Russ Roberts

Pete Boettke on Katrina, Ten Years After

EconTalk Episode with Pete Boettke
Hosted by Russ Roberts
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Monetization, Meaning, and Mas... Hurricanes, Heuristics, and th...

Katrina2.jpg Pete Boettke of George Mason University talks with EconTalk host Russ Roberts about the political and economic lessons he has learned as program director of research in the aftermath of Hurricane Katrina. In this wide-ranging conversation, Boettke discusses the role of civil society, the barriers to recovery that have hampered New Orleans and what worked well as people and institutions responded to tragedy and devastation.

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0:33Intro. [Recording date: September 11, 2015.] Russ: Our topic for today is the aftermath of Hurricane Katrina. We first talked about this in December of 2006; and you actually confessed to me before we started recording that you went back and listened to that episode. Which excites me to no end. I did not. I kind of wanted to come back fresh to it, because I'm sure most listeners don't remember that episode. That was a while ago. But that episode--we taped that, we recorded that a little over a year after the hurricane struck. We are now 10 years after that destruction. And you've been involved in a project assessing the recovery and what we can learn from it. So, talk about what that study has involved and what's been your role. Guest: Yeah. So, at the Mercatus Center at George Mason U., very soon after Katrina in August of 2005, we decided that we were going to try to do a longitudinal study down there about economies can come back. And so we went and we got support from various different foundations and whatnot to engage in a study to see how resilient and robust societies are in the wake of natural disasters. And we decided to go about doing that by establishing teams, different research teams, that would focus on different components of the rebuilding period. And for the response and then the rebuilding period. And so we started making field trips down there, in the late Fall of 2005, and then into 2006, and made several trips. I was the principal investigator on that, but then we eventually would have teams that were either in residence or making very often trips there. And those scholars that were tapped for that were Russ Sobel, who was then teaching at the U. of West Virginia and now teaches at the Citadel; Emily Chamlee-Wright, who was then teaching at Beloit College but is now the provost over at Washington College; and then Sanford Ikeda, who teaches at State U. of New York at Purchase. And then underneath of them we had other junior faculty and then graduate students. And the teams were divided up into those who would focus on public sector issues or what we called the 'political and legal leg', and then those who would focus on the social and cultural kind of ideas, civil society component. And then the third one was the entrepreneurial or commercial society or market sector--private sector responses. So, if you think about it, you have a public sector, a private sector, and then a civil society sector. But we want--the study was, in detail, each of the various different aspects but then more important, the interaction between all three of those as you tried to both assess why the society is having difficulty coming back or why it is that it is succeeding coming back. And we wanted to sort of look at that question; and it turns out that New Orleans was quite an amazing place--tragic event made more tragic by a lot of follies. But yet also a very uplifting story, if you focus on certain aspects of it, with regard to resiliency of civil society and the interaction between commerce and civil society.
4:54Russ: So, that's a very unusual plan, that you were planning to execute, and did execute. Most economists would probably look for some aggregate data on incomes or test scores in schools. They'd look across, maybe, neighborhoods or districts or parts of the city or parts of the state. But this three-legged approach--which I am of course a big fan of--and doing field work is very alien to most economic research and is much more, what people would call, sociology. Guest: Right. Russ: What were you thinking in taking that approach? Why did you take that approach? Guest: It's a great question. I mean, there's a sort of a methodological aspect of this, an analytical aspect of it; and obviously then a practical, public policy or political economy, in the art of political economy sense of this. I do think that we economists, you and I, were trained to think in terms of thin models and very clean data. And so we like to have, you know, large data sets that we can run statistical analysis on; and we get clean, you know, results based on [?] very refined models. And for some questions, it turns out that that's a very successful research strategy. At least it's proven to be one that is self-perpetuating. But in my own experience, in studying the former Soviet Union--so, I started my career studying the Soviet Union. It wasn't 'former' then. And my first works were on the origins of the Soviet system, and then on how that system operated, given the problems that we would associate from an economic point of view with the incentive structure and the informational constraints that a Soviet-type planning system would operate under: How could that system ever operate? So there's kind of two ways to pursue that kind of research. One way was what you were suggesting, which was: Take the growth figures; re-estimate them, taking into account that the Soviet system was going to bias them in certain directions; and then try to come up with other growth estimates of what was going on in the Soviet Union. And that is what a lot of people did in economics. But another aspect of it was, is that that didn't really kind of capture what was going on over there. And so, the idea was is that you had to sort of delve underneath, dig deeper, and get to like the real social interactions that were taking place to see how the failure in the planned system would generate, you know, markets and black markets, both in producer goods and consumer goods. So there was also a kind of an informal market that interacted to allow the planned system for the state enterprises to try to even pretend to meet their state, their output targets. But then there was also this vast black market activity, which is how consumer frustrations in a shortage economy get alleviated to some extent. Not that they ever got really alleviated. You didn't have an alternative supply network in that system, right? So it wasn't like goods were sneaking in to get in there from the West to get in there except when you had limited tourists--so then you could sell them your Levi jeans or whatever. But it wasn't like an open market, an easy supply network. So how do you understand how the Soviet system ticked? Just to give you one example, there's a study that was done in the late 1970s that estimated the amount of black market dealings for gasoline in Moscow. And they put that figure at like 80% of the transactions of gasoline were bought in non-official markets, in some sense. Russ: Under the table. Guest: Under the table, or side-payments, to be able to get it. And all kinds of different things. You know, the Soviet Union, it's not just like--I oftentimes say, 'Imagine the market for illicit drugs in the United States, then make it writ large for the entire economy.' That explains how the Soviet economy operated. That's actually kind of more pedagogical than real. Because what happened is the Soviet markets had various different gradations in the official market. You know, so-- Russ: Like a bribe. Guest: Yeah, like a bribe, to an outright black market dealing, where a state shortage of buns and a state shortage of sausage leads to a sandwich out the back window. That's not the same thing as someone saying, 'Oh, admissions to college, yes, but it will cost you x number of dollars.' That's more like the [?] and more be in a rent-controlled apartment idea. Anyway, so, if you are going to study that stuff, you can only study that because the official view is not clean and easy to get. And so instead you have to do field work, and you have to make access or use unusual data sources like memoirs, and you know, kind of more ethnographic data, to be able to actually get access to the information that enables you to study how this economic system operates. And then when the system started to collapse, it wasn't the textbook model that was collapsing. It was actually this, you know, Rube Goldberg kind of system that was in place that you were trying to then understand--and what the property rights were of that, and everything. [?] Barzell is fantastic on this, actually: he says, one of the only great achievements of the Soviet bureaucracy achieved was to convince you that while they owned the resources, that they didn't own them. Right? So that they were owned by all the people, but actually it was owned by these, you know, various different people in the party and whatnot. They just had control rights, but not cash flow rights. So, now, how am I going to change those property rights systems? And more importantly, for your question: How do I go about studying it? And I'll just be very brief here. It's just: You can't just rely on studying the official system. You have to open up to study the unofficial system. Which means you have to, you know, get on the ground and get access to data which is very dirty.
11:40Russ: But I think it's more than that. I feel presumptuous telling you that. But let me take a crack at it. I think, as economists, when we say things like, 'Oh, the market will solve that,' or 'The market won't solve that,' we have in mind sort of a black box of what markets are. If we can draw it--we can draw a supply-and-demand diagram; we can draw a supply-and-demand diagram with intervention that keeps it from reaching its, where the curves cross. And we sometimes fool ourselves into thinking that's what's happening. Guest: Right. Russ: But that's just a very stylized way of conveying some very simple things. They're very important. I don't want to understate their importance. Guest: Sure. Russ: It's extremely important to focus on those basics like what things are going to cost and whether there will be waiting in line and whether there will be a gap between what consumers pay and what suppliers receive because of a tax or because of waiting. So that's all very important. But it's not what's going on in the street. And when you say, 'Well, that's not so important,' we're abstracting from that. That's the black box effect. What I think about, when I think about the Soviet Union's collapse and then the so-called aftermath, recovery, whatever you want to call it that's somewhat analogous to Katrina, is that a lot of economists use that black box--and the reason I said I feel presumptuous is: I've learned this from you. So I'm going to say this, and you can chime in and say I got it right or I'm missing something. But what I think I've learned from you, and some other EconTalk episodes, is that a lot of economists had a very stylized story about the recovery: 'Oh, it's easy. We'll just put in property rights and we'll sell off these state resources, and markets will emerge.' And dah-dah-dah-dah-da. And it didn't happen. Guest: Right. Russ: And when you confront people with that--most of them don't--to be honest, I think most economists don't even want to think about it. And what I respect in your work, especially, is that you said, 'This is a learning opportunity.' Instead of saying, 'Well, I'm going to wave my hands, and it wasn't quite like the models say and it's fine because we know markets work; we know what prosperity is based on. It's based on real law, property rights, and markets; and so, we just have to get there.' But it turned out that getting there was the most interesting part, and it wasn't easy to get there. And that these pieces didn't all emerge quickly. And so what I see your work and your methodological approach as doing is saying: 'Look, there's real value here in trying to understand how these pieces--in particular, government, entrepreneurship, commerce, and civil society, that is nonprofits and other voluntary activity--how they interact. Because if we just wave our hands and draw something on the blackboard and run some regressions, we are going to miss learning about what we should be learning. Is that a good way to--? Guest: Yeah. No, I mean, that's a better summary than I can ever give. I think that our first--if you go back to this post-Soviet context--let's say we Eastern-Central Europe in 1989 and then look at in Russia in 1991, the first thing you think about is, 'Oh, these were shortage economies. We know how to fix a shortage economy. You let prices--' Russ: Let prices adjust. Guest: Yeah. Let the price adjust. So our first and foremost period of reform was: Get the prices right. And then, you know, that like didn't go as smoothly as we hoped, because we had to realize that prices are formed within an institutional context. And so you needed to have, you know, various different institutions in place. And then that became in vogue to then say, 'Get the institutions right.' So we moved from getting the prices right to getting the institutions right, to then, 'Oh, well, gee, institutional transplantation is really difficult; you need to have certain value systems and beliefs'-- Russ: Culture. Guest: Culture. And so then it's like, 'Get the culture right.' Russ: And then it's like, 'Good luck.' Guest: But I do think it's important to keep in mind, you know, the fact that it's still the case you've got to get the prices right. So, even though it's so intractable, the culture issue, and you have to, for the pure positive economics of it, have to at least take into account that part, you also have to recognize that, yes, it's true that culture is this framework within which institutions are; and institutions sort of define or frame within which how markets operate. And in these transition or crisis situations, it's the framework that's up for grabs. Right? It's the thing that's fraying and whatnot. You know, I, one of my favorite EconTalks of all time, for you, because it's actually now been saved for all of us to hear, is Milton Friedman--the fact that you did Milton Friedman early on in your process and obviously before he passed away, so now we have it. It's there. And there's a fantastic one with him about monetary policy, and another one you did. But Friedman was famous in 1979 when he first toured China, and they said to him, 'Milton, how would fix things?' And he said, 'Privatize, privatize, privatize.' And then, you know, just a few months before he passed away, someone asked him: 'Professor Friedman, would you change your dictum at all?' He says, 'Yes, I would.' And he says, 'What would it be?' He said, 'Privatize, privatize, privatize, provided there's a rule of law.' And, you know, that--'provided there's a rule of law'--becomes a rather big issue. Because, where do those institutions come from? How do they get formed? How can we study them as economists rather than just treating them as given? And Raghuram Rajan, you know, wrote a famous paper for the IMF (International Monetary Fund) in the mid-200s, beginning part of the 200s, when development questions run, especially a lot of these reconstructions of these failed and weak states after 9/11, you know, there's a big discussion of all that. And he wrote an essay called "Assume Anarchy." And the argument was is that you had to assume anarchy because you can't treat the institutions as fixed and given. You have to study how those institutions come about. And that became a real impetus of what we were trying to do in our transition studies, in which we morphed out of Eastern Central Europe to then Africa and Latin America and even East Asia and whatnot. And then that became the impetus of what we thought we might do with Katrina. Russ: So, if I can just put on my sociology hat for a minute--and I don't have one, so you'll just have to imagine it. But I think one way to talk about what Friedman was saying was that, when you say, 'rule of law,' that's not something you just say: 'Do you have it or not?' It's not an on-off switch. There are many things in the United States, depending what city you live in, depending what county you are in, depending who is running the government this month, this year--how free you are to use your property as you see fit. And I think understanding that is part of what we're talking about here.
