Richard Epstein on Cruises, First-Class Travel, and Inequality
Jun 27 2016

cruising.jpg How should we feel about cruise lines that offer special amenities for top-paying travelers, or first-class sections of airplanes? Do such consumption inequalities harm the social fabric or is there more to the story? Richard Epstein of New York University and the Hoover Institution talks with EconTalk host Russ Roberts about these issues arguing that these kinds of unequal treatment provide benefits beyond those who receive the top-of-the-line option. The conversation then moves on to a general discussion of inequality, taxation, and redistribution.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.

READER COMMENTS

Greg G
Jun 27 2016 at 7:43am

I urge all EconTalk listeners to actually read the NYT article referenced here and not accept Richard Epstein’s straw man description of it.

The economic fallacies and moral condemnation of cruise ship operators he sees in it are just not there. Epstein appears to be projecting his own sense of moral outrage onto Schwartz.

The NYT article is descriptive not prescriptive. There is an assumption by Schwartz that extreme and growing inequalities of wealth, income and class are problematic and that people should be aware of them. The profusion of new luxury options on cruise ships are offered as evidence for the growing inequality – not as the problem itself.

No bans or regulation of any type are advocated. No where in this article is there any suggestion that there ought to be only one level of service where we “standardize everything.”

Cruise ship operators are portrayed as doing exactly what a rational economic actor would be expected to do in the situation. Different cruise ship operators are described as having different views about the trade offs involved in making new and exclusive service levels more or less transparent to those unable to afford them. Some worry that transparency will make non-elite cruisers resentful and less satisfied with their vacations. Others see more visibility as a good opportunity to market the new service to possible future customers.

Charles
Jun 27 2016 at 10:17am

The guest makes the mistake of assuming that utility and wealth are equivalent. It is possible that my utility function is, in part, based on my rank within society rather than purely the absolute level of wealth. Therefore, a change in wealth in which everyone goes up, but the rankings shift, may not necessarily result in an improvement in utility for everyone.

rhhardin
Jun 27 2016 at 11:20am

As said, the rich consume only a fraction of their income, which is a measure of their actual load on the economy.

Far better than the rest going to beneficience is the rest going to serve as capital in other ventures, even if the rich guy just leaves it in the bank, where it continues to do that.

It’s seed corn, wealth that’s been created but not consumed, going towards next year’s crop.

Distributing the seed corn to the masses for today’s consumption is a really bad idea.

As for the rich doing charity, that’s probably hugely ineffecient, a cheap grace indulgence. They can’t figure out how to do it any more than other central planners usually do.

So I’d add the one and take out the other from the argument.

Greg G
Jun 27 2016 at 12:28pm

rhhardin,

Let’s not forget that the reason you want seed corn in the first place is so you can use it to produce the much larger volume of corn you want for consumption.

I see no evidence that there is any shortage of investment capital today. Never in human history has more capital been chasing fewer promising investments.

It’s not clear to me if you are arguing that all the charity should come from the lower classes or that “doing charity” is a bad idea for everyone. Either way, I think you are wrong.

jw
Jun 27 2016 at 4:30pm

Best. Guest. Ever.

Since I can’t argue with Epstein, I will add some comments:

  • As a traveler who only flies first class, I can confirm that there are other reasons for people to pay for that option than those discussed. When we fly internationally, the cost of the plane tickets can be more than the rest of the trip, but that is factored into how often we go and the rest of the travel budget.
  • I can now fly round trip from coast to coast in first class for less than I could for full fare coach in 2000. Inflation adjusted, that is a major decrease.
  • I just checked, the fully changeable, round trip, refundable coast to coast coach fare is $200 less than first (about 12%). For a last minute traveler, this is negligible.
  • Southwest has a first class-like pricing option. You buy two seats, get on before anyone, and get a full refund for the second seat if the plane is not full.
  • Utility costs are also a big part of the equation for the top 1% (Epstein stressed productivity). The Bridge suite at the Atlantis is $25,000 per night. That is of course prohibitive for even the top 10%, which might be 25% of their yearly income. But on a percentage basis for Oprah, it would be the equivalent of $25, so why not stay there?
  • These programs have been around a lot longer than Schwartz makes out. You never had to see another gambler at the MGM if you stayed at the Mansion and could get to the front of any Disneyworld line via exclusive and “secret” side doors if you had an Amex Black card. Schwartz needs to understand that these programs are enormously profitable for the companies that offer them and keep other prices down, as discussed.

Greg G,

Schwartz’s article is snarky, obviously biased and highly judgemental. He is trying his best to look down on a class as he imagines that they look down on him. What is hilarious is that he is also talking about the 0.1%’er (used to be 0.01%) that gave him his job.

Dmitrii
Jun 27 2016 at 5:05pm

Russ, let me say that the way you handled the discussion was amazing – in the beginning I thought it would be a one-sided conversation based exclusively on pro-market arguments; it must be very hard trying to challenge the speaker with points of view you don’t necessarily support.

It seemed like the whole argument of Richard Epstein pivoted around this notion of Pareto improvement and he was willing to sacrifice all considerations of equality in favor of it.

But as Charles points out, the popular literature about psychology of happiness tells us that people value their relative position in the society much more than the absolute amount of wealth [and I am by no means familiar with recent scientific studies, which might prove this assertion wrong]. So it indeed could be the case that in the hypothetical example of Richard Epstein the society where everyone has 10 units of wealth might be on aggregate happier than the society where 90% have 100 and 10% have 1000.

The real issue here is whether we can effectively redistribute wealth – it seems that big countries like the US can’t do this without politicians taking too much out of the “pie” in the process; but other counties, say those in Scandinavia, give us a more optimistic example.

It is indeed true that those Scandinavian countries produce less innovation – I cannot remember any advanced technological product other than Nokia quite a few years ago. But again, the level of innovation is by no means a major driver of happiness.

And it is also too bad Richard ignored your question about China – although I am pretty sure he would have responded by saying that China had been importing innovations from dynamic free-market societies. But China is still a very interesting case to study.

Russ Roberts
Jun 27 2016 at 5:23pm

Dmitrii,

Thanks for the kind words.

The usual answer from free-markerters about China is that China has grown to the extent is has unleashed market forces. I’d like to believe that’s true but I don’t have any evidence for it.

Ill
Jun 27 2016 at 10:59pm

I really loved the discussion; whenever I hear Richard Epstein speak, there are always points where he articulates chains of logic that are so long and involved, and yet understandable, which never cease to fascinate me, often while nodding in approval, and Dr. Roberts did a great job of playing devil’s advocate.

One thing I kept thinking about during this discussion, since both the Bill Gates’ charitable work and education policy were mentioned (though separately), was the issue of common core, which has been implemented in many public and Catholic schools (often for the lack of availability of cost-effective materials that aren’t common core), but not where Bill and Melinda’s kids go, tying the issue very much to the inequality discussion: https://www.washingtonpost.com/politics/how-bill-gates-pulled-off-the-swift-common-core-revolution/2014/06/07/a830e32e-ec34-11e3-9f5c-9075d5508f0a_story.html

I know very little about the issue, but the harshest criticisms (from Libertarians) I’ve heard potray common core as a deliberate attempt to dumb down education for the masses by conditioning them for menial tasks (including accepting wrong answers to math problems so long as the student can write an explanation for them, and not giving full credit for correct answers to math problems because the explanation isn’t sufficient?!), which would make it much closer to the opposite of charity than how the IRS treats the Foundation largely responsible for implementing it.

Like most things, I feel the truth probably lies between the extremes–Bill Gates’ assertion that common core is the best thing to happen to public education in a long time, and that it is a vast conspiracy to dumb down most American children–where the truth more lies might be something interesting to explore with (an) education expert(s) in the future, since it is so polarizing, to people on the Right and the Left: http://www.usnews.com/news/special-reports/a-guide-to-common-core/articles/2014/02/27/who-is-fighting-against-common-core

Ajit
Jun 28 2016 at 2:03am

The unstated fact behind the redistribution agenda is based off paternalism. It would come off merely as shameless envy if we all favored taxation as a means to punish the rich for being rich. Instead, it gets repackaged as untapped resources to help those poor, benighted, trampled masses who could use the help. Because we, the better educated, really know whats going on.

I live around and work with so called progressives(that term itself is steeped in effective marketing); who bemoan inequality and empathize with the poor. San Franscisco tech firms are apparently full of such people.

Its always the same – advocate policies that make you feel good rather than what actually works. It boils my blood because libertarian viewpoints are sold as callous indifference while activist rabble rousing is seen as solidarity with the poor man on the street. In truth, not one of my liberal colleagues knows a damn thing about being a poor person on the street(I don’t either btw, but I never engaged in that false pretense).

In the end, I trust what the most up to date, well done empirical evidence and theory say. And here the results seem unequivocal. Government has been an abject failure with regards to the poor. So I ask any liberals who read this to answer; how exactly, in the face of this monumental failure(see public schools, section 8 housing, medicaid scandals, etc etc) – do we keep championing redistribution as a cure for poverty? If you feel my words are a strawmen, take it as a general philosophical viewpoint. How exactly does redistribution through the tax system plagued by public choice actually work in reality?

Robert Telles
Jun 28 2016 at 3:28am

Just a quick comment about tax policy and entrepreneurship. I’ve been part of starting two high tech companies in California. Me and my partners never discussed whether to start a company or not because of how much we might have to pay in taxes upon a liquidity event. We had an idea and a passion to bring it to market. I really think it is passion that drives entrepreneurship. I don’t think I could have dealt with all the challenges involved with starting and running a startup if it was all about money.

Greg G
Jun 28 2016 at 9:29am

jw,

I find more hilarity in this statement by Epstein:

“And so the advice to people like Nelson Schwartz is, the first thing you have to do is to figure out what’s going on and basically you have check your indignation at the door before you start to analyze these problems.”

Epstein then goes on to such an indignant attack on Nelson Schwartz that he winds up accusing Schwartz of undermining the foundations of civilization itself.

I don’t know anything about Nelson Schwartz’s person biases and opinions other than what was in that article. I did not see a lot of indignation in it. I saw a reporter presenting strong evidence that income inequality between the rich and everyone else is growing and leading to less mixing between social classes than before.

I did not see an argument that cruise ship operators are behaving any other way than the way we should expect them to behave in response to growing income and wealth inequality. Epstein did see that. Did you? If so, where?

Saleh Daher
Jun 28 2016 at 10:05am

What a delight it is to listen to Professor Epstein. His arguments are searingly logical and frequently comical. Most intelligent people I know manage to speak in complete sentences; Richard Epstein speaks in complete paragraphs, sometimes in complete chapters. The man is a wonder!

Saleh Daher
Jun 28 2016 at 10:19am

Robert Telles is undoubtedly correct about the motivation of entrepreneurs being frequently beyond money.

I have observed this first-hand as an investor in startups. Founders frequently give up high-paying jobs to pursue uncertain returns from a new venture that may not be strictly justified by a a cold economic analysis.

