Editor's Note: On June 7, 2025, the Institute for Economic Thought and Practice of Tsinghua University (ACCEPT), the School of Social Sciences of Tsinghua University, and the International Society for Economics of Government and Market (SAGE) jointly held the seventh "International Conference on Government and Market Economics" and the founding ceremony of the journal "Research on Government and Market Economy." During the keynote speech session, Eric Maskin, Professor of Economics at Harvard University, 2007 Nobel Laureate in Economics, and Co-President of the Society for Government and Market Economics, sent a pre-recorded video address. He profoundly analyzed major current social issues in the United States from the perspective of government and market economics. Observer Network has been authorized to organize and publish this content.

【Text by Eric Maskin, Compiled by Observer Network】

Do you agree that we are currently in an economically chaotic period, given the current state of the world?

Maskin: Indeed so. This period has been turbulent since Trump's administration took office. His re-election in January has seen him impose tariff policies internationally or lack thereof, along with his team's attempts to significantly cut government spending wherever possible.

Firstly, Trump's stated goals seem entirely contradictory to the means he employs to achieve them. For instance, he claims part of the purpose of the tariffs he imposed on China is to increase fiscal revenue. However, as of yesterday (May 12), the tax rate on Chinese goods reached up to 145%, making it nearly impossible for Americans to purchase these goods. Thus, I believe these tariffs will generate almost no revenue. Hence, this goal can be seen as contradictory to the actual policies implemented.

Nobel Laureate in Economics and Co-President of the Society for Government and Market Economics, Professor Maskin's video speech

In terms of international agreements, economics tells us that multilateral treaties and trade arrangements often outperform bilateral ones. For example, the European Union originated from trade arrangements among European countries, known as the European Economic Community, and proved quite successful. Eventually, the EU decided not only to be an economic entity but also a political one. Trump, however, chooses to engage in bilateral negotiations, negotiating separately with China or the UK, which is less efficient, narrower in scope, and less stable than multilateral agreements.

Of course, before Trump's re-election, many trade arrangements already had a specialized mechanism to adjust these arrangements—the World Trade Organization (WTO). However, Trump chose to ignore all these institutional arrangements and unilaterally raised tariffs significantly. This approach creates uncertainty and angers trading partners. Such unilateral actions are highly aggressive, even if some agreement is eventually reached through negotiation, countries will still worry about how long these agreements can last under Trump's approach, given that he has directly torn up previous arrangements.

Therefore, in my view, Trump's policies are self-contradictory and extremely destructive to international relations. I am sorry to see what has happened over the past two months.

Elon Musk was invited to help reform the U.S. federal government, including cutting spending and closing institutions, etc. As an expert in mechanism design and government and market economics, do you think there is a problem with Musk's approach?

Maskin: I believe he does not fully understand the important public functions carried out by many government agencies. As a private enterprise manager, he usually focuses only on profits and losses, without realizing the public interest attributes of much government spending.

For instance, this is closely related to us, namely research funding expenditures, particularly in basic research. The U.S. government typically invests hundreds of billions of dollars annually, approximately seven hundred billion dollars in basic research. Most of this research is conducted in universities, yet many funds are now frozen or canceled. Part of the reason is that some people believe these studies are unnecessary or not closely linked to national needs. However, this overlooks the fact that, fundamentally, basic research is the driving force behind economic growth.

Economists know that most economic growth does not come from capital investment, nor is it primarily due to labor input; rather, it comes from technological progress. If we trace the origins of new technologies, they actually stem from basic research. Take the computer industry as an example, a good case in point. High-tech industries have transformed the world; without the foundational research in quantum mechanics, the computer industry would not exist, and neither would the semiconductor industry, which is based on quantum mechanics.

Thus, Musk and his team's approach to cutting the budget for basic research is extremely short-sighted strategically. In the long run, basic research is a key factor in enabling sustained significant progress in economic growth for both the United States and the world.

You might ask why the government must fund these studies, why can't they be fully privately financed? Of course, some basic research is indeed privately funded. However, it is important to remember that the majority of the benefits from basic research have externalities, meaning they benefit society as a whole, sometimes globally. Private enterprises are often unwilling to participate in such investments when they cannot exclusively enjoy the benefits, as their primary purpose is profit. Basic research is a public good, so private enterprises will never invest enough to achieve optimal results. The government plays an important or indispensable role in ensuring that basic research is adequately carried out. However, due to Musk's and his associates' fanatical cost-cutting actions, all of this has been neglected.