19:11Russ: So, let's move on to Katrina. So, the bottom line is that you try to do a much richer, wider-breadth look at the process of recovery, rather than just saying, 'Well, how much did GDP (Gross Domestic Product) go up this quarter in the city of New Orleans? What happened to sales tax revenue? Guest: Right. And we wanted to see the interaction between these various different ideas, mainly to see how--so, again, you know, we take a lot of these inspirations from different people. So, John Stuart Mill has a great quote in the Principles of Political Economy where he says that one of the most amazing things that we see in human history is the great rapidity with which countries bounce back from famine, war, earthquakes, fires, whatnot. Right? So, we took that idea and we wanted to say, so what are the conditions under which Mill's proposition is true? What are the conditions under which it would fall away? So, one of the conditions that Mill says explicitly is: Complete depopulation. So, you know, if you came in and you know, something happened--an asteroid hit--and it wiped out--a small asteroid hit--so it wiped out like a whole country or whatever: yeah, that country is not going to come back tomorrow. Right? And so that--we understood that. But somewhere in between that and-- Russ: The electricity goes off for a week. Guest: Yeah. We want to see how they form. In fact, one of the really made-me-sit-up in my seat and realize how, you know, sensitive these issues are, is in one of my early trips, we went and met with a gentleman who was one of the leading, you know, business people in New Orleans. He took us to the top of his office building. And it still was the case when we looked out from over [?] that I think it was something like, you know, 3/5ths of the city footprint was still, the infrastructure was wiped out, because you know, the water had stayed there and then that wiped out their electric grid and all that. And he sat there and we were talking about what we were trying to do, and he turned to me and he said, 'Look. I understand. You guys are very excited, because not every time that you can fill the rat maze with water and then see what the rats do.' Russ: It's a lovely--what a lovely thought. Guest: And I sat up and I said, 'No--[?]'. But in some sense, that is what we were doing. But it made me realize that we are talking about real people, real lives; and we need to be very sensitive to the way that we think about, you know, this; because that's different if I were studying the rats. Right? Russ: Right. Guest: I wouldn't worry so much about--but these were real people and they were really affected. So you had to always balance that because we are who we study, and what we were trying to do was we were right in the midst of a lot of this when the nerves were still very raw. Russ: Tell us what some of the lessons that you've taken from that, from the work. Guest: You've talked--when we talked in December of 2006, I went back and as I said, I listened to it. And one of the things that I always like to stress when we start doing this is, first, at the moment of the crisis how people that were on the ground, there, mainly in this instance the churches and church leaders, played such an important role in getting people out of harm's way. And that isn't recognized enough because we always think of that as being the role of government to do. But it's phenomenal what the network of Southern Baptist Churches did. And also what the network of yacht club--boating clubs--did, where they came in, in little skipper boats and got people out and got people to safety that otherwise would have been stranded. And even in some of these instances like with the Church, they actually were violating the official rules, which said that people weren't supposed to be going in and out of the city like that. Because they were trying to control the evacuation or control the, centrally control how they were going to do the protection in the wake of the storm. And these were very, very courageous young people--one couple that we met was a youth ministry couple in central city New Orleans, and they really just responded. It was like your neighbors at this time were going to help. And obviously we hear the tragic stories of people being trapped in the 9th Ward or wherever and then at the Superdome, and those are the images that we have in our head. And those were very tragic aspects. Russ: And real. Guest: And real, and no one is denying that. But it is pretty phenomenal, the amount of effort that civil society expended and the resilience that they showed in the face of very difficult times. And I think we should celebrate that more, the human capacity for compassion and just getting the job done is a lot greater than we often think. Russ: Yeah. We talked with Paul Robinson recently about, in life or death situations, a cooperative urge somehow can often spring into action, and people can take risks for their own safety and do great things for their neighbors. Guest: So, that's the first thing that comes to my mind; and I really want to stress that. And that even comes back to the--so that's in the immediate response. But you also see varieties of this sort of strength and resiliency of civil society throughout the process, from response to recovery to rebuilding, to today, getting on with your life. And it's not perfect, and there's still a lot of lingering difficulties. But there also are some real heroic examples, and I think that we should pay more attention to that. Robert Putnam kind of made the argument that right before all of this happened, in the 1990s, that we were in fact becoming more atomistic, less connected to our neighbors. Russ: This is Bowling Alone, right? Guest: Yeah, Bowling Alone kind of idea. And I think that he just misidentified where people were finding their new forms of civil society; and that civil society isn't dead in America. It hasn't been completely crowded out, though I think it's not as vibrant as we could tap into. But when pressured it can actually respond quite well. And I think that that's one of the lessons that we learned from Katrina.
26:09Russ: What about--talk about what happened in the education sphere, to schooling. Guest: Well, one of the things that you should understand right up front is that New Orleans had some of the worst schools, if not the worst schools in the country, prior. And so you have to ask this question: there's a variety of ways in which Katrina studies have gone in and looked at what's gone on with charter school movements and whatnot, afterwards. Russ: Because a lot of schools--well, you tell me. The public school system was gone for a while, right? Or is it--what was the status? Guest: Well, okay. So, one of the really great stories is in the St. Bernard Parish, this woman who was the Superintendent of Schools in that parish, Doris Voitier--she understood that in order to get the workers back, you would need to have your schools up and running. Because it's a coordination problem: I'll come back if you come back. Right? And I'm not going to come back if you don't come back. And so they needed to have all of that, like normalcy of life back for the workers to return back and sort of build their lives back up again, return to their homes, rebuild their homes, all that stuff. And again, the incentives get a little goofy here because FEMA (Federal Emergency Management Agency) had extended their payments for not working for a longer period of time. People moved to Houston; they look around and they're like, 'Hey, Houston ain't half bad compared to where I was living New Orleans'. Russ: Right. A lot of people did not go back. Guest: But what she did--and it's a kind of--so, they did a mix between her private effort, or her efforts as well as in the public schools. So, it's not like they were independent schools. She's a public employee, right? Working within the public school system. But she's acting very independently to help get people going there. Does that make sense? Russ: Yeah. So, what did she do? Guest: Well, in her case, what she did was she opened the school much faster than they thought they were going to do. Various different officials, FEMA and whatnot, said, 'You'll be able to reopen your school in, let's say, 18 months.' And she was able to open the school in like 8 months. And of course you can even see, like there's an HBO (Home Box Office) on one of the independent schools because they went to the state finals in basketball the next year, in which there was a conglomeration of a bunch of public schools and they put them into a school and they ended up having a decent team and helped rebuild back the community and build things. With Doris Voitier, what she did was she got the FEMA trailers, and she was able to use them; and when they didn't send them to her fast enough she would go and act very entrepreneurial and get them from some other place that had FEMA trailers. Then, later on, they complained to her that she was misusing funds, you know, because she wasn't--she was just, like, a real bulldog to make sure that she could get her school district set up. One of the trailers didn't have the right dimensions, so it was determined that it couldn't be used for school use. But it was just sitting there, vacant, on the lot. But her teachers were back and they didn't have a laundromat. So she turned this trailer into a laundromat. The original FEMA official that was on the ground said, 'Okay, go ahead and do it.' But then they cycled him out. And then this new bureaucrat came in, you know, who's got his pencil and pad of paper, and he's like 'This trailer is not supposed to be used for that. And you are violating the law.' And she's like, 'Hey, buddy, I don't have time for this now.' And they were actually going to bring her up on charges or whatever. And so she's very publicly entrepreneurial, but it's kind of this mix. Then you also have private schools, like the Catholic schools, trying to get their communities back, and how they opened up as well very soon after; and again, schools understood that in order to get the people back, they had to have a place for the kids to go back. And so it became a very big part of the community. I think that part of the story is a kind of significant part. And then, now, there's been this discussion of what's happened with the various different charter schools and their results. And I think that I don't really have that on the top of my head. Russ: It doesn't matter. Because one of the most obvious problems with those kind of analyses are, it's not the same people. Because a lot of people left, and the people who left or then came back are not the same people as the people who decided to stay. So I'm not sure how to interpret those results. Which I'm sure doesn't stop a lot of people from arguing about them. Guest: There's a lot of questions there about the density of the population and where you build. So, yes. To go back to originally when we first saw it, one of the things that we wanted to try to do was maybe do a comparative study between Biloxi and New Orleans. Similar like you might do a study between Poland and the Czech Republic in the post-Communist period, right? And we gave up on that idea very quickly because the conditions were so different from the initial start state. From the simple reason of the effect of the storm. Whereas in one area the storm came in and went out; and another where it came in and it sat. That changes a lot of the dynamics of what goes on. And so--but originally that was our idea: we were going to try to do this comparative study between Biloxi bounceback versus how New Orleans bounced back--what could we have learned from this comparison? But we gave up on that idea within, you know, like 3 weeks of originally studying it. And I think that's a similar idea to what you were just talking about with schools. Because it's not the same thing. You are not comparing apples and apples.
32:26Russ: So, I interrupted you to ask you about schools. Let's go back to the more general question. I asked you what you had learned; what are the most important things you learned. One of the things you said was the role of the churches. What else is an important takeaway for you? Guest: Okay. So, also the role that entrepreneurship and commercial life plays in not only supplying initial responses but bringing a normalcy back to life--that if you can't have a commercial life, you are not going to rebuild. Those things go hand in hand together. And so the importance of not only small mom-and-pop shops getting started, restaurants and whatnot, but also the big box stores. How Walmart played a role in all of this, Home Depot. Large pharmaceutical, drug stores like CVS and Rite Aid, I think, and how they are very much a part of your communal life and make living happen. Russ: So, let me take this in an obvious and very different direction. When I interviewed Nina Munk about the Millennium Villages Project, her sort of bottom line assessment, the way--I mean, the reason it was, to me, such a memorable conversation, was her summary, which was two words: Nothing grew. Yes, there were some injection of cash and wellbeing and some activity. But when it receded, when the injections stopped, what was left? And again, this came up indirectly in my conversation with William MacAskill. I love the idea of giving people money rather than trying to figure out what they need. Let them figure that out. But how often is it that--what I worry about, then, is you give the money; does anything grow? Is it just a one-time effect that you have to continue to do, or does it jump start something? And if you look at the cities of America, the really bad parts of the worst cities of America, the biggest problem they have is there's nothing growing. Meaning, there isn't that commercial vibrancy. There might be one restaurant in a four-, six-block stretch of abandoned stuff of deserted buildings, of housing. But no commercial life. It's a big deal when they somehow work out a special arrangement to get a grocery, especially if it's a chain. People say--they don't go into the minority neighborhoods, they're racist, and for whatever reason they don't go in. But they are not there. And I find, when I think about development, whether it's in Africa or in an American city that's not been hit by a hurricane, or in the aftermath of a hurricane--coming back to our earlier conversation, I don't think we have a very good understanding of how to make stuff grow. What are the real requirements for that to get started? Guest: Yeah. I think that--so, if you look at, say, for example, the area of Baltimore where the riots broke out, obviously there's a huge problem there of public distrust about police and whatnot. But it's also the case in the particular area where the riots broke out is a very, very bad section of Baltimore in which there is no work--right? Unemployment among the young men in that area is extremely low. Russ: I bet the schools aren't very good, either. Guest: Yeah. As economists we really have to take seriously this idea of what happens to these communities when work disappears. There's a very sort of--I love Casey Mulligan's book on the Redistribution Recession because if you can boil it down to a very simple point, he says: 'Look, through public policies we've made it be very high-cost to hire people and very low-cost to be unemployed. So, don't be surprised when the gap rose--about the unemployment.' Mulligan does really nice economic analysis and summarizes in a really good way. And so I like that. But it's really getting at a point of an earlier theme of work which was done by Walter Williams and Thomas Sowell, but also captured in this sociologist William Julius Wilson, which is: What happens when work disappears? Because of a variety of circumstances, policies are adopted which actually cut the bottom of the economic ladder off for people. They can't climb up the economic ladder. That is a tragedy that we need to address in this country. And in Katrina, one of the other lessons was that initial conditions really matter for how resilient you can be. So, if your society or your area is one of the worst places in the country to do business, and then you shock it, and you don't do any changes in your policy space, it's not going to be an easy recovery. Because the reason why you were so bad at doing business before didn't have to do with race or anything like that: it had to do with rules of the game which prevent people to realize productive specialization and peaceful social cooperation through exchange. And New Orleans, and Louisiana as a whole, and New Orleans in particular, has been a section of our country which is very, very bad sets of rules of the economic gain. It's a connection-based society, not a contract-based society. So, that's why you have all the corruption and whatnot that's in there. You have regulations which are extremely onerous for anyone to try to come up with a new innovation, so you don't see much innovation. And now you shock it, and lo and behold, people don't come up with new ideas about how to make use of the resources there. And so, that was a really stark lesson [?]. So, initial conditions matter a lot. And unless you are willing to move off of those initial rules--say, relax those rules--you are not going to have the kind of commercial vibrancy that you would expect to see in a real growing and thriving metropolis.
