ENTREVISTA A PAUL ROMER

PAUL ROMER INTERVIEW

David Enrique Arboleda  

Nelson Esteban Rojas

On this occasion, we had the honor of interviewing Paul Romer, Nobel Prize in Economics in 2018. Paul Romer is a mathematician graduated from the University of Chicago, who also has a PhD in economics from the same university. Paul is one of the greatest references in the economic discipline and has dedicated his work to studying issues such as growth, technological innovations and human progress. In this interview we discuss issues such as economic growth and the economic situation in Colombia generated by COVID.  

GROWTH:

In 1990, you published a paper called “Endogenous Technological Change”, which has undoubtedly transformed the way macroeconomists approach the growth question. The notion of technological development as a result of agents’ investment decisions in R&D ended up embedded in the heart of growth theory. Moreover, the way you modelled such idea was so innovative that 30 years later this model is still taught in econ programs worldwide. 

1.     Nonetheless, it is evident that the world we live in today is quite different than it was 30 years ago. Has the way you conceive economic growth changed too? How do you belief that the determinants of growth and technological change have evolved? 

Here is the change. One way to summarize the argument of the 1990’s paper is to say that, if the government creates the right conditions, the firms will discover valuable new things, growth will take place, and society will make progress. The updated statement I would offer is something like this. If the government creates the right conditions, firms will discover new possibilities. Some of those possibilities will be beneficial for society. Some of them will be profitable for firms, but harmful to society. Thus, innovation creates possibilities, but some are good, some are bad. The government has to play a role in this process. It must prevent firms from doing things that are profitable, but harmful to society. Hence, the updated message I would give is that you need both market innovation and government regulation for a society to make progress.

Let me just give you one example to illustrate this. Dow Chemical invented a class of compounds known as chlorofluorocarbons which turned out to be useful in refrigeration and air conditioning, they were a safe way to extinguish fires in confined spaces, had many beneficial properties and Dow made money selling them. But it turned out that these chemicals were also destroying the planet ozone layer. So, we needed governments to do what they did, which is to ban the sale of this compounds and to tell the market “you have to go out and discover another chemical that you can use to provide these benefits”, and then that was what the market did.

2.     In your model, you remark the importance of patents to enhance innovation and, thus, achieve better economic performance. Do you think that patents are a good strategy for countries far from the technological frontier such as Colombia? What challenges do developing economies face in order to adopt foreign technology?

I think I never said that I thought patents were a good thing or that we should have stronger patenting. I just assumed that there was a way for a company to protect an idea that it discovered. The question about whether the protection that firms have for their ideas is too strong or too weak is a very subtle question. I think right now the biggest risk we face is that companies have protections for their intellectual property rights that are too strong. We are seeing too much monopoly, too much concentration, too much dominance by a few big firms, and that is the risk that competition and innovation engross. So, I think that even in rich countries we need to be worried about how do we maintain free entry and competition. Strengthening patents, strengthening intellectual property will not help us do that. 

//Do you belief sometimes the protection of intellectual property can be harmful if it is too strong?

Absolutely. Sometimes the government has a legitimate reason to force firms to disclose things that they know that they are keeping secret. I think the government should use that power more frequently, especially as we move into this era of Big Data and artificial intelligence.

//Do you think the problem of a too strong protection of intellectual property is going to be important now that we are in the search for a vaccine for Covid-19? 

Yes. It could lead to prices that are too high and to too little usage of a vaccine. Remember that every person that gets vaccinated confers a benefit on others, so we should be subsidizing people to get them vaccinated. We should not be charging them to be vaccinated.

3.     What do you belief is the optimal relation between the use of mathematical tools, such as modelling, and macroeconomics? In your opinion, what are the main errors in which economists have incurred in this regard?

Picture a distribution of outcomes. There are many things we often think about policies which shift the distribution in the positive direction, but many policies just increase the dispersion of the distribution, so you get more good outcomes and more bad outcomes. This is what I was suggesting about innovation and the private sector, that you can encourage innovation, but that means you are going to have more good things and more bad things. It is why the government needs to limit the bad things. I think mathematics in research and scholarship has that same effect. It can lead to remarkable clarity when it is used effectively and with good intent. But math can also be used to obfuscate, confuse, and hide. Therefore, what we need as economists are standards where we insist that when an economist uses math this person do so transparently and clearly, and we have to reject instances which are clear where people are using math to obfuscate and hide. 

COVID-19:

Now we want to talk about the most popular topic in recent months, the COVID-19. In Colombia we were in quarantine for six long months, and for this reason we are in a complex economic situation.

1.     Do you think that due to the Covid-19 crisis some countries might eliminate environmental policies to achieve a faster recovery? 

I do not think that the interaction between policy for Covid and policy towards the environment is an important concern. I think that what we need are policies that will stop the spread of the virus. Policies that are effective, which stop the spread of the virus and let normal life resume. Few countries have succeeded at putting such policies in place. It would be a waste of time to change the environmental policies. It does not address the fundamental problem. The problem is how do you suppress the spread of the virus and let people go back to normal life. Thus, environmental policies are just a distraction and it would be a mistake to even think about changing them.

2.     During your last interviews, you mention that massive testing and large investment in sanitary equipment and facilities that guarantee workers’ safety is indispensable for economic recovery. However, in countries like Colombia, characterized by high levels of informality and a relatively low governmental presence in vast parts of the territory, such investment may be impossible to carry out. How do you belief this strategy could be adapted to the conditions of a developing country as ours? 

If you do not have the capacity in your government to stop the spread of the virus, then you should invest to build that capacity, because if you do not stop the virus you will not be able to let people go back to their daily lives without fear of infection. Think back to a time when cities were first starting and cholera that was transmitted through unsafe water was making people sick. Governments at that time did not have much capacity, but people recognized that it was important to develop that capacity and they developed it at a time where income per capita was much lower than it is in Colombia now. So, I think that it is entirely feasible for a country like Colombia to invest in public health measures that will stop the spread of the virus and let the economy recover. It would be a good investment for Colombia to develop that capacity.

3.     Which do you think are the new challenges and opportunities arising from this crisis for economics as a discipline? How should economists reinvent themselves and the way they “do” economics in the light of this new reality?

I think economists should look both at our failures over the last fifty years and at this crisis and conclude that a society will not make progress unless it has a government that can do the government’s job. So, instead of arguing that the government should just get out of the way and the market will do everything, as economists have tended to do, we need to start focusing on what are the most important jobs that the government uniquely can do and how can people put in place systems that let the government do its essential jobs and do them adequately.

//In Colombia, some economists have argued that this crisis is an opportunity to build up state capacity by, for example, implementing fiscal reforms that were politically impossible before the crisis. Do you agree that the government should take this chance to pass long-needed political reforms that were previously inviable?

Yes. My sense is that we need a package of reforms. This package should include enough resources so the government can hire the kind of skilled workers that it needs to do its job well, and civil service reforms, so that we stop thinking of a government job as free money and a way to redistribute income. People who work for the government have a job to do. We should be able to hire the most talented people to do that job. As every firm finds when you hire people, some of them do a job well, some do not. We need to say that government jobs are so important you cannot let someone stay in the job if they are not performing. I think that package of resources to pay people to do jobs well, and an insistent that government workers actually do their jobs well, is the kind of reform we need.

4.     Is there a final message you would like to give to future economists?

A nation needs an innovative market and an effective government to make progress. The biggest threat the world now faces is governments which are ineffective and on the verge of failing. The crisis of the 20th century was a fear of governments that were fascists or totalitarian, that were too strong. The crisis of this century will be governments that fail to do essential jobs. This needs to be the focus of the next generation of economists.