However, it is also true that investors are highly sensitive to incentives, positive and negative, imposed by the legal, regulatory and tax environment. For example, California’s reluctance to enforce non-compete agreements is widely recognized as an important reason why Silicon Valley outdistanced the Boston are in venture-funded startups.

Incentives do matter.

jw
Jun 28 2016 at 10:59am

Russ,

I am surprised by your answer. Granted, we will never have a randomized clinical trial on a country wide scale in economics (although North and South Korea are close), saying that there is no evidence that moving from the Communist Maoist China era to the Communist/Socialist era China we have now does not demonstrate that even a modicum of freer markets produces enormous gains for the population is hard to understand.

Granted, Chinese GDP per capita, average income, and average living standards are still far below democratic Western standards and the system is completely corrupt and unsustainable, but if they can continue to move to freer markets, they may just make it. Unfortunately, this is not the probable outcome with their current leadership.

And yes, there are counterfactuals galore, but the main driver remains their move to freer markets.

Alternatively, I agree with Epstein that there is a case to be made that the US is moving the opposite direction on the freedom continuum and our stagnant productivity, wage growth and economic growth can be put squarely on the shoulders of increased redistribution and regulation.

The simplistic siren song of Sanders’ socialism remains strong and we all suffer when political leaders like Sanders (and Clinton and Xi) value power over basic economics.

Alvin
Jun 28 2016 at 12:53pm

Russ,

As a dedicated listener, I really appreciate when you have Professor Epstein on as a guest. There is so much to process, and with him, you need to have a discussion touching many different topics.

Also I remember when you had Judge Posner on as a guest to discuss the great recession. I wish you could have him on again to discuss various legal subjects this time.

Again, thank you for making this podcast series every week. I always look forward to waking up on Monday morning to see who is your new guest.

My best regards,

Alvin

Dharma Bum
Jun 28 2016 at 7:23pm

During the discussion of luck vs. effort, Epstein claims that success in our society is highly correlated with things such as effort, determination, perseverance, risk tolerance, etc.

But aren’t these traits highly heritable? And if so, isn’t this just another form of luck? Of the remaining variance in these traits, a lot is also due to the family and socioeconomic status you are born into. Again, luck.

Any discussion of luck in life should at some point flow into a discussion of free will. If there is no free will, then life is 100% luck (though this does not mean that incentives aren’t important for maximizing human flourishing).

Luke J
Jun 29 2016 at 12:10am

@ Greg
The Times article is not as bad as implied (I listened to the podcast first), but “creating a money-based caste system can hardly be said to be descriptive and not prescriptive.

Dmitri said,

…people value their relative position in the society much more than the absolute amount of wealth [and I am by no means familiar with recent scientific studies, which might prove this assertion wrong]. So it indeed could be the case that in the hypothetical example of Richard Epstein the society where everyone has 10 units of wealth might be on aggregate happier than the society where 90% have 100 and 10% have 1000.

This makes me sad for humanity. It is like we are fundamentally greedy.

Timothy Davis
Jun 29 2016 at 6:10am

Dr. Roberts,

Great episode! Richard Epstein is a great presenter and articulates his arguments amazingly well.

Having said that, I feel he basically dodged the point you raised about some successful people being so because of their rent-seeking or ability to game the current system of political economy to their advantage. To my thinking, that is a very legitimate issue that those sympathetic to libertarianism and free markets need to address more clearly, and I am glad you raised it in the discussion.

It’s all well and good to say that the fundamental nature of the institutions that allow such gaming to take place needs to be changed. But to me, that’s like saying that the pernicious problem of finding successful cancer treatments could be solved if we could somehow fundamentally change the complicated nature of various types of cancers themselves. It’s a bit of wishful thinking and smells a little of the nirvana fallacy.

So how can this problem be solved? I am not smart enough to even begin speculating. But I can’t imagine a switch to a consumption tax (as beneficial as it may be otherwise) will adequately and fundamentally address that issue in particular.

Andy Hooper
Jun 29 2016 at 9:38am

The idea that the imbalance in income is okay because of Epstein’s “I cannot drive more than one car at a time, I cannot lie with more than one woman at a time” argument is incredibly specious.

As demonstrated most recently by the Washington Post’s review of ‘billionaire’ Donald Trump’s charitable donations over the past years (amounting to perhaps not much more than the $1M he was shamed into donating by the media last month), there is no push by our culture and country to create Buffets and Gates rather than Ellisons and Trumps.

The accumulation of income leads to the accumulation of wealth, and the self-perpetuating cycle continues.

Eric
Jun 29 2016 at 9:45am

Speaking specifically to the air rage part of the discussion. I think that you both neglected the effect of the terrible customer service experience provided by the airlines. It might not be a class thing at all and may just be that seeing a seat with actual leg room and then being herded into the cattle car (with worse everything than even just 10 years ago) actually causes some people to feel stress.

I wouldn’t rule that out without further testing.

Greg G
Jun 29 2016 at 11:02am

Luke J,

Calling the separation of different service levels on a cruise ship a “caste system” IS descriptive. And it is a description that indicates Schwartz thinks the that the growing income and social hierarchies that produce it are problematic. That does not make it prescriptive.

Prescriptive would be if he was advocating some particular policy response. He does not do that in this article. If you think he does, then please tell me where you are finding that.

People disagree about how much income inequality and social stratification are happening. To the extent that they agree on how much it is happening they disagree on whether or not it is a good thing, a bad thing, or a neutral thing.

Even among people who agree that increasing inequality is a bad thing, it is not at all obvious what the appropriate policy response to that should be. Even John Rawls was very clear that some degree of inequality is crucial to making an economy better for its poorest citizens.

Richard Epstein is a formidable debater. It would have been much more interesting to hear him arguing against what Nelson Schwartz actually said in the article than to hear him argue against a straw man.

jw,

I too was surprised that Russ said he didn’t find “any evidence” that the unleashing of market forces was what spurred the spectacular economic growth in China. At the risk of putting words in his mouth I will say that I think he really meant that he didn’t have any proof of causation. He may have been a little careless in that word choice.

Certainly the tight correlation between allowing more economic freedom in China with their growth is good evidence for an important role for economic liberalization in that process. The problem is, they still have an extraordinarily high level of government interference in their economy of the type that free market enthusiasts think should be inimical to some of the fastest economic growth in all of human history.

Russ was being very Hayekian in resisting the temptation to claim knowledge of how much one factor is responsible for in a very complex system. Epstein, in contrast, is more confident in his ability to know how much economic underperformance should be attributed to one factor such as government regulation.

To be sure, Hayek favored less government regulation in most cases. But he did this on theoretical grounds not on the claim of any ability to detect particular causes and effects in complex systems in a reliable way.

Stefan
Jun 29 2016 at 2:54pm

Russ, what a masterful way of putting forward arguments (which I’m sure were not necessarily always your own) and structuring a debate. Your guest was eloquent but you created a great stage for him to perform. Very enjoyable episode, bravo!

Trent
Jun 29 2016 at 4:00pm

With respect to first class air travel, there is another reason why you may choose to buy that class of travel – the rising price/fees in the coach cabin.

Last month, my wife and I flew from O’Hare to Las Vegas and back from Los Angeles. Between the two of us, we had to check three bags, and given my height, I need to buy extended legroom on flights of that length.

On the return flight, the price of a first class seat was roughly $30 higher than buying coach, paying for economy plus legroom, and paying to check two bags. So for that extra $30 per person, we got first class seats/legroom, expedited security screening line access, airline club access before boarding, free food/drinks on board, free entertainment consoles on board, and expedited baggage claim. A true no-brainer.

What I’m wondering is how many first class seats are actually being bought at the full fare prices. I’m guessing that most people use upgrades to sit there….and businesses have cut back on paying for first class seats. So airlines may be reducing the price gap on first class vs. coach seats on some flights to try to get that extra revenue. It’s worth looking at the first class ticket prices, especially if you have to check multiple bags.

Jon
Jun 29 2016 at 9:31pm

While I enjoyed the discussion overall, I found Epstein’s argument about the biggest advances in the quality of life happening during the robber barron era almost insultingly simplistic and borderline intellectually dishonest. Obviously the driver of these advances was the largest expansion in scientific knowledge in human history–hardly something that occurred as the result of laissez-faire economic policies.

jw
Jun 30 2016 at 2:10pm

Jon,

Whether it was the early-mid 1800’s or 1750-ish, the cause for the huge increase in the world’s standard of living around that time has been widely debated. Whether it was the Wealth of Nations, American democracy, Watt’s engine, McCloskey’s business reputation theory, or wider adoption of the scientific method, it was probably a combination of all of the above.

It is quite possible that the era’s expansion in scientific knowledge was very closely related to the wider adoption of free markets.

One of the results was robber barons, but as he pointed out, they also contributed mightily to economic progress, in fact much more than the actual barons of earlier times.

Like Churchill’s quip about democracy, capitalist economics leads to the most inequality, except for all of the others.

GINI is a horribly flawed metric for inequality and the US is much more equal than the inequality proponents would like you to believe (here).

Ben
Jun 30 2016 at 6:28pm

Epstein is talking out of his hat when he discusses Warren Buffett’s tax rate, claiming that it is so low because of complicated tax shelters. That is nonsense. As Buffett has clearly stated (see NY Times op-ed link below), his tax rate is the lowest of anyone in his office (24 people at Berkshire Hathaway HQ) because the bulk of his income comes from dividends and long-term capital gains instead of wage income.

http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html

That Epstein speaks so confidently and appeals to authority about a relatively uncomplicated topic where his so so clearly wrong shreds his credibility on most of his other claims. This is the exact kind of “expert” that Roberts generally professes to disdain.

Kevin
Jul 1 2016 at 11:13am

Epstein has a unique and fascinating mind that can rapidly articulate complex topics with insight and knowledge that bring mere mortals such as myself to our knees and need to relisten to sometimes catch the points. He is clearly brilliant and I often find myself in agreement with him but it often feels disagreement would be futile and short lived.

That being said, I really really appreciate the pushback Dr. Roberts gave him. It was great to hear thoughtful challenges to his stream of conscious genius and made the podcast one of the best I have listened to. Thanks Dr. Roberts for your fine and brave work in challenging a rare mind.

Kevin
Jul 1 2016 at 12:12pm

Robert Telles,

I do not think your argument has merit. While you were involved out of passion your situation is not the norm. Young people working on software, often rich from other endeavors, often getting paid something whether or not it pans out, often without responsibilities are the outlier for starting a business.

The average business is a small venture that is not developing “world changing software” that has the potential to be worth millions, it only has the potential to develop a modest income and allow independence. In these situations every regulation and marginal tax rate makes a difference to a person who may have dependents, whose other options might be steady pay from a larger corporation.

So, I find the argument that silicon valley types are passionate about their ideas and don’t think about money an irrelevant red herring. That is a tiny fraction of businesses and says nothing about a plumber, dentist, shop owner, restaurant owner contemplating their own venture.