39:22Russ: So, let me challenge that point, or try to get you to make it a little more subtle. Because I think it's a really important point, but I think it's really easy to see it as a dogmatic point. And I don't think you see it that way. I don't see it that way. So, let's take--we're talking on September 11, 2015. So, if we think about 9-11, September 11, 2001, when we think about what happened to New York City--well, it bounced back incredibly well. Of course, the space that was literally, physically destroyed has been a long, dragged out process because of the nature of politics and the nature of real estate in New York. And in a different set of rules of the game, I think there would have been a building back up there in 6 months or a year. But that's just one square block, or 3 square, or whatever, 6 square blocks. At the same time, there's unbelievable stuff going on in New York City. You have the Hudson Yard s Redevelopment plan--this unbelievably ambitious entrepreneurial explosion. And New York is full of rules and regulations. It's an incredibly unpleasant, I assume, overall, to do business. But there's a group of people who figured out how to play by the rules of the game. Some of them--I won't mention who some of them are, but you could imagine. But they figured out the rules of the game. They're not the rules you and I would pick. They are not really great rules for encouraging commerce and exchange and social interaction and specialization. But people have figured out how to deal with them. And yet, you go to New Orleans, and it doesn't work at all in certain parts. Is that because the rules are really bad? Much worse than in New York? The point I'm trying to make here is that it's easy to make this sound like it's just an anti-government screed: government has much bad policies and of course it didn't bounce back like John Stuart Mill or you and I would think. But I think it's a subtler point. I think it has to do with the three legs of the stool and with how culture and civil society and the public sector interact. And in many places, you and I don't like the rules, but it works fine. Like Adam Smith said: There's a lot of ruin in a nation. And people find ways to be productive. But in other places they don't. And I wonder if you have any thoughts on why, in this particular place, some of the things just didn't get overcome. Guest: You're exactly right. There's a lot of moving parts in the story down there. I was going to invoke Adam Smith for you as well, which is, prior to the ruin of the nation he also has a line where he says that basically the power of economic interest is so strong they can overcome a hundred impertinent obstructions which human folly can thrust in its way. And I've always thought that that's brilliant that Smith says that. And then it's a gradation, right? A hundred impertinent obstructions, but how about a thousand? How about two thousand? And I do think that, while it's true that New York is a highly regulated--New York, New Jersey, the tax rates are ridiculous, and whatnot--it is the case that New Orleans was rated as the worst place to do business in the United States prior to this. But I also think that there's other aspects. New York is able to put up with a lot of ruin, as you might put it, because the rates of return are so high. Russ: Yeah. There's a big concentration of folks to sell to. Guest: Yeah. So, there's an attraction there of that. So, I think basically on New Orleans--so, I agree with you that we need to be very subtle and not present this as 'markets good, governments bad.' Jeff Sachs, when he was here in his conversations with Tyler had this very funny line--I am not always a complete fan of what Jeff is saying, as you might imagine, but he had a funny line. He said his wife is a pediatrician, and when she gets on the phone and someone calls, she doesn't just say, 'Property rights' and then hangs up the phone. Right? Russ: 'Vaccine.' Yeah. 'Medicine.' Guest: Yeah. She does diagnostic and then prescription[?]--blah, blah, blah. This kind of thing. And so I understand where you're going with it, and I don't want to be the kind of economist that just says, 'Property rights; prices and profit and loss; and let's get on with it.' But at some level I also don't want to lose emphasis on that point. I like to say to our colleague, Tyler Cowen, that, you know, simple economics is not necessarily simple-minded. People think a lot of times that you have to get really complicated about these ideas. But I think there's low-hanging fruit in public policy especially. In New Orleans, they had things like, and right after the hurricane, they did not allow people that were tradesmen--like electricians and plumbers and whatnot--from other states to be recognized for their occupational license in Louisiana. They had waiting periods and restrictions. So, of course, when people migrated, the flow of labor in there, there were menial laborers who were able to move debris. But not to rebuild your house. And since there was this huge outflow of population, one of the things you need to build is tradesmen again. And the state never relaxed. Now, compare that to Hurricane Andrew in Florida, where they actually reduced occupational licensing. And then all of a sudden--if I'm from New Jersey and I'm an electrician, I can be an electrician in Florida. And all of a sudden, rebuilding after Andrew takes off. And here, it doesn't. And the other thing that was really problematic was there was this going back and forth and political football similar to what you were talking about with the site of the Trade Center, where it just became a project of political football with people. In New Orleans, what became the political football in a lot of this stuff was where we're going to re-draw the flood plains. And so the public officials and the Army Corps of Engineers, and whatnot. And they delayed and delayed and delayed. And of course that has huge impact on whether or not I choose to rebuild or not rebuild. Russ: And where-- Guest: Because--yeah. And what I'm going to do with my home, and all this. And in the meantime, you have sitting water, which cause mold, which is worse than if the water came in and went right back out. And so it became sort of a comedy of errors that really could have been avoided.
46:41Russ: You mention follies. So, those are two. Do you have any other, one or two, that stood out? Mistakes that were made that they might have done differently? That might have helped? Guest: Well, a lot of it is just basic incentives. Like, originally there was money sent to New Orleans to shore up the levees, or allocated towards doing the levees, before this storm. And then they just decided for political reasons that that money could be used elsewhere. And so it technically wasn't a violation of anything [?]-- Russ: Bad decision. Guest: Bad decision. Russ: Ex post, anyway. Guest: Of course, people sometimes--part of our studies, that was led by Russ Sobel and Pete Leeson, they really focused a lot on the corruption aspects of all of this: Basically that what FEMA does is create kind of a rent race. And so, FEMA allocates-- Russ: Before you go on, a rent race meaning rent in the economic sense of the term, meaning a chance to win a prize. Not related to apartments necessarily. Guest: Right. Russ: The economic term 'rent.' Just for our listeners. Guest: And that creates, then, the opportunity for those on the ground to do all the things to try to get those rents from FEMA. And so FEMA allocates based on politics, as you might imagine; it's a political entity. So, Russ [Sobel] had written several papers on this prior to Katrina. So, when Katrina happened we entrusted Russ with our public and legal sector team. And he and Pete Leeson, they wrote papers; they have a paper in the Journal of Law and Economics called Weathering Corruption which sort of looks at this issue. But they had a few others papers--one on knowledge problems that are associated with FEMA directions. But they also studied electoral politics and corruption issues. And of course they predicted that various different aspects of the political system to concentrate benefits and disperse costs; and of course Mayor Nagin is now in jail, with corruption charges. No one in this in the public officials comes off all that clean; but at the same time, for people like you and I who have been schooled in economics, none of it surprises us either, because it's just following basic incentives. So, again, I would stress one of the important lessons, even from when we're on the ground and we're learning, is to see how the structure of incentives impacts the direction of behaviors. So, if you want to change these outcomes, you need to change the rules of the game, not necessarily change the players. Because the players are all going to play the game facing the incentives that they face. And so what we really have to focus on is those rules of the game.
49:48Russ: So, let me challenge you. I want to stretch you a little bit here, Pete. There was an interesting piece, I think in The New Yorker, Kathryn Schulz wrote--I hope I get that wrong. If I got it wrong I'll edit it out. But, it was about the fact that the really, really big earthquake that might be coming is going to hit Seattle, Washington. It's a very provocative, interesting piece. And of course it's a black swan--nobody--I don't know if it's literally a black swan, but it's--by that I mean, probably not going to hit tomorrow; not going to hit next year; but it almost certainly will hit in the next hundred years, or two hundred, let's say, or whatever the number is. Might be 50. Might be 20. And I hire you--I'm the mayor of Seattle, and I hire Pete Boettke and I say, 'Pete, you've studied New Orleans. If, God forbid, Seattle gets hit with a catastrophic experience like this, what do I want to be ready for--what do I need to do? What are the lessons that you took from their aftermath? What are the mistakes I want to avoid? And what do I want to do that they forgot to do?' Guest: I'm going to give you my snarky economist response, which is-- Russ: 'Get the prices right.' Guest: No, it's actually to invoke one of your teachers. So, one of my favorite books in economics is by George Stigler. It's called The Memoirs of an Unregulated Economist. And he tells a fantastic story in there of, during WWII, Tjalling Koopmans wrote him an outrageous letter saying, 'George, George, I'm very upset. I've been told that you argued that in the case of a bombing of New York City, we should use the price system to evacuate and reallocate resources.' And Stigler writes back calmly, he tells the story, he writes back calmly; he says: 'Dear Tjalling, No I did not write such a proposal. But on second thought,' and then he goes through and writes how the market would be the most responsive and resilient. But he does make the point before he starts that, by saying, 'In the case of a bombing, recognize that all rationing systems will be chaotic.' So, in comparison to all the other chaotic systems, the price system will actually do better than all the other ones. So, now, let me move off of that-- Russ: Yeah. Go ahead. Guest: The real position, which is--but I think that passage in Stigler, we should all think about as a thought experiment and think about it seriously, because it's always: As compared to what? And a lot of times we think the 'as compared to' would be the way that we would do it if everyone followed in the right way and all the efforts were, everyone trusted the public officials; the officials were trustworthy; and everyone did it the right way. And we have to always do the 'compared to what.' But what I would stress is, first and foremost, that the proposition that's most key to Mill is the idea of the free mobility of capital and labor. And so I would love to see restrictions on capital and labor relaxed in the immediate aftermath of a horrific event. Russ: Give me an example. Guest: So, like what I was saying before about occupational licensing, right? Or any kind of regulations that would make it undesirable for people, including foreigners, to want to invest in your area. So, New Orleans could be not quite New York, but could be like New York because it could be a gateway into the United States from Latin America for a lot of business and commerce. In fact it already is to some extent. But it could be even more if it wasn't such a regulated and restricted environment. Russ: It could be more like Miami. And less like the south side of Chicago, say. Guest: Or, it could be like Hong Kong. Everyone can be like Hong Kong in that sense. Russ: Hang on. I've got to stop you there, Pete. I've got to stop you there. Because I want to come back to our opening conversation--that it's not just these simple things. And you just--I think-- Guest: just committed-- Russ: you just slipped into that: 'You know, if they just got rid of these rules, they'd be like Hong Kong.' Do you really believe that? I'm open to the possibility; I like the idea of it. I just don't know if I believe it any more. Guest: I believe it; but I don't believe that they'll get rid of the rules. And that's part of the culture issue, too. Right? So it's kind of like: Ideas--so I have a very simplistic kind of linear model in my head a lot of times. Ideas generate institutions or legitimate institutions. Institutions structure incentives and control the flow of information and the knowledge feedbacks. And that generates economic performance. Now, that-- Russ: Say that again. I love that. Say it again. Guest: Ideas legitimate institutions-- Russ: I'm going to annotate it. So, when you say, 'Ideas legitimate institutions,' you are talking about the fact that we might have some cultural beliefs; we might have some things that we perceive as principles. That's what you mean, right? Guest: Right. And so, think about this like: If I didn't believe something about private property, then if someone had private property, I would violate the private property all the time unless they had a policeman all the time looking over it. Russ: Correct. Guest: But if I believe that private property is sacrosanct, even if no policeman is looking at me I might not violate another's property right. And so I think it lowers the cost of enforcement-- Russ: Yep-- Guest: of the institution. So, ideas. And then these institutions, why they're important is because they structure the incentives that we face; and they generate a flow of information and the various feedbacks of knowledge that we need to learn. And then that generates our economic performance. But now, once I have that linear line, then we have to recognize that, what does it mean to live like--what does wellbeing mean? Wellbeing means more than GDP (Gross Domestic Product), right? We don't eat GDP rates. So, wellbeing--then what does flourishing mean? And those ideas about that, they feed back into the ideas. Right? And that's going to influence what institutions are acceptable and so forth and so on. And so there's this giant feedback: I take a very linear presentation and the next thing you know, I've got arrows going everywhere all over the place, because it gets very complicated very quickly. And we're very fortunate because we live in a heritage that comes from Europe and then transplanted into the United States, which believed in, had a variety of things that justified Western liberalism--justified market economies, private property, contracts, contractual-based society; and that generated these economic benefits that we've all enjoyed over the last 200-300 years. And so this is a huge blip in human history, that we've been able to do this. And so I think that those things matter. And deep questions like you've asked about, when Adam Smith is asking us to think about our moral sentiments or Hayek is asking us to think about our moral intuitions and the moral demands. And so we have to, as economists, open up to this idea of where we get these--where these sentiments, what do these sentiments suggest to us, because they legitimate or de-legitimate these institutions. So, as an economist, a lot of times, I'll just go: institutions to performance. But I always have to be reminded that those institutions don't get plucked out of thin air. They have these intellectual support networks which are in ideas, belief systems. Some of which are not scientific support systems, but mythologies and [?]superstitions and stuff.