On May 30, Trump hosted a farewell event for Musk at the White House. Visual China

Do you think Trump's tariff policy and Musk's cost-cutting policy can be seen as a lack of understanding of the incentives and roles of government in modern market economies?

Maskin: Indeed so. As I mentioned, Trump's policies are contradictory. In a sense, some objectives are understandable. For example, encouraging manufacturing development in the U.S. and increasing fiscal revenue. However, the methods he uses to achieve these goals contradict the goals themselves, often having the opposite effect. This shows his lack of understanding of the role of government.

On the other hand, in Musk's case, I believe his biggest mistake lies in ignoring the critical role of government, specifically its role in providing public goods. He views the government as a regular business, but the government exists precisely to provide necessary services to the entire economy, to the nation, and sometimes even to the world. These are public goods that would not be provided without government involvement.

As an expert in mechanism design, what are the fundamental principles for designing central banks that could better enable them to alleviate economic fluctuations?

Maskin: A crucial principle is that the central bank should be independent of other government departments.

The central bank is, of course, a government institution, but its policy choices should not be in the hands of the president. The reason is that presidents often face conflicts of interest. If he is running for re-election, he will want to ensure that the current economic conditions are favorable to the public, consumers, and businesses. Therefore, he has an incentive to increase liquidity or lower interest rates, which are essentially the same thing, while ignoring the fact that inflation caused by increased liquidity will harm in the future. So presidents and high-level decision-makers always tend to expand the money supply while neglecting inflation. Therefore, it is crucial for the central bank to remain independent, free from political motives.

Central bank officials are not elected; indeed, they do not run for re-election. They are appointed professionals entrusted with missions, especially those of the Federal Reserve System. Their mission is to maintain price stability, i.e., to curb inflation, and similarly, to address deflation if it occurs, though inflation is usually more concerning. The Federal Reserve is also required to strive for full employment, meaning that during economic recessions, the central bank should take on the responsibility of expanding liquidity to promote the economy back to full employment. Therefore, the central bank's mission combined with its independence are two key elements to ensure effective operation.

I would also like to point out that the length of term is also important. In the U.S., the term of members of the Federal Reserve Board is fourteen years, which is quite a long time. This allows them to focus on long-term monetary policy rather than short-term factors when considering monetary policy. They can look ahead because they will continue to hold the position of the central bank for quite some time, which is beneficial to the country as well.

Local time on June 6, Trump stated on "Air Force One" that he would soon announce his nominee for the next chair of the Federal Reserve and again criticized Chairman Powell for moving too slowly on the issue of lowering interest rates.

How would you describe the incentives of local governments? Taking Cambridge, Massachusetts, where you work as an example, how do the mayor and her colleagues differ from the Haidian District Government of Beijing in attracting businesses?

Maskin: One major difference between the U.S. and China is how local governments raise fiscal revenue. In most American cities, including Cambridge, the main source of revenue is property taxes. If you own land or property, you need to pay taxes annually based on the assessed value. Of course, there are exceptions, such as New York City, which levies income taxes in addition to property taxes, but such exceptions are rare. Property tax statements generally apply universally. By contrast, in China, local governments can levy income taxes on residents and profit taxes on businesses to increase fiscal revenue. This gives Chinese local governments greater room to attract businesses. By offering preferential tax rates to local enterprises, cities can attract these companies to relocate, which benefits the city. Because they can obtain final taxes from these enterprises. Enterprises receive tax breaks today but will pay more taxes in the future, meaning the entire city will benefit from the arrival of these enterprises. This has always been an effective method, promoting both business development and local economic growth over the years.

Of course, tax incentives can also be given to local businesses in the U.S. However, due to these incentives often manifesting as property taxes, cities have less flexibility. For instance, imagine a software company that moves into a city but hardly occupies any office space. Most software engineers can even work from home. In that case, the municipal government cannot levy much property tax on such a company, making it difficult to offer substantial tax incentives since the company itself pays little tax. Therefore, the U.S. model imposes stricter limitations on local governments compared to China.

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