering would be gone, that no tears would ever be shed, and we’d all get along. But I’ll take my chances with that world.

PolicySphere: Let’s move on to the regulation aspect of your argument. There’s a standard free market/libertarian/conservative argument against regulation, the basic Hayekian knowledge problem. Individual actors know better than centralized regulators, and so, all else equal, if you reduce regulation, you have more creativity, more innovation, and so on. At a general level, most sensible people agree with that, we agree with that and we assume most of our subscribers agree with that. But proponents of regulation, at least the smart ones, also say they agree with that idea at a high level; but, they also say, in this or that specific case, there is a collective action problem, or an information problem, or a safety issue, or some other good that means that in a particular case there should be regulation. And sometimes they’re right! But, of course, sometimes they’re wrong. So we find specifics more interesting than the abstract case for deregulation. Which are the big industries or the big technologies or the big issues, where you can point to specific rules that make obviously good things illegal? The most obvious one to us would be nuclear power. Maybe that’s also your pick. But what would be, let’s say, your top three things that are clearly overregulated and where we should clearly deregulate?

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James Pethokoukis: What makes this an easy answer is that we’re running a sort of real-time experiment on this. Currently, we have seemingly unlimited funding from the government to build things in this country. And we’re seeing what happens when you have massive funding running against the existing regulatory regime. And what we have found out is, well: let’s say we are able to build those nuclear reactors–good luck getting that power out of those reactors to anywhere else in the country, because it is really, really hard to build something boring like a transmission line. You cannot build those quickly. So that’s that. And so my friends on the left have found out that, oh, you can’t try to build a transmission line. The problems with building high speed rail at this point are extremely well documented. According to the Obama administration, to meet their clean energy goals, we’re going to need about 25 new factories that can build wind turbines. We currently have one, and at the current pace, we are not going to have 25. More broadly, if you have a country where it’s really hard to innovate outside the internet or cyberspace, that will direct resources and cognitive firepower into different areas. If we had prevented that, would it have produced superconductors in 1982? Would the nuclear fusion startups that were currently seeing, would we have seen them 20 years ago? Would the advanced geothermal startups we are seeing have been created 20 years ago? Of course, no one can say for sure.

But a big area is certainly energy. And it was not even clear to me as I was writing the book just what an absolute constraint energy is. And it’s been made very clear even to someone not-so-smart like me, that when people who, let’s say they’re against AI, they’ll say: “Oh, look, maybe you all are right, that it will create miracle cures and brand new materials, but it just uses too much power. The data centers suck up too much power. And that’s bad for the environment, so you can’t have AI.” Which is why a lot of these companies are trying to figure out building microreactors or what have you. So energy is a massive constraint. 

But I’ll also mention regulations such as the National Environmental Policy Act which requires endless environmental reviews and really gives a lot of weight to the “Citizen Voice” issues you mentioned earlier. There were some efforts to reform that even by the Biden Administration, they also want to extend and broaden that to outer space, to apply the same sort of environmental regulatory regime to space. So that is still our world today.

PolicySphere: Great answers. Can we look at this set of issues from the perspective of the intramural debates within the right? That is to say, there’s a sort of traditional conservative or libertarian answer, which says it’s mostly a story about regulation and unleashing market forces. We have talked about that, and there is clearly work to be done there. But there is a new answer on the right that is more nationalist, and comes with ideas like tariffs and trade wars and industrial policy. And this set of issues can be deeply offensive to some of the more libertarian-leaning voices on the right. So what is your take? 

James Pethokoukis: I think we are at a very interesting period. One thought that some people might call nationalistic or even jingoistic is that, you know, we seem to be in a global competition with China, a country which, at best, you could charitably call authoritarian, I would say totalitarian. And we do not want that country to be the leading economic global power in the 21st century. So shouldn’t that have an impact on what we do? And I think it absolutely should have an impact on what we do. 