58:16Russ: Yeah. There are traditions. The way you were raised. I think about, when you mention Baltimore, I think about any of the places you might think about around the world--the poorest parts of the United States, the poorest parts of Latin America, the poorest parts of Africa--where there isn't an opportunity for people to flourish. And you say, 'Well, what's wrong?' And the answer is: Everything. Guest: Yeah. Everything. Russ: Everything is wrong. The incentives are wrong, the culture is wrong. And we cherry pick--I'm going way off the track here because it's interesting to me--based on our ideology, philosophy, specialty. I think about Arnold Kling's three languages of politics. He argues that people look at the world according to a certain axis. So, if you are a conservative, you see the world as about savagery versus civilization. If you a liberal, it's about oppressors versus the oppressed. If you are a libertarian, it's about freedom versus coercion. Guest: Right. Russ: And I see myself all the time in those boxes, if I'm not careful. And I think a thoughtful person needs to go beyond that. And it's so difficult. Because it's true. It's true that New Orleans doesn't have good rules. But as you said, there's a reason that it doesn't have good rules. Guest: And it goes a long way back. You might even be able to say it comes from, it's origins are not the same as the rest of the U.S. origins. Russ: Maybe. I don't know. Guest: Maybe going back to its legal system. Russ: Napoleon. Guest: Yeah. Russ: It's Napoleon's fault. Guest: No, I mean--this is the whole thing of the legacy of these various different institutions that exist. I don't know how strong the path dependency is. I don't know if the footprint of history stays that long. But it seems like it does in some instances. Russ: Yeah, it seems to. Guest: And yet at the same time, we want to say--if you think about like the Hong Kong, Taiwan, China-- Russ: And anything is possible-- Guest: It can flip over. And so I think one of the things that we learned in New Orleans, especially in the book that Emily Chamlee-Wright and Vergil Storr and Nona Martin did, which is an oral history of how they came back--and this is the oral history really of the 9th Ward and whatnot--one of the things that you see there is that you actually do see some--it's based on these oral histories. So it's 9th Ward and other areas of New Orleans, and they took a lot of structured interviews and they recorded them and then they brought it back; so it's people telling their own story. And you do see in that a lot of character that is highly desirable. Right? So it's not just a story of people that are--when we translate bad culture into economic terms, it usually means that they have a shorter-term time horizon. Russ: Yeah. Guest: And so they don't care as much about the future, so that means they are going to act opportunistically on that. They don't have, like, a work ethic, and blah, blah, blah--a bunch of different characteristics you can-- Russ: Or my favorite--grit, don't have enough grit. Guest: Yeah. Grit. Russ: Grit's important. Guest: It is. And going back to, one of your favorite players, and my favorite players, Tom Brady--he has the report card on what they expected him on draft day. It still hangs in his locker room. It says his legs are too skinny; he's not going to survive in the NFL (National Football League), blah, blah, blah, and all this stuff. And he still has it there. Because he has that grit. That work ethic, to fight that. And we associate that--but one of the things that this story tells us--and I highly recommend all your readers to take some time to look at this, because it's in their own words-- Russ: The oral histories. Guest: The oral histories. You will hear a story of a people that, I really believe--and this is a belief; note I use the word, even, right--that if the rules of the game were better, their behavior patterns would be more in conformity to the things we associate with advanced economic progress and all of that. But right now, the payoffs that they face--it's not like they are confronted with payoffs and then choosing the worst payoff. Right? It's instead that the rules of the game are structured such that the best they can do given their situation is to behave the way that they do. Which is not conducive to advanced economic growth. And, I mean, I know that that's too simplistic of a story, but it kind of is like the hanger that you kind of put the analytical dress on, because you've got to look and see where these payoffs are going, and the--and right now, it's still the case: New Orleans hasn't adjusted itself. And that's one of the reasons why it's having--its population has declined and the other kinds of things that are associated[?]. So, when we did the 10th anniversary, HBO did it, and CNN (Cable News Network) did it and everyone like that, there's lots to celebrate. There's lots of civil society. There's lots of revibrancy[?], the French Quarter is back--all of that. But the metropolis as a whole is not what people hoped it to be in the remaking of it. And a large part of that is because that particular environment is still not as conducive to economic investment in development in the way that one would hope it would be. And so that's what leads us to do that. You asked me about lessons learned. I think one of the big lessons learned, of course, is that you can't deal with anything but this interaction between the public, the private, and civil society. And that the groups who have negotiated that effectively, those are the ones that actually experience high-end economic growth. We don't live in a society yet where we've seen someone just have a private sector and civil society sector and no dysfunctional public sector and somehow survive. There's always the public sector at the moment. And the question is: How do you negotiate the relationships between that and the private sector and civil society? And the catch-phrase, which is due to my colleague at Mercatus, Adam Thierer, that I like is, on the private sector side what we want to have is 'permissionless innovation'. We want to be able to have people who seek not to always have to get permission from public officers about how to come up with private solutions to these commercial problems or public problems. And so we need permissionless innovation. What are the rules under which we find that? That's where you are going to see vibrancy. When you have to ask for permission for everything, that's when you are going to see stagnation.
1:05:48Russ: So, I'm going to--I'd like to make three comments. They're not related, but they just came to my mind. And I want to get them down here on paper. Guest: Yeah, yeah, sure. Russ: And then I'll let you react to them, and we'll close, because we're over time. But that's okay with me if it's okay with you. Guest: Well, I'm enjoying the conversation. Russ: Me too. Very much. Guest: And I like Arnold's characterizations, too. I didn't do justice to it. I don't know if listeners who haven't heard that figured out what I was saying. What I really was trying to say is that we cherry-pick the data to confirm our pre-existing worldview. Guest: Which pocket we sit in. Pete Leeson and I--I apologize, but Pete Leeson and I have a new book coming out; it's actually been published but we haven't gotten our copies yet: it's an edited volume on the economic role of the state. And in the introduction to that, we call it 'presumptions of political economy.' And basically the easiest way to put it is that people are optimistic or pessimistic about private predation or public predation. Russ: Yeah. It's true. Guest: And so-- Russ: They only notice one of them, though. Guest: That's the problem. And traditionally, economists that believe the state has to have a major role, they are pessimistic about the private but very optimistic about the public. Russ: And we're the opposite. Guest: And other people are the opposite. So, unless you sort of work through that, that's a way to sort of frame how it is people tell political economy arguments. Russ: That's a good example. Guest: That's why I think Arnold's is very good, because the vision that people have about who they are and who their 'enemies' are--quote, unquote--that's going to be-- Russ: Who are the bad guys. Guest: Yeah. That's going to be very influential on the way that they sort of frame their world around them and see--that's how ideas then impact institutions. And those institutions then, we can get more technical in our economics about the marginal rates of substitution and the equal marginal principle and that kind of stuff. And that gives us this--you know, outputs. But then, once we get to outputs, again, we're going to be like: Is that what it means to have a flourishing human life? And those kind of questions. Russ: Yeah. That's right. So, here are my closing thoughts. First, contrary to some economists--who we will not mention--but most economists understand that destruction is not good. And so the Bastiat broken window principle applies. Breaking windows does not stimulate the economy. The Louisiana or New Orleans economy hasn't been stimulated by the destruction of Katrina. That's my first thought. My second thought is a long-time theme that listeners will recognize, which is: Sometimes to escape from poverty the best thing is to give people luggage. That is, help them get out of town. Get somewhere different. Start over. If they want. And in this case, they were forced to leave. Some of them were subsidized to leave--the state made it easier for them to leave. Which was a kindness, for them; and they took advantage of it. And they didn't come back. Because they did better elsewhere. That's a hidden lesson that I think is easy to forget. But the third thing, to come back to what we've been talking about for the last 15 or 20 minutes which I think is important about the three legs and the simultaneity problem and what I've been calling over and over again in the last 6 months, the 'prairie problem'--the idea that things have to emerge in a certain sequence; there have to be certain things in place before these things are important. You can't just snap your fingers and say, 'Let prices adjust,' because there are these cultural and other factors. On an optimistic--so I've been kind of pessimistic. Because I'm pushing you. But the optimistic view is something like this: Your point is really that, while letting prices adjust or letting the free movement of labor and capital may not be a magic solution, it's hard to get ahead without those things. And perhaps--well, not perhaps: I believe that culture and the civil society part that we're talking about is one of the keys of economic development and decent life. It's all endogenous. It's all simultaneous. It's all emergent. And when we get the public policy a little bit better, the culture can change. It's not fixed in stone. So, it is hard to change the rules of the game. Obviously they are there for a set of incentives as well, they are there for a reason. But if you can have some heroism and some encouragement and maybe some economic understanding you maybe can move to a place where you give the culture a chance to flourish and emerge that will make the system work a little bit better, all three legs. Guest: Yeah, I agree with that. I just published a paper with Olga Nicoara--you might have-- Russ: Oh, sure--she was my student. Guest: Yeah. And we did a paper on what we've learned since the collapse of communism. So, one of the things that we did this time that was different was we sent out a survey to leading economic reformers--about [?] over in Poland, and various different kind of leaders or whatever. Including Kornai from Hungary, who is the famous economist in this. Anyway, one of the things we came back and we were struck by is how people, what they thought the lessons were. And two of them all emphasized, which relates to this last point that you just made, is leadership and moral character of the population. Now, those are two things which economists are terrible at talking about. Right? It's just not what we do. And so we ignore it. So, think about like our standard economic models. We want to make sure that individuals of measure zero, so we are mainly talking about no--the person doesn't have any market power or whatever. And if he does, it's always going to be in a negative way rather than in a positive way. So, we don't really talk about market-makers as much. We might in our appreciative theory, but not in our actual textbook, formal theory. Russ: Nuts and bolts. Guest: And so as a result, what they found in these different discussions is contingency of leadership. So, for example, in Russia it mattered, for example, that Sobchak died of a heart attack, because then the alternative was Yeltsin. It might not have been Yeltsin had Sobchak not--and he might have been a totally different kind of leader. This kind of leads to this kind of weird area of conjectural history--the 'what ifs', which is always a strange kind of thing to think about. But I actually think it's hard for us not to. And let's go back even to your first point, which is extremely well taken, which is, a lot of economists did say, at the time of Katrina, that, 'Oh, watch. You are going to see: New Orleans is actually going to be more vibrant now.' Well, it is true that more investment in direct building took place, as measured by monetary outlays. Russ: Yeah. Guest: It just turned out that if you study the data, all of a sudden there's a blip up in spending on investment. Well, that's because you didn't capture the destruction, that was more the pattern of resources that was spent elsewhere. So 'what is seen, what is unseen' is very real in all of these environments, and a lot of people get confused by that because of our ideas. But the other thing, as I think, is why I call this--it's actually an idea that comes from the economist Steve Payovic[?], which is, the interaction thesis. So, between the cultural and social, the political and legal, and the economic and financial sector, the interaction between those--right? And so all I was saying before about the resiliency or trying to communicate is that I think the human spirit can get atrophied by various rules of the game. And we can become rather unpleasant people. But I think we can actually adjust. We can speed up much faster than what you might think. So, at one time I was a college athlete. I haven't really been serious working out since my late 20s. I'm no longer like that. If I ever wanted to get back in that kind of shape, it would be a very, very long process. And of course I'm now 55 rather than 28, and so there's a huge difference in what I could maybe ever do. But my skill sets have atrophied in a way that I don't think the human character has atrophied. So I think that if you take a young man and you don't allow him to get a job and not working and all these things like that, he appears to be someone who might have a lot of character flaws. But all of a sudden, if you put him in a situation and you allow him to find work and then see dignity in work, you might end up by seeing that change very quickly. And much more quickly than we imagine. So I don't think the dependency argument is as strong as we might think it to be. We do see the effects of the dependency culture. But that can be eradicated quickly by sort of changing the rules. And now, what does that mean? And this goes back to a point you made about, that it's not perfect, but it's--I always used to try to say in the shock therapy versus gradualism debates, is that if you actually look into the analogy--which is a bad medical practice--but if you actually look, it's not like they ever promised, 'I'm going to give you shock therapy and then tomorrow you are going to be a perfectly healthy person.' They said, 'We need to give you shock therapy to get you on the path to normalcy.' And I think that that's what you always have to remember. Because the way people thought about it in the judgment was gradualism versus shock therapy. And so, 'Oh, you're a market fundamentalist: you believe in shock therapy. So aren't the results disappointing to you?' And the question is: I don't think, not that I gave a shock to the system--which by the way, in many instances they rhetorically called it a 'shock' but in reality they never put any voltage on it. So you have to sort that out. But this idea that it's on the path. So I would think that if we changed--the variable that's at our disposal is the rules of the game. We don't really have that much control, directly, over moral character-- Russ: culture-- Guest: other kinds of things. So, you've interviewed Paul Romer on the cities. But I also think that one of the reasons why he started on the charter cities was precisely this issue: That he became focused on this idea that it's the rules of the game which is the variable that we can--so, if you can imagine baking a pie or something like that, you have recipes or rules, these rules. You have, you know, people, and you have resources. Russ: Raw ingredients. Guest: Yeah. And the thing that you can play with--the raw ingredients are given, the people are kind of given. And the thing that as a policy analyst that you can adjust is the rules under which people interact with each other and interact with resources. So, we have to constantly fight the idea that all it is, is the rules. But we have to recognize that rules might be the only thing that we can vary in the thought experiment.