Seth
Jul 1 2016 at 3:20pm

“the popular literature about psychology of happiness tells us that people value their relative position in the society much more than the absolute amount of wealth [and I am by no means familiar with recent scientific studies, which might prove this assertion wrong]. So it indeed could be the case that in the hypothetical example of Richard Epstein the society where everyone has 10 units of wealth might be on aggregate happier than the society where 90% have 100 and 10% have 1000.”

Does the popular literature on happiness say they value their relative position more or that’s just the comparison that’s easier for them to make?

Given the choice, would you choose to live in the equal society that sums to 100 or the unequal society that sums to 1,900?

Rich Berger
Jul 2 2016 at 8:58am

Epstein is like an intellectual freight train – I wouldn’t want to take him on.

Russ’s pushbacks were less disagreements than setups to allow Epstein to present counter-arguments. I loved RE’s description of the NYT as “that most indignant of newspapers, the New York Times”. Someone should contact Schwartz and ask him if he wants to ban the “caste system” on cruise ships, as Epstein proposes.

I used to enjoy the NYT on Sunday, until it became insufferably leftist. Then I thought the WaPo was ok, even given its slant, but it seems lately to have eclipsed the NYT for lunacy. Do people whose news diet consists largely of these papers consider themselves smart and well-informed? I’ll bet they do, which is sad.

Regarding those who are arguing that some people do not create new businesses or products for the money, that certainly may be true, but increased regulation and taxation does not affect everyone equally. It does deter the marginal business that decides enough is enough and moves or modifies its operations (such as keeping headcount below some magic number such as 50). It may cause an established business to move or curtail operations (see GE and Connecticut). In NJ, my former home, one hedge fund manager decided to relocate to FL, where he will save roughly $100MM in taxes, a large enough loss to be noted in NJ budget projections. Rush Limbaugh left NY for Florida, and probably saved $5-10 MM annually. Then Governor Patterson quipped that had he known that, he would have raised taxes sooner. Not a smart man, that one.

Todd Kreider
Jul 2 2016 at 11:32pm

Epstein said that there were “huge advances in medicine” toward the end of the 1870 to 1940 ‘gilded age’ That means the 1930s. Well, what were the huge advances?

Penicillin wasn’t available to the public until 1942.

Epstein also has no way of knowing what those in 1900 thought of their children’s future, that is much better than their lives. Name one poll. He can’t.

Epstein has no idea what he is talking about with respect to longevity and expectations in 2016, but he says so much wrong it doesn’t pay to go through them one by one —
it takes too long.

Todd Kreider
Jul 3 2016 at 1:02pm

Around 47:00 Epstein states (and Roberts agrees) that life expectancy “started to decline last year.”

Except that didn’t happen. The decline was 5 weeks for white females. Here is U.S. life expectancy for the past three years:

both sexes

2013 78.8
2014 78.8
2015 79.3

Epstein says that the decline that didn’t occur was due to economic stagnation. He pontificates how life expectancy will get worse due to median income declines, which didn’t make sense to me. (Especially since an increase in life expectancy.)

It is in minutes 48 and 49 that Epstein’s “freight train” style of arguing goes of the rails, which is unfortunate for a serious topic like longevity and health-span.

Ak Mike
Jul 3 2016 at 9:25pm

Todd, Todd, Todd – come on, no penicillin = no medical advances? (And of course, even penicillin was discovered back in 1928, although it was not mass-produced until the 1940’s)

Here are just some of the advances in medicine 1870-1940:
Development of the germ theory of disease
Vaccines for anthrax, cholera, rabies, tetanus, diphtheria, typhoid, yellow fever
X-rays
Blood transfusions
Insulin for diabetes
Sulfa drugs
Electrocardiograms
Discovery of vitamins

You don’t know that Epstein “has no way of knowing” what the parents of 1900 thought about their children’s future. They had writing back then, and some of that writing has survived. But even if he did not read contemporaneous accounts, it is a reasonable presumption that parents living through a revolution in living standards would expect their children’s lives to be better.

Abraham
Jul 3 2016 at 11:09pm

Ben,
Warren Buffet talks in that piece about carried interest. That is not simply dividend and long term cap gains. And if you pay long term cap gains, you must be selling a stock, right? Does Warren Buffett sell a lot of Berkshire stock? Epstein is pointing out the hypocrisy of Warren Buffett. Warren Buffett pays 17% ish in taxes because he is wealthy and can arrange to take income in a myriad of different ways that avoids ordinary income taxes. Can you do that? Can the middle class do that? I cannot. And I am confident that Warren Buffett has paid or does pay a lot of legal fees to get his tax rate down to 17ish. I can’t afford that. The point is that the system is rigged for the wealthy like Warren Buffett. Epstein and Russ talk about a flat tax of some kind, income or consumption with no deductions. Warren Buffett talks about raising taxes on certain wealthy people and forgets about Hausers Law.
I’ll end by asking this: How much will Warren Buffett pay in estate tax? I think the answer is zero. How much did he pay to arrange that? Alot!
Simplify the system. Warren playing word smith games with his OPED’s is nonsense. He should talk about leveling the playing field so everyone can get the same treatment as he does. His money pays for his 17% ish tax rate. Nothing else. And as long as the system allows that, he and his friends will keep doing it and the middle class will bear the burden of paying more as a percentage.

Abraham
Jul 3 2016 at 11:24pm

Great episode. Thanks Russ.
If anyone is concerned about income inequality I suggest they stop supporting democrats who refuse to allow full school choice. Education is the biggest barrier to more fairness in income levels. The worst schools are in the inner city..on the whole. That is not to say there are no bad schools in the suburbs but in general the minority neighborhoods of our inner cities have the worst schools. When presented with opportunities to give those folks choices, like they have with their EBT cards or their housing vouchers, the President and every other democrat kill the programs. Obama killed the DC program and sent his Justice Department to Louisiana to prosecute those trying to offer school choice. Full and complete school choice through an Educational Savings Account (ESA) or some other mechanism that would transfer the educational dollars to the families so they can spend them as they see fit, would create an educational revolution we have never seen before. That is social justice. That is redistribution. Anyone who votes for a democrat is actively working against school choice. Why are those politicians working so hard to keep those minority groups shackled to the same awful schools year after year?
Full and complete school choice like what NV has done would change income inequality. To be against that begs the question, what is your real motivation?
Imagine how many smart people would open new schools with that flood of money going from the government coffers to the citizens wallets. Imagine the existing schools being able to diversify their student bodies because all the students stuck in the worst schools in the worst minority neighborhoods could suddenly go to any school that would accept them. Imagine the opportunities that those students would receive. And imagine the power that would be taken from the political class and given back to the citizens. Complete school choice is the best way to solve income inequality…….and many other issues.

Todd Kreider
Jul 4 2016 at 6:40am

@Ak Mike

I was sticking to what Epsteins said about going to the “end of the period” 1870 – 1940 “and the huge advances in medicine.” For what Epstein was driving at, an advance would have to extend the lives of a notable percenage of the population like penicillin which was not available until 1942.

But salsa drugs that were popular in the late 1930s probably fits as may blood transfusions. The EKG, used by the public in significant numbers after 1940, not so much before then. The tetanus vaccine also wasn’t used in the U.S. until the 1940s.

Of course people wrote in 1900 but Epstein didn’t provide any evidence that parents were
as optimistic as he claims or as pessimistic today.

With respect to technology that drives health, wealth and life expectancy, a 2014 Pew Survey found: “Some 59% are optimistic that coming technological and scientific changes will make life in the future better,… ” However, 65% of Americans think children will be worse off financially, which is an interesting contradiction.

This is saying those in their teens today will have a brighter technological and health future but poorer overall.

Elise
Jul 4 2016 at 12:48pm

Great discussion, Prof. Epstein’s stateroom scene ignorance notwithstanding. Make that three hardboiled eggs!

Martin Dertz
Jul 4 2016 at 7:54pm

This episode reminded me of a personal experience: After living/working in rural Sierra Leone for 2 years, I rode a trans-Atlantic cruise home (London to NYC). As I recall there was much interaction spanning cabin assignment and class (maybe the really wealthy were someplace unseen…).

However, That societal dynamic the article is pointing out — on display everywhere from cruise ship cabins to sporting event box-seats to political/corporate revolving doors — is the issue. People aren’t upset about others having things/opportunities, they’re upset their children don’t.

Epstein’s example of an executive talking to his secretary is a great case in point (“it’s a real tribute to people that they can negotiate these sort of social interactions across economic lines.” is a phenomenal line). That they spend no time together outside of work, their children attend different schools and have vastly different life outcomes isn’t the issue, it seems, to Epstein. It is the lefty Schwartz writing about those social structures and making their office BS/small-talk awkward.

Also…

@Rich Berger:

Have you considered it isn’t the NYT or WaPo that has moved further in an ideological direction?

@Abraham – You have oversimplified the issue of education and income inequality. I agree school choice is a good thing, but things are much, much more complex than you suggest. Parents factor in other variables — like distance — when selecting schools. Also, variable other than school — like the neighborhood you’re from — have a huge impact on academic success. There are real reasons to be against a school choice model as a sole solution. Better to understand them than paint them as conspiracies from the left.

jw
Jul 4 2016 at 9:29pm

Martin Dertz,

I agree that there are many factors (family structure being a huge one), and I am sure that there are anecdotes about poorly run charter/private schools, but I haven’t found a theoretical reason where more school choice is not a better solution.

Ben
Jul 5 2016 at 2:16pm

Abraham,

The reason that Buffett’s federal tax bill was 17.4% of his income, as mentioned in the piece, is because almost all of his income was from dividends and long-term capital gains, which were taxed at 15% at the time (now closer to 23.8% for high income individuals). This income is not related to his Berkshire Hathaway stock as he has not sold any and it does not pay dividends. His income comes from his personal investments outside of Berkshire Hathaway. Buffett does not benefit from a low tax rate from carried interest, as he does not run or work at an investment firm and thus does not earn any carried interest. He mentioned carried interest in the piece as an example of other ways that wealthy individuals sometimes have lower tax bills. There is nothing hypocritical here or even particularly complicated. Everyone else does get the same treatment that he does. If any person owns $1 billion in stock and earns dividends from it or sells that stock for long-term capital gains over time, they will pay similar tax rates that are far lower than those high income wage earners, and it requires zero dollars spent on tax advisers. Why people like you and Richard Epstein continue to pretend like this is due to some complicated legerdemain is a mystery to me. Also, Warren Buffett will pay very little in estate taxes because he will have given almost all of his money away.

Casey
Jul 5 2016 at 3:00pm

One of the attractive qualities of Libertarianism for me, is the elegance of its answers to many societal ills. We all inherently make models of the world around us, and apply Occam’s Razor to keep the edges smooth.