And I think we are getting there. Congress just released this big report on how to think about AI to advise its committees. When that report began getting formed, they brought in a lot of technologists and economists to speak to Congress, and clearly, concerns about existential threats were very front of mind. That was during the calls for a so-called AI pause. But over time, the argument was made: what are you truly more worried about as a threat? Are you worried about the Terminator or are you worried about China? Because that is the actual, non-science fictional threat, right? And that argument has carried weight, as I hoped it would, and as I thought it would. So that issue is definitely a tailwind for suggesting that we can make changes. 

Another example is the semiconductor issue. It’s the government spending money to try to bring chip making back to the US. If I was selling that, I would talk a lot about jobs. But if I’m being honest, more important is that I would not be comfortable if China in 2027 tried to invade Taiwan and 90% of our advanced chips are manufactured in Taiwan. I don’t think anybody would be comfortable with that. And I think the fact that not only are we subsidizing US chip manufacturers like Intel, which may or may not work because they’ve had a lot of problems, but also other countries to build stuff in the United States is a kind of not-crazy middle path. As long as we understand what the goal is. The goal is to produce advanced chips in a place that is invulnerable to Chinese invasion. Right? The goal isn’t to create union jobs in Ohio. Or to create, let’s say, great day care centers near the chip making factory. So as long as you keep the main thing the main thing, I think that’s very interesting policy-making.

So, narrowly, tools like protectionism and industrial policy can be useful. Am I worried about, you know, imports from France? No. I am not worried about imports from countries that aren’t a geopolitical threat. Perhaps some people would like to be. I think there’s a difference between friendly countries and a rival like China, and I think that matters. 

Let’s take a hypothetical: what would be our policy toward China if the dreams of the early 2000s had come true and it was on its way to becoming a liberal democracy? If we have no interest in Taiwan and they let Hong Kong be Hong Kong? Would I be worried and would I be advocating these tariffs? No. Because then China 2024 is Japan 1984. But I think the fact that China is what China is makes a difference.

PolicySphere: We saved this question for last, because it’s a much broader question with less clear answers–but always fun to talk about: the role of culture versus policy and economics. As you know, another school of thought on these kinds of issues is, the reason why we’ve had this downshift and the reason why it’s hard to get out of it is fundamentally cultural. We decided that consequence-free sex was the most important thing in the world, we decided to have fewer kids, we decided to have less stable families, and so on, and that has a corrosive effect on society, which has made us less forward-looking, less ambitious, less long-term-oriented. Do you think there’s merit to that? And if yes, then, what can we do to get out of this cultural dead-end? 

James Pethokoukis: You know, one of the things that led me to write the book was a study that came from a Yale economist named Ray Fair, in which he looked at two things. He looked at how much the United States was spending on infrastructure and the state of our finances. He noticed that right around 1970 we started seeing a decline in infrastructure spending. And we started to see budget deficits emerge. And our finances began to deteriorate slowly. And from those sort-of boring statistics, he said that it seemed to him that a society that was future oriented would not let those two things happen. And so he asked, why did we start seeing it around 1970? And he went through a laundry list of everything you could think of, because obviously a lot happened in the ‘60s. Everything from women’s liberation, the gay rights movement, Vietnam, the environmental movement. He’s like, what caused that? The decline in future-orientation. And he’s like, I don’t know. And I’m not sure. It’s something we could absolutely figure out. I mean, I try in the book to offer some theories. Clearly I think it matters.

It matters how people think about the future, whether they think about the future at all, whether they think it can be a good thing based on our decisions, or whether they think it’s out of their control. Look at the fact that we had this new technology called generative AI: there were about a week’s worth of stories about how cool it is, and you can make it do a rap song in the style of Winston Churchill and do these cool images; and after a week, the dystopian themes began creeping in, about job loss and robots killing us. That is a cultural issue. 