COMMENTS (16 to date)
Joseph Crivelli writes:

Your discussion of economies and countries that work despite bad ways of doing business -- or Smith's 100 obstacles -- makes me think of where I live here in Italy. So often man-on-the-street responses to why things are so screwy here repeat the mantra of that's the way it is here. You can find a mess in any corner of society. There's a restaurant here, for example, everyone seems to know, that launders mafia money. Every plate of china and flatware must cost about $70 per place. It also was the source of huge government revenues that renovated and expanded the restaurant and built a 4 star superior hotel on the floors above it. It has been a couple of years since the work was mostly finished but you can still find working electric radiators, for example, right on the restaurant floor simply without the metal cover -- all the wiring and the filter system is open right there, clearly endangering clients and in violation of code. There's lawless order. It's you don't like the restaurant or school whatever, then don't go, they say. It's just bizarre here. Is there anyone studying society in Italy and reporting on it in English? Italian's talk about it sometimes but it doesn't seem that they study it with any improvement outcomes in mind. I'm really curious and would love to read along or hear about it on EconTalk. Whether it's the economy or politics or the school or healthcare systems, it's all very bizarre here. Italy must be a fascinating place to study and yet it seems to be largely ignored. Here you hear about scandal after scandal but not really about why or how it works despite of them.