However, our model of the world around us is necessarily simplistic and the world is always changing. Our experience acts as our experiments so we can evolve our views. There has to be a certain level of understanding that no model is perfect or universal, knowledge is widely dispersed, and our ability to test our theories is limited.

Given that, I find the level of perceived certainty from Epstein and some of the posters here a little disappointing.

I do believe that Epstein, and the posters are incredibly intelligent still. It reminds me of a notion from one of Taleb’s books that humility decreases faster than knowledge increases.

Abraham
Jul 5 2016 at 6:14pm

Ben,
The tax code is not fair. WB lays out that case and you drive it home for the rest of us. How many of us can decide to not be compensated in any real way from our primary employer? If WB is getting his income from his private investments as you state then that makes the case even more clearly. WB decides how to take his income. Who but the very rich can do that? Not his assistant I am guessing. The tax code is not fair and needs to be made so. And raising the rates does not accomplish that. As we can see from the most recent tax increases. WB should be more honest about his tax situation. I hope I get to be a billionaire like WB. I aspire to that and I respect him for his accomplishments but he is not helping America by creating the false sense that by raising rates on certain income levels fairness will rule the land. Obviously that is not the case given his own admission.

As for his estate, if by giving it away you mean that he created billion dollar foundations for his children to run and then will give away the rest to the Gates Foundation then you are correct. But you miss the important fact that in order to give it away he has likely had to spend tens of millions on creating trusts and LLC’s owned by those trusts and then gifted over time his ownership to the various trusts by getting valuations that were discounted for lack of control and/or marketability and likely other fancy methods by whcih sophisticated people pass wealth from one generation to the next and avoid giving the government anything. BTW I applaud this and I agree the government should not get one dime of his estate. But this is not as simply as giving away ones favorite baseball glove to a grandchild. And I would add that if the government is such a great steward with out money (tax revenue) and WB is so interested in getting more of our money into the hands of the government, why would he bother to give away his estate to a charity? Why not allow the government to have it? As I stated I agree with him but I hold the opinion that the government has a) already received a tax on the assets in WB’s estate and b) that passing on wealth should be the sole right of the owner of that wealth. I just do not like the hypocrisy that WB seems to hold on to.
WB is not being honest with the public. He has options both when he pays income tax as well as when he decided about his estate tax, that ordinary Americans do not have. If we want it to be fair we need to stop raising rates, look up Hausers Law, and start making it fair. Zero deductions. Zero ways a wealthy person can get lower rates and make every American pay one rate or maybe two, that is a good debate. And perhaps it is on consumption and perhaps it is in income. Another good debate. But as long as the political class has people like WB running interference for them we will not achieve fairness.

Abraham
Jul 5 2016 at 6:29pm

Martin,
I admit I have oversimplified the education topic a bit however there is no reason to be against school choice if the goal of public education is to have a free thinking and well educated public. Government will never make better decisions for the individual citizen than the citizen themselves and the idea that government is somehow the all knowing avuncular good actor is one I do not subscribe to.

Why should the citizens not have school choice? The wealthy areas have better schools on the whole than the poorer areas in the USA. There are exceptions and where those exceptions exist the families will not likely move their children to other schools but they will have the option and that is never a bad thing.

This obviously brings up the issue of the teachers unions and political donations. But that is too big for this forum.

I would encourage you to offer up examples of how citizens are better off without school choice and with the government making the decision on where the citizens go to school.

And then as an exercise lets imagine a world where all citizens had complete school choice through ESA or other means. Why would that world be worse than the one we live with today where the poorer citizens have the worst schools, on the whole?

Guy Crouchback
Jul 7 2016 at 4:44am

The guest is right about first-class passengers subsidising the others. British Airways makes no secret of this. A Boeing 777 flying from New York to London uses about $24,000 worth of fuel, so $48,000 for a round trip. This is equivalent to three first-class fares – or maybe just two, as there are always people who want to leave right now, with money no object. Now, I would pay $500 for the same trip in economy. If BA relied only on proles like me, it would take 50 of us just to cover the fuel. Clearly they would have to put the fares up. Next time I see those pampered guys drinking champagne on reclining leather seats, I won’t feel angry but thankful. Separate classes mean social justice.

Christopher Mckenzie
Jul 7 2016 at 7:20am

I disagreed with this interview so much that I wrote a medium piece on it:

https://medium.com/@261fb5696ac2/e1f6f47b42db

Casey
Jul 9 2016 at 12:34pm

Guy,

I think if the fuel is 48k and the economy round-trip fare is 500 on average, it would take 96 passengers to cover the costs (though perhaps you were implying the 1 way trip was 500). But anyway, a Boeing 777 has about 120 economy seats before counting the 100 first class and business. As a contrast AA has 200 economy seats with 50 first class/business. Obviously there are many more costs to consider – just wanted to clarify.

Also, Southwest often doesn’t have higher rates for domestic flights than economy on airlines that have first class.

I don’t know the best way to arrange the passengers on an airplane – but a post rationalization for the present state of things might (or might not) be misleading.

There’s a lot of hard working, intelligent people trying to figure these things out, but that doesn’t mean they get it perfect all the time.

And when the status quo is the best that can be done with scarce knowledge and resources – it still doesn’t mean any theory that justifies the status quo is a valuable lesson or that it’s not.

Mark Crankshaw
Jul 12 2016 at 9:50am

Finally got to listen to this one. Bravo, Mr. Epstein! Words of wisdom.

Epstein is right, whenever a NYT liberal gets idignant and wants to “change the world” or frantically frets about this and that, you can be sure that they will subsequently advocate abysmal policies that never seem to fix whatever they think is a problem in the first place, and middle-class taxpayers like me will get stuck with the bill (to the benefit of some liberal).

Rog
Jul 19 2016 at 2:15am

Amazing Episode,
I’m getting goosebumps listening to this. So eloquently put by Richard Epstein.

So many golden Nuggets there by Richard, Wonder if he came up with such awesome words off the cuff or he has such awesome sentences written down in advance.

Very Well done Richard.

Stephen
Jul 22 2016 at 8:20am

I felt there was quite a bit of cherry picking going on here. Russ did push back but I think some of the assertions could have been a little more robustly challenged.

Just a point about Page and Brin, they could look a little like rent seekers if you review the history of the internet http://www.internetsociety.org/history I guess it is a matter of perspective.

Comments are closed.


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AUDIO TRANSCRIPT

 