Let me put it this way. The sort of go-go capitalist dynamic stuff which I write about has downsides. Right? It has downsides. Companies rise and fall, businesses rise and fall, families are disrupted. If you lose your job because the company you work for fell behind because of some new technology, people have to think it’s kind of worth it. People have to be able to think: “Okay, I lost my job, but I can get a better one.” Or maybe: “I’m 55 or 60 years old and I’m probably not going to get a better job. But you know what? Ultimately it will be great for my kids. They’ll live in a world of greater prosperity. And if I get sickle cell anemia, now we have a cure.” People have to think it’s worth it. And if our image of the future right now is: my kids will be no better off financially. We live in a more dangerous world. And maybe the climate will be more volatile–pick whatever you want. I think it becomes harder to make the case that the disruption is worth it. And that comes from our culture and our popular culture. That’s a big part of the book. And I think it absolutely matters. 

PolicySphere: And so what’s the solution, if there is one?

James Pethokoukis: Well, listen what you do is you knock down that top marginal tax rate, you got to get that good and low. 

PolicySphere: (Laughs.)

James Pethokoukis: (Laughs.) Though I do have some ideas. In the book, I mention a conservative futurist, Herman Kahn, who was a nuclear war theorist in the ‘60s, and became a very go-go, techno-capitalist, futurist, optimistic guy. And he said: when it comes down to it, if we want a better future, we have to make fewer bad decisions or no catastrophically dumb decisions–and we need a bit of luck. And if suddenly we get an AI-driven productivity boom and the economy accelerates like in the late ‘90s, that goes a long way toward making us worry less about inequality, right? So hopefully we’ll get lucky and we won’t do anything stupid. 

I love the fact that now, we don’t need to be as dependent on Hollywood to create positive images of the future. If you spend any time online, you have a lot of pro-progress types creating not just images, but short movies, with AI. I think that stuff absolutely matters. 

This isn’t a major thing, but I would like to have a pro-progress Genesis Clock to offset the Doomsday Clock. I think those kinds of symbolic things are important, because they take these ideas and make them understandable to people.

But certainly it’s the trickiest part of the book. Take something like fertility rates. I have seven kids. That certainly makes me very future-oriented. I’ll be the first to make the case for why kids are wonderful. But I’m not sure how susceptible that is to policy. I mean, I think we’re going to find out because I think we’re going to find out that the demographics are worse than we thought, and you’re going to see a lot of novel policy making, maybe very expensive policy making, to get people to have more kids. We’ll see. I’ve been underwhelmed by the policy prescriptions I’ve seen so far. I hope that changes. 

But it’s certainly better if people can see improvement in their real lives; you know, cures for cancer and incomes going up in real terms and the sort of space age that we imagined 50 years ago. And when you can point people to the real world around them, then you don’t have to give people as many statistics.

PolicySphere: That’s certainly true. Finally, our two traditional end-of-interview questions. Number one is: what do you think is the most important issue that nobody talks about?

James Pethokoukis: I’ll be honest. I think people think it’s not important or trivial. But I think it matters that every single science-fiction movie we get just about shows us the absolutely worst future. I think the quality of science-fiction matters. And if I doubted it, the fact that the cultural touchstone for AI is Terminator, and that that’s actually influenced our policy makers, means it’s actually an important issue. And if more billionaires would like to fund more pro-progress media, I wouldn’t be against that.

PolicySphere: Great answer.

James Pethokoukis: Also tax rates of course. (Laughs.)

PolicySphere: Well we’re now a business owner. So we have definitely taken a strong stance on capital gains tax rates. (Laughs.) Last question is: who’s the smartest person we should interview next?

James Pethokoukis: The smartest person. Well, this is going to seem amazingly self-serving, but to me, the most interesting right-of-center economist is my colleague here at the American Enterprise Institute, Michael Strain. 

PolicySphere: That’s a very good recommendation. He’s very smart. All right. Thank you very much for your time.

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