Greg G writes:

I thought the most interesting part of the podcast was the discussion of confirmation bias in presumptions of political economy. It was observed that people's views and intuitions in this area tend to be driven by whether they fear public or private predation - but often primarily just one or the other.

I think this is a very useful way to understand how political movements and ideologies form. But it does occur to me that we should be worried about both. Power tends to corrupt in all its forms, not just some of them. Mixed economies in constitutional democracies have provided the best results we have seen so far in human history in terms of economic prosperity and individual freedoms. Maybe the reason for that is that the compromises necessary in that system best limit both kinds of predation.

Fred writes:

A very interesting podcast. Thanks for producing it.

My only quibble is at the very end you conclude with the idea that the only thing we can really change are the rules of the game, which will hopefully have an impact on the culture, and then give the feedback loop of economic success everyone is looking for.

We can control more that the rules of the game.

Immigration is the defining issue of our time. The influx into Europe from the middle east, and the influx into the US from the south, the far east, and now even the middle east, brings with it cultural realities.

The influx of course can be controlled. But there seems to be little will to do so.

You can have all the rules you want. But when the players in your game have no interest in following them, well, good luck.

The west should be careful about who it brings on the team. Everlasting nirvana with unlimited virgins may trump your western rational actor incentive theories. And by the time you find out, it may be too late.

Michael Byrnes writes:

I thought the "rules of the game" stuff at the end was interesting, but on its own it isn't enough. People also need to perceive that the rules have indeed changed and trust that they will stay that way.

People are going to act, not based on the actual rules of the game, but rather based on what they believe those rules to be.

I think that for a lot of people in various situations that is a VERY tough sell.

So even in situations where we may succeed in changing the rules of the game it may not have the desired effect.

And in situations where people can be convinced that the rules have changed, they better really have changed. Otherwise those who are preaching about the new rules will lose trust.