Time
Podcast Episode Highlights
0:33Intro. [Recording date: June 2, 2016.] Russ: Our topic today is inequality, and it's based on a very thoughtful piece you wrote in reaction to an article in The New York Times. That New York Times article was bemoaning the fact that a Norwegian cruise line has created a separate status on their cruises for 275 elite guests, who would in turn get better treatment than the other 4000 or so passengers--fancier cabins, better amenities. And to some extent they would be physically isolated from the masses--although I don't know if that's the right word for a cruise ship's other passengers. Which is one of the ironies of this article. But, the article was criticizing the physical isolation of different classes from each other. And that's an interesting question, whether that's something to be concerned about socially. But your point was that the author misunderstood the economics of the situation. What was missing? Guest: Well, the first thing is you have to take into account seriously the notion of revealed preferences. If this was such a huge indignity with respect to the other people on that cruise ship, what you would expect is the basic demand to dry up or evaporate as this elite group gets more and more pampered. But you don't see anything like it. I mean, these are less than 10% of the people on the boat; and my guess is if you were to ask the other 4000 plus they would regard it as something of a modest amenity to have people with a little bit of star and glitter on the same ship that they are. So the criticism isn't based upon the sense that it's a market failure. Which means that it's not based on the sense that there's something wrong for the people who were involved in this situation. Rather it's an aesthetic concern by somebody outside the situation, who really doesn't like to see these kinds of walls or separations and is so confident in his moral judgments that he's willing, if he could possibly have the wherewithal to do so, to impose this on somebody else. That, of course, is another one of the hidden mistakes economically in this argument. It's okay for him to be indignant if the only thing he wants to do is to take him out of the cruise ship liner, stay home. But it takes a lot more to justify regulation of other people's behavior than your own indignation and offense about what they are doing. And so the question to ask, Schwartz at least, one of the questions to ask him-- Russ: The author was Nelson Schwartz. Guest: Nelson Schwartz, yes. Is, tell me: Are you prepared to ban this particular form of behavior? Indeed, let's go further. Are you prepared to ban sending off to sea any cruise ship where 95% of the people have incomes which put them in the top 5% of the overall population? I don't think he's prepared to do that. So, at this particular point it's a classic form of economic cheap talk. And it's also the case, as I could explain if you want me to, why it is that the economics essentially make clear that the patterns of behaviors that we see are not irrational; they are not transient; they are not ephemeral. They are there for very strong and powerful reasons.
4:06Russ: Well, the part I like is that you point out that often in these cases it's the less pampered passengers who are being subsidized effectively by the pampered ones. So, talk about how that works and why it's not in the interest of the poorer passengers in any of these situations--and we'll talk about some different applications of this principle in a little bit--but why it's not in their interest to rule out these kind of tiered differential pricing and treatment. Guest: Okay, look: What you have to do is to imagine an alternative universe in which there are two cruise ships, one which only has the 275 elite passengers--and it's going to be a smaller boat; it's going to have heavy fixed cost, and it turns out they are going to have to pay more per person in order to reach the same level of amenities. On the other hand, the 4000 people who don't have these richer folks in there, they are also going to have to have a higher level of fixed cost to pay for the various amenities that they want, because the revenue stream which comes from the very rich people supports not only the particular benefits that that group get, but also the general operation and overhaul of the ship. So the confident prediction that you can make is if the voluntary arrangements, these synergies between the two parts, it means that the cross-subsidies as it were moving in both directions, so that both groups gain from this thing. And if you separate these two things, then it turns out that the poor passengers are going to be worse off than they otherwise would have been. Because they would not be able to sustain on a boat which had only people in that group the same level of amenities they had somewhere else. Now, this is not saying that this is a universal truth. I'm not trying to decree that you must have these things. If it turns out that the amenities of the pampered clients are too expensive and the physical separations on the boat don't merit the increased wages, what will happen is a cruise ship will then go back to a different form of pricing and a different form of carriage. But that's the genius of markets. You have two boats. From the outside they may look alike. But inside their internal cultures could be very different. The regulator can't figure it out, but the operator of the two ships can. So, as I mentioned in this article, there's another cruise line, the Royal Caribbean; and it also has a pampered class onboard, also tries to take advantage of the fact that the higher demanders[?] can help subsidize the folks on the bottom end of book[?] by doing very well for themselves. But it tends to downplay physical separation, thinking that other methods are preference[?] or a bit more subtle. So, it may well be that those customers get free bottles of wine on the boat, or they get access to this, that, or the other room on certain kinds of occasions, or preferred seating in different kinds of shows. My job it not to explain to people how they ought to run their businesses--economists and lawyers are not managers. It is to try to explain why it is that the differential knowledge is such that the folks who are in charge of this situation would internalize the plusses and minuses of all of their decisions, are going to make more accurate decisions than somebody who is very indignant who happens to write for that most indignant of newspapers, the New York Times. Russ: So, I want to just go a little deeper into the essence of the point. Which is, as you point out in the article: Both groups, the high-end elite group and the less-pampered group, want a boat that goes a certain speed, that has a certain safety and stability to it. So, you can't have one set of passengers going at different speed on the same boat. They both have to go--now, if they wanted to go a different speed, of course, as you point out, they can pay for it. They can take a faster boat, if you wanted to, evidently that's not economically viable. But the fixed cost, which is so interesting and is at the heart of this is that by sharing those fixed costs across both groups, both groups are benefitting. Guest: Yeah. And, you know, this is not, as we say, universal truth. There are many small, elite ships. I recently took a trip to the Galapagos. And I was on a boat of 48 people; there was no obvious class differentiation on this particular boat. Now, what was interesting about it is it seemed to have every conceivable kind of group. It had families on it with some children. It had a lot of people who were in the retired or near-retired classes, and it had a lot of students backpacking across South America in one form or another who just happened to spend some time on this particular boat. So, you can work it any way that you want. But the key question is, if you work a device out that fails, either you change or you go bankrupt. And if turns out you work out a device that succeeds, well, you expand the model. But every one of these models, if the first boat is wildly successful, the law of diminishing returns at the margin will suggest that the second one might not be quite as good, and the third one will be worse. So, after a while, what you expect to see in a market is a set of diverse strategies in which different boats follow different particular alliance behavior. And even though he doesn't understand why it's the case, that's what Nelson Schwartz reports: is, you see different strategies, both of them succeeding. And chances are if you acted, took the passengers by main force and put them on the other, and took the boat patrons on the second boat and put them on the first, both groups would have been unhappier in their second environments than they were in their initial environment. So, the self-sorting equilibrium is an extremely important feature of these kinds of arrangements.
9:24Russ: Yeah. When people complain about it, my first thought is usually: Well, why don't you start a cruise line? You are going to be a very rich person. But of course what people often want in this situation is they want. Either they don't like the social consequences of the profit-maximizing, even though it's a competitive outcome. Or, they just wish the world was a different place than it is, where people didn't care about, perhaps, those amenities, or cared more about being with people who weren't like them. I can understand that argument a little bit better--the idea that I wish--and putting aside the regulatory, say, suggestions or demands--I understand this idea that it's okay to root for a world where people would like to mingle with people who are different from themselves rather than stratifying themselves, say, economically by income or race or other things. So, I get that part. Do you have any sympathy for that? Guest: I have a lot of sympathy for it. But I think you have to understand how it takes place. This is often an issue, for example, that arises when you are talking about single-sex clubs. This was an issue which [?] botched very badly when it made a decree that these clubs were incompatible with social [?]. What happens is you join a single-sex club or you join a club which is Jewish or black, for certain portions of your life, and then for the rest of your life you go somewhere else. So, you know, I live in a very nice building when I'm in New York City on Central Park West, and I take the subway and I go with lots of people when I go to the pizza parlor in order to get myself a slice of pizza at lunch--God knows whom I'm with but it's perfectly fine as far as I'm concerned. And so what happens is--the way in which I think of it is--that I have a portfolio of events. And what I do is I diversify. There are some of them which I tend to engage in with my family only; I don't want outsiders. Others it turns out are Jewish events so it turns out I'm quite happy to go to those; others turn out to be NYU (New York University) events; others turn out to be events--one of the things New York City does is take Bryant Park and they'll put an old movie up there and you'll have thousands of people coming and watching it from all walks of life. The one thing that you discover is that the young always do better on these things because when it comes to sitting on the grass my back won't take it, and my children are really quite happy staying there for the duration. But I think what happens is most people really want to have a mixture of experiences in the way in which they interact with the rest of the world, and so what they do is they structure their social lives in this fashion. But if you put yourself in a case of somebody who is going on a cruise ship to get away from the really tough work that they do on a day to day basis, it may well be that a little bit of indulgence is a very important thing to them; and then they go back to a very democratic office. Look, I'll put it to you this way: I work at a law school; and people work at law firms and businesses and so forth; and one of the things that you have to understand is that if you go through the same building often within feet of one another you have people whose incomes differ from one to another by a factor of ten or more. And what's interesting for the most part is in reasonably socialized people, everybody seems to get along with everybody else. It's not as though every prominent partner in a hedge fund talks down to his secretary even though she earns maybe $100,000 while he's earning $3 or $4 or $10 million dollars. I think it's a real tribute to people that they can negotiate these sort of social interactions across economic lines. And what happens is when you get guys like Nelson Schwartz coming up there and starting to tell you there's something basically insidious about these people going on these cruise ships, what it oddly[?] does is it creates a kind of resentment which makes ordinary social interactions a little bit harder than they ought to be. I mean, my view about it is that civilization survives in many ways by small, kind deeds that people do one for one to another. So, every time somebody holds open a door for somebody who is carrying a heavy package or a load of groceries, what you do is you see civilization at its best. And you want to get lots of things like that going on; and you won't get them if you have people writing for the New York Times or other left-wing publications who constantly hector people because they want to sit on a boat with their piña coladas in the most idyllic of circumstances. I think what we have to do is to learn to relax about the way in which other people live their lives. I can assure you that many things that I would not be caught dead doing, which many Americans really love--I've never seen, me, at a wrestling match, for example, and so for, unless it's for Columbia College or something; and, you know, my view is 'Live and let live' is much better advice than 'Be indignant about everything that you don't understand and that you don't like.' And so the advice to people like Nelson Schwartz is, the first thing you have to do is to figure out what's going on and basically you have check your indignation at the door before you start to analyze these problems. Russ: Well, we're going to move on--I want to leave cruise ships behind. Before we do, I do have to use the phrase, 'Make that three hard-boiled eggs.' And that's a reference for a very different range of services going to passengers on a cruise ship in a Marx brothers movie, and I'll put up a link to the scene. It's a classic scene; it's called the Stateroom scene--the Marx brothers [?] themselves in "Night at the Opera." But you can't, we can't leave cruise ships without mentioning it. Guest: All right, you may mention it. And I'll try to watch it.