Dmitrii writes:

Dear Russ,

as I always say 99% of podcast are of excellent educational quality. But the ones where you and your guests discuss economic history of countries outside the US quite often seem rather questionable.

This one is no exception. I am of Russian origins myself and very interested in the history of my country. Also my parents we born in the 60's and saw the 70's with their own eyes.

Just try to combine common sense with well-known historical facts about 70's in USSR:

Just to give you one example, there's a study that was done in the late 1970s that estimated the amount of black market dealings for gasoline in Moscow. And they put that figure at like 80% of the transactions of gasoline were bought in non-official markets, in some sense.

This is just ridiculous! It is a well-known fact that in the 70's a personal car was a rare thing, people used public transportation all the time. So what would they buy gasoline for?

And the gasoline for trucks was distributed by companies which owned them, completely legally. I guess every once in while the serviceman would illegally take some it (although for what purpose?), but 80% is a ridiculously high share, the transportation system couldn't have operated if that were the case. Just common sense!

Brezhnev's era is called not only the "era of stagnation", but also the "golden age of socialism", and it is called that way for a reason.

Although I have to say that the second part of the podcast was good.

Michael Bromley writes:

Love the idea of contingency here. Most appropriate.

If I could simplify the language a touch, I would reduce the idea to:
1) conditions
2) choices

Actors cannot choose their conditions, but they do have certain choices therein. Their choices lead to the next set of conditions, which shape subsequent available choices.

Mark Crankshaw writes:

@ GregG

It was observed that people's views and intuitions in this area tend to be driven by whether they fear public or private predation - but often primarily just one or the other...I think this is a very useful way to understand how political movements and ideologies form. But it does occur to me that we should be worried about both. Power tends to corrupt in all its forms, not just some of them.

Agreed.

However, in my view, the root of the problem is the use of the metric "private" vs. "public". These terms are very broad, overlapping, incoherent and ambiguous.

The metric I prefer is evaluate my relationship with people and institutions is: voluntary or involuntary. Viewed with this ideological "lens", the problem with the abuse of "power" comes from only one direction, that is, those relationships that are involuntary in nature.

The entire "public" sphere, from my perspective, is comprised of involuntary relationships in which there is a massive asymmetry of power. Taxation, regulation and the entire edifice of the "State" is an unwanted "relationship" with those I hold with the deepest suspicion, if not contempt (whether they be other voters, politicians, bureaucrats, or military officers), whose power over me is very great, and over whom I have virtually no power to control or influence. I have little power to resist or refuse these "relationships" (except the cliched love-it-or-leave-it "solution" usually offered by Statists to either move to another country or become a hermit in a remote lightly governed part of the globe).

The "private" sphere is not completely so. One reason I am not a leftist is because I do not equate "private" with multi-national corporations nor do I equate "public" as "mine" or "us" but rather as "them". I view the relationship between large corporations and the State as incestuous. It would then preposterous for me to assume, as leftists evidently do, that the State will "protect" my interest, an individual with insignificant wealth and no power that they have absolutely no care for whatsoever, over the interests of those it is "in bed with" who also have great wealth and economic power. Do leftists assume the "masses" share their interests, have coherent political power, and will use that power to "check" economic power in the political arena?

I do not suffer from that delusion: I share interests with very few other voters, I view the bulk of the electorate as a dull, incoherent mob led adroitly by the nose by the ruling elite, and believe there is no readily available check on economic power on offer in the political arena at my disposal.

On the contrary, the first image that crosses my mind when I think "private" is the proverbial lemonade stand. My relationship with the patron of a lemonade stand is perfectly voluntary and completely devoid of power (let alone massively asymmetric power). If I want to buy lemonade at the price demanded by the patron of the lemonade stand, then a voluntary exchange is made to the betterment of both parties. The same holds with personal relations and employment: if spending time with or working with another is satisfactory, then maybe there will be a relationship, if it is not, there will be no relationship. I make similar and countless commercial and personal transactions each and everyday. I assume leftists do as well, so why do they equate "private" only with large corporations?

My relationships with politically powerful, active and integrated multi-national corporations is much more ambiguous. I can (and countless time have) easily engage in voluntary, mutually advantageous relationships with large corporations that are indistinguishable from the proverbial lemonade stand. (I assume leftists have as well, so why the vitriol and hostility?). However, corporations can and do act politically and often do not share my political interests. In the political sphere our relationship ceases to be voluntary and mutually beneficial, and quite often so.

The problem with the political is that it is, by nature, adversarial. If we all agree that X is good, then doing X will be inculcated naturally and culturally without the necessity of political direction or enforcement. The political field is reserved for those aspects where there is no agreement about X and is dominated, much like warfare, by zero-sum power games replete with absolute winners and absolute losers.

Mixed economies in constitutional democracies have provided the best results we have seen so far in human history in terms of economic prosperity and individual freedoms. Maybe the reason for that is that the compromises necessary in that system best limit both kinds of predation.

Again, I agree, but I also believe that is an exceedingly low bar to clear. For most of human history, both prosperity and freedom were extremely meagre, and remain so for significant portions of the worlds' population. A "constitutional democracy" may be the "best" we can manage but it still is thoroughly rotten with extravagant levels of political predation (just one example: the DOD trillion dollar yearly budget).

I don't see much, if any, limits to political or economic power even in constitutional democracies taking place. Rather, the ruling elites have decided that allowing the rest of society the limited freedom to pursue their economic interests provides greater political spoils to the ruling class than does an absence of such freedom. Has any other ruling class been as large and economically well off than those within constitutional democracies in the whole of human history? I suspect not. But why must that sorry political mess be tied to a sorry economic mess of a "mixed economy"?

Viewing the world as I do, I would like to limit all of my involuntary relationships as much as humanly possible. Mankind has, in the past few generations, finally began to decouple political and economic power by denationalizing "State run" industries in formerly economically sclerotic socialist regimes. There is so much more that can be done economically in all economies to decouple the economic and political. How about abolishing State-run schools, state run police forces, post offices, or anything else the State does? Surely worth a consideration. No, I think we can do much better than a "mixed economy"...

As for our political "culture" (or lack thereof) and constitutional democracy, I truly and regretfully do believe you are right. A "constitutional democracy" is merely the agreement not to weaponize aggressive political conflict, it is war without the bombs. True, much better than war with the bombs, but still nasty and based solely on the resort to brute force. Most western democracies have led to a delicately poised "standoff" in this brutal political "knife fight" that has indeed allowed greater levels of freedom and prosperity than held previously. (However, a constitutional democracy may be necessary but not sufficient: non-western models have not always yielded this benefit, there may be a cultural component, see 19th century South American versions of constitutional democracy). I hope we can do better, but this archaic, fetid, dysfunctional mess actually might be the "best" we, as a species, can do.

x writes:

Interesting discussion.

The New York vs New Orleans discussion should include the very important different strategic position of these two cities. NY might lose its top position eventually, just as Rome and Athens did, but that will take a long time. Meanwhile, people put up with corruption and regulations for the chance to be in NY. Not the same can be said about New Orleans.

"...culture and civil society and the public sector interact" - isn't the public sector the product of culture, and isn't culture same as the civic society?

"the variable that's at our disposal is the rules of the game" - aren't the rules of the game a product of the culture/civic society? Sure, New Orleans culture (therefore rules of the game) could be easily changed by migration, but again, the city doesn't have a good enough strategic position to attract new people.

casey writes:

good podcast as usual, i believe you made the whole podcast without uttering 'uber' or 'airbnb'.

However, I am disappointed to report you did use the word 'prairie' ( I skipped the previous podcast as I'm worn out on this particular analogy.. :)

Jerm writes:

These comments are a good reminder of why I slowly explain the definitions of "public" and "private" to my students during the "public goods and externalities" chapter. It's easy to forget that the economics definition is very specific (and not always intuitive).

I was also a little bummed to hear the comparison of New Orleans to New York (and 9-11). The situations are so different. A better comparison would be between New Orleans and Biloxi (or some other gulf community that was hurt by Katrina or the other storms), as marginal differences in culture and society would probably yield more interesting and useful lessons.

Greg G writes:

Mark,

I am afraid I can't answer most of your questions about "leftists." I don't consider myself a leftist and I can assure you that those who do consider themselves leftists do not consider me to be a spokesman for them. My understanding is that they have a lot of disagreements with each other.

One problem with your desire for a world where all choices are "voluntary" is that the overwhelming majority of people will not voluntarily choose to define private property in exactly the way you do. So anarcho-capitalism founders on the fact that, in order for it to work, most people need to voluntarily choose it. And yet, that is a choice they do not voluntarily want to make. So there's that.

You say that getting the best results in human history is "an exceedingly low bar to clear." I think the irony in that statement is self evident, especially in light of the fact that there is no sign of anarcho-capitalism clearing any bars of any kind.

I agree with you entirely about the best way to obtain lemonade but disagree about how far that will work as a metaphor for other economic relationships in a very complex economy.

Mort Dubois writes:

Interesting episode, but I must have missed the summary of what actually happened in the aftermath. Did the white areas recover faster than the black areas? Is that even a good way to frame the question? Even after looking at the papers, I'm still a bit mystified as to whether recovery can be described or measured in some more objective terms, and what those terms might be.

For a different, anecdotal take on the recovery, I recommend a recent This American Life episode:

http://www.thisamericanlife.org/radio-archives/episode/565/lower-9-10

As always, thanks for a provocative discussion, and thanks to Lauren for the transcript.

Mark Crankshaw writes:

@ Greg G

Sorry if you felt that I was considering you a leftist (or a spokesman of 'The Left'). I do not believe you are a leftist, you seem reasonable enough to me. No offense meant.

Nor I am an "anarcho-capitalist" either, nor a spokesman for any political movement. I am simply in favor of a world that works better for me.

From my view, however, it is not the opinions of "the overwhelming majority of people" that stands in the way of my "better world". The overwhelming majority of people are preoccupied, indifferent, and prone to supporting the "status quo" and will only "choose" whatever world is presented to them by whatever ruling elite is actually running society.

I wasn't around in the 1960's, but when I watch a movie from that era (or those eras before), it strikes me how little has actually changed in western society. The major societal structures, norms, and political systems were already firmly in place. Whatever changes that have occurred in the structure of society or the political system since then have been incremental, cosmetic and largely peripheral.

The opposition to social and political "change" comes from the minority of people who actually hold effective political power. This is so whether that minority governs through constitutional democracy, fascism, socialism, or communism. As ruling groups are drawn disproportionately from the most "successful" members of society (the measure of "success" may vary depending on the political system), this ruling group is also drawn disproportionately from those who benefit most from the current political and social environment and those who have the least to gain from wholesale change in the current social and political system. Once the Bolsheviks secured power in Russia, they immediately became extremely "conservative" with respect to political change.

Since the existing order in the US predates even the oldest members of this ruling class, it is evident that even the current ruling class didn't "choose" the current political and social order, but have largely "inherited" it, making slight modifications, as need be, to suit their current tastes and interests. "The overwhelming majority of people", myself included, are simply swept along as if adrift in a strong current.

Hence, I believe that the only avenue to political and social change is slight, incremental change directed by the ruling classes. As I noted in my previous post, I believe that the ruling classes in the West have slowly, incrementally and successfully transitioned over the course of 200-300 years from Monarchies, that provided little to their subject classes in terms of freedom and prosperity, to Constitutional Democracies, that provide a greater level of freedom with respect to choice of occupation and private ownership of production.

I do not believe that this was a deliberate "choice" made by the ruling elites of that epoch, but rather due to a series of events largely outside of their control. Since, in my view, ruling elites are in the business of predation, what they are interested in is 1) securing their position at the top and 2) maximizing their exploitation of subjects classes. The constitutional democracies that exist today fulfill both of those ruling class interests: the ruling elite maintains permanent control of the political and social system (since they direct, fund and control ALL political parties and entirely direct, fund and control the media and education establishments), have successfully staved off all attempts of political revolution, and they have maximized their exploitation of subject classes to unprecedented levels.

This maximization of exploitation has occurred, ironically enough, the more they allow their subjects to thrive and prosper. If one is a bank robber, then it is better to rob a wealthy bank than a poor one. It turns out that the political means, as described by Franz Oppenheimer, can pay off far better when ones' subjects are productive, ambitious, innovative and prosperous than it does when ones' subjects are poverty stricken wretches. Economic freedom, economy opportunity, trade liberalization, and the roll-back of dead-weight institutions like the Church and the State are highly correlated with increased productivity, ambition, innovation and prosperity. It is no coincidence that the ruling elites of Western nations, especially those that are most affluent, have slowly, incrementally and unanimously moved in that political direction.

My only hope is that the ruling classes of the West decide that it is in their interest to move further in that economically "liberal" direction, by further eroding the State churches (where they still exist) and state run enterprises, and reducing the burden of the State on subjects. I favor incremental change--and I am almost certain to get it. If I am better off with the State eventually eliminated, so be it. If some remnant of the State exists and that makes me better off, that's fine, so be it. I have no certainty here as to where the "ideal" balance for me is, and due to the incremental nature of political change in our system, I am unlikely to live to see anything like "anarcho-capitalism" regardless, so it's no particular goal of mine. But clearly, more liberalization can be accommodated, and to my benefit...

Since the ruling class does have factions, each competing for dominance, in my view, it is best to pit one ruling class faction against another. If reducing the burden on the subject is to be done by reducing the "take" of any one faction (education, the military, social "services", etc.), it is my hope that a "competition" is created to force the reduction from the political predation of the other guy. Give them all guns, line them up in a circle, and let the firing squad begin. Use their own self serving nature against them. You are right that "the overwhelming majority of people will not voluntarily choose" this outcome, but then again they have never "chose" much of anything...

Greg G writes:

Mark,

No worries. No offense taken here. Just because I get snarky doesn't mean I'm mad. Thanks for clarifying your views.

I would be inclined to say that "the" ruling class that you speak of is not some unified group with a common understanding, but a lot of individuals, all having their own views on governing - even within particular factions. Their views probably do tend to be more like each other's rather than yours but that 's just a function of the fact that your views are fairly unusual once you get off libertarian sites. Politicians compete with each other for influence much more than they conspire to get particular results. Politics is a kind of marketplace of ideas and I think we agree that it is a good thing politicians are forced to compete to keep their seats in a democracy.

I did live through the 60's and a lot has changed, especially for women, racial minorities, gays and people living in poverty throughout the world. The millions of people who have risked, and currently are risking, their lives to get to places with better governments tend to see a lot more differences between governments than you do.

Mark Crankshaw writes:
Their views probably do tend to be more like each other's rather than yours but that 's just a function of the fact that your views are fairly unusual once you get off libertarian sites.

I agree that my views are not "mainstream" (and thank goodness for that, given the dire level of "mainstream" political understanding in this country). My contention, though, is that the views of the individuals within the ruling class are much more like each other's than that of the general voting public (exemplified in Bryan Caplan's "Myth of the Rational Voter").

I agree that politicians compete, but it seems, at least to me, that they do so less in the marketplace of ideas and more in the demagogic manipulation of the fears, ignorance and bigotry of the voters. Once in office, and once the heated partisan rhetoric has been forgotten, politicians then attend to the preservation of the status quo in the social and political order as demanded of their ruling class paymasters.

a lot has changed, especially for women, racial minorities, gays and people living in poverty throughout the world.

This is the standard depiction of the result of the sixties I have countless times heard (that I have most often heard from "boomers", btw). I will not deny there have been a lot of changes since I was born. What I have been strongly struck by, however, is how much has not changed and how deep and fundamental that continuity is.

Things are better for women, especially for affluent women, but for most, and especially non-affluent women, I don't think there has been real fundamental change. (Just ask any self-described "feminist").

Racial Minorities? Dunno, I've taken a stroll in Detroit, DC, and Baltimore in recent years, seen the riots and protests on TV (similar to that of the 1960's), there's been some changes, sure, but a lot of inner city minority communities are as hopeless now as they were then, if not more so. How many millions of minority men languish in prison nowadays? Has the gap between white and minority mean income and unemployment rate shrunk lately? Those gaps were actually smaller in 1970 than today. Are minority families more or less dependent on government support than when I was born? Segregation, though not legally enforced, is more the norm now then it was then.

However, I still see all these changes, some good, some bad, as cosmetic, much like painting the walls of the house or putting up new curtains. Such changes can definitely improve the looks and livability of a home, no doubt. What I was getting at though are the deeper super-structures of society akin to the foundation and the actual physical structure of a house in engineering terms. Those types of deep, fundamental changes in the structure of society and its institutions has been curiously lacking.

I actually do agree that there are tremendous differences between governments, actually. In statistical terms, I agree with the range of the distribution but disagree upon the location of the mean. Rather than believing in a range of good to bad with a mean of neither good nor bad, I see the worlds governments (past and present) ranging from bad to hideously horrible with a mean of lousy. That is actually a very wide spectrum, as I see it. I can quite understand the millions who would risk their lives to leave hideously horrible to get to merely bad. Better, however, does not imply good...

Robert Swan writes:

Another enjoyable and interesting discussion.

I happen to be rereading Richard Feynman's "QED", a transcript of four lectures he gave on quantum electrodynamics. These lectures show that our "intuitive" model of light (travelling in straight lines, angle of incidence = angle of reflection, etc.), while accurate in many circumstances, leaves even everyday things like partial reflection and mirages a complete mystery. QED explains everything about light's behavior, but there is a cost. It's hard enough throwing away your intuitions, but you also lose the certainties; QED only gives you probabilities of events.

At about the 12 minute mark in the podcast it struck me that there was a parallel with the economic models. Supply and demand curves (etc.) are quite like the straight beams of light in that they really are a massive simplification of underlying mechanisms. And they are surely at least as prone to being wrong in some circumstances.

Given that humans are probably a bit more complicated than photons, it seems quite unlikely that we'll ever get an equivalent of QED for economics. It might well be that economic modelling is like weather forecasting: mostly OK when things are stable, but you can only really know in hindsight.

I do recommend Feynman's book. It's not as light a read as his memoirs, but his insight and humour shine through. It has certainly made me look at light in a different light.

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