14:56Russ: Now we're going to move on to airplanes--briefly--because recently in a landmark study for social science, and I'm not going to worry about all the details, but the gist of it was that air rage--which can be anything from kicking the passenger in front of you I guess going berserk on an airplane--that it was discovered in a "study"--I put that word in quotes; maybe I should put the word 'discovered' in quotes--that planes that have passengers walking through a first class section have more air rage than flights where you don't walk through the first class section. And the authors point out--and we'll put up a link to an article about this if you are interested in it--the authors do point out that this could be subconscious. You don't even realize that by walking through first class, you become resentful and indignant. I have to say that is not my general reaction. I've only flown first class I think twice in my life--maybe once. It's fun. I really like it. And when I fly to Israel, which is a 12-hour flight, roughly, and I pass through the really comfortable seats that look like cocoons that the first class passengers get to sleep in, I wish I had one. But I have chosen not to pay for it. And sometimes the people who are paying me have chosen not to pay for it. So I'm content not to sit in them. But it doesn't make me usually want to hurt someone. But evidently there's a claim that it does. So I just want to let you react to that. I think you'll have a good time. Guest: Well, I'm astonished; I suppose, disappointed. But I think in effect one of the reasons why this happens is that people are constantly told that the inequalities are signs of a rigged system. And so what you do socially is you stoke up resentments that would not otherwise take place. One of the things to do this is to do a longitudinal study and ask whether or not the same phenomenon existed 25 years ago when inequality was not "the defining issue of our times." My guess is that the resentments were lower then, and the incidents were lower as well. It's also, I think, extremely important to ask who are those people sitting in first class, anyhow, before you get resentful. And, you know, it's a real sort of interesting medley. Some of the people are there because they need the extra space to work. You have somebody who is on a plane for 12 hours and he's going to be working or she's going to be working for 6 of those hours, and they earn a million dollars a year--all of a sudden that's basically $3000-worth of work time that you may be able to accomplish on a plane, which you would not be able to do if you were in more cramped quarters in the back of the plane. I remember once I was with a friend of mine, a law school classmate, who is the general counsel of a major corporation, and he said he always took cars with drivers everywhere he went in New York City. I said, 'Not me. I'm sitting there in subway.' He said, 'Well, look. When I'm in the back of this car, I get on the phone and I talk to people; I review memos; sometimes there's something come in to me.' And you know you take the salary of this person and you realize that the driver is a rounding error relative to the productivity error. So you get people like that. Another class of people who sit in first class are those people who have medical conditions which really don't tolerate sitting in small areas. They've got arthritis; they may be severely overweight; they may have other kinds of problems with their backs and so forth that make it difficult to sit in the coach class. And you know, if they want to go into first class to get a modicum of comfort, that's fine by me. And then, third, there are these frequent fliers, and I include myself in this class, who tend to buy first class fairly often on upgrades from other kinds of flights or from card benefit programs and the like. And so, what we're doing in effect is we are not paying a lot of money for the plane: what we're doing is we're buying other services which get this as a freebie. And this is open to people with generally above average incomes but it's certainly not the case that Richard Epstein at least is willing to pay $2000 or $3000 to sit in first class going across country. To me, economy class [business class? first class?--Econlib Ed.] is a perfectly viable alternative under those circumstances; and it does allow me to work in a way in which I generally find it more difficult to do in the more squinchy seats that are in the back. So it's kind of like the cruise ships, an efficient sorting mechanism. And you don't have to go on an airline like that. Southwest doesn't have first class. Southwest has open seating. Southwest--when I remember quizzing somebody who worked for the company said, 'We do it this way because it increases the ability for us to turn a plane around in very rapid fashion; and we don't have to pay the administrative cost of all this other fancy stuff. And so we are the Greyhound bus of the sky.' Now, I fly Southwest all sorts of times and manage to survive quite well under these circumstances, so it's the same kind of point: there will be heterogeneity. There was a time once when one company decided to call themselves 'Smoker's Airline'. And the reason was, everybody on the plane was entitled to smoke. It gave you notice of what would go on. And the government shut this thing down--not because it was a safety risk, but they thought that smoking was dangerous. Now I happen to think smoking is dangerous as well; never had a cigarette in my life. Never will, as far as I'm concerned. But, somebody else wants to go on Smoker's Airline, it doesn't bother me. Again, it's the same point: How much is your indignation, your outrage, and your offense sufficient to warrant you to tell other people how they ought to be able to run their own businesses? And I think it's a very, very dangerous frame of mind to get yourself in that. And so the way I would want to handle the problem about rage is for people who now get on the air and tell you how bad inequality is, to get on the air and change the message: 'Look, there are conveniences for being wealthy[?]; we hope you have incentives to succeed in it; but do not resent people who are more successful. Try to emulate them. And respect them for their achievements rather than denounce them for their wealth, treating it as if it were all unearned.'
20:51Russ: Well, let me push back against that a little bit. Guest: Sure. Russ: So, again, just to make the economics point, the fixed costs of the wings and the engines, the first class passenger does get to the destination about a minute and a half before everyone else, just because they are closer to the exit. Guest: They get off first. Russ: They get off first. But they do tend to touch down at pretty much the same time. So that part is shared. And of course one of the great miracles of modern economic life is that millions of people can fly on an airplane. That has to be--and millions can take cruise ships. It's hard to remember that. It's not just the people who get yachts who get to go across the ocean in comfort. It's lots more people. And exactly as you say, airplanes are really the buses of yesterday, to some extent. And the availability of air travel, being able to move across large distances in short periods of time, that that's available to such a huge portion of the public is a glorious thing, partly due to the fact that, of course, that there is this mixture of amenities. But also of course just for general prosperity. To focus on the fact that some people have a slightly bigger seat for three hours or two hours or an hour and a half, even 12 hours, strikes me as missing the forest for the trees kind of problem-- Guest: Well, you are missing the essential point. But let me make another point which I think is instructive. I refer to upgrades and so forth. One of the things that you want to do when you look at everybody in coach is to put a little sign, imaginarily, on top of everybody's head and ask how much money they paid for their seat. And you will probably find that there are 10, 12, 15 different prices that have been paid by these various people for the same seats. And so the question of: Why is that going to be fair, some people pay more than others? Well, it turns out that seating is a very complicated business. So, it turns out that if you want a guaranteed seat together across the country you'll pay a premium to get it. If you are a flier who doesn't care whether you go out on the 9 o'clock or the 12 o'clock plane, are you willing to wait? And so the prices on some planes will go down and you'll take those. Other people are last-minute travelers, and they will basically, if a plane is filled up, will pay an enormous premium to get that last seat. I can recall several occasions where there have been storms, where we were presented with the option of flying on an airline and paying $900 for a coach seat to get from Chicago to New York, saying thank you, no thank you. But there was somebody out there who is prepared to do it. And what happens is if you allow for that particular flexibility to take place. What you will do is on average have lower rates and higher occupancy rates than you will if you basically use a model that says one fixed price for all people at all times, regardless of when they come. And so virtually every system not only doesn't worry about the gradations in the products that you receive, which is the point that you are emphasizing; what it does is have continuous time models for repricing everything that goes on. This is done all the time in airlines; it's done all the time in hotels, under various circumstances, apartment leases are done in exactly the same way--these prices are often reset once a day, sometimes twice a day. The standard index with respect to hotels and apartments record every decline or increase in demand and then calibrate their prices to do that. What happens is you get much more efficient utilization of the overall system, so that satisfaction across the board is higher. Now, as you mentioned, you can always look at the pimple[?]. And the pimple is the guy sitting in the middle seat paid $50 more than the guy sitting on the aisle because he happened to buy the ticket at a different time, in a different bucket, as they call it in the airlines industry. But you have to understand the systematic notion of what's going on, and realize that the greatest growth in virtually every one of these markets takes place when there's the greatest degree of freedom in the way in which you price services and in the way in which you package these services. And the egalitarian impulse on this to standardize everything is essentially a guaranteed way to make sure that these institutions will sputter and perhaps even die.
25:05Russ: So, I was actually--without making it clear--trying to move away a little bit from the fixed cost point you are making. And I'm going to try to rephrase that. But I'm also going to push back about your general feelings about resentment. The point I'm making is that--about first class versus coach--is that it's more easily seen in, say, automobiles, which don't have this fixed phenomenon. Although they do a little bit, through research and development. So, you know, I drive a Honda Accord; you might drive a Lexus or you might drive a Ferrari for all I know, Richard--I don't know. Guest: I'd love that Ferrari. I can't get in one. Russ: Or you might not have a car, for all I know, living in urban-- Guest: In New York, I don't have a car. Russ: But, so you poor fellow. I have a car and you don't. But what I was going to say is, yes, my Honda is not as fabulous as a top-of-the-line Lexus or BMW. But it's remarkably great for such a fraction of the price. And I don't--I just think it has to be remarked on that market forces have given the lower end of the market not to the dregs but to incredibly high quality products, whether it's my cellphone or my car or my trip across country on that airplane--the fact that my seat is a little bit more cramped than your, I just don't see it to be a major issue. But now I want to give the complainers their due. And I'm going to push back against your earlier point. So, I think what motivates them--and I even feel this myself a bit, which is a confession--is that there are people who don't earn their money. And we had Robert Frank on recently talking about success versus luck, and he emphasizes luck in its role in success. And I think it definitely plays a role. The part that I don't like, where I share the resentment of some folks, is that some people use either the political process or other means to earn rents--that is, to make a, to earn a premium above and beyond what they would earn in a market setting through manipulating the rules or some sort of advantage. And that's what bothers me. It doesn't bother me that they'll then use that money to sit in the best seats at the theater or the best seats on the plane or the best seats in their car or whatever it is. I do not--I certainly agree with the complainers that we have a situation where some people make money that they should not be entitled to; or I wish the world were such that they didn't earn it, because of their use of the political process. The problem I have with that view is that if you're not careful then you've complained about all success. As you point out. And I think that's very, very dangerous. If you don't distinguish between success that's earned and success that's stolen, I think you are on the road to a very bad situation. Guest: Well, first, let me comment on the Robert Frank point, because I think we disagree fairly strongly. There is no question that with respect to any particular venture that any person undertakes that luck will have a lot to say about whether this one works or doesn't work. But it would be a mistake to assume that life is just one venture which either succeeds or it doesn't succeed. It turns out that people try many different things in all sorts of different ways; and what you can say is that as you increase the number of plays that you take, the persons which perseverance, imagination, determination, and grit and so forth are the ones who will succeed; and the people who tend to be more lackadaisical and indifferent are the ones who will fail. So, when you look at the end of this particular game, what you are doing is, the people who see at age 50 or 60 turn out to be highly successful; and then you go back and you track how much risk they took, how much discipline they showed, how much hours they put into their job and so forth, I think that you will find that there's a pretty good correlation between the efforts that people put in and the natural abilities that they have, and the outcomes that they received. Now, the second point you make has to do with the problem about political resentment for people who use the system. It is ironic that the people who basically get most upset about inequalities with respect to wealth are also the people who want to constantly jigger the political system in ways that make huge wealth transfers from one group to another. So, if you take something like New York City, there's many a privileged person who lives in a rent-stabilized unit. These units rent for under $2500 a month, and if you are on the upper West side of Manhattan their market value in a deregulate market would be two or three times that on a monthly basis. They take the excess and they put it into their Connecticut houses and their New Jersey vacation homes and so forth. Yeah, I think that this is really outrageous. But, rather than getting mad at individuals, what you have to do is you have to fix the institutions that are there. And competitive markets essentially wouldn't allow the people who ought not to succeed, whereas political markets allow you to keep a program like rent control in New York City in place since 1943, in the stabilization programs; since 1969, and so forth. The various agricultural programs that we have in place are from the New Deal, and so forth. So there are huge numbers of things. But my attitude is not to get mad at people who take their money and spend it, but to simply attack these kinds of programs and say, 'Every time you see a deviation from competitive market solutions that are mandated by government across subsidies, you have an illegitimate accumulation of wealth.' What is so ironic is that the people who are really rich--the Mark Zuckerbergs and the Bill Gates--they don't make their money on rent-stabilized units. They made their money by inventing new markets that nobody ever saw and taking a tiny fraction of the total social gain that they've done. The usual estimates are that the billionaire who gets a billion bucks from his ventures has probably created $10 or $20 billion dollars of wealth in everybody else. And as far as I'm concerned, hallelujah. Because not only have they created wealth in everybody else, but there's the following dirty little secret: nobody can spend a billion dollars a year on himself and still keep sane. There's no amount of wine that you can buy, no amount of things that you can consume that would allow you to do that. And so in the end the people who earn huge amounts of money consume relatively little of what they earn, and they end up endowing laboratories, schools, hospitals, churches and all the rest of that stuff. America lives in many cases off of the largesse and benevolence of its richest people. And I think we ought to acknowledge to some extent the debt that we owe to them. Look at the name of every university that's been created in recent years. Now, our friend Nelson Schwartz starts talking about the robber barons--well, one of those robber barons was Johns Hopkins--oh, as in Johns Hopkins University. Another was Leland Stanford--oh, as in Stanford University. And so forth. Russ: Don't forget Mr. Rockefeller. Guest: Yeah; Rockefeller University, University of Chicago, Spellman College, Rockefeller Institute, and so forth. Bill Gates--huge amounts of largesse here, there, and the other place. If you look at the patterns of consumption, the inequalities of wealth on the income side are much less frightening.
32:22Russ: Of course, a lot of people don't like the idea that Bill Gates and others use their wealth to steer social programs through voluntary philanthropy. They don't like that they can influence universities; they don't like that they can influence, say, malaria efforts around the world. They would much rather prefer a democratic process where the political process allocates that money instead of a single wealthy individual. Again, that's not my issue, but they do worry about that. They don't even like--you're viewing this as the gravy or the silver lining for them. They don't even like that, either. Guest: Resentment has its price. But then you think of all the people who attend these institutions, all the people who benefit from these institutions, all the people who are cured by these institutions; and imagine what would happen if what you did was you made these allocation decisions rest in the Department of Education or the Office of Civil Rights, where the way in which they get things is not through voluntary situations but they coerce everybody to do things which are absolutely crazy, including the way in which they start to work in housing markets by trying to mandate a whole range of programs that force interactions that have no voluntary basis and which can only be kept in place by the arm and the force of the state. And between the two, voluntarism as opposed to coercion, one is cheaper and more effective than the other. And if other people really resent the fact that Bill Gates wants to save the lives of small children and if Warren Buffet manages to get billionaires to give away half their money, I think that we should rejoice in their resentments rather than simply say, 'Oh my God, you've really got a great point here.' We want to see the creation of wealth; and what happens is voluntary redistribution, which was always a key feature of laissez faire economics going back to the 1850s and so forth, is in fact a much more powerful way for equalization than any of these forced government transfer programs, which have a funny way of benefiting the people who run the programs rather than their ostensible beneficiaries, who almost always get short-changed in the process. Russ: Yeah, I agree with you. But I know many people do not-- Guest: I know. And you know what? I'm quite happy to debate them. One of the things that I find today is that there's so much willingness to treat inequality as though it's a sort of dominant social problem. But there's a deep philosophical mistake. You and I, trained in the economic tradition, like Pareto improvements. We like situations where you move from State A to State B where everybody is better off in State B than they are in State A and nobody's worse off. We kind of like all of that. But every time you allow that to take place, you may well increase inequality inside the system. So the hard question, Russ, is to ask yourself the following question: You start with 10 people with 10; and then you have a huge innovation. One of them goes up to 1000, and everybody else goes up to 100. And you say, 'No, no, no; there's much more inequality in this system now because one person has more wealth than all other 9 people in that society together. So, what's their alternative? They want to go from a society in which everybody starts with 100 to one in which everyone then ends up with 102? Instead of having much larger gains. Russ: I think that's the tough question. Guest: I think that inequality at this particular point, if you really get upset about inequality, Pareto improvements become almost impossible to achieve. Because the moment the gap starts to get larger, as it will when there is initiative and risk-taking and all the rest of that particular stuff--the moment it gets, a gap gets started, you are going to try to have somebody who is going to try to veto the transaction. And of course, when you look at the ex post distribution, you have to remember that there was a risk factor that was built into it. This person may have tried five of these ventures, succeeded on one; and if you don't give him the return on the one, then the next person going forward will never have the wherewithal to survive the five failures, knowing that he won't be able to get the return from the sixth success.
36:15Russ: So, I'm going to agree with you, and then I'm going to disagree with you. I'm going to agree with you in the following way. I want to create a Rawlsian veil of ignorance--reference to John Rawls where we are going to imagine different states of the world but you don't know where you are going to be in those different states. So, the first state is 1900. You might end up being a rich person or a poor person. The next state of the world is 2016. Again, you might end up being a rich person or a poor person. I think most people alive today--I don't think most, I think everybody alive today, almost everyone, not quite everyone but an enormous number of people today--would prefer to have a random shot at 2016 life than even actually to be in the upper 10% or 5% in 1900. Guest: Not even close. Russ: Right, you'd accept that as a truth, right? Guest: Right. But there is another truth. Russ: Go ahead. Guest: You tell me your truth and I'll tell you my truth. Russ: Well, that's the part where you and I, I think agree on. I want to give you the part where you and I might disagree on, or at least I'm going to push back a little bit. So, let's say--let's take two of my favorite examples. Brin and Page--Sergey Brin and Larry Page, who founded Google--I think they've made the world an immensely better place. I'm happy that they are incredibly wealthy. They are free to squander their wealth or invest it or try to make the world a better place with that. I think they do all three--they don't try to squander it--but they certainly are trying all kinds of different things; and God bless them; and I'm happy for them. And my life is immeasurably improved by Google. But let's take the counter-example. Let's suppose instead of Google--I'm going to try to give Robert Frank his due here--let's suppose instead of Google getting to the top, it was Lycos, which was a search engine, or Alta Vista--two search engines in the 1990s that I used. They were wonderful, too, by the way. I'm willing to concede the fact that they are not quite as good as Google. It might they are, or they would have been. But let's say that they are not quite as good. As you point out, Google has made a lot of us very rich; and a couple of people--more than a couple, but a number, a small group, incredibly rich. So, the argument would be: Well, if we hadn't had Google, we would have had Lycos or Alta Vista or Yahoo or whatever it would have been. And is it really right, in some philosophical sense--I'm not talking about the economics right now, but a moral sense--that they get so much of the gains? That they are so wealthy? And if we took some of it--and of course, I don't want to, but the critics do--if we took some of it, would it really be a bad thing? Would they have not worked on Google? Would the incentive effects not have been so strong that it wouldn't have happened? That their search engine wouldn't be quite as good if they could only have been worth, say, a billion instead of, say, tens of billions or whatever it is--I don't even know? That's the argument. So, I think that argument is--I think our side tends to overstate the incentive effects. I am opposed to that kind of confiscatory taxation for different reasons--not the fact that, 'Oh, we'll all be a lot poorer if we did that.' Because I'm not sure that's true. But I think-- Guest: Well-- Russ: So, go ahead. Respond. Guest: Look, I mean, first of all, you have to ask yourself, would you even have these other search engines like this Lycos thing if you had changed the incentive structure. It's one thing to say that Google is only a little bit better than the other guy--which may or may not be true. But if you changed the risk-and-reward ratios you would have never had the platform from which these other things could have gone. Russ: Maybe. Guest: And, so I mean, I don't think it's amazing[?]. I think it's--so look, I spent a lot of time working on the patent innovation space and so forth. And it seems very clear to me, I mean done that [?]: when you start weakening the remedies that you give to intellectual property it's going to have a serious negative effect on innovation. Russ: I don't think-- Guest: It complicates-- Russ: Richard, I don't think Sergey Brin, when he was a grad student, sat around thinking, 'Oh, if I'm only going to make a billion instead of thirty billion, this isn't worth it.' Guest: No, no. It isn't that he does that. But what he did think about is 'If I know that when I go in there that somebody is going to be able to stop what I can gain, it's going to be a less attractive venture.' And that would start to slow these people up. We see right now under the current situation that the formation of startups in the United States is very much at an all-time low relative to recent years, and it's because the entire regulatory climate is that way. The second point, on redistribution: One of the things that people tend to neglect is that the most efficient tax system--that is, a flat tax, probably not on consumption but perhaps on income--a flat tax like [?] is massively redistributive. It turns out that, you know, you earn a billion dollars; somebody else earns $100,000 dollars; and when you take 10% from each of these guys, the fellow who was now having to put in $100 million a year is not getting million in public benefits out of this particular situation. And in fact one of the great achievements that we had during the so-called Gilded Age is that the rich paid for the sewers from which everybody benefited, in terms of the improvements in health from cleaner water and lower rates of disease. And so, if you go back to this public space again and realize that it cannot function if you finance it with happiness. You have to have dollars in one sense or another. You get a lot of redistribution working through the system, under a system which is not going to be explicit for it. And so the redistribution you get under that system plus the higher level of growth that you get with a simple tax system and the greater private opportunities tends to swamp everything else. Let me mention one other point. There's an interesting book a man named Robert Gordon that came out. And what he points out, without dispute, is that the single greatest transformative period in the history of the United States, indeed the world, in terms of wealth, is roughly speaking the age of 1870-1940. If you go to the beginning of that period and you see the nation's development starting with railroads, and then you go to the end of it with the airplane and the electric [?] and the movie theaters and the huge advances in medicine--we've never had a period--that's the gilded age. That's the era of Lochner-like [Joseph Lochner] capitalism in the United States Supreme Court. So, if you are trying to figure out what the aggregates are, you have to put the 1900-2016 issue in a slightly different fashion. There's no question as a matter of static wealth that things are infinitely better today than they were then. And indeed, many of these things which were once protected as intellectual property have long passed to the public domain, as they should. But ask a different question: What do you think the expected growth was in 1900, as opposed to the expected growth of the economy today? And there's no question that in 1900, everybody expected that their children would live longer, be taller, richer and happier than they were. The year 2016, I think most people were decidedly pessimistic. And were they right in 1900? Russ: They were. Guest: Well, let me just give you the best numbers. The single most reliable index of social welfare is life expectancy. Because you can't fake death; and it's much more difficult to measure levels of happiness and satisfaction. From 1850-1900 it goes from 40 to 47 years. That is more increase, in 50 years under laissez fair type regimes, than took place in the previous 300 years, where life expectancy was basically constant around 40. From 1900-1920, it goes from 47 to 54. I mean, this is astonishing progress which takes place. And the thing about a life expectancy number is everybody is weighted equally. So you can't say, 'Aha! This is simply what happened to the top 1%," so the argument would be, 'Well, ordinary people, their life expectancy goes from 40-41, but somebody who is in the top 1%, their life expectancy goes from 50-300,' in order to build this up. It's essentially what happens is if you take the single most valuable measure of social welfare, it turns out that the inegalitarian societies of laissez faire do far better under that measure than anything else. And if you just with the check the rate of decline in childhood mortality, it's simply unbelievable. I once had a debate with a man named Michael Marmot[?] who is an English health statistician and egalitarian. And what he does is he points out, if you are born in the top quartile, your chance of infant mortality is about one quarter of that of somebody who is born in the bottom quartile. That's absolutely true. But if you go these numbers 150 years ago, you are talking about the difference between 15% and 60%; and then when you go later, it's 1.5%-6%, roughly. A tenfold increase for both groups. What does it mean? It means rich people live, they gain a little bit, 5%. These poor people are gaining 50% improvements in their lives. That is, if you are the most vulnerable populations, it turns out you are the ones who receive by far the largest gains from any kind of generalized improvement with respect to the health care delivery system. And once one recognizes that and takes into account the nonpecuniary part of income inequality, it turns out that the leveling that has taken place is enormous by virtue of the fact that poor people enjoy their longer lives--maybe not quite as much as the rich people. But getting an extra 30 years of life when it turns out you are in the bottom quarter is a very big deal indeed, by any kind of hedonic measure that you care to choose.
45:36Russ: Well, I'm tempted to stand and applaud. Guest: Well, thank you. Russ: But I do have to mention-- Guest: In fact, your favorite word-- Russ: Yeah. Well, that's my polite word for 'disagree' or 'argue with' today. I don't know why I've fallen into that habit. So, I do have to mention that, you know, a lot of enormous improvements are going on right now in world life expectancy, in world poverty, in the standard of living. In China, where they are being run by a totalitarian regime, you can argue how much of the improvement is due to the capitalist forces they've unleashed; but it is awkward to notice that. I don't know--and of course a lot of the improvements in longevity that you mention are coming from health improvements, many of which were centralized, like the clean water and other things that reduced infant mortality, which is a huge part of the increase in longevity. Not all of it, but a good chunk of it. Guest: Well, I said the whole stuff. The London sewage was the greatest public works project in history up to the time, and it had huge effects. But it can only be financed out of wealth, not out of happiness. And so it turns out the rich paid a disproportionate amount, from which the poor got a huge cross-subsidy. And there was nobody on the rich side who complained about it. So I agree with all of that. My point is that if you want to keep those forces going--let me just mention one other number which is very frightening. If you try to figure out about the increase in health expense, in longevity, and you take the pre- and the post-Medicare age, roughly speaking it's clear much more advance took place in the early years. And the interesting feature is if you take health expectancy, or life expectancy, conditional on reaching age 65, in the last 55 years or so it's only gone up by about 40 years. Russ: I think it's declining. And it's declined recently for the first time in--forever. Guest: In the last year it's starting to decline again. And the reason is the stagnant growth in the United States. If you want to get a good measure of why health outcomes and mortality outcomes are likely to get worse, you don't look at average income, which is going to be heavily influenced by the top 1%. You look at median incomes; and median incomes in the United States for the last 8 or so years have been going down close to a percentage a year. And the reason is we have these massively oppressive policies on labor and capital markets and on real estate markets. And it turns out individually each one of them has some fancy ad hoc rationalization, usually not worth the powder to blow it to hell, but they have them anyhow. But, cumulatively these things are synergies; and these synergies are all negative. So, that's why I mentioned the 2016 prospects, the arrow is pointing in the wrong direction. In 1900, when you had government at all levels being 3% or 4% of GDP (Gross Domestic Product), the arrow was moving in the opposite direction. I don't think people really understand that the New Deal at its best was, you know, 5% of the economy was controlled by the government, by direct expenditures. And then the more important thing is that was to direct market after market by cartels. But today, what we do is we have all the cartelization going on in many of these markets and many more direct government controls, and an economy cannot survive. The incremental burdens from these new programs far exceeds the incremental benefits. But if you start looking at the way in which things come out of Washington today and so forth, you will always see that the next protective program 'is going to be better than any one that we've had before'; and they always turn out, they backfire. We've seen this with respect to financial services; we've seen it with respect to health care. The two great achievements of the previous Administration are the Dodd-Frank Act and the Affordable Care Act on the other are turning out to be huge albatrosses on the economy. Russ: I have news for Richard--we're still in that Administration. It's not the previous one yet. Guest: Well, I know-- Russ: You're looking ahead. Guest: It's not soon enough. Yes. Russ: We'll see about that. Of course, I'm sympathetic to your concerns about government regulation. I find it hard to accept that there is strong evidence, other than correlation, for those claims. And I do see lots of other factors. I do see mismeasurement of, say, median income, the ignoring of demographic change, immigration, changes in family structure that I think have distorted how we perceive the overall health of the economy. And I do think there are some idiosyncratic things going on, say, with drug use, in particular, perhaps lowering life expectancy that have nothing to do with government regulation other than the subsidies to drug use that are built into our insurance and health care schemes.
50:21Russ: I want to make a more philosophical point about redistribution, though, and get your reaction. So, I do believe--I worry, as I mentioned earlier, that our emphasis--the people on our side who want smaller government and less redistribution--on the incentive effects are overblown. And I'll just mention one example. As we know, as you know well, in the 1970s, in the 1960s, the highest marginal tax rate was 70%? 90%? what was it? Guest: Seventy percent. Deceptive number. Russ: But it was a very large number. And now it's a lot lower. It went lower still for a while and then it slowly crept back up. But you are not going to see any changes in the growth rate data, to your eye. It's got to be a very subtle effect to try to tease out the impact of that. It's striking to me how much growth and how much innovation we had when those rates were high. It didn't seem to stop things. So the crude evidence--I'm not saying the crude is correct; of course, it's just a different correlation than the one you are mentioned. But it is striking that--and Ed Leamer has pointed this out--under high tax regimes, low tax regimes, the growth path of the United States, pretty straightforward. Guest: Well, but I mean, you have to know what a high tax regime is. What happens is, whenever you have high tax regimes--like the 90% progressive tax rates--first of all, the marginal rate at that is very, very high, so a very tiny proportion of the population is affected. But high tax rates are always accompanied by tax shelter gimmicks of one sort or another. And so, during the 1950s and 1960s the ability to shelter income, ordinary income, through real estate tax devices was very great. Indeed, even today, if you know what you're doing, you can shelter huge amounts of money. When Warren Buffett starts to talk about he pays less on a marginal tax rate than his secretary, what he's doing is concealing from you the serious problem. Which is: he has found ways through a series of indefensible devices, all of which are perfectly legal under the current law, to shelter income through using partnership devices of one kind or another with their phony allocation, using depreciationship devices off of borrowed capital on the one hand and a stepped up basis of debt. I'm sure you don't understand what any of these things are; I'd be happy to-- Russ: And I don't want to. That's the best part-- Guest: explain them. But you do want to, because that's the point-- Russ: No: the beauty of the system is that even people in public policy, like myself, find these snoozers. So we don't want to hear about them. So it's-- Guest: My point is that you don't want to hear about them but that's what keeps the system alive-- Russ: Yeah. It's a feature, not a bug. It's a fabulous thing that it's opaque. For them. For them. Guest: For them. But not for us. What happens--for many years--you know, I started as a tax professor. And actually I went into teaching--the year I entered, 1968--was the year in which the Rule 68-643 was introduced in which sort of the pre-paid interest deduction was finally removed from all sorts of real estate deals. And in my first semester of teaching, in 1968 in the Fall, all the tax laws that I knew were busily closing these deals before this ruling took effect some time in November. I think people do not understand the ability of the one thing to offset the other. Russ: Fair enough. Guest: But when you have the [?] of system, when you have the current kind of system of people having earned income, where there's no shelter, it's not only the Federal taxes that you have to worry about, the rules of state and city taxes; and so in a place like New York you start to see this. And if you really think taxes don't have this kind of effect then you'd be very hard-pressed to explain why it is that the zero-tax states like Florida and Texas on the income tax attract droves of people coming out of New York, California, and Illinois. Illinois doesn't have high income taxes. It has high real estate taxes, dreadful workman's compensation laws, and so forth. But a lot of the internal movements that take place inside the United States are very powerfully explained by state tax differentials, which are in many cases much smaller of course than the total amount of the Federal burden. I think it's wrong to assume this. Anybody who goes into business knows how to calculate what they call internal rates of return; and if those tax numbers start to go up, these projects that are marginal get shelved. And so what you see are the ones that survive are the highly profitable ones. People say, 'Aha. Look at these enormous gains that people make.' What they are missing is the true social cost comes not in the reduced return on these bonanza projects but the fact that other projects that would be viable in a lower-tax environment are no longer going to start to take place. That's the first one. The second point is, you have to understand, it's not just the tax system that works. The regulatory system overall has a huge impact. And when we had these very high tax rates in the 1950s and 1960s and so forth, it turned out the other regulatory environments were more or less congenial to the aggregation of capital--in some cases unduly so because they created pockets of monopoly, wealth, and so forth. And the big difference between now and the 1990s is, in the 1990s we had a mildly deregulatory regime starting with Reagan going through the end of Clinton. And after 2000, starting with Bush I. (George W. Bush's first term--Econlib Ed.) of course in the beginning of his years and going through the Obama Administration, we've been much more intensively regulatory. And regulation is a substitute for taxation. And when you are trying to figure out what's going on, you have to sum the two. You can't simply look at the one that you've had. And so, you are trying to figure out what's going on with capital gains--everybody's capital gains is now subject to a 2.9% tax in order to fund the Medicare programs, and so forth. This has real impact on liquidity and capital markets, and the way in which things go. And if you can't turn over your investments what happens is bad investments get kept too long; and good investments never get made. Bob Lucas, I remember, after he won his Nobel Prize, what he said was he started out in life as somebody who believed in high capital gains taxes for everybody. And he came to the conclusion that the correct capital gains tax was zero. Because you want to get redeployment of capital, which simply dominates the amount of wealth you take out. I will go one step further. The ability to distinguish between capital and labor in all sorts of very complicated business transactions is almost an impossibility. So I've actually come to favor a consumption tax, because at that point you don't care about the source of the income--you just care about when it's spent and a consumption tax will on average do better on the tradeoff between current consumption and savings. Savings, as we know, was systematically overtaxed under the current [?] Russ: And, a lot of tax lawyers and accountants after that change will no longer be able to sit in first class on the airplanes. Guest: That is certainly true. Russ: Which would be a good thing, not for them personally; and maybe it might be painful for a while. But it would be better to have fewer people trying to figure out ways around a complex tax system, and have productive--genuinely productive--people who produce benefits for people other than just their clients having the chance to create wealth and sit in those seats, too. Guest: Amen.
57:34Russ: But, I want to make a different philosophical point. So, I'm going to be agnostic about those incentive effects. I do agree, by the way, on capital gains. Obviously I would prefer a simple tax system--a consumption tax. It could even be progressive. I don't really care, as long as it's straightforward with no deductions and no capital gains. It would just be a fabulous thing for the world. And it's probably not going to happen. But let's put that to the side. I want you to concede--or I will concede--I'm going to ignore the incentive effects. I'm going to assume they are small. That there aren't big discouragements of creativity and innovation due to taxation or due to regulation. I do think there are some from regulation despite my pushback earlier. But I want to make a different point. Which is--I'm going to go out on a different limb. And I have to concede--I realize this from talking to you--that even if those incentive effects are zero, that there's no discouragement of innovation and creativity from the tax rates and the regulatory system--it turns out I really don't want those billions of dollars going through the sausage factory of Washington, D.C. or Albany or Annapolis--those are state capitals. I say that because I have to concede that actually I think it's a better world when Mark Zuckerberg and Sergey Brin and Steve Jobs and Elon Musk--when they allocate their wealth as they see fit. And they are going to make a ton of mistakes; and they are going to do some things people don't like. But they'll be accountable. And there's also tons of competition. I really much prefer that to a world where money is taken from them, even if it has no incentive effects, but it is then up for grabs through the political system. Because I think that's ultimately the road to tyranny. I don't have enough faith in the ability of the political system to spend that money wisely; and I would much rather have creative people spend it as they see fit, even if it's on themselves. But they don't--as you point out--they don't spend it on themselves much. A little bit; but most of it they spend in ways they think will maybe transform the world. And some of those will succeed; and that will be great. Guest: Let me just mention one area where the contrast is most vivid--and that's education. You look at the charter schools on the one hand and the public schools on the other. And the charter schools are heavily supported by hedge fund people of one kind or the other, most of whom have some libertarian instincts who are desperately concerned to see that kids, often minority kids at the bottom of the economic ladder, get a fair shot in life. My son, Elliot, works at the Success Academy in New York, and these kids score in the top 1% in math and the top 3% in English, statewide. And so what happens? Every single public institution tries to break them down. The unions try to destroy them. The New York Times sics Kate Taylor on them with a series of stories which are an embarrassment to the newspaper and so forth in an effort to try to turn popular opinion against them. This is a classic illustration in which different kinds of money start to work. And what happens with the public money? The single most important word in modern social theory today is compliance. Because compliance is a direct function of regulation. And it turns out that the commands that are put on people are not ones that are easily knowable, that you could read in a book. What they do is they require constant monitoring and supervision. There was a graph in the Wall Street Journal yesterday about the huge decline in the total size of the amount of money in the home mortgage market, for a variety of reasons. But one of the powerful drivers of this is compliance costs on loans. And as[?] it turns out these costs are basically fixed, for the size of the loan doesn't matter very much. So you are going to have a better shot at making a loan to a rich person because your compliance costs are lower than doing it for poor people. Russ: Per dollar. Guest: And so, sure enough, not only do you have fewer rich people getting money, you get disproportionately fewer poor people getting money, under these kind of regimes. And why is it that we need all this compliance? Nobody knows. But I teach legal system after legal system in which a common strategy is we want to investigate everything that could possible go wrong; and then, when something does go wrong, do nothing about it. And this is the way in which we tend to work. The correct system is: You don't want to worry about compliance. What you do is punish people when they overstep the line and let them figure out how to stay on the right side of the line--which they will generally do. So, what we are seeing now is: This change in the compliance culture means that virtually every business that you are looking at today is less nimble, less efficient than it was before. And the government does this on private firms; it does it on public institutions. It's the Federal government riding herd over the state. And unless we can reverse that particular notion and recognize that the old maxim, when somebody from the government comes to you and says, 'I'm here to help you,' you know exactly what they mean. And they are here to take advantage of you, because you cannot basically turn them down on the grounds that they don't have good customer